Law firms will continue to grow much faster than law departments (See my post of Sept.10, 2005 on size differentials.). The simple reason is that when two law firms merge, they do not lay off lawyers to achieve efficiency. The merger is purely additive. When two companies merge, inevitably the resulting law department terminates lawyers (See my post of Sept. 13, 2005 about Honeywell and Oracle.). The merger is partially subtractive.
Second, law departments are subject to internal headcount constraints; companies do not like to add permanent employees. Law firms, on a different economic footing altogether, strive to attract additional business and therefore hire more lawyers. Much renown and brand power goes to those law firms that can trumpet their gargantuan size (See my post of June 12, 2005 on the lure of brand cachet law firms.).
The third reason is productivity. Law departments strive to get more work done in the same amount of time and with the same number of people. Law firms that charge by the hour open the cash register more when they add staff who charge more and more hours. Thus, economics and politics will drive the difference between the largest law departments and the largest law firms wider and wider.
I wonder whether this trend tells us that eventually the balance of power between buyer and seller will shift. A 10,000-lawyer law firm can readily rebuff a 30-person law department.