Hiring Teams from Rivals: Theory and Evidence on the Evolving Relationships in the Corporate Legal Market

Abstract:     
How are relationships between clients and service providers in the corporate legal market evolving, and why? This paper is part of a larger investigation of the purchase of legal services by large companies. The overall project assesses the ways that ongoing changes in the legal market are affecting the choices large companies make in managing law firm relationships and the extent of variation in those choices. Based in part on interview and survey data from 166 chief legal officers (CLOs) of S&P 500 companies from 2006-2007, this and related papers extend theory from economics, management science, and sociology relevant to the purchase of corporate legal services. Standard depictions of client-provider relationships in corporate legal services suggest that, unlike the pre-1970 model of retaining a single law firm, hiring decisions have become akin to spot contracting based on individual lawyers’ skills. Contrary to such depictions, we find (1) large companies have a small number, typically ten to twenty, of preferred providers (a phenomenon commonly referred to as “convergence” by law firm consultants); (2) the legal purchase landscape is dominated by long-term relationships between clients and the preferred providers, with clients providing a flow of work to those preferred providers in return for relationship-specific capital, quality assurance, and soft forms of legal capacity insurance – that is, a soft guarantee that their law firms will stand ready to provide legal services when and as needed by their clients; and (3) clients not only focus on the platform the law firms offer, but also, and more substantively, on the qualities of teams and departments within the preferred providers, allocating work to teams or departments at rival firms over time, preserving competitive pressure that may restrain costs and provide a complementary form of quality assurance. Apart from the descriptive value of understanding how purchase decisions are made, these findings have normative implications for law firms, corporate departments of law firms, and law schools. (We should note here, however, the caution that our data pre-date the financial crisis and economic downturn, and may not be wholly representative of the current environment, in which large companies have cut back on expenditures of all kinds, and US law firms have for the first time laid off significant numbers of attorneys.) The plan of the paper is as follows. First, we synthesize existing literatures, drawing on theoretical approaches and journalistic accounts of the modern corporate sector of the legal profession to state our null hypothesis – the (conventional) view that relationships in that setting have been getting less durable over time, as information costs have fallen and CLOs have become more sophisticated buying agents for large companies, reducing the relative value of long-term relationships (Part I). We then briefly present our theoretical contributions – which consist of more carefully specifying the forms that long-term relationships could take and the harms as well as benefits that such relationships could provide – and we frame the hypotheses that flow from them (Part II). We describe our methods (Part III), and then present our findings, including summary statistics about companies, law departments, and CLOs in our sample, as well as more qualitative findings regarding legal purchasing practices in large public companies, which exhibit strong commonalities but also significant variation even within industry sectors (Part IV). We then conclude with a brief discussion of implications (Part V).

Working Paper Series