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Introduction: The Rock and the Hard Place

There are forces at work that continue to disrupt the legal services industry.

Big Law continues to increase starting salaries and raise hourly rates, and total compensation and benefits for in-house lawyers, especially general counsel, continue to grow. Between a rock and hard place, businesses are looking for ways to reduce the cost of and meet the demand for legal advice and counsel in an increasingly complex legal and regulatory environment.

A growing pool of former general counsel, deep in experience and steeped in judgment, are underutilized, not hired by Big Law because they do not command a book of business and mostly aged out of their next GC assignment.

Taking cues from other fractional C-Suite service providers, a new business model is emerging to respond to these trends: fractional general counsel services. A fractional GC service can provide businesses with seasoned, part-time, business-oriented, operationally focused legal executives for a budgeted fixed fee, without the risk, cost or time burden associated with hiring a full-time in-house legal resource, and without the high and unpredictable invoices that have become all too typical from outside counsel.

Larger companies can also benefit by a fractional GC filling the gap created by a planned or unexpected leave of absence by its GC or a senior member of the legal department, and law firms can contract with a fractional GC to provide a seasoned lawyer to a valuable client requesting a secondment while avoiding the perils of losing, even on a temporary basis, a profitable mid- or senior-level associate.

Let's explore these trends more closely.

The Rock. Let's start with the obvious.

Associate salaries have skyrocketed. Big Law is paying $190K starting salaries to first-year associates, and no client wants to pay for a first-year associate. (2019 Associate Salary Report, National Association for Law Placement). As reported by Sam Reisman in Law360.com (Large Law Firms Drive Spike in Associate Starting Salaries, May 22, 2019), the increase in associate compensation was a major contributor to “the 6.5% growth in expenses that law firms reported last year” (citing a survey by Citi Private Bank's Law Firm Group).

Big Law firms have become conglomerates of specialty practices that command specialty hourly rates. In the 1980s, General Electric rocked the legal industry by bringing lawyers in-house and creating the modern legal department. Big Law since then steadily has become more specialized, doing critical or unique work that demands deep experience in niche practice areas—and commands high hourly rates for that work.

The generalist lawyer who can work across disciplines and add value when faced with undifferentiated, general legal matters is a dying breed at a traditional law firm. Such work, if it remains at the firm at all, typically is given to junior associates who have not yet developed a specialty. (Freelance Attorneys Are an Asset to In-House Legal Teams, Law360.com, April 9, 2019). As a result, the work comes “with a high price tag for generalist, junior-level attorneys” (Law360.com). Such junior-level attorneys “rarely earn their salaries as their work often cannot be fully billed to clients and their work requires significant supervision and revision.” (The Future of Big Law: Alternative Legal Service Providers to Corporate Clients, John Dzienkowski, Fordham Law Review, Vol. 82, Issue 6, Article 15 – 2014).

Unless Big Law innovates to address these structural issues, and there is little indication of this happening, the “Rock” of high outside counsel costs for anything other than highly specialized work will continue to force companies to search for ways to reduce or at least control legal costs.

The Hard Place. The logical response is the continued growth of in-house legal departments, but therein lies the rub.

In-house law departments have grown in both size and stature to the point where many of the larger companies are becoming mini-versions of law firms—highly specialized and costly themselves. (The Legal Market Landscape Report, Commissioned by the State Bar of California, William D. Henderson, July 2018). For the small- and mid-cap companies, hiring of experienced, business-focused in-house talent is itself becoming cost restrictive. Lawyers are among the highest paid corporate employees, with total compensation packages—salary, bonus, incentives, benefits and overhead—that rival their law firm counterparts. (See, e.g., In-House Counsel Salaries Are Increasing, New Study Shows, Corporate Counsel, May 24, 2019).

[I]n-house lawyers grew at a pace four times faster than law firm lawyers from 2000-2007, before accelerating to six times faster between 2007 and 2016. That growth has come with significant costs to companies: In-house department salaries and wages accounting for $33 billion in spending in 2016 (citing The American Lawyer, February 2018) …. That cost has grown at an annual rate of 8.5%.

(The Law Firm Disrupted, Law.com, August 9, 2018). “The average pay for a general counsel in the United states is US$408,000, based on a total compensation package which includes base salary and performance-based bonuses (citing ACC 2018 Global Compensation). In a different league altogether, Fortune 500 GC salaries approach seven million dollars annually.” (The 2019 General Counsel Landscape, LawGeex in association with the Association of Corporate Counsel.)

