Client Call for Greater Diversity at Fever Pitch

As legal departments narrow their rosters of outside counsel to shortlists of preferred providers, they have greater leverage to set more rigorous diversity and inclusion expectations.

Law firms, consider this your notice: The days when your client—aka in-house legal departments—held a laissez-faire philosophy toward your talent management practices are over. As legal department leaders have surged to the peak of their influence during the last decade, they have repeatedly called on law firms to prioritize diversity. At first, they communicated their collective commitment by joining together to sign pledges such as the Statement of Principle and the Call to Action.

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Those efforts were followed in the mid-2000s by legal departments asking their firms to complete comprehensive surveys that enabled the evaluation of diversity metrics. And, although companies have been surveying outside counsel diversity for years, the needle has not moved forward as much or as fast as expected.

The representation of women in the equity partner ranks has been stuck at around 18 percent for the past decade, and the percentage of minority equity partners has actually dropped 2 percent since 2011 at a national level. This decline has driven some forward-thinking general counsel to question whether laborious survey and tabulation processes—without a reward or consequence tied to the outcomes—are ultimately worth the effort. Having learned from the “survey without accountability” era, leading legal departments have developed and are testing new nudges with the goal of turning the tide on diversity.

We are entering the third generation of this dialogue with clients at the helm, which has justifiably evolved into a focus on action and accountability. Many legal departments have made their own progress internally, and they want their law firms wholeheartedly “all in” on their journey to greater diversity and inclusion as a profession. And as legal departments narrow their rosters of outside counsel to shortlists of preferred providers, they have even greater leverage to set more rigorous diversity and inclusion expectations. Additional clients are joining the chorus daily and, together, are raising the bar on expectations and responsibility.

These “third generation” nudges vary in specifics, but they all have at least one thing in common—concrete expectations and consequences. Many of them also broaden the focus from just numbers to firms’ substantive inclusion efforts and outcomes. While some law firms still contend that clients aren’t enforcing what they preach when it comes to requiring outside counsel to include women and minorities lawyers on significant legal matters, the evidence doesn’t bear that out.

Microsoft, an early adopter of the third-generation approach, offers bonuses for firms that meet specified benchmarks. Initially, they gave bonuses to firms that increased the representation of minority lawyers working on Microsoft matters. Over a seven-year period, their efforts increased the percentage of diverse law firm working on Microsoft matters from 33 percent to 48 percent. The most recent iteration of Microsoft’s initiative also has seen some early success. Firms are awarded for boosting minority representation in three areas: first, firm leadership and management; second, relationship partners working directly with Microsoft; and third, attorneys working on Microsoft matters. Microsoft scores firms on a point system and ties bonuses to the results. Firms that score eight points overall receive a 2 percent bonus, and the highest-scoring firm gets an additional 1 percent bonus, plus public recognition. The initiative is just over a year old, and diversity representation in Microsoft’s outside counsel management committees has already increased from 31.2 percent to 34.4 percent, while overall diversity in outside counsel partners rose from 33.2 percent to 34.5 percent.

Toyota Motor North America’s legal department, with Sandra Phillips at the helm, also has seen dramatic returns from its efforts to increase outside counsel diversity. The in-house team analyzes its firms’ diversity composition, particularly the teams that work on Toyota matters, then it carefully reviews the firms’ existing D&I initiatives and plans to grow them. It also helps its partner firms follow through on their commitments through a variety of metrics, including an e-billing system. To engage and advance diverse junior lawyers, Toyota has asked firms to have them observe or participate in more substantive work with in-house counsel on responsibilities such as strategy meetings, deposition preparation and actual depositions. And here’s the most interesting part: Toyota shares the cost of the junior lawyers’ time with the firms.

In her recent LinkedIn post, Phillips reports that the diverse outside legal professionals working on Toyota matters increased a whopping 340 percent over the previous fiscal year. And, in 2017, about 52 percent of its legal spend was with diverse professionals, compared to about 42 percent in 2016.

Also following the carrot-rather-than-stick approach, the legal departments of DuPont, General Mills, Verizon and Wal-Mart co-founded Engage Excellence a few years ago. These legal departments have committed a portion of their legal spend to hiring ethnically diverse or LGBT outside lawyers to serve as lead counsel on select matters. They also require diverse teams to work on their outside legal matters and their law firms to certify that the diverse lead lawyer hired receives financial credit as originator of the matter. The goal is that half of the diverse/LGBT lawyers will be women.

Michelle Ifill, senior vice president and general counsel of Verizon Corporate Services, says they have already seen positive results, but she believes passionately “that this effort is a marathon, not a sprint.” She said, “It took more than a few years to get here, so it will take more than a few years to fix it—but it can and will be done.”

