OverhireWhat might be cause for cheers today is really another warning shot across the bow. The growth in law department hiring will be followed by a dark period as law departments shrink. General counsel can avoid some troubled times ahead if they don’t overhire and modernize their practices now.

Most lawyers believe they are mostly immune to developments in the automation of legal tasks and artificial intelligence. They think what they do requires human abilities computers can’t match. On the analytical side, these abilities include legal argumentation and abstract thinking. On the personal side, they include empathy and collaboration. Despite what some futurists tell us, lawyers hold steadfast to the belief that no black box will replace them.

Lawyers aren’t alone as they defend this ground. A recent McKinsey report says that certain types of jobs, including those done by lawyers, are among the least likely to be replaced by computers anytime soon. Apparently many general counsel believe “anytime soon” is far enough in the future that they should build headcount today rather than improve the efficiency and expand the use of computers in their departments.

Don’t Confuse AI Hype With the Value Computers Can Add

We should ask two questions when considering whether a computer can do a lawyer’s job. First, have we reached the point where we can program a computer to do the tasks lawyers do? Despite the abundant hype and stream of articles saying AI is about to do it all, the answer clearly is and will remain for a long time (decades) no. More on this in a bit.

Second, even if a computer can do a task, do we want it to do the task? The answer here is a bit more complicated. If the task is routine, boring, and not very complicated, some lawyers are willing to cede the ground. Not many lawyers cried when computers took over large volume document review. But humans do not seem excited about computers replacing lawyers for tasks like serving as a judge, even when the computer will be more consistent. In some roles, people want people.

So the world is split, with most lawyers falling on the side of tradition: it takes a person to practice law. Reinforcing that view, general counsel seem to be placing large bets on people over computers. The Association of Corporate Counsel’s Chief Legal Officer’s 2016 Survey shows strength in law department hiring:

Few CLOs made any cuts to their in-house lawyer staff last year. In fact, 37 percent added in-house staff and 14 percent made significant increases (greater than 10 percent) among in-house lawyer positions last year. CLOs in Europe, the Middle East, and Africa (EMEA), and the Latin American/Caribbean region outpaced other regions in adding in-house lawyers last year. Following compliance, law departments were focused on creating positions in the practice areas of contracts, general legal advice, and regulatory/ government affairs.

After years of slow growth in law departments, general counsel got the go-ahead a few years ago to bring in bodies and since then the trend has been up, up, and away. Good news for lawyers and law schools!

Things aren’t all rosy for in-house lawyers, however. It seems general counsel can hire but the hiring quid comes with a budget decrease quo. The money to pay for those hires must come from somewhere and that somewhere is the pockets of Big Law. When in-house hiring picked up outside spending dropped. According to the ACC’s Survey, general counsel are hiring to bring work in-house and decrease outside spending.

Budget cuts can be a predictor for staffing trends. Forty-one percent of CLOs who expect their outside budget to decrease by more than 10 percent also anticipate the work outsourced to decrease. Eighteen percent who anticipate a reduction in outside sourcing to law firms or legal service providers intend to increase the number of in-house lawyers in their department.

The good news for lawyers really turns out to be good news for those lawyers who can get in-house jobs. The profession is transferring work from outside to inside.

Computers Will Displace Many Lawyer Tasks

Let’s go back to what computers can do and compare that to what general counsel their new lawyers to do. According to the survey, general counsel want these lawyers to handle compliance and “contracts, general legal advice, and regulatory/ government affairs.”

Contracts is an obvious choice. Corporations swim in contracts and the pool gets deeper each year. We don’t know what impact the current nationalist trend in many countries will have on global business. But aside from that trend, as countries have increased their regulatory and compliance activities, companies have had to do more contracting.

Recognizing the contract trend, lawtech has made contract automation software one of the hottest development areas. . It seems like every other startup has a tool to help with contract drafting and management. Those tools have focused on automation, but there are some tendrils out there touching the edges of AI. Combine what computers already offer with some process efficiency, and you can significantly reduce the time it takes a lawyer to do a contract.

Before we see much in real AI, blockchains and smart contracts will come into play. Fintech is growing and banks know the disruptors have them squarely in their sites. Blockchain may not be everything, but it also may be a way to dis-intermediate or de-centralize some lucrative portions of banking, and smart contracts will play a role. With finch pushing blockchains, lawtech is catching up. Expect to see contracts migrating to code.

Outside the banking industry, we have the Internet of Things. More than a trillion devices will inter-connect by 2020. You will ask your watch to tell your phone to start your car, which will drive you to work and start the coffee maker just as you get there. Welcome to George Jetson’s life.

As all these things talk to each other, they will need some rules—some way of negotiating who pays for what and what to do if things don’t go as planned. More smart contracts.

As the number of smart contracts grows, it doesn’t take much imagination to see the technology  of smart contracting migrating into commercial contracting. Lawyers like to massage documents. But, it is hard to argue convincingly that we need thousands of boilerplate language versions and thousands of tweaked basic agreements.