Experience is a prized quality for in-house counsel, and, as expected, salaries for in-house counsel increase precipitously with experience. “The biggest increase in salary for in-house experience comes after reaching 11-15 years in a legal department, when salaries rise on average by 48 percent from US$437,547 to US$646,906.” (Law Geex in association with the Association of Corporate Counsel.)

In addition, there is the time and cost of hiring an in-house lawyer, very often including the expenses of an executive search firm and the severance costs of terminating an in-house resource. Thus, the cost of hiring, retaining and replacing in-house legal talent is the “Hard Place.” The squeeze between the “Rock” of outside counsel costs and the “Hard Place” of in-house counsel costs has led inexorably to the rise of alternative approaches to the delivery of legal services, including the creation of innovative new business models.

But That's Not All: Keep Your Eye on Other Trends

Other trends also are disrupting the legal landscape, including four discussed below: a growing pool of underutilized talent, the disaggregation or unbundling of legal needs, emergence of businesses providing C-Suite fractional services, and coming changes in the regulation of the practice of law.

An Underutilized Pool of Talent. Against the backdrop of the “Rock” and the “Hard Place” is a growing number of former general counsel who are not hired by law firms because they do not have a book of business and are not hired by companies who seek general counsel with longer work horizons. As reported by Law Geex in association with the Association for Corporate Growth, the typical GC (63%) is between the ages of 35-54, with less than a third over the age of 55. It is rare indeed for a 55+ old attorney to be hired as general counsel. The irony of these statistics is that the average tenure for Fortune 500 GCs is less than six years (Experience Preferred: The State of Today's Fortune 500 General Counsel, SpencerStuart, 2018), and 62% of Fortune 500 GCs gained their experience in-house (SpencerStuart).

Fractional general counsel services leverage this experienced pool of underutilized talent for the benefit of client companies who otherwise are squeezed between the high cost “Rock” of retaining outside counsel and the high cost of “Hard Place” of employing in-house lawyers.

Disaggregation of Legal Needs. The increasing specialization of Big Law and the increase in hourly rates that accompany such expertise (see, e.g., The Age of the Specialist is Upon Us, Scott Flaherty and Phillip Bantz, The American Lawyer, Nov. 30, 2018), have led clients to unbundle or disaggregate their legal needs, and to seek alternative legal service providers to do their undifferentiated, general legal work.

“By now corporate general counsel are well along in the process of disaggregating traditional law firms, taking advantage of new competitors such as Axiom and Lawyers on Demand, which reduce costs and increase efficiency through technology, streamlined workflow, and alternative staffing models.” (Consulting on the Cusp of Disruption, Clayton M. Christensen, Dina Want, and Derek van Bever, Harvard Business Review, October 2013.“) (See also Fordham Law Review: “[C]orporate clients do not need a full-service law firm to perform all aspects of the transaction for the client at high lawyer rates. Instead, every matter must be analyzed and effectively unbundled. The purpose of the unbundling is to determine who most efficiently and competently can do each aspect of the representation … The high-risk, complex work should be unbundled from the routine, low-risk work.”)

This trend feeds the worldwide growth of contract lawyer legal services, such as the U.K.'s Lawyers on Demand, Canada's Conduit Law, the U.S.'s Axiom, and the move (in certain non-U.S. jurisdictions) into legal services by the Big Four accounting firms.

The Growth of Fractional C-Suite Services. The legal industry can learn from the examples currently disrupting the delivery of other C-Suite services. More and more companies are turning to fractional providers of finance, human resources, marketing and IT services.

In recent years, we have seen an explosion of new businesses that provide executives on demand in a variety of disciplines. For example, finance: The Fractional CFO (2004), CFO Simplified (2009), PreferredCFO (2013); human resources: HumCap (founded 2001), Fahrenheit Advisors (2010), C-Suite Support (2017); marketing: Marketri (2004), Chief Outsiders (2009), Fractional CMO (2017); and IT: JSCM Group (2000), Tech Savvy Executive (2016), Fortium Partners (2017).

These services thrive because they provide “greater efficiency, experienced workforce, scalability and flexibility, and timely turnaround.” (How to Utilize Fractional Business Services to Grow in 2019, Inc.com, Dec. 21, 2018). “When CEOs apply an outsourced approach in select areas, it enables them to channel their energy into developing the company and generating revenue. If there's an area in your organization that needs support, but not 40 hours of help per week, outsourcing may be the answer.” (Inc.com).