This past year brought a series of similar diversity nudges from big name clients. HP announced it will withhold up to 10 percent of invoiced fees for failure to meet benchmarks, while Facebook and MetLife unveiled new requirements to ensure that lawyers from underrepresented groups have access to growth and leadership opportunities. Others, such as 3M, Wal-Mart and Home Depot are hosting events to connect directly with their outside firms’ diverse and women lawyers.

Xcel Energy’s new law firm evaluation process exemplifies the clarity and accountability of this new wave of approaches. This year, the company eliminated its detailed outside counsel survey in favor of scoring and ranking firms on key performance indicators such as “a demonstrated commitment to diversity and inclusion.”

In addition to reviewing diversity statistics, the department is assessing whether diverse lawyers at its go-to firms have access to meaningful opportunities. Firms can review the standings to see where they rank on each factor and against each other. Though the standings are anonymized for the nearly 30 firms on the list, Xcel’s legal group anticipates that the prospect of being ranked against their peers will light lawyers’ competitive fires and inspire them to take the steps needed to move forward on diversity.

“Having conducted these labor-intensive surveys for years without seeing much improvement in outside counsel, diversity was a strong indication to us that we needed to do something different and bolder,” said Jim Altman, vice president and deputy general counsel at Xcel Energy.

At the same time as legal departments introduced this new generation of initiatives, the ABA adopted Resolution 113, which urges all providers of legal services to expand opportunities for diverse lawyers. The resolution specifically asks clients to direct a greater percentage of their legal spend to diverse lawyers. More than 70 companies have co-signed since the Resolution was passed in August 2016, indicating the breadth of interest among GCs in using their influence to improve diversity. The ABA also developed a Model Diversity Survey for use in connection with the resolution, in part to streamline the diversity data provision and collection process.

Although it might seem that legal departments are simply shaking their finger at law firms and saying “do better or else,” there are numerous examples of law firms and legal departments working together to increase diversity. Recently, more than 30 law firms signed on to pilot a version of the NFL’s Rooney Rule in the legal profession. Named after the first woman admitted to a U.S. bar, the Mansfield Rule measures and tracks whether law firms have considered a diverse candidate pool comprised of at least 30 percent women and minority lawyers when making leadership and governance, equity promotion and senior-level hiring decisions. More than 55 legal departments—including 3M, Workday, PNC, PepsiCo, Gap, Target, VMware, Facebook, Abercrombie & Fitch, Mastercard, PayPal, American Express, Ford Motor Co., BASF, Salesforce, Google, HP Inc., Bloomberg, Wal-Mart, SurveyMonkey, Cargill, CBS Corp., Medtronic, Xcel Energy and Charles Schwab—have agreed to support the law firms that meet or exceed the Mansfield Rule requirements by meeting and getting to know their newly promoted diverse partners.

While legal departments continue to test new ways to gently and not-so-gently nudge large law firm diversity, GCs also are sidestepping Big Law to directly engage with minority- and women- owned firms, often facilitated by the National Association of Women & Minority Owned Law Firms (NAMWOLF). More than 30 corporate legal departments, including Accenture, Google and Verizon, have joined NAMWOLF’s Inclusion Initiative to encourage using minority- and women-owned firms, spending over $1 billion since the Initiative’s 2011 launch.

These legal departments are walking the walk themselves in keeping with their own corporate values and their strongly-held beliefs on the business benefits of diversity. Internally, many legal departments have diversified over the last several years. For example, of the 15 people Tony West, general counsel of PepsiCo, has hired or promoted during his tenure, nine were women and six were lawyers of color. Microsoft’s in-house lawyers are now 58 percent women or minorities, up from 48 percent in 2008. And nationally, women now comprise 35 percent of Fortune 500 GCs. It is not simply altruism driving these changes. A study in 2006 by The Hackett Group found that companies that focus on supplier diversity generate a 133 percent greater return on investment than companies that do not.

As further evidence that diversity is a business imperative—in addition to the right thing to do—2016 research from legal market analyst firm Acritas shows that clients spend 25 percent more with legal teams that they consider “very diverse” than they spend with teams they see as “not at all diverse” or strictly male.

At a time in the not-so-distant past, only a handful of legal departments pushed for outside counsel diversity. Now, there are several dozen, ranging from the smallest to the largest in size and legal spend. Their strong message of improved law firm diversity is being amplified by both the large number of participating legal departments as well as the increased focus on accountability.

What was once a gentle whisper is quickly becoming a roar in favor of greater law firm diversity. The clients have spoken. Let’s hope law firm leaders and partners are listening.

For additional examples of legal departments’ range of activities designed to drive outside counsel diversity, click here. The list is updated frequently.

Lisa Kirby is the director of research and knowledge sharing for Diversity Lab, which experiments with innovative ways to boost diversity and inclusion in law through data, behavioral science and design thinking. Caren Ulrich Stacy is the CEO and founder of Diversity Lab.