How many ways and times do we need to say “if there is a fight, we will duke it out in New York” or “your payment is due on the last business day of each month”? Overall, general counsel could offset much of the growth in contract work by embracing existing ways to improve efficiency and augmenting what lawyers do with some computers.

What about the other areas where general counsel are placing these new hires? General legal advice. This is a mushy area that often means: we get so many questions each day we need lawyers on the phones and in meetings to answer those questions. Talk to many in-house lawyers and you find that those requests for advice can be sorted into two broad categories: the questions they get over and over again and the truly unique questions. The first category sounds suspiciously like what expert systems can handle. The second sounds like the field where lawyers think computers will have a tough time playing.

Finally, general counsel need more lawyers on regulatory/government affairs. This category keeps general counsel up at night. More countries, passing more laws, and more corporations doing more business in those countries. Weaving business through those laws isn’t easy and the complexity constantly grows. Having more lawyers helps. Having more lawyers operating inefficiently just increases the coming labor crash.

Lawyers Repeat Sins of the Past

Overall, this leads us to a bit of a mess. It reminds me of what happened decades ago in the IT and human resources departments (both service areas within companies). The growing complexity of their fields and the greater demands placed on the departments led to increased hiring in those departments. IT and HR departments grew to handle new responsibilities. And then judgment day came.

CEOs started asking fundamental questions. Were their corporations in the business of running IT and HR departments, or were those ancillary to the core activities of the corporation? If ancillary, and if there were others who handled IT and HR as their core businesses, wasn’t it better to shed what wasn’t core and let others do it? And what about cost? Could a corporation decrease cost by having outside experts, who did the same thing for 50, 100, or 1,000 corporations, handle the tasks instead of trying to do everything within each corporation?

Today, at large corporations, IT and HR focus on the value-add activities they can do in-house and let outside providers do everything else. Why build non-core operations in each corporation when outside providers already have created what is needed? By outsourcing, a department head can reduce headcount, get the expertise of someone who does the task each day 100 times, and focus the people in her organization on what makes it unique.

Build Abilities Instead of Headcount

Let’s do a mashup. Computer automations is creeping into law practices. The startup disruptors will continue their push, computers will become more powerful, and what today is mostly automation and a little AI will become a movement to do more and more within law. A computer won’t take over 100% of a lawyer’s job, but if it takes over 50%, then you need only one lawyer, not two. Do the math, and the law department should shrink by 50%.

We have seen the beginnings of outsourcing in the legal industry. Managed service providers grew out of legal process outsource providers. They  have strong incentives to use technology more effectively. If they can show better quality, lower cost, and faster response times, these providers have an edge over humans. We are early in the disruption cycle, but the signs are clear that these and other businesses entering the legal industry can take more work away (a lot more work away) from lawyers.

The mashup comes when these businesses bump up against law departments, and the CEO does some management by wandering the halls. Even the CEO who is the most ardent law department supporter will eventually ask: “why do we have so many lawyers and not enough X”? That X can be engineers, designers, or any other job classification directly tied to the revenue stream. Directors and shareholders don’t ask CEOs to build large internal service organizations, they ask them to cut costs, grow revenues, and increase profits.

When the CEO makes that walk, the general counsel who grew headcount will have some difficult questions to answer. We already have the methodologies and technology to offload a tremendous amount of what lawyers do onto computers. This isn’t wishful thinking, this is simple blocking and tackling. We have software that has been around for decades that we know works. We have businesses and consultants who know how to use the software and have lots of experience with it in the legal industry.

We also have lots of experience studying processes, simplifying them, and rebuilding them to be less costly, higher in quality, and faster than labor-intensive systems. We have corporations and consultants experienced with these methodologies.

Put it all together, and you have proven ways to reduce the burden on law departments without building a headcount overhang that will come back to haunt everyone. We don’t need to repeat what IT and HR did to learn the same lessons they learned. History teaches us how to do better, but we must listen to the lesson.

Hiring serves an immediate need, but it isn’t strategic planning or running a department for the long term. Lawyers learn managing by headcount in law firms, but it also reflects much of modern corporate thinking. Hire today because headcount can be reduced tomorrow. The long-term bond between employee and corporation does not exist any more.

The strategic alternative to piling labor on labor is building a law department that can flex with the business and the times. To do so, general counsel should get to the roots of how their departments operate, start with a proven technology backbone, and then add lawyer services. In other words, general counsel should build a sustainable practice not just a large labor pool.

They should build the 21st century law department from the ground up, not from the law department out. We have moved past the law department being an in-house version of a law firm, and have moved past the general counsel managing like a former law firm partner.

The new generation of law department and general counsel are professionals running complex internal service organizations. The trend towards hiring “chief of staff” to help manage those organizations is another step in the right direction. Law departments deserve individuals with the analytic and management skills prevalent in other departments. All of these skills go to waste, however, if law departments don’t move past replicating past mistakes.

Ten to fifteen years from now, if the current law department hiring binge doesn’t stop, we will see law departments go through some traumatic changes. Building efficiency and integrating computers will help law departments avoid the trauma. There are many reasons for law departments to embrace a new business model today. Avoiding the long term consequences of this hiring binge is another one.