OK, that’s an uncivilized headline, so we can dignify matters by calling the NewLaw Revenue S-&$*(# the NewLaw multiplier.  This multiplier, however, is not your friend.

In economics the concept of “multipliers” is widely applied.  Keynes famously argued in his General Theory of Employment, Interest, and Money (1935) that deficit government spending in a recession would trigger a “multiplier” of its direct dollar outlays in additional private sector activity, well designed tax cuts are said to have a “multiplier” effect on spending and growth, new companies and industries entering a local economy almost certainly prompt a “multiplier” of their direct spending in increased job growth and economic activity across the region, and so on.

I’d like to invoke the multiplier metaphor in a slightly different fashion.  

In Law Land, we have (with the help of Thomson Reuters) calculated the relative market share of demand for legal services as between the three primary sources of supply in that sector: (a) law firms; (b) in-house legal departments; and (c) NewLaw.  In narrative rather than graphical fashion, here’s what we’ve come up with:

  • Ten years ago law firms captured about two-thirds of all (US domestic economy)  spending on legal services; corporate in-house departments absorbed the rest, and the NewLaw share was not measurable.
  • Last year law firms took about 60%, corporate departments north of 35%, and NewLaw on the order of 2–3%.
  • Ten years hence we project law firms’ share at about half, corporate departments at 40%, and NewLaw at 10% or perhaps higher.

If you analyze this data series in constant (inflation-adjusted) dollars, as is proper hygiene with any financial series over a meaningful span of time, law firms’ share did not grow in the past decade and will all but surely shrink in the next decade.  Meanwhile, corporate spending is growing about on pace with GDP and NewLaw is achieving 25–40% or better compound annual growth.

The question is where is the increased spending on NewLaw coming from?  Our strong hypothesis is that it’s coming at the cost of reduced law firm revenue, not lower (real $$) in-house spending.  Why?  Because, according to the market research firm Acritas, corporations have discovered a “sweet spot” range or band of spending on their in-house legal resources, and it’s from about 40–70% of total corporate legal spend. Aside from its empirical underpinnings, this makes intuitive sense.  

Corporations of any moderate degree of sophistication would be profligate to have no in-house lawyer at all and have to send even the most routine matters out to BigLaw, while at the opposite extreme it’s not a core competence of any Fortune 1000 to create an in-house law firm.  Law firms will continue to get the odd, outlier, or scary matters, and they should as they have economies of scale in terms of assembling an array of legal talent under one roof as well as an ability to supply “accordion capacity.”

In other words, corporations are rational to keep their in-house legal expenditures within an equilibrium range which, barring unforeseeable and almost unimaginable changes to the regulatory and law/compliance landscape worldwide, will remain constant-ish as far as the eye can see.

But corporations are also rational to get the greatest bang for their buck on legal services they have to buy, or more realistically rent, from outside suppliers.  This brings us back to NewLaw.  

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