The Industrialization of Law

As published on The Lawyer’s Daily. A more concise version of the Biz-ification of Law, though I think “industrialization” is a better word.

In early 2016, Archer Daniels Midland (“ADM”), a Fortune 50 company, were working with 700 law firms. Six months later, they were working with only 20. Last year, Microsoft brought in 12 of its top law firms to ask “what have you done for me lately?” Clearly, something in the legal world has changed.

It is old news that law is a now buyers’ market. ADM’s and Microsoft’s actions speak to something much deeper: the structural shift of the legal market from simply a profession to an industry. While a “profession” connotes guild-like protections, an “industry” is more dynamic and requires multi-disciplinary approaches (e.g., legal ops). As big buyers of legal services, in-house departments are poised to become more influential than ever before.

Signs of a structural shift

In pursuing lucrative tuitions, universities inadvertently propelled unsustainable growth in the number of lawyers. 54 new ABA-accredited law schools opened from 1971 to 2001. The US went from roughly 27,000 law grads in 1974 to roughly 47,000 in 2010. That 20,000 per year increase is enough to accommodate every new law school having a cohort of 200 grads and for the initial 147 schools to each grow their cohorts by 62 grads. Though Canada didn’t see as much growth, there was enough to fuel an “articling crisis” and the Ontario Ministry of Education to reject Ryerson’s law school proposal over concerns about the employability of new law grads.

Older lawyers didn’t simply retire to make room for these new grads. Yet these new lawyers had to go somewhere.  So the number of lawyers in the market grew and grew. Inevitably, the market value of lawyers would decrease if demand could not keep up.

The market value per-lawyer eventually became such that it made economic sense for more corporations to hire more in-house lawyers. In 2010 we see both (1) in-house lawyers begin a period of unmitigated growth, and (2) law school enrollment begin a period of unmitigated decline.

I suggest that 2010 represents the point when the perceived value of becoming a lawyer became too low to justify three years and significant debt. In addition, the lower market value can also explain also why companies are finding it increasingly easier to justify hiring in-house counsel – lawyers are just as smart and effective as ever, and companies can get them at better prices than ever. The abundance of lawyers supplied the resources to grow three disruptive industries: in-house legal departments, legal out-sourcing companies (and ALSPs), and legal tech.

 

The rise of in-house lawyers

In-house lawyers in particular will propel the “industrialization” of law. By massively lowering the cost and risk of switching firms, companies can now treat legal more like a consumer good. Companies used to rely on law firms to (1) diagnose what legal services they need, and (2) ensure the quality (both pre- and post-purchase) of the legal services they received. Because of these information asymmetries, shopping around for a better price was not worth the risk of losing a reliable law firm (sort of like finding a good mechanic).

Yet when companies began to bring more lawyers in-house, they internalized theses diagnosis and quality control functions. Long-term relationships became less important – they were now more of a nice to have and less a method of managing one’s legal needs. Companies had acquired the ability to monitor the work of outside counsel, which enabled them to bargain over price.

That ability not only drove prices down, it massively changed the market dynamics. In-house counsels began to select their own specialists. The rule became to hire lawyers, not firms. That is why we see large companies like ADM using as many as 700 law firms at one time. And then cancelling relationships with 113 of those firms – every month for six months. Though ADM is a massive company, it’s indicative of the coming “elimination” of law firms’ market power.

 

Looking ahead

Oversupply forced lawyers to find jobs outside of law firms, taking salaries that legal departments or legal companies were willing to pay. By internalizing diagnostic and quality control functions, companies lowered the cost of switching enough to drive the industrialization of law. The current changes in the legal profession are not simply another buyers’ market. We’re witnessing an unprecedented structural shift.

There is a real opportunity for in-house legal departments to be leaders in the coming transformations. Indeed, given their outsized influence, large legal departments will be relied on to drive these changes. As businesses gain more market power, they will continue to demand more from their legal providers. Instead solving legal problems, businesses will want lawyers to solve “business challenges that raise legal issues.” This might feel like semantics, but consider how Microsoft’s strategic partner programs is doing just that.

As for the law firms, levelling the informational playing-field will keep pushing competition to even higher levels. So it might be wise they heed a warning from Richard Posner: “Competitive markets are not much fun for sellers.”

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