The In-House Counsel Movement

In 1989 the American legal scholar Robert Eli Rosen published an article on the dramatic growth in the size, prestige, and influence of internal legal counsel in large U.S. corporations. In fewer than 20 years, Rosen argued, in-house lawyers had gone from a position of marginality and subservience—think “house counsel” as in “house pet”—to being “general counsel,” a pivotal role in both defining and serving the legal needs of their powerful corporate clients.

In the 25 years since Rosen’s article, the power and prestige of in-house lawyers in the United States has only continued to grow. Internal legal departments routinely employ dozens of lawyers, and many large companies have general counsel (GC) offices that rival the size of large outside law firms. Lawyers in these departments now regularly perform legal work that traditionally was done by outside counsel, acting both as “diagnosticians” of their company’s legal needs and as the primary “purchasing agents” for legal services that need to be procured. In-house legal departments also rival large law firms as a destination of choice for talented lawyers.

GCs have also strengthened their presence in policy debates, both within the bar and in broader discussions about law and legal institutions. This heightened public profile has helped to cement the GC’s standing as a member of the company’s senior leadership team. Indeed, many top in-house lawyers have traded in the legal-sounding title of general counsel for the more corporate sobriquet of chief legal officer (CLO) to signal that they are part of the company’s C-suite. Indeed, several CLOs have ascended to the CEO seat in recent years.

For this issue of The Practice, we turn our attention to the rise, development, and future of the in-house counsel movement, in the United States and around the world. We begin where the revolution was born: the United States. Drawing on the Center on the Legal Profession’s Corporate Purchasing Project (CPP) survey (see below) and using the United States as the archetype of the movement’s penetration into the legal services industry, we offer a narrative and set of analytical tools for assessing the growth and development of in-house legal departments in both developed and developing legal markets. In doing so, we also assess whether the movement yields homogeneity, such that all reformed legal departments look alike, or allows for diversity under its broad tenets. A subsequent article, “Going Global?: In-house legal departments in the emerging economies,” uses this framework to examine the spread of the inside counsel revolution to Indian and Brazilian legal departments, comparing and contrasting the growth, development, and maturation of GC offices in these jurisdictions to each other and to the U.S. model. We also hear from GCs currently in the field (see “General Counsel in Practice: Perspectives from the Field”), examine how law schools around the world are offering classes specifically geared toward training in-house lawyers (see “From the Classroom”), and learn about the future of the in-house movement-cum-revolution from its dean, Ben Heineman Jr. (see “Speaker’s Corner”).

The rise of the in-house counsel movement

Starting in the 1980s, GCs in large companies began to make three distinct claims about the market for corporate legal services that justified increasing the power, authority, and standing of their position.

Economic. As legal fees paid to outside firms skyrocketed, GCs argued that they were in the best position to help companies control legal costs, both by taking work inside and by reining in unnecessary and abusive practices (e.g., duplicative work) that many business leaders believed were endemic to most law firms. As a result, companies like General Electric, whose GC, Ben Heineman Jr., would become the face of the in-house counsel movement (see “Speaker’s Corner”), built up internal legal departments that were as large as many of the law firms that continued to serve them.

At the same time, these increasingly sophisticated internal lawyers sought to break up the long-standing relationships between companies and law firms by requiring firms to compete for every new piece of significant business and choosing the winner based on the price and perceived expertise of the particular lawyers involved. “We hire the lawyer, not the law firm” became the rallying cry of the day, and advocates of the revolution claimed that the long-standing relationships with outside firms had been relegated to the graveyard of history.

Substantive. As the movement gathered steam, GCs began to supplement the economic argument with a substantive justification for taking work away from outside counsel—and, more importantly, for giving internal lawyers more authority inside the company. Proponents of the inside counsel movement argued their advice was not only more economical but also better. Traditionally, companies looked to outside counsel to play the role of “trusted advisor” who could guide them through the web of complex problems at the intersection of law and business. But precisely because the long-standing relationship between companies and firms was being systematically dismantled, inside counsel could credibly claim that even senior partners in law firms could no longer provide this kind of advice. Instead, GCs asserted that inside lawyers within the corporate hierarchy were in the best position to understand the company’s business and to engage in the kind of risk assessment and preventive counseling that managers need to survive in an increasingly complex and turbulent legal environment. As a result, GCs argued that they should be entrusted with the role of being both a “partner” to the business and the “guardian” of the company’s long-term reputation and values.

