The Client Quest for Value – Innovation, Insourcing, and Outsourcing

Recent surveys and news items illustrate clients’ quest for value, the challenge of innovation, and renewed interest in outsourcing for value. Can we draw any conclusions from these disparate items?

Innovation Gap Survey by Thompson Hine

Last week, Thompson Hine released a firm-sponsored survey of almost 200 GCs and senior execs, Closing the Innovation Gap. It asked about views on law firm innovation:

• Only 4% of clients say have have seen “a lot” of innovation from law firms.
• Less than 30% say their firms have offered any “significant” help to alleviate the pressure they face.
• Under 40% received better budgets or matter plan.

One statement stands out for me:

Corporate counsel say that many of their law firms fail to prepare useful budgets, fail to plan their engagements, and fail to apply knowledge management and process management systems.

And here is my favorite chart:

Thompson Hine Survey Finds an Innovation Gap

The survey also found that the clients acknowledge that they contribute to the problem:

Nearly 64% blamed firms that have been slow to change. And almost 45% admitted that they were culpable for not demanding more change.

I was glad to see this admission because other data suggest that law firms are significantly ahead of clients on adopting artificial intelligence (AI), a key component today of innovation. For example, one provider of machine learning to accelerate due diligence reviews and contract management noted in August 2017 that over 200 firms have licensed its software. In contrast, LegalTech News reported (9 Feb 2018) in Corporate Law Still Not Ready for AI, Survey Says that “only a small minority of legal departments were currently moving to leverage AI in their operations. Only six percent, for example, either considered AI a ‘high priority’ in their department or have deployed AI in-house in some fashion.” That sounds like law departments lagging law firms.

Just What Do We Mean by Innovation

The Thompson Hine findings forced me to think more about innovation. As a former econometrician (statistical economist), I want to assess innovation with hard data. In my view, successful innovations improve either quality or productivity. Unfortunately, in the legal market, we lack accepted measures for either. It is quite possible both have improved but clients nonetheless perceive little action or impact. I am not saying that’s true – just that we don’t know without productivity or quality measures. (I remind readers again that I use productivity as the rest of the world does: output per hour, not hours billed per year.)

Reducing Labor Cost Remains Popular – But is it Innovative?

Whatever may be happening with innovation, we know that clients continue to seek better value, or at least lower cost. Most tangibly, they continue to bring work in-house. Today, Special Counsel released its 2018 In-House Legal Trends Survey of 500 in-house legal professionals. It found that 65% would prefer to bring more talent in-house versus relying on law firms. Preference is one thing, plans another. More than half of the respondent plan to or will consider adding in-house headcount:

Special Counsel Finds Law Departments Plan More Hiring

The ACC Chief Legal Officers 2018 Survey also found the move in-house continues: “Law department budget distributions saw little change this year, with spend on outside counsel declining slightly from an average of 40 percent of the total budget to 36 percent.”

Bringing work in-house reduces labor cost but, by itself, does not change how lawyers work. The cost savings come from reducing labor cost, not innovations in how lawyers work.

New Trend? Outsourcing Chunks of the Law Department

Clients chronically face a build versus buy decision. They can build – that is, they can create and grow a law department. Or they can buy, that is, outsource to other providers. Historically, and still today, law firms get the lion’s share of outsourcing. But two recent deals show another option…

UnitedLex recently announced two large outsourcing deals: DXC and GE. The DXC deal affected 200+ personnel, and both companies announced significant costs savings. The press I read suggests the cost savings come from a combination of labor cost savings, technology, and improved processes. I hope that once the transitions finish, we learn more specifics about those savings. Whatever the biggest source of savings though, what’s clear is the appeal of new ways of working. That possibility, practically speaking, is generally absent from simply moving lawyers from law firms to corporate law departments.

Conclusion: The Bad and Good News

Tying this together, I think we can make sense from the disparate items, see both bad and good news. The bad news: we lack good metrics and client perceptions of law firm innovation are low. The good news: clients may well be wrong and, if correct, can make other moves to compensate. Hiring more in-house lawyers reduces cost but does not fundamentally change who does the work or how. The promise of the UnitedLex deals – and any comparable moves – is to go beyond labor cost arbitrage.

To answer my opening question about drawing conclusions from this disparate news I turn to my first blog post this year. In it, I argued innovation only matters if changes the training- and pay-level of people doing work and how they do it. These news items reinforce my conclusion. We must focus on scoping matters more carefully; sticking to scope; working more efficiently with technology, KM, and process improvement; and delegating to lower cost lawyers and other professionals. This will require more than just boosting the number of in-house lawyers.