General counsels complain about large law firms: too costly, bad service, and clueless about the clients’ businesses. After the failure of GC’s many attempts to fix the problem, regulation is surely the solution. 

This simple and easy idea struck me last week when I heard a panel of GCs address the Strategic Technology Forum in Lisbon, hosted by LegalWeek. Their anger at firms was palpable. CIOs have their own frustrations: few partners or clients use the innovative systems they create. The despair all around caused me to think about the market. Consider the many steps GCs have taken that have had no impact on outside counsel:

  • Countless law departments have voted with their dollars, switching firms, and privately and publicly explaining their quest for better value. Yet large law firms refuse to budge.
  • Rampant standardization has failed. The standard documents of ISDA (International Swaps and Derivatives Association, Inc.) is only one of hundreds of instances of clients coming together to simplify and standardize. Yet bills continue to mount.
  • The Tyco arrangement with Eversheds, which introduces various metrics and carefully crafted payments to illicit particular law firm behavior (link to Legal Week article), is only one among many such agreements. No market impact.
  • Law departments have invested heavily to create best practices, for example, how to manage outside counsel, checklists for transactions, empirical studies on reducing discovery costs, and regularly using risk analysis in litigation. Law firms ignore these well-document guidelines and every effort at enforcement.
  • Law department frequent use of non-lawyers and lawyers in India has no affect.
  • Large law firms have bid up the price of talent, shutting out the ability of law departments to hire.

Alarmed at large law firm recalcitrance, I consulted my economist friend Madam Smythe, who told me: “On first glance, the legal market looks competitive. The scores of large, global law firms with good reputations should not fool you. Once a company retains a firm, a mini-monopoly ensues; just one bite at the apple – then switching costs skyrocket. It’s diabolical. I’ve run the numbers: law firms are natural monopolies. They have too much market power, which they use artificially to raise rates and corner the market on talent.”

Out of my commiserations with the plight of the poor GC, suddenly, the solution emerged: regulation. Corporations should engage lobbyists to spur federal oversight of the monopolists. The lobbying cost is a small price to eliminate large law firm monopoly rents. Yes, GCs, who have tried every trick in the book, can finally rest – regulation will rescue them.