Changing Out of White Shoes: Why General Counsel Are Moving Work to Challenger Firms
Market Dynamics Are Changing In-House Relationships with Law Firms
A quiet revolution is taking place in outside counsel management: general counsel (GCs) are turning away from the traditional elite law firms — bastions of prestige and high fees — and instead embracing challenger firms.
Traditionally, GCs have maintained strategic relationships with Am Law 20 firms. Consciously allocating work to these firms as a form of retainer, GCs avoided engaging and negotiating with these firms cold when engagement for crucial matters was needed. However, the economics of ever-increasing fees have made this approach unsustainable. While GCs may still use the largest firms in the Am Law 100 for bet-the-company litigation and billion-dollar public deals, GCs are engaging other firms for both routine and specialized work. GCs, once hesitant to make this change, have been driven to action by accelerating rates.
In-House Spend is Shifting Toward Challenger Firms
With elite firms charging hourly rates of more than $2,400 and clients reporting a 9% increase in hourly rates in the first half of 2024, who can blame GCs for steering in a new direction?
AdvanceLaw’s conversations with 30 GCs and in-house leaders reflect this decision to move spend. Over 50% of GCs reported that at least 50% of their outside legal spend goes to challenger firms – firms in the bottom half of the Am Law 100 and across the Am Law Second Hundred – and that Am Law 20 firms now account for less than 25% of their outside counsel budget.
GCs Are Proactive About Firm Engagement and Relationships
This shift is not just a trend: it’s a strategic pivot that’s redefining the future of legal services. Every year, 72% of GCs are reviewing their law firm partnerships. While rates matter, they’re looking beyond rates and legal capabilities to make legal partnership decisions. Notably, 31% of GCs named client service approach as the most important thing they could learn about a firm aside from rates and legal capabilities, while more than 40% of GCs agreed on either DEI statistics or technology innovation.
The market demands GCs reconsider legacy firm relationships whose primary benefits are name recognition and familiarity. Instead, more than 90% of GCs are utilizing a formal vetting process to build legal partnerships with competitive sourcing methods like RFPs, preferred panels, and flat fees. In fact, 43% of GCs selected cost savings and more AFA work as the top goal for improving their outside counsel management approach.
Challenger Firms Are Growing While the Am Law 20 Stays Stagnant
Firm growth statistics also illustrate the shift from firms at the top of the Am Law 100 to challenger law firms: in 2023, mid-size firms led the market with a 2.4% growth in demand, whereas Am Law 100 firms saw no demand growth. Challenger firm growth is persisting into 2024, where Am Law Second Hundred firms saw a 4.7% growth in litigation demand in the first quarter. As they grow, challenger firms are looking to solidify their market position. Where firms at the top of the Am Law 100 maintain their market position through brand capital, challenger firms are hungry for continued growth and recognition as a standalone in the market. Challenger firms are using more to drive work: tech innovation, diverse teams, and solutions with a value focus to meet changing in-house demands.
GCs Can Use Competition to Drive Improved Work Product and Cost Savings
One GC’s experience encapsulates this shift. When deciding whether to increase spend with an elite incumbent firm or diversify among new firms, the GC sought AdvanceLaw’s advice: “What will provide more value?” She had the option to double her spend from $2M to $4M with the incumbent, or distribute it among several eager firms, each competing for $500K to $1M of the enterprise’s legal budget. Was it better for the GC to maintain a single $4M relationship with a comfortable incumbent or foster multiple new relationships?
Increasing her spend with the elite firm would offer a familiar, consolidated relationship. However, the incumbent was very comfortable and reluctant to negotiate inflated rates. Conversely, engaging multiple enthusiastic firms would require the initial lift of onboarding new firms. The right challenger firms work to minimize this lift for GCs. They proactively learn the potential client’s business strategy and streamline onboarding for a more seamless partnership launch. Additionally, offering work to these enthusiastic firms drives competition, enhancing the quality and value of legal work. Competition among hungry, high-performing challenger firms may not be the most familiar move for GCs, but is best for business.
GCs need high-quality legal services delivered with value. Incumbent Am Law 20 firms will always have a seat at the table, but the market requires more seats for firms that can provide support for routine legal work without over-inflated rates. Challenger firms are becoming the go-to choice for GCs needing results alongside value.
This is a substantive market shift that should not be overlooked: challenger firms can solve GCs’ current outside counsel needs better than anywhere else in the market. With dynamic innovation and value emerging from the challenger firms, GCs have an opportunity to capitalize on this shift. If you haven’t yet explored the benefits available from engaging these high-performing firms, now is the moment to profit from changing out of white shoes and engaging in new firm relationships.