By Stuart Wood, CEO, Caravel Law.

Like many people, prior to the pandemic I was a regular customer of certain sharing economy companies like Uber and Airbnb. I remember attending a presentation by someone from Turo, a marketplace for renting cars from individual owners, and I must admit I was surprised that I could fly to a different city and have someone meet me at the airport and toss me the keys to her car. It’s clearly a continuation of the trend away from ownership towards using goods and services when needed.

What’s more, car-seekers can choose exactly the kind of car they want – from a camper van to a Jeep to a Lamborghini – rather than being restricted to selecting ‘midsize’ from a dropdown menu.

This kind of cost-effective, convenient and personalized service model isn’t unique to alternative car rental companies. It exists for legal services as well.

In the same way you might want to rent a SUV for a weekend in the country but a convertible for a drive down the coast, with fractional in-house counsel offered by alternative law firms, you can hand-pick legal experts with the precise expertise you need, and the service model that best fits your company, for every legal project. This offers similar cost-saving benefits and shares the same rent-don’t-buy ethos that is spurring the sharing economy business model forward.

Yet in-house legal teams continue to grow.

While these outside options continue to expand, and more and more companies take advantage of them, in-house legal teams continue to add more lawyers, more paralegals and more legal operations professionals.

This has been true for a number of years, and according to ACC’s annual Chief Legal Officer Survey, the pandemic has not altered this trend. Companies continue to add lawyers to their in-house legal departments. Despite the financial impact of Covid-19, very few companies plan to reduce the number of in-house lawyers.

Why are companies choosing to “own” more lawyers, vs. just hiring them as needed?

Certainly the main driver is cost. If you have enough legal work to keep a team busy, it’s less expensive to hire people vs. pay a law firm by the hour to do the same work. As one example, insurance companies have grown their teams to handle the steady stream of files instead of relying on outside counsel. As law firm rates have skyrocketed, many companies have found themselves unable to afford the legal advice they need through the big firms.

At the Legal Marketing Association conference prior to the pandemic, Mark Smolik, the Chief Legal Officer for DHL, talked about how he had grown his in-house team from 7 people to 62 people. Yet despite that huge increase in head count, his total all-in cost of legal services has gone down. He knows the all-in cost per hour of his legal team and it’s much lower than his law firm options. He has been shifting work from law firms to his internal team.

All three of the GC’s on the panel made it clear that law firms should expect to continue to lose work to these internal teams.

This growth in internal legal departments has taken place during a period where all of these new options have emerged – alternative legal service providers and software solutions that can help bring down legal costs, without increasing headcount. Companies are aware of these options and often use them for specific tasks, so they are purposely choosing to go the in-house route instead of using an ALSP, which would give them some cost savings without adding headcount.

So is it just about cost, or is there more to the story?

The GC’s who were part of the panel really focused on cost as the driver, but their answers also suggested other factors. Alexia Maas, the GC for Volvo Financial Services, mentioned that she is looking for industry expertise over practice area specialization. Mark Smolik highlighted that DHL is really looking for business advice from people with legal skills. All of the panelists stressed the importance of law firms doing their homework, but no amount of homework can compete with someone who is in the business every day as part of the internal team.

As businesses and entire industries continue to change quickly and evolve, the importance of in-depth industry and company knowledge will only increase. Law firms will need to make investments of their own time and resources to keep pace. Finding new ways to add value working in partnership with these in-house legal teams, and demonstrating real teamwork is what will help law firms distinguish themselves and remain trusted advisors.

My guess is that the difference in cost between hiring a lawyer and using an outside firm will shrink over time. There will be upward pressure on in-house salaries as more and more companies compete to hire the same talent. New options from non-traditional law firms and other ALSP’s will present more attractive solutions for companies considering hiring an in-house lawyer. It will be the other benefits, such as industry expertise, a full understanding of a company’s strategy and in-depth knowledge of a company’s culture and preferred way of doing business, that will keep this in-house hiring trend going.

Hiring a lawyer isn’t easy though, especially if you are hiring for the first time and creating a law department of one person. One of our clients just hired a general counsel for the first time and the process took much longer than they expected. They ultimately found a very strong candidate and I think she will do a great job for them, but the search has been a large distraction for the past few months and has taken up a lot of valuable time for some key executives.

That will be the case again if she leaves and they have to search for a replacement – possibly even more of a challenge than the original hiring process given the need for offboarding and onboarding. The salary also becomes a fixed cost and as we’ve seen over the past two years, if things slow down, that in-house lawyer becomes an additional expense to carry.

Findings from the first Canadian Legal Innovation Forum: 2021 Legal Department Survey reveal that in-house lawyers are finding it extremely challenging to manage their current demands. Respondents said the most significant challenges their legal department will face over the next 12 months are increased workload, burnout and a requirement to deliver more within the same budget.

With legal work piling up and a flat budget, in-house counsel are being forced to find cost-effective legal support. Law firms certainly have to start by leveraging technology and becoming more efficient to close the cost gap as much as possible. They will also need to find new ways to work as a team with in-house legal groups, and deliver exceptional service that is tailored to the specific client.