ABA Section of Business Law

ABA Section of Business Law
Business Law Today
July/August 1998

Chaykin is vice president: law, general business and technology at Sprint Corp. in Kansas City, Mo.

I'm in favor of happiness for outside counsel. I'm also in favor of Mom and apple pie. But, let's be honest with ourselves. As Mr. Henning points out, lawyers in big firms "are making more money than ever before." I'm not sure whether — as Mr. Henning reports — "a very high percentage of them are unhappy," but none of the lawyers I know who are making "more money than ever before" are anxious to volunteer for a program that would significantly reduce their incomes. How is it that all these unhappy lawyers are making so much money? Mr. Henning suggests that it is because the "guild" has collapsed. If so, it might be the first "guild" in history that raised its prices and prospered after its collapse.

A better — and more obvious — explanation is that outside lawyers are making more money than ever before because the total amount of legal work has increased and the demand for sophisticated practitioners has also increased. At the same time, outside counsel have enhanced their economic positions even as in-house counsel have finally established their respectability.

This "win/win" has transpired because successful law firms have prospered by leveraging their areas of relative competitive advantage, which are recognized by in-house lawyers as they retain outside counsel. Overall, this gives the client the special abilities of outside counsel and the business knowledge of in-house counsel and permits them to apply each where appropriate. The ability of outside firms all over the country and in all areas of business to adapt to these variances and continue to prosper demonstrates that outside firms already understand a great deal about their clients and their needs.

Nevertheless, in spite of the unprecedented success of the modern American law firm, it's still worth the effort to think about some of the questions Mr. Henning has raised. But if we're to arrive at a proper conclusion, let's make sure that we identify the right problem and get the facts straight.

First of all, even if outside lawyers are "unhappy" they will not find "happiness" giving up their income base, departing from what they do best, and trying to wrestle legal work away from in-house counsel. In-house functions at major American companies have not grown and prospered because "the guild collapsed." They have grown and prospered because it is more efficient and sensible for some of these services to be provided in-house, and because professional management of outside counsel fees have fostered important savings and efficiencies. Outside counsel need to understand their clients; there's no doubt about that. But they also need to understand the client's in-house legal department, and work with it.

Some in-house departments have a philosophy of maximizing the amount of in-house work. Others have the opposite philosophy, and attempt to "outsource" as much as possible. A great many in the middle attempt to perform a variety of legal functions with varying degrees of outside counsel involvement. Although it is difficult to generalize, it is probably fair to say that the greater the need to relate the legal work to the business on a continuous basis, the greater the comparative advantage of in-house counsel. Conversely, the greater the need for a "lawyer's lawyer" the greater the comparative advantage of the outside lawyer. Outside lawyers excel at providing advice in areas that require extensive staffing for relatively short periods of time, require continuing contact and concentration on a specialized area of legal process (as opposed to corporate process), or require the type of expertise that a particular in-house department simply cannot provide on a cost effective basis (which could result if the law in a particular area is highly specialized or if the call for that particular expertise is infrequent for that particular client).

As a result of this division of labor, both in-house and outside counsel have a chance to do what they do best, and both groups have prospered. Is this a problem? Perhaps Mr. Henning is looking at the glass and saying, "it is half empty." I look at the glass and say, "our cup runneth over."

The origin of Mr. Henning's problem seems to be his perception that the fall from grace for outside firms started when their CEO golfing buddies lulled successful partners at major law firms into crossing over into in-house positions. These new general counsel then declared that they could do almost everything better in-house. However, according to Mr. Henning, this was a big mistake because these ex-partners deployed the inefficient models they learned at their law firms. Moreover, "the heady days when general counsel and their in-house departments could do no wrong was also the era when law firm practice" became "less fun." "All of a sudden the client was upstream. The client told outside counsel what to do, when to do it and how much he could charge. Competent associates on partnership track sometimes opted to go in-house."