Professionalism. This substantive claim furthered a third argument for increasing the standing and prestige of internal counsel. As the pejorative sobriquet “house counsel” underscored, internal counsel traditionally labored under the assumption that their employed status made them less independent—and therefore less professional—than their external law firm counterparts. Reversing this second-class status was a major goal of the in-house counsel movement.

To accomplish this, the new breed of GCs claimed that their status as corporate insiders gave them a unique perspective from which to give advice that was every bit as independent as the “wise counselors” whom the bar had always assumed populated prestigious outside law firms. Indeed, in an age in which many believe that law firm partners have abandoned the ideal of law as an independent and public profession for a slavish devotion to power and profit, some commentators have gone so far as to suggest that internal lawyers are best positioned to fulfill the gatekeeping role of ensuring that companies comply with both the letter and the spirit of the law.

By the end of the 20th century these three central tenets of the in-house counsel movement had taken on the aura of accepted orthodoxy in the United States.

Metrics of change

Notwithstanding this general acceptance, however, there was little systematic, empirical research on in-house legal departments. In 2006–2007, the Center on the Legal Profession conducted the Corporate Purchasing Project (CPP) to remedy this situation, interviewing more than 50 GCs from a broad range of industries and administering an in-depth survey of the organization and legal purchasing decisions of in-house legal departments in S&P 500 companies (see “The Corporate Purchasing Project” below). We used this data to develop six metrics with which to evaluate whether the structures and practices of legal departments in large U.S. companies conformed to the central claims made by the proponents of the in-house counsel movement:

• Size of the in-house department
• Credentials and demographics of the lawyers working inside the department
• Relationship to, and degree of control over, outside counsel
• Internal standing, jurisdiction, and authority of in-house lawyers within their organizations
• Professional standing of internal counsel in the profession as a whole
• Participation and influence of GC in public policy debates

Although the CPP data upon which these metrics are based was collected before the 2008 GFC, subsequent conversations with hundreds of GCs around the world—including more than 250 CLOs who attended Harvard Law School’s course, Leadership in Corporate Counsel—have confirmed that these six factors still capture the most important indicators of whether an in-house legal department has absorbed the philosophy and practices of the in-house counsel movement. We have therefore used them as a guide for our ongoing research on whether the in-house counsel movement is spreading to the legal departments of companies headquartered or doing business in emerging economies such as India, China, and Brazil (see “Going Global?: In-house legal departments in the emerging economies”). We will also employ them as we launch the next phase of our Corporate Purchasing Project (CPP2) to investigate how the practices and purchasing decisions of large U.S. and European companies have changed since 2008 (see “Corporate Purchasing Project 2” sidebar below).

In the following sections, we summarize what the Center has learned about the practices of corporate counsel offices along each of these dimensions from the CPP and other sources, and highlight the implications for the central tenets of the in-house counsel movement.

Size matters—but in complex ways

One clear way to measure the importance attached to internal counsel is to look at the size of the legal department. As indicated above, in the United States, this size has increased significantly since the 1980s, making internal counsel one of the fastest-growing segments of the U.S. legal profession.

While this rapid growth has been widely viewed as an important signal of the rising power of U.S. internal counsel, we have also learned that size remains an imperfect measure of a legal department’s power and importance. Specifically, the CPP revealed that the size of the legal departments of the largest U.S. companies was surprisingly varied in 2006–2007. Thus, while the median legal department employed 35 lawyers, the range in size was quite significant, with some companies having almost completely outsourced their legal function and others maintaining legal departments of more than 1,000 lawyers. Although we do not have systematic data on this variable since 2008, anecdotal evidence suggests that, if anything, the financial crisis has exacerbated these differences, with some companies responding by increasing the number of in-house lawyers, while others significantly contracted the size of their in-house legal departments to cut fixed costs.

This difference in size affects the legal department’s functioning, although less than one might expect. Even with respect to the displacement of outside law firms, the size of a company’s GC office is an important—but not determinative—indication of the split between the amount of money spent on outside lawyers and the percentage of the legal budget that is spent on in-house counsel. To be sure, according to CPP data, those with a very small legal budget send almost all of their work to outside firms. But above a certain size there is much less correlation between size and outside spending. Indeed, the five largest legal departments in our sample spent a higher percentage of their legal budget on outside law firms than the average company we surveyed.

