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Corporate legal departments to give law firms less work in 2016

Many are creating in-house law firms with specialist expertise, research finds

15 October 2015

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By Manju Manglani, Editor (@ManjuManglani

Corporate legal departments are reducing their reliance on law firms by hiring more specialist lawyers and leveraging technology.

That's according to the newly-released results of a survey of 303 in-house lawyers by Thomson Reuters.

"Legal departments are innovating - shifting some reliance away from outside counsel by deploying a combination of technology, alternative legal providers and bulked-up internal staff to meet the needs of their business," said Eric Laughlin, managing director of the corporate segment at Thomson Reuters Legal.

"For firms, this intensifies the competitive environment - they are competing amongst each other for a shifting pool of work and have to continuously demonstrate value to their clients."

Eighty-four per cent said they now outsource half or less of their company's legal work to external counsel. Thirty-five per cent said that, over the past two years, they have reduced their reliance on outside counsel for legal work.

Only 24 per cent said they plan to increase their use of outside counsel, which the research suggests may be attributable to an overall increase in their volume of legal work (78 per cent).

Among the legal departments which are relying less on law firms, more than three quarters (79 per cent) said this is because they have redirected work to in-house resources. In addition, 52 per cent said it forms part of a cost-containment strategy. Less than a fifth (17 per cent) said it was due to an overall decrease in legal work.

This trend of cost-cutting through growing internal resources is expected to continue. Many legal departments said they intend to create more in-house positions in the coming years.

Rise of the in-house law firm

In-house counsel have long complained about the high cost of law firms and their lack of commercial awareness.

Many are now taking steps to internally create their own ideal legal practice, including hiring lawyers with specialist expertise and an in-depth understanding of their business needs.

Some survey respondents said in-house lawyers have a "superior grasp" of their business and industry, with outside counsel having a less pragmatic approach.

In 2014 alone, 60 per cent of legal departments hired new staff. And, in the past year, a third added more staff, of which four-fifths have specialist expertise.

The new in-house hires, particularly in specialist areas, have allowed legal departments to "gain the expertise in-house at a fraction of the cost related to outside counsel", a corporate counsel in the insurance industry told the researchers.

The most popular areas of focus the new positions were contracts (37 per cent), compliance (36 per cent) and litigation (22 per cent). Also popular were intellectual property (15 per cent), employment and labour (15 per cent), and corporate and securities (13 per cent).

The research also found that legal work which is voluminous, repetitive and less complex is increasingly being kept in-house.

For many legal departments, contract drafting and negotiation is a "core competency" of in-house staff. Two thirds said they rarely or never use outside counsel for this type of legal work.

Similar to other respondents, a general counsel in the oil and gas industry said his team prefers to keep contracts work in-house "because in-house lawyers have more experience in our business".

When legal departments do use outside counsel for contract drafting and negotiation, this is primarily due to the complexity of contract/drafting issues (45 per cent), an overflow caused by a high volume of contracts (42 per cent), or a significant risk associated with a contract (38 per cent).

Similarly, when legal departments have IP, M&A and/or litigation lawyers in-house, their top reasons for instructing law firms for such work are the complexity of the issues and the significance of the matter or case.

Three quarters of in-house counsel are also leveraging technology to increase their efficiency and workflows, extend their capacity and minimise or decrease their administrative costs.

Among the systems suggested by the researchers which "support effective legal operations", nearly half (49 per cent) said they are using document management systems.

A third are also using legal hold and matter management systems, while 28 per cent are using electronic signatures.

E-billing is being used by a quarter, while just over a fifth (21 per cent) are using e-discovery and entry management systems.

The full findings of the research are published in Thomson Reuters Legal Department In-sourcing and Efficiency Report.





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