The idea that in-house counsel became more active and respectable because powerful CEO's persuaded lawyers with big egos to come in-house seems terribly silly to me. American corporations were facing legal issues of increasing complexity and needed someone on the management team who was immersed in those problems on a daily and continuing basis. This was a need that an outside firm finds difficult to fill, for a variety of structural and economic reasons. An in-house lawyer focuses on one client and spends a great deal of time, effort and energy learning the intricacies of that business and the relationships within it. An in-house lawyer sacrifices the ability to serve many clients and substitutes greatly enhanced value to one client. In-house lawyers prospered because their services were needed.

True, over the past few years we have learned that in-house lawyering is not the answer to everything, but that should be no surprise. The real challenge is for in-house and outside lawyers to work together to provide the most effective and efficient delivery of legal services to that client. Of course, this will change over time as the client's needs change and as in-house legal skills shift. Finally, I don't quite know how to respond to Mr. Henning's nostalgia for those "good old days" when a law firm could "banish" an associate from the partnership track and leave him with no alternative. We now have more options for smart lawyers. On balance, isn't this also a good thing?

Apparently, Mr. Henning still sees a problem because lawyers in successful firms are truly unhappy — even though they are better off financially than ever — because they are no longer the "trusted counselors" of CEO's. According to Mr. Henning, they have been relegated to the position of "junk yard dogs," working on a piecemeal basis. Once more, I think this derogates the role actually played by outside counsel and I question the accuracy of this assertion. Outside lawyers are still trusted advisers of general counsels and senior management all over America. Many outside lawyers are "repeat players" who are called in for their special expertise in litigation, securities, M&A transactions, deal making or investigation.

It's probably true that few law firms still enjoy the "general counsel" role they played before the advent of prominent in-house counsel. However, it is a long way from there to "junk yard dog." Of course, a lawyer who thinks like a junk yard dog will probably become one. A lawyer who works with in-house counsel to be a trusted adviser to the in-house lawyers will be called on to become a trusted adviser of senior management.

But even assuming that Mr. Henning is correct and lawyers in big firms are truly unhappy with their lot, I think that Mr. Henning's prescription for happiness needs some adjustment. The distribution of "trust" and "happiness" between in-house and outside counsel need not be a zero sum game. If an outside lawyer feels alienated, relegated to piece work and divorced from the client's business, they certainly do need to work harder to reconnect with their client. I can honestly state that I would not want such an alienated and unhappy lawyer working with me. A lawyer with an outlook like that would be unmotivated, fail to make decisions that are consistent with achieving the business goal, and would avoid taking appropriate risks to minimize unnecessary costs. It makes some sense that an improved understanding of the business would make outside counsel more effective, thus making outside lawyers "happier" and the business client better served.

If Mr. Henning is describing a real problem, the root of it might be who will pay to make outside counsel more effective and "happier." If Mr. Henning is correct and outside firms have more than enough "piece work" to keep them going, there may be some reluctance to invest to become "happier." However, my experience has been that outside counsel gladly invest the time if they can develop a better understanding of the business context. It is almost always worth doing, and brings large returns for the client. If it happens to make outside counsel happier, so much the better.

The evolution of the relationship between outside counsel and in-house lawyers is largely a matter of economic forces. Over all, sensitivity to these forces has led to more effective and efficient delivery of services to major corporations, while both in-house and outside lawyers have prospered. Unhappiness and alienation among outside lawyers — to the extent it exists — cannot be solved by an outside counsel counter-coup against the rise of in-house counsel. Rather, outside counsel need to assure that they understand how their work relates to their client's business and in-house counsel needs to be cooperative in passing on this knowledge. In my view, this is exactly what is taking place, mostly because it leads to better results.

There may be a day where a new kind of law firm with lower overheads, lower salaries, and more efficient practices evolves to truly act as a substitute for in-house counsel. Such a firm would face some real constraints, because the degree of integration with the business to replace an in-house department would probably limit such a firm's representation to one company in each industry. Firms like this may evolve in particular areas, such as employment law, intellectual property law or procurement and real estate practice. If such firms evolve, I believe they will look very different from the current law firm model.

For now, however, there is still much work to be done tuning the relationship between in-house and outside counsel for the good of the client and — perhaps — the greater "happiness" of in-house and outside counsel.