Outside General Counsel: A Third Way to Deliver Legal Services [Gaille Energy Blog Issue 98]
- Posted by scottgaille
- On November 3, 2023
- 0 Comments
Many of my clients have engaged consulting firms like McKinsey and Bain to tell them how to decrease legal costs. In doing so, corporations and their consultants routinely swing between two legal services approaches: “more in-house counsel” or “more outside counsel.” This blog examines a new, emerging option for controlling costs while maintaining quality: the “Outside General Counsel” law firm.
In-House Counsel and Legacy Law Firms are Good at Different Things
Compared to legacy law firms, in-house legal teams will generally:
- be cheaper on a per-hour basis (assuming the in-house legal team’s capacity can be fully utilized);
- be more effective at interfacing with and understanding the unique requirements of the various business teams and units within their company; and
- have lower employee turnover.
Compared to in-house legal teams, legacy law firms will generally:
- have more capacity available to handle short term increases in the need for legal services (i.e., staffing related to periodic transactions or disputes);
- provide more independent and unbiased legal advice; and
- bring a more comprehensive array of strategies and solutions (reflecting perspective and experience gained from handling matters for many clients instead of a single client).
Downsides of a “Primarily In-House” Strategy
Unless the corporation’s legal needs are the same from week-to-week, it needs to employ enough lawyers to meet its busiest week—which could end up costing more than outside counsel engaged on an ad-hoc basis. The corporation’s legal advice from attorneys who are its own employees may be skewed toward what businesspeople want to hear—causing the company to take on greater risks than if it had received more independent advice from outside counsel. The corporation’s forms of agreements might lag behind (e.g., be missing newer clauses and risk allocation strategies that have developed elsewhere in its industry). Administrative distractions also make it more challenging for in-house lawyers to focus on complex legal issues without interruption.
Downsides of a “Primarily Legacy Law Firm” Strategy
Over the past two decades, the 200 largest law firms have “nearly doubled the number of [full-time equivalent] lawyers.” https://images.law.com/contrib/content/uploads/documents/292/Am-Law-200-2022_20-Trends-from-22-Years-FINAL-1-1.pdf. However, the number of equity partners (i.e., the lawyers with real continuity at these firms) has dropped from 31.9% to 22.2% of total headcount. This reduction is deliberate—the legacy law firm model is built on “leverage”, which is the ratio of partners to associates. For example, Davis Polk & Wardell has 142 partners and 629 associates (a leverage ratio of 0.23). This means that on average, one partner at Davis Polk supervises the work of four or five associates. https://www.chambers-associate.com/law-firms/partner-associate-leverage. Associates have become responsible for more work, and each partner is charged with managing more associates.
It’s not surprising that one-year turnover of associate attorneys now approaches 25% at such firms. https://www.americanbar.org/groups/journal/articles/2022/the-great-resignation-the-toll-taken-on-the-legal-field-and-wha/. Increased turnover causes network inefficiencies because lawyers are constantly billing to “get up to speed” and the corporation’s personnel must continually re-learn how to work with an ever-changing squad of lawyers. Fewer partners managing many “short-term” associates also makes it harder for legacy law firms to maintain the quality of their work product—which is mostly produced by their associates.
Such circumstances make it difficult for legacy law firms to service small and medium-sized matters. For the big deals, though, legacy law firms are the only choice. Only a legacy law firm can deploy the numbers of lawyers required for major mergers, acquisitions, and securities offerings. Their rates and profits reflect this market strength. Adjusted for inflation, equity partners at the largest 200 law firms have seen profits increase 138% percent (from $889,059 to $2,114,229 per partner) over the past 20 years.
Filling the Gap
The shift of legacy law firms toward the largest, most profitable matters has created an opportunity in the marketplace—between the in-house counsel and legacy law firms—for a third type of legal services delivery model: the Outside General Counsel. The Outside General Counsel is a smaller law firm designed to fill the gap between in-house lawyers and legacy law firms. I often explain the biggest difference between Outside General Counsel firms and legacy law firms as follows:
Legacy law firms seek matters requiring a large number of lawyers for a short period of time. Outside General Counsel firms seek matters requiring a small number of lawyers for a long period of time.
