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.
It’s too early in the game to tell how this will play out, but there’s growing evidence supporting the notion that when corporations hire a NewLaw firm to fulfill a function previously served by in-house counsel, rather than dismiss those beached lawyers they prefer to give them more interesting and sophisticated work. (We have seen this happen at HSBC and at Vodafone where Riverview Law’s “Kim” process optimization tools freed in-house lawyers from roles supporting front line customer service.)
Let me hasten to add that we’ve seen counterexamples as well, famously with GE letting (forcing) 600 of its in-house tax department staff, including senior-level lawyers and accountants, relocate to PwC under a five-year contract to continue servicing GE’s tax needs, but while also being free to work for other clients of PwC.
The only sensible way to characterize the net result of this transaction, for present purposes, is as a shift of spending from in-house resources to NewLaw (PwC and the other Big Three being very solidly in the NewLaw sector).
These kinds of deals, and there have been a handful of others, get headlines because they’re so novel. Repurposing some lawyers “upstream” when a NewLaw provider can take over their previous responsibilities happens under the radar. Although genuine data on this point is as yet nonexistent, our strong intuition is the latter movement is far more common than the GE/PwC paradigm.
Back to the NewLaw multiplier.
If we can stipulate for now that shifting spending from in-house resources directly to NewLaw is the exception rather than the rule, shifting spending from BigLaw to NewLaw happens every day, and whether it’s voluntary or at the point of a checkbook is immaterial.
I believe the great majority of NewLaw revenue represents spending shifted from BigLaw.
So finally to the multiplier itself. What size is it? 1.00? 2? 37?
Again, we lack genuine sector-wide data on this question, but I submit it’s trivial to conclude it’s > 1.00. Why? Because clients shift spending to NewLaw to….save money. Yes, there are increasingly perceived benefits of NewLaw providers in quality, consistency, reliability,, repeatability, process and cost transparency, auditability, and so on and so on, but the #1 motivation is to cut costs vis-a-vis having BigLaw dl the same work. If you believe this, which is not a “heavy lift,” as they oddly seem fond of saying in Washington, DC, then the multiplier > 1.00. QED.
How much bigger?
Based on widely available information, and with the help of conversations with knowledgeable participants in this area, it depends. It depends primarily on the exact nature of the activity being shifted from BigLaw to NewLaw. If NewLaw is being substituted on a massive document review for BigLaw partner track associates, it could easily be 10 or 12 to 1. For BigLaw contract or staff lawyers, 4 or 6 to 1. For BigLaw with a captive offshore or nearshore installation, still on the order of 2 or 3 to 1.
On the condition that this is only an estimate, subject to change, and desperately in need of solid empirical grounding in support or refutation as soon as possible, my working hypothesis is that across the board the NewLaw multiplier is ~3.00 to 1.
Simply put, for every $1.00 of revenue NewLaw gains, BigLaw loses $3.00.
Now, shall we re-run that decade-hence projection of the relative market shares of BigLaw, in-house, and NewLaw? Feel free to revert to calling it a Revenue Suck in lieu of the front-parlor suitable Multiplier.