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Corporate Law Departments

Insights in Action: Corporate law departments find their outside firms’ innovation lagging, but there may be little incentive to change

Zach Warren  Manager for Enterprise Content for Technology & Innovation / Thomson Reuters Institute

· 5 minute read

Zach Warren  Manager for Enterprise Content for Technology & Innovation / Thomson Reuters Institute

· 5 minute read

While our data shows that many corporate law departments see their outside law firms' innovation efforts as inadequate, most firms are still slow to change

It’s not a secret that corporate law departments have been increasingly focused on operations and technology. In fact, legal operations are cited as corporate law departments’ most strategic important initiative, according to the Association of Corporate Counsel’s 2023 Chief Legal Officer Survey, which showed that 70% of chief legal officer respondents noting legal operations as a strategy priority. More than half (58%) of corporate law departments also have a professional dedicated to legal operations today, up from 47% five years ago and 21% in 2015, the survey showed.

Given that increased operational focus, there is a belief that corporate law departments are expecting similar innovative thinking from their outside law firms. However, data from Thomson Reuters Market Insights indicates that while law departments are generally satisfied with their outside firms, they believe firms’ overall innovation is lacking compared to other performance indicators. And even as law firms continue to invest in technology and other solutions, there may not be an incentive to innovate in the way that clients wish.

According to the Market Insights data, corporate law departments rate their outside firms’ innovation at a 7.5 out of 10 — a measure that has stayed consistent in recent years, as the rating has hovered between 7.3 and 7.5 dating back to 2019. While the rating may seem high, it actually ranks as the lowest key service attribute measured, with other attributes such as quality of work (8.9), communication (8.5), efficiency (8.3), and value (7.8) outpacing innovation in each of the past five years. The figure also stays consistently as the bottom ranking regardless of geography, including in the United States (7.6), the United Kingdom (7.0), Canada (7.4), or mainland Europe (7.7).

Corporate law departments’ overall rating of their outside firms stands at 8.6 out of 10. The data is drawn from interviews with 1,831 in-house counsel during the 2022 calendar year.

This rating of firms’ innovation may come as a surprise to the firms themselves, which have been continually pumping resources into technology purchases. The Thomson Reuters Law Firm Financial Index (LFFI) reveals that on average, law firms have seen jumps in technology spending of at least 4% year-over-year for each year dating back a decade. In each of the past five years (outside of pandemic-addled 2020), those tech spending boosts were all greater than 6% year-over-year.

So, where’s the disconnect? Jason Winmill, Chair of the Buying Legal Council and Managing Partner at corporate law technology consultancy Argopoint, says that based on his conversations with corporate law departments, they do indeed find their law firms’ innovation lacking. And Winmill says he has a theory as to why. Although firms may be innovating in terms of technology, he explains, they’re not innovating in the way that clients really want — in the firms’ business model.

“Outside counsel does excel in developing innovative responses to legal questions that emerge from today’s dynamic legal environment,” Winmill says. “Where outside counsel falls down is, as a group, they have failed to develop innovative business models, more attractive commercial approaches to solving clients’ problems, and innovative service delivery models or strategies that provide quality legal representation at better value.”

Law firms’ use of alternative billing structures and even alternative legal services is growing, but the overall alternative market still represents a fraction of the overall legal market. Thomson Reuters 2023 Alternative Legal Services Providers (ALSP) Report, for instance, estimates the total ALSP market to be around $21 billion, accounting for about a 20% compound annual growth rate. However, that figure still pales in comparison with an overall global legal market that’s nearing $1 trillion by various sources, with more than 40% of legal buyers anticipating even more upcoming spend increases.

Largely, Winmill says he believes the historical success of the legal market might be its own biggest barrier to change. “The law firms have built very impressive business models,” he says. “And my hypothesis is that the outstanding financial results of the Am Law firms doesn’t provide them with much incentive to innovate commercially. It almost seems to be a ‘If it ain’t broke, don’t fix it’ mentality.”

Then, are corporate law departments destined to think less of firms’ innovation than of their other attributes? Perhaps, barring a major shift in the legal business model. But even if law firms were to more rapidly change how they conduct business, corporate law departments themselves may not be pushing for more innovation out of their legal partners, if not by their words than by their actions. Market Insights data finds that when asked what attributes they want their law firms most to improve upon, just 2% of corporate law respondents mentioned innovation. That ranked far below more common concerns such as comparative costs (27%), responsiveness (8%), and quality of advice (7%).

Indeed, until corporate law departments start focusing on their outside law firms’ innovation and making purchasing decisions based on innovation, the incentive to change remains low. And until that happens, there may remain a disconnect between what corporate law departments see as innovative, and how their firms choose to approach innovation.

For the immediate future then, one can expect to see innovation remain corporate law departments’ lowest ranked key service attribute of their outside law firms.

If you’re interested in understanding more about how the insights that underpin this month’s “Insights in Action” article are generated and how this data can better position your firm to adapt to changing market conditions, visit here.

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