Nor is size a perfect proxy for the importance of the work that is done by internal counsel, or their importance within the corporate hierarchy. Financial services firms tend to have some of the largest in-house departments, yet much of these lawyers’ work relates to the routine processing of transactions and other compliance-related matters. Tellingly, in the CPP, the GCs of these organizations were less likely to report directly to the CEO than those of other companies, implying a less important position in the corporate hierarchy. It will be interesting to see whether this has changed since 2008, given the prominent role that banks and other financial firms played in the crisis.

Credentials and identities of the lawyers

There has also been a significant increase in the educational credentials and prior work experience of the lawyers who work in in-house legal departments in the United States. In the past, in-house departments were viewed as less prestigious destinations for young lawyers, and competition for entry was less tough than at law firms. Today, the relevant status between in-house legal positions and law firms has been significantly reversed, particularly at more senior levels. Although most GC offices still do not recruit directly from law school, they now have their pick of talented midlevel associates and junior partners from the best law firms, with senior in-house lawyers frequently recruited from the top ranks of the partnerships of outside firms.

Moreover, this change in status has been accompanied by an interesting increase in the number of women working in-house, including in the most senior positions. Prior to the revolution in the 1980s, the overwhelming majority of lawyers working in in-house legal departments—like the overwhelming majority of lawyers everywhere—were white and male. But as in-house departments began to grow in size and status, they also began attracting a significant number of female lawyers. Today, women make up a significant percentage of the lawyers working in-house, including 25 percent of the GCs of Fortune 500 companies, according to a 2015 report from the Minority Corporate Counsel Association. This percentage is far higher than the average number of female partners in large U.S. law firms, let alone female managing partners or other senior leaders, who remain a tiny percentage of those who hold these positions.

This pattern is the opposite of what one tends to see in other professions when women become a significant percentage of the workforce, particularly in senior positions. As sociologists have long documented, when an occupation becomes “feminized”—by which they simply mean that the majority of workers are female—the job tends to decline in status and in other corresponding rewards such as pay. Elementary school teachers and nurses—and many would now claim even doctors—are relatively recent examples. But as in-house legal departments have become increasingly feminized, they have gained in status both within the company and in the legal profession as a whole, and the financial rewards have increased as well.

In the United States, from the perspective of gender equality, three factors appear to have contributed to this happy state of affairs. First, in the 1980s and 1990s in-house legal departments developed a reputation as being a better environment for women lawyers to succeed—particularly compared to large law firms, which many female lawyers viewed during this period as inhospitable places to work. As a result, when GCs looked to fill in-house positions, they found that they had many more qualified female candidates then males. Second, as these women moved up the ranks, they became advocates for other women, both within their own department and in the law firms they used for their company’s outside work, thereby encouraging even more women to view the in-house route as an attractive one. Finally, this all coincided with a growing emphasis in many companies on achieving diversity among its professional and managerial staff, something many companies found easier to do in the legal department, where, as indicated above, there were more talented female applicants than in other parts of the business.

Although all this could have resulted in a diminution of the status of internal counsel, the fact that companies had independent reasons for raising the status and importance of the position—reasons identified and promoted by a group of influential male GCs such as Ben Heineman Jr. at GE—helped to propel a virtuous circle in which the women joining corporate legal departments were the beneficiaries of both escalating status and gender equality.  Whether this virtuous cycle will continue in the United States in the face of tightening legal budgets and the growing number of men interested in in-house positions, and whether we find anything similar in emerging economies such as India and Brazil, are among the most important issues we hope to explore in future research.

Control over the legal function: who’s the boss?

Arguably the key feature of the in-house counsel movement in the United States has been the effort to wrest control over the core legal functions of the corporation away from outside counsel. However, the success of this effort has been mixed. Notwithstanding a significant investment in building up in-house capacities, many companies discovered that outside spending on law firms continued to escalate throughout the 1990s and into the first decade of the 21st century. Similarly, the extensive monitoring and controlling of law firms did not result in increased levels of client satisfaction.

The result has been that GCs continue to have less control over outside counsel than the movement’s rhetoric might lead one to believe. According to the CPP study, for example, only about 20 percent of GCs from S&P 500 companies reported terminating an important law firm relationship frequently within the last three years; more than 30 percent had never done so; and almost 50 percent had done so only once or twice. In the words of one GC, terminating an important law firm relationship is a bit “like turning the Titanic”—something that takes an enormous amount of time and energy to accomplish and runs the risk of creating an even bigger disaster in the process. Interestingly, companies with very large legal departments were no more likely to attempt this tricky maneuver than companies with relatively small departments, underscoring once again that department size does not always equal increased power. Medium-size departments of 26 to 100 lawyers showed the greatest willingness to exercise this ultimate method of control.

