Does the increasing role and prominence of in-house lawyers represent a threat to their external legal advisers? Jonathan Rayner investigates

The days when working in-house made you some kind of second-class solicitor are long gone. There is now a career structure, with the promise of quality work. Existing legal teams are growing bigger, and many smaller companies are employing in-house counsel for the first time. And there are ample opportunities to take on a critical role at your company or branch out into non-legal areas of the business.


It is small wonder, then, that private practice solicitors are knocking on the door to join their colleagues who have already opted for the corporate shilling. Law Society statistics show that around 23,000 of the 100,000 practising solicitors work in-house, of whom 8,000 are in commerce and industry. However, as they do not need practising certificates, it is estimated that there may actually be up to 14,000.


But what impact is the booming in-house sector having on the rest of the profession? Are corporate law firms losing work that has traditionally been farmed out to them?


A recent survey by accountants Grant Thornton has magnified fears that this is happening. It found that more than half of in-house legal teams at FTSE 350 companies plan to expand over the next 12 months (see [2006] Gazette, 21 September, 8). ‘As the reins are tightened on external spend, in-house legal teams are making use of their specialist practitioners by taking on more work than ever before,’ says Grant Thornton partner Toni Pincott.

Michael Armstrong takes more than a passing interest in these issues. He is national chairman of the Law Society’s Commerce & Industry Group (C&I), as well as head of legal insurance services at Mount Grace Insurance and a director of industrial diseases claim manager Freeclaim IDC.


He says the key issue for most companies is achieving a greater degree of control over costs. A company employing many thousands of members of staff, for example, is likely to find it cost-efficient to keep employment law in-house.


Less obvious is what he has perceived to be the increasing tendency of companies to keep litigation in-house. Mr Armstrong says: ‘You can deal directly with chambers and, now that we’re being encouraged to embrace mediation, you often don’t get to court anyway. So why go to the expense of a middleman?’


The list of organisations granted ‘licensed access’ by the Bar Council, giving them the right to instruct barristers directly, is surprisingly long and varied. It ranges from the likes of accountancy giant KPMG and banking behemoth HSBC, via a host of public bodies, to the Labour Party and the Kennel Club.


That could be particularly bad news for law firms in light of another recent survey, by US law firm Fulbright & Jaworski, which found that UK businesses have seen a steep rise in the amount of litigation they face (see [2006] Gazette, 12 October, 6).

Mr Armstrong says that where the litigation is highly complex, as is often the case with the larger building contractors, the work is still farmed out. Transnational contracts are also often given to outside law firms. ‘There’s indemnity insurance behind the lawyers acting for you, which is always an attractive commercial consideration when you’re grappling with cross-jurisdictional agreements.’


At the same time, larger in-house legal teams does not necessarily mean less work for the outside lawyers. Wayne Gibbard, head of legal and compliance at VW Financial Services, explains why he recently recruited an extra lawyer: ‘Compliance is now a discrete function sitting within legal, meaning the work is more complex technically and requires a more detailed understanding of the law than you could expect from a paralegal. So we were up-skilling when we recruited another lawyer, not looking to bring work in-house that we normally outsourced.’


Mr Gibbard adds that the legal team, which is increasingly involved in committees and other key forums of the business, reports quarterly to the chief executive and board. He says: ‘It’s important that our contribution to the business is quantifiable and demonstrably more cost-effective than buying it externally.’


Sealed Air Ltd also plans to expand its legal team and is about to recruit an additional solicitor. Mike Chapman, the company’s associate general counsel and regional counsel for Europe, the Middle East and Africa, explains that the decision to expand the team was business-led. He says: ‘Eastern Europe is a growth area for us and we need extra expertise in our European legal department. There’s the increased weight of regulation and compliance, too, which means we’re having to resource ourselves to deal with it. So there’s no question of taking work away from an external provider.’


The company sources external work in particular in the areas of commercial property and litigation. Mr Chapman for one does not see litigation as a field which will increasingly be absorbed in-house. Sealed Air trades across 27 jurisdictions, and he says: ‘It would be utterly impractical to have 27 specialist property lawyers or litigators sitting at their desks here.’


He adds that whereas the in-house team might do the initial preparations for a supplier contract or acquisition, for instance, specialists in an outside firm are asked to check and advise on the finished article.


Dawood Pervez, company secretary and director at Bestway (Holdings) and a Law Society Council member, agrees that the in-house sector is enjoying a period of rapid development, but not at the expense of the private sector. He says businesses are facing increased regulation in almost every sphere of their activities and the high cost of insurance has meant they now have to look at risk management in a different light.


He reckons that there are other factors at work, including an increasing recognition that lawyers bring a vital skill set to businesses and are able to contribute at all levels. Mr Pervez adds: ‘It would also be true to say that if one of your competitors or suppliers has a legal team, then you need to get one to keep up – so there’s a domino effect.’


As a result, perhaps, recruitment and retention have become less of a challenge. ‘Lawyers are keen to go in-house because of the perceived benefits in quality of life and the desire to be involved in a red-blooded commercial environment,’ Mr Pervez says.


Deepak Malhotra, chairman of C&I Group’s London branch and senior counsel at Interbrew UK, observes that the in-house legal function has evolved into new areas of the business, such as risk management and corporate governance. In-house teams, he adds, are now working at the very heart of the operation and are being ‘bulked up’ to meet their expanded responsibilities.


Mr Malhotra says: ‘With bigger in-house teams involved in strategy and projects from day one, it has become more important than ever to measure performance and quantify value. The reporting line for most legal teams is into the finance director or CEO, with tangible metrics for success. This also facilitates in-house folk moving laterally into the business. There is more acceptance that lawyers have the right skills to make a contribution – in negotiations, for example.’


Yet another survey of late, this time from publisher PLC in conjunction with management consultancy Hildebrandt International, confirms this trend, with more than half of general counsel now reporting to the CEO, up from one-third in 2003 (see [2006] Gazette, 5 October, 3). It found that in-house legal teams are playing an increasingly central role in overall business strategy, with nearly three-quarters of heads of legal now attending board meetings. However, they are less likely now to be directors, reflecting an increasing emphasis on the in-house lawyer as independent of the board and the guardian of corporate governance.


Elizabeth Norris, a senior lawyer at ExxonMobil International, reports that although her own legal team is growing quite slowly, in-house is the fastest expanding of all the sectors monitored by the Law Society.


Unlike external providers, in-house lawyers understand the business and can contribute at every level, she says. They recognise the legal risk and can act to forestall problems. They can work with the business on projects from inception to completion. And they are fully aligned with the objectives of the company.


This fast-growing army of in-house lawyers has specific training and mentoring needs that differ from the private sector. This need is met by the C&I Group’s training sub-committee, which Ms Norris co-chairs with Tony Brierley of 3i plc. She says: ‘We put on around 50 training courses a year, which represents a big throughput of lawyers. These are courses designed for in-house lawyers by in-house lawyers.’ As well as legal topics, soft-skills training has been reintroduced. ‘The plan is to equip in-house lawyers with every skill they need for a successful career,’ Ms Norris says.




Michael Armstrong predicts a bright future for the in-house legal sector: ‘In-house is no longer the poor relative of private practice. It’s a sector that brings a whole new set of challenges, job satisfactions and career opportunities. It’s dynamic and it’s evolving.’