Large corporate law firms (a/k/a “Big Law”) are on a hiring spree. They are snapping up tech-oriented talent to fill a mélange of newly-formed firm C-Suite roles. The list includes: Chief Officers of Innovation, Information, Process, AI, Data, and Value. Firms are also onboarding data scientists, machine learning engineers, and other digital experts, many of whom are recruits from other sectors. The Chief Innovation Officer (CINO) role is not new, but its widespread adoption and focus on digital talent is.
It’s a stretch to conclude the hires evidence Big Law’s wholesale commitment to a “digital or die” transformation. It’s reasonable to infer, however, that firms anticipate a reckoning for their remarkably resilient, enduring, highly profitable economic model.
The real story of the new hires is whether their mandate is to transform the existing firm model or, far more narrowly, to improve its efficiency. This is a distinction with a significant difference. Peter Drucker put it this way: “There is nothing so useless as doing efficiently that which should not be done.”
Transformation is not an epiphany, creating a new role, or launching a short-term change initiative. It is a long-term business strategy focused on leveraging technology and data to create new structures, models, and processes that benefit customers. Transformation is much more than an arsenal of new tools; it requires a workforce that understands and creatively and responsibly applies them to enable material advances. Accenture calls this a “digital core,” the critical technology capability foundational to the creation and empowerment of reinvention. The allied concepts of transformation and innovation have become an existential business imperative in an environment where change has become a constant.
Successful transformation requires an organization culture committed to continuous innovation. It is a team journey whose North Star is customer results and an elevated end-to-end experience. It is enabled by technology, fueled by data, and creatively propelled by a diverse workforce bound by a shared purpose. Its workforce has a digital core, curiosity, emotional intelligence, resilience, and cross-functional, learner-for-life mindset. This is an environment where innovation thrives.
Big Law does not presently have a structure or culture conducive to transformation and innovation. This ups the challenge of their Chief Innovation Officers and other new firm C-Suite hires. Their success hinges on the scope of their mandate and the commitment of firm leadership to enthusiastically support a long-term transformation strategy. Without it, innovation will, at best, be isolated and sporadic. More importantly, the longer-term sustainability of the firm depends upon it.
The success of the new hires will also depend upon their budget, success metrics, input in talent management, finance (notably billing rates, fee arrangements, and compensation), thought leadership, strategic partnerships, and structural organization. The new firm C-Suite roles must be integrated, not balkanized—data, AI, information, and process are all threads of innovation.
Even if there is buy-in from the firm management committee, the transition will not be easy. Unanimity is highly unlikely among equity partners- especially those nearing retirement. Many will resist “leaving money on the table” to invest in long-term firm initiatives for which they will receive little or no return. A firm’s commitment to transformation also risks defections from rainmakers for whom even richer, often guaranteed compensation packages and innovation hall passes from other firms are presently available.
A demonstrable commitment to innovation will, however, be a talent magnet and potential market differentiator for a firm. Big Law’s structure has long been monolithic, cautious, and loathe to break from the pack. This has produced a herd mentality. As Walter Lippmann wryly observed, “When all think alike, no one thinks very much.”
These are some of the headwinds that the firm Innovation Chiefs and their fellow digital hires will encounter. They can expect a bumpy ride.
Big Law’s Challenges
It’s no coincidence that the flurry of innovation and digital hires coincides with Generative AI’s (GenAI) rapid transition from investment to experimentation to implementation. While GenAI is by no means the sole threat to the Big Law model, it’s impact is already evident.
A recent study conducted by the Association of Corporate Counsel (ACC) and Everlaw examined the transformative impact of GenAI in corporate legal departments. Some key findings include:
· 58% of legal departments expect a reduced reliance on outside legal service providers, specifically due to GenAI. This has more than doubled since the 2023 survey.
· Nearly half (49%) of those surveyed expect reduced operational costs from AI. Year-over- year, 33% of respondents in the 2023 survey looked to technology/AI to control costs, up from 12% in the 2022 survey – a 400% increase in three years.
. Less than a quarter believe their legal departments are prepared for the talent implications of this transformative technology. Providers that can fill this void will benefit from huge, unmet, and urgent market demand. This is emblematic of the changing character of “legal services.”
Law firms will likely be clients, not providers, of those services. Progressive firms would be wise to explore strategic partnerships with elite multidisciplinary business consultancies and/or large tech companies. Multidisciplinary consulting organizations with enterprise transformation expertise and experience will be especially well positioned to take on digital core and change management work. Those that can galvanize the legal function’s enormous untapped enterprise value into the wider enterprise transformation journey will be in high demand. The legal function remains the “missing link” in enterprise transformation.
A 2024 Wolters Kluwer Report on legal innovation identified several key trends that will significantly impact the legal industry in the next three years. GenAI, information management and security, and the ability to attract and retain top legal talent top the list. Notably, 67% of corporate legal departments and 55% of law firms expect AI to reduce the prevalence of billable hours. Agentic AI will deliver another blow to the billable hour, long the financial cornerstone of the Big Law economic model. The sunset of the billable hour is emblematic of law’s transition from input to output and lawyer to customer value determination.
Law firms are beginning to see the effects-if not yet financial- of their misalignment with in-house counterparts. Migration of work in-house as well as to other legal provider sources has steadily increased over the past several years. In-house spend now accounts for 54% of total corporate legal spend. This market shift is not simply a matter of cost; it also involves in-house’s close alignment with business purpose, customer-centricity, the speed of business, holistic view of risk management, cross-functional engagement with other business units, proactivity, and enterprise value creation, It also reflects a shift in talent needs.
Corporate legal teams have been in the vanguard of enterprise re-imagination of the legal function. The author described Chief Legal Officers (CLO’s) as “law’s astronauts” in a 2020 Forbes article, noting, “The expansion of their role and influence—and the “ultra-legal” skills required—foreshadow changing expectations of all lawyers and allied legal professionals.”