As a result, we concluded at the end of the CPP study that while there had been an important shift in the degree of control that internal counsel exercised over both the amount of work that is given to particular firms, as well as the manner in which that work is assigned, evaluated, and compensated, it was an exaggeration to view GCs as employing a strict “spot contracting” model for the purchase of legal services. Relationships at the firm level still mattered.

Ironically, from my extensive experience with GCs since 2008, it seems that the financial crisis has not significantly altered this fundamental truth—at least not yet. Although companies have attempted to exert even greater control over outside counsel fees since the GFC, this has not caused them to terminate law firm relationships more frequently than they did before the crisis. If anything, companies are insisting even more on a “partnering” model with their primary external providers in which these increasingly sophisticated and price-sensitive consumers concentrate the bulk of their legal spend in a relatively small number of “preferred providers” in return for discounts and other forms of investment by the law firm—discounts and investments that firms are even more willing to give than before 2008 in order to keep the work. Once again, whether the growing number of consultants and other potential “disrupters” attempting to convince companies that they can reduce their legal spend even further by sending work to non-law-firm providers will change these patterns is a central question we will explore in the CPP2.

Relationship with the boss

One of the most visible markings of the in-house counsel movement in the United States has been the growing power of internal lawyers within the hierarchies of corporate decision making.  Thus, in the CPP we found the overwhelming majority—almost 90 percent—of the GCs in our sample reported directly to the CEO. Many also oversaw other related corporate functions, such as public relations, government affairs, human resources, and compliance. And virtually all were working to convince corporate leaders that their companies should move beyond a culture of “legal compliance” to one in which the goal is to create a “legally astute organization” where legal and business considerations are integrated at every level of the organization.

Once again, what evidence we have seen since 2008 reinforces the basic trend of the GC being a central figure of the top management team in most companies; although, as a result of the crisis in some organizations, compliance no longer reports to the GC. Nevertheless, the fact that we continue to see CLOs make the transition to CEO is a testament to the importance corporate boards now place on the skills and dispositions that internal counsel bring to corporate management.

Professional status

Whether or not one believes that these efforts explain all of professionalism, there can be little doubt that such a “professionalism project” has been at the heart of the in-house counsel movement in the United States. At the core of this project is the claim that in-house counsel are just as capable—indeed, arguably more capable—of exercising independent professional judgment than lawyers working in outside law firms. As with other aspiring professional groups—including the bar itself, whose professionalism project included the founding of the American Bar Association in 1871—one of the first things that GCs in the United States did to raise their status and visibility was to found the American Corporate Counsel Association (ACCA), an organization that has been very successful in raising the status of in-house counsel.  (As we indicate in the following story, “Going Global: In-house legal departments in emerging economies,” this organization has now been renamed the Association of Corporate Counsel to emphasize that the in-house counsel revolution is not just a U.S. phenomenon.)

That said, the claim that in-house counsel are capable of exercising the kind of independent professional judgment required to detect and deter corporate misconduct is not without detractors. In the wake of Enron and the GFC, some academic commentators have begun to challenge whether internal counsel are too dependent on their corporate employers to act as gatekeepers and ensure compliance with the securities laws and other public-regarding legal rules, especially when compliance might conflict with corporate profits (see “From the Classroom”). Indeed, some have gone so far as to argue that GCs should be removed from the control of corporate managers and report only to an independent committee of the company’s board to ensure true independence.

Moreover, as GCs have attempted to spread the movement’s gospel to jurisdictions where the status of in-house lawyers has traditionally been even more tenuous than in the United States, resistance to the professionalism claims of internal counsel has been even stronger. Despite years of lobbying, in-house lawyers have still not been able to convince the European Court of Justice and other regulatory authorities that they are entitled to the attorney-client privilege with respect to discussions with their corporate employers. At the core of this decision is a fundamental doubt about whether employed lawyers can ever truly be independent.

Influence over public policy

Finally, in addition to projecting influence in the profession, the in-house counsel movement in the United States has aimed to empower GCs to participate in the wider world of public policy and law. To see this ambition, one has to look no further than the ACC website. Under the heading “advocacy,” the site proudly proclaims that the ACC “is the voice of the in-house bar, fighting for both our members’ professional rights and their clients’ representational needs before courts, media, government agencies, legislatures, and bar groups.” In recent years, the ACC has exercised its voice with increasing vigor, weighing in on a number of policy issues ranging from the permissibility of multidisciplinary and multijurisdictional practice by lawyers in the United States to the whistle-blowing provisions of the Dodd-Frank financial regulatory reform.