Changes in Rules Governing the Practice of Law. In the United States, long-standing ethical rules that prohibit the ownership of law firms by non-lawyers have stunted the growth of fractional general counsel services. Contract lawyer services like Axiom can provide lawyers to businesses, but only if they are supervised by another in-house lawyer or outside counsel. This is the primary reason why the Big Four accounting firms have not expanded their legal service options to the U.S., and why U.S. businesses that provide fractional C-Suite services have not expanded to include general counsel services.

Commentators have suggested that such “ethical” considerations are nothing more than Big Law clinging to its monopoly over the delivery of legal services. Commenting on such rules in the U.S. and Canada, Ken Jagger, former CEO of AdventBalance, an Australian provider of “insourced” lawyers to corporate clients on a fixed fee basis (acquired by U.K.-based Lawyers on Demand), summed up the criticism well: “The argument that alternative structures will result in unethical behavior is the argument of a guild that is looking to protect its monopoly.” (Ken Jagger, former CEO, AdventBalance, Interview by Laura Snyder, notjustforlawyers.com).

But times are changing, and where do we see the push for change? California. Process is underway in the Golden State “that could lead to sweeping changes to the delivery of legal services, without regard to whether the businesses have lawyer ownership or management.” (California Task Force to Vote This Week on Sweeping Changes to Legal Services Delivery, abovethelaw.com, June 24, 2019). According to reporting in abovethelaw.com, “the State Bar appointed the task force … after reviewing the Legal Market Landscape Report it commissioned from William D. Henderson, professor at Indiana University Maurer School of Law.”

According to Professor Henderson, as costs decline in the delivery of legal services, productivity will improve. “Both clients and lawyers view the financial gap between legal budgets and the corporations' legal needs as a problem of price—i.e., that legal services cost too much. Yet, it is more much accurately characterized as a problem of lagging legal productivity.” A way to reduce cost and increase productivity “would be to ease rules on non-lawyer investment in order to allow lawyers to more closely collaborate with professionals from other disciplines, such as technology, process design, data analytics, accounting, marketing and finance.”

Should California lead the U.S. toward such changes, expect to see businesses already successful in offering other C-Suite services to companies on a fractional basis move into law as well, and, naturally, the Big Four accounting firms, already active in the delivery of legal services in other parts of the world, move aggressively into the U.S. market.

The Solution: Fractional General Counsel Services

There is no need to wait for California.

Nestled between the “Rock” of high-priced hourly billing from Big Law conglomerates of specialty, niche practices and the “Hard Place” of rising internal costs of hiring, retaining and replacing in-house lawyers, is a soft landing: fractional general counsel services.

Owned and operated by lawyers, providers of fractional GC services can service clients now without concern for long-standing ethical rules that prohibit outside investment in law firms. They can tap into the pool of available former general counsel to provide growing businesses with seasoned GC executives—individuals deep in knowledge across of wide array of subject matters and steeped in business judgment. They can do this on a fixed fee and part-time basis for less than the cost to their clients of either employing full-time legal resources or retaining full-service law firms.

This model can be leveraged for the benefit of: (i) small- and mid-cap companies in need of regular legal advice on a wide array of issues but on a less than full-time basis; (ii) larger companies to fill temporary gaps in their legal departments; and (iii) law firms who wish to second a lawyer to a client—thereby servicing a client need and developing a closer client relationship—without sacrificing a valuable (and profitable) mid- to senior-level associate in the process.

Small- and Mid-Cap Companies. Employment, IP, data security, commercial contracts, real estate, promotions, sales and marketing—these are some of the many routine challenges facing a growing company, and yet such businesses may be reluctant to hire an in-house, full-time legal resource. “These companies have achieved a level of sophistication such that they need and consume legal services. But they understand that doing it on a traditional basis and by the hour does not work for them, and they are not ready to employ a full-time in-house counsel.” (Peter Carayiannis, Founder and President, Conduit Law, Interview by Laura Snyder, notjustforlawyers.com.)

A seasoned general counsel with skill sets across all of these areas, a roll-up-your-sleeves work ethic, business judgment and an operational focus can step into the organization and hit the ground running in short order. They can work with the company as part of the team for one or two days each week at an affordable and budgeted fixed fee. A firm offering fractional general counsel services is uniquely suited to provide these benefits.