The Outside General Counsel model offers many of the advantages of the in-house and outside counsel models while minimizing their disadvantages:
- Lower Rates. Hourly rates charged by Outside General Counsel firms are considerably lower than those of legacy law firms. Lean overhead, minimal administrative expenses, and a different approach to career development make lower rates possible without sacrificing quality.
- Continuity of Personnel. Assuming top-notch work product, there is usually no “up-or-out” moment for associates at Outside General Counsel firms. Every associate can be a partner, and clients will see the same faces and hear the same voices in ten years’ time. In contrast, of the approximately 350 associates hired by Kirkland &Ellis in 2023, less than 20 (6%) of them will become partners. https://www.chambers-associate.com/law-firms/how-many-associates-make-partner.
- High-Quality Work. Outside General Counsel firms can hire the same quality of lawyers as the legacy law firms—and thereby deliver the same quality of legal services—because lower rates are achieved by decreasing overhead and providing associates with more career path certainty. A better ratio of partners to associates also results in accelerated associate development and enhanced supervision of legal work.
- Understanding of Client Business. Outside General Counsel firms are frequently founded by ex-general counsels. As experienced consumers of legal services, these partners are more sensitive to client needs and financial constraints.
- Capacity for Larger Matters. Outside General Counsel firms can provide overflow capacity to support an in-house team at far lower cost than legacy law firms.
- Independence of Legal Advice. Because Outside General Counsel firms have a diverse client base, they are economically independent of any one client and can therefore render unbiased legal advice (similar to legacy law firms).
- Enhanced Market Perspective.Outside General Counsel firms work for several companies in the same industry, so they have a broader understanding of existing market practices—i.e., the different types of terms and conditions being utilized—than most in-house counsel. Outside General Counsel firms also typically concentrate their practice in a single industry. This allows their attorneys to have a deep understanding of the contracting strategies used in that industry.
- Minimal Administrative Distractions. Outside General Counsel firms have few administrative employees, internal meetings, or other bureaucratic requirements characteristic of larger organizations. This allows for long periods of deep focus on client matters and translates into high quality work product and high per-hour efficiency.
Optimal Use Cases for Each Delivery Model
For larger corporations, the optimal number of in-house counsel should approximate the recurring (flat) volume of legal work. Outside General Counsel should be used for overflow and for matters requiring and for matters requiring only a handful of lawyers. Legacy law firms should be used for matters that require many lawyers, often from multiple disciplines (e.g., mergers, major acquisitions/divestitures, securities offerings).
Start-ups and smaller businesses are likely most efficiently served by an Outside General Counsel, who interacts directly with the executive team. The Outside General Counsel will then select and manage (in a manner similar to an in-house counsel) legacy law firms, on an as needed basis, to provide specialized services (e.g., litigation). When a business consistently has enough recurring and ordinary-course legal work, an experienced in-house counsel should be hired, and the Outside General Counsel returns to its role of filling the gap between what the in-house counsel can do and the larger matters that require a legacy law firm’s attention.
The evolution of legacy law firms has created a widening gap between the comparative advantages of in-house lawyers and outside counsel. The good news is that companies can fill this need with a third delivery model: the Outside General Counsel.
About GAILLE PLLC – Outside General Counsel
GAILLE PLLC just celebrated its 8th anniversary as an Outside General Counsel law firm. Three of GAILLE PLLC’s partners previously served as in-house counsel, including as the Chief Compliance Officer & General Counsel for a NASDAQ-listed E&P company and the General Counsel of Occidental Chemical Corporation. We have four partners and three associates (a leverage ratio of 1.33).
About the Gaille Energy Blog. The Gaille Energy Blog discusses issues in the field of energy law, with periodic posts at www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, the author of eight articles in the Energy Law Journal, and co-author of the award-winning travel book, Strange Tales of World Travel (Bronze Medalist, IPPY Awards for Best 2019 Travel Essay; ForeWord Magazine Finalist for Best Travel Book of 2019; North American Travel Journalists’ Honorable Mention for Best Travel Book of 2019).
Images available on the Internet and included in accordance with Title 17 U.S.C. Section 107.