The speed, complexity, multiplicity of risks— geopolitical and domestic instability, climate change, mass migration, supply chain, talent gap—and asymmetrical competition are among the challenges confronting GenAI- era business. The C-Suite is demanding more from the legal function. It is leveraging legal’s critical thinking and problem solving capability, aptitude for synthesizing large amounts of information, and other cognitive skills and applying them well beyond the traditional boundaries of “legal.”
The input of the corporate legal function in enterprise strategic decision making, risk management, governance and corporate social responsibility, and value creation continues to expand. The legal team’s footprint is no longer a narrow one; it now cuts across the enterprise. The in-house “legal” role is becoming far broader, strategic, and impactful than it has ever been. This is beginning to put pressure on Big Law to bridge the gap separating its modus operandi from in-house teams. As the author noted in a 2017 Forbes article, “the growing obsolescence of the incumbent partnership model is increasingly visible.”
Law firms will be challenged to operate as in-house teams do. They have different organizational structures, business models, cultures, objectives, resources, and metrics. Bridging this cultural divide will be firms’ greatest challenge in aligning with corporate teams. But there are others.
Most firms will be unable to keep pace with corporate investment in tech and data, nor can they leverage their formidable IT and data infrastructure and expertise. They will also be challenged to attract and retain top-tier talent from other fields unless and until they engage in an end-to end cultural change. That is difficult to do, especially absent a “burning platform.”
Asymmetrical competition is another challenge to Big Law. Firms are no longer competing against each other in what has long been a monolithic, self-contained, self-regulated legal marketplace. Big Law will soon be competing and/or partnering-with- large technology companies global consulting giants (beyond the Big Four already in the marketplace), and private equity (a potential opportunity as well as challenge for large firms). Big Law’s lawyer-centric, practice-oriented, pedigreed, and artisanal workforce will struggle to morph into a multidisciplinary, integrated, tech and data-enabled, customer-focused delivery system designed to respond to the speed, customer-centricity, and demands of business. BigLaw will undoubtedly survive, but not in its current form. It will be part of a more holistic, integrated, multidisciplinary, delivery engine. The transformation of medical practice to healthcare is instructive in this context.
Will Big Law attempt to extend the shelf life of its legacy model by retaining work it should no longer be doing and improving efficiency? Or will it transform its structure and business model to focus on what it does best: provide legally-trained business expertise, experience, judgment, and broad trusted advisor counsel in high-value matters?
Up, Up, and Away; Big Law’s Rates and Profits are Soaring.
Amidst all the change and challenge confronting it, Big Law’s already stratospheric profits and and billing rates are soaring. Elite firms are partying like its 1999.
The Am Law 100 firms enjoyed a banner year in 2023. Their financial metrics showed significant growth in revenue per lawyer (RPL), profit-per-equity-partner (PPEP) and profit per lawyer. The annual earnings of an average partner at top firms is now in the $5M range. Top partners can earn twice that.
“Above The Law” recently reported that the hourly billing rate for third year associates at several Am Law 50 firms now tops $1,000. A few firms bill first-year lawyers at almost $1,000. Senior associate hourly rates are almost $1,600 at some elite firms. Senior partners have now cracked the $3,000 hourly barrier.
The latest data on Am Law 100 bill rate increases shows that law firms continue to implement substantial hikes. For the first half of 2024, billing rates rose by an average of nearly 8%, one of the highest increases in recent years. The Am Law 50 firms raised their rates even more. Approximately 86% of the Am Law 100 expect to continue increasing their rates over the next 12 months.
How long can Big Law defy economic gravity?
The Big Law economic orgy (remember “Churn that bill, baby!”?) is occurring even as its in-house colleagues contend with escalating cost takeout quotas, increasingly complex and voluminous workloads, and value creation expectations. Why, with all the internal and external pressures in-house teams are facing, is its leadership not saying “No mas!” to firm rate hikes? When will CLO’s and procurement get tough with law firms- not only their billing practices, but also lack of knowledge and data management sharing, more effective use of technology, and a host of other issues?
There are several reasons. First, most in-house teams are so overwhelmed by their workloads, transformation journeys, up-skilling, and digital talent shortages that they are triaging. At a time of overwhelming change and an absence of ready solutions, Big Law is regarded as a known quantity and a safe bet. This is especially true with high-value matters. Negotiating firm rack rates or seeking fee discounts is not a long-term solution, but it is a relatively safe, easy way to return to even more pressing matters.
A second reason why CLO’s don’t show firms tough love is the perceived lack of alternative provider sources capable of delivering Big Law’s consistent results at scale. That market bias emanates from the longstanding symbiotic relationship between law firms and in-house legal departments. It also stems from the “lawyer selling to lawyer” dynamic. Procurement is now taking an elevated role in legal buying decisions, a sign that the “uniqueness” and lawyer-to-lawyer dynamic that long drove legal buying decisions is shifting to a more pragmatic, results-driven one.
The third and most fundamental reason why corporate teams are not pushing harder on firms to change is because they are themselves in the early stages of the transformation journey. They are still trying to figure it out. Until this is sorted, Big Law will continue to be sourced too much work it should not be doing and not enough “non-traditional” strategic work where it could add significant value.
Conclusion
Is Big Law in the early stages of a transformation journey or following the path of companies like Kodak, Sears, and Blockbuster whose dominant market position, resistance to change, and hubris resulted in disruption?
The willingness of clients to ratchet up expectations of BigLaw performance, value, and alignment with enterprise objectives is critical. That would profoundly affect the impact of Big Law’s new digital hires as well as alter the firms’ course. It would also confirm the catalytic role business plays in driving legal transformation.