Because a firm offering fractional general counsel services provides lawyers who work from home or at a client's business, it has virtually no overhead; pricing models are both affordable and certain. “By stripping out the overhead, we are able to charge the client less than what they would have paid to a traditional firm. But even more important for the client is the price certainty. Clients like that we charge them a fixed price, and that, unlike with hourly billing, there are no surprises when they receive our invoices.” (Ken Jagger, former CEO, AdventBalance, Interview by Laura Snyder, notjustforlawyers.com.)

Larger Companies. For larger companies that already have a legal department, a fractional general counsel might fill a gap caused by the planned or unexpected absence of a lawyer, including its GC, “providing the flexibility to add—or reduce—resources on demand without the costs of hiring and turnover.” (Inc.com)

The growth in law departments is dwarfed by the growth in the demands placed on law departments. On a relative basis, we have fewer resources. We do not have enough bodies to throw at the barrage of matters we need to tackle. Nor do we have enough budget to pay outside counsel to throw bodies at our matters. We need to find better ways to serve our clients, and those better ways need to be sustainable—i.e., they need to scale right along with the business outcomes we are asked to pursue.

(Unless you Ask: A Guide for Law Departments to Get More from External Relationships, D. Casey Flaherty, Sponsored by ACC Legal Ops External Resources Interest Group, 2016.)

Law Firms.  “[S]econdments can be part of [a] concentrated effort to develop a greater understanding of, and rapport with, the client. For firms trying to establish a new client relationship, secondments can be a high-touch, low-risk opportunity to open a communication channel.” (ACC Legal Ops External Resources Interest Group.) “Above all, the company benefits from the presence of a lawyer available to him for a fixed term and at a reduced cost.” (The seconded lawyer is not a service provider like the others, magazine-decideurs.com, Oct. 3, 2014).

But the fragrance of the rose comes with the prick of the thorn. The law firm cannot detach to a client an inexperienced lawyer, and so it loses an associate that is profitable to the firm, often at reduced rates, and subject to poaching by the client. (Internal/external resources: looking for the right mix, Laurence Garnerie, The Business Lawyers Letter, business.lesechos.fr, March 29, 2016). David Zapolsky, General Counsel at Amazon, put it bluntly: “[I]f we/re getting really strategic, important business advice from an outside counsel, I'm going to want to bring that person in-house.” (Law Geex in association with the Association of Corporate Counsel.)

But a law firm can avoid these issues by contracting with a fractional general counsel, providing a seasoned legal executive to its client, and passing through to its client the cost (which likely is less than the firm would charge for seconding a mid- to senior-level associate). The firm doesn't lose, even on a temporary basis, a high performing and profitable attorney, the client gains a seasoned lawyer to do quality work, and the firm maintains the client relationship.

Conclusion

Businesses find themselves between a rock and a hard place when it comes to paying for quality, business-focused legal services.

Growing companies in sophisticated markets need seasoned general counsel who can collaborate cross-functionally on a wide array of business-focused legal issues and work within the construct of the client's management structure but not always on a full-time basis. Legal departments of larger companies often need an experienced extra hand on a temporary basis and are reluctant to hire another full-time in-house resource. Retaining outside counsel for such matters is becoming—if it is not already—cost-prohibitive.

A fractional GC delivers an experienced legal executive for a fixed fee, filling the need for business-focused and operationally-oriented legal help while controlling the legal budget.

Change is happening whether or not it is supported by Big Law. In Consulting on the Cusp of Disruption, Clayton M. Christensen, Dina Want and Derik van Bever summed it up well (Harvard Business Review, October 2013): “The temptation for market leaders to view the advent of new competitors with a mixture of disdain, denial, and rationalization is nearly irresistible … there may be nothing as vulnerable as entrenched success.”

Noel Elfant is the founder and principal attorney of General Counsel Practice LLC, delivering fractional general counsel services to businesses that require staffing flexibility and control of the legal budget. From 2010 through 2018 Mr. Elfant served as Vice President and General Counsel for the North American operations of DeLaval Inc., a leading maker of dairy farm production equipment and cleaning solutions for the food processing industry and part of the multi-billion dollar, privately held Tetra Laval Group. From 2003 through September 2009, Mr. Elfant served as Vice President, General Counsel, Secretary and Chief Compliance Officer of Zebra Technologies Corporation, a publicly held manufacturer and marketer of bar code and RFID technologies.