Motion Graphic by Hyeon Jin Kim

DXC Technology's deal to outsource the bulk of its legal department to UnitedLex got us thinking. Is the buildup of in-house lawyers turning? Do companies no longer look at in-house lawyers as a way to save money on outside counsel but instead look at the legal department as a cost to be minimized through outsourcing?

The data suggest a more complex dynamic. Yes, the growth in the number of in-house lawyers has outpaced the broader market, as has the growth in their compensation levels, leading to swollen legal department costs. Naturally, companies are finding ways to lower this cost. Routine work was taken from Big Law and brought in-house to lower costs; now it's moving from in-house to “new law” outsourced service providers to reduce costs further.

This is only half the story. The data also show that the cost differential that drove displacement of work from Big Law to in-house has not diminished and that in-house lawyers can handle increasingly complex matters. Thus, we can expect the displacement from Big Law to in-house to continue and to center on work of greater sophistication.

With both displacements happening simultaneously, general counsel will increasingly operate ambidextrously: taking work from Big Law to execute in-house with one hand, while outsourcing work currently executed in-house to outsourced service providers with the other. This is a once-in-a-career moment for forward-thinking general counsel: push less-interesting work out, take more interesting work in, and earn plaudits from management for lowering the company's overall legal cost.

It's a less august moment for Big Law lawyers whose services aren't especially distinct from those an in-house lawyer might expect to perform. The opportunity for such struggling Big Law lawyers? Take the comp hit of moving in-house now rather than take an even bigger hit as part of the wave of partner departures that will accompany the next market downturn.

The Rise of In-House Departments

Let's start with some data on in-house lawyers. Figure 1(a) shows the actual number of in-house lawyers by year from 1997 through 2017 contrasted with the number there would have been had growth tracked that of the overall economy. The number of in-house lawyers today is almost twice what could have been expected based on economic growth.

This growth has not been smooth; rather, the year-to-year changes in the number of in-house lawyers have moved as an exaggeration of changes in real U.S. GDP, see Figure 2. This is evidence of law's strong cyclicality and an evergreen reminder that, just as the leaders of law firms during the last downturn weren't all idiots, leaders of firms enjoying today's ebullience aren't necessarily all geniuses.