Moreover, in addition to intervening in specific controversies, GCs—particularly those in large multinational companies—often decide on key public policy issues themselves. For many important policy issues facing global companies—for example, the question of child labor standards for third-party suppliers in countries such as India and China—relevant legal standards are likely to be ill-defined, under- or overinclusive, or contradictory. In such cases, it is often up to the GC to craft a policy within these broad constraints that is consistent with both the company’s economic interests and its values.

Thus, how the GC crafts this kind of private ordering—and what kinds of enforcement mechanisms he or she institutes—will have a stronger effect on the realities of child labor than many other kinds of formal legislation. The fact that the United Nations and other global regulatory bodies are increasingly attempting to enlist GCs in creating corporate commitments to human-rights norms underscores just how important in-house counsel have become in the overall public regulatory system.

Six metrics of the movement

As described above, the six metrics provide a concrete starting point for understanding the transformation of in-house counsel, and whether the goals of the “revolution” are being achieved in the United States and other mature legal markets. Furthermore, by isolating these six important dimensions, this framework allows for a global comparison of in-house counsel to understand the extent to which the model has crossed borders.

This question of expansion is particularly salient for the legal industry in emerging economies, such as India and Brazil. In the following story, “Going Global: In-house legal departments in the emerging economies,” we examine the extent to which the in-house movement has spread around the world and how that expansion should be understood. Is it a story of dispersion, with societies merely mimicking the process as it developed in the United States? Or is it a process of adoption and adaptation, with local factors playing a significant role in determining the contours of the in-house movement in emerging economies?

The manner in which the U.S. model of internal lawyering has spread to the United Kingdom and Western Europe provides some important clues to these questions (see “European expansion” sidebar). Although many of the six variables described above can be found in the internal legal departments of large U.K. and European corporations, there remain essential differences that are arguably based on important economic, political, and cultural differences between Europe and the United States. As our preliminary data on India and Brazil presented in the next article underscores, there are good reasons to believe that these differences will be even more significant with respect to the movement’s spread into the rising powers in Asia, Latin America, and Africa.

In-house controversy?

Our continuing work on the U.S. legal profession, however, suggests that while the in-house counsel movement has made important progress on all six of the metrics identified above, the dynamic changes that continue to roil the corporate legal services market since the GFC may very well alter the structure and practices of in-house legal departments in the coming years.  Always prescient, Rosen, the legal scholar who named the in-house counsel movement, has already indicated that important parts of the gains made by GCs may already be in decline, particularly in the area of professionalism. In an article published in 2002, Rosen revisited many of the legal departments he had studied for his initial article on the in-house counsel movement and found that several of “those that had been transformed in the 1980s and whose inside counsel were management’s trusted advisors have been reengineered” in a manner that significantly altered their work—and, more importantly, their self-image. Instead of seeing themselves as “independent professionals,” Rosen argued that the growing integration of in-house lawyers into cross functional project teams designed to work more closely with business leaders threatened to turn the in-house lawyer into just another “consultant” who values the “appearance of ‘independence’” as opposed to any real commitment to public purposes or detachment from client aims. At the same time, the late Larry Ribstein argued in 2012 that in a world in which “smart” technology will increasingly allow companies to develop process-based solutions to many standard legal problems, “in-house lawyers ultimately may find their own power eroded by products and services that replace customized legal advice with standardized technology.”

Needless to say, these are large and difficult questions, and prior reports of the demise of lawyers as independent professionals have proven to be significantly exaggerated for both in-house and outside counsel. Nevertheless, from the tumult of the GFC to the introduction of new disruptive innovations to the concerns about professionalism hinted at by Rosen, there is good reason to suspect that even in the United States, the contours of the in-house counsel movement remain flexible, and the roles and structures of corporate legal departments will continue to evolve, sometimes in surprising ways. The six metrics described above offer a powerful tool to accurately understand how these changes impact in-house lawyers and in-house legal departments. And that is exactly why continuing empirical research on the changing role of internal counsel in the United States and around the world is so critical.

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David B. Wilkins is the Lester Kissel Professor of Law, vice dean for Global Initiatives on the Legal Profession, and faculty director of the Center on the Legal Profession at Harvard Law School.