Our fourth in-house survey shows a softening stance towards external advisers from general counsel, reflecting the need for high-quality consultative advice.
With more than 20 years spent in multiple in-house legal positions, BAE Systems’ group general counsel (GC) Philip Bramwell has been at the centre of the evolution of the in-house legal profession. But despite seeing the GC rise in prominence to trusted adviser status, he doesn’t believe the role will shift so fundamentally that it will lessen dependence on external counsel.
‘I don’t see a drive towards having more specialist capability in-house because most departments are constrained by the need to stay within their budgets,’ he says. ‘That constraint means you have to staff to your forecasted demand for in-house legal services and not hire. General counsel will always be dependent on a healthy, capable private practice sector – we simply can’t justify the cost of retaining that work in-house.’
While the mood music from GCs over the past five years has undoubtedly been to criticise private practice firms and attack their billing methods, this year at least there has been a retreat from the grousing. The views expressed by more than 450 respondents at major companies illustrate that while in-house legal teams have grown at dramatic rates in the last decade and have asserted their clout over private practice firms, there will long be a need for a good law firm. Nearly two thirds (60%) of respondents said they rate their preferred firms as ‘good’ at providing value for money against 35% who rated them as ‘fair’, broadly the same number as last year in both camps.
Inside out
Our survey shows demand for external legal services remains unchanged for 40% of respondents, while 44% say it has increased. Notably, the percentage of respondents who report reduced demand for external services at their company has gone down since last year (from 23% to 16%). This points to a slowing of the dominant trend of in-house teams of recent years: retaining work in-house rather than using external law firms.
In keeping with this softening attitude, the percentage of legal budget spent on external counsel has slightly increased, with 46% of respondents spending more than half their legal budget on external lawyers compared to 39% last year. Sixty-one percent of respondents said that spending on external counsel had risen over the previous 12 months, against 39% reporting a fall. Pointing to moderate but sustained increases in demand was the change in legal budgets overall, with 63% of respondents reporting rising budgets over the last year, including 21% who saw their combined spend up by more than 10%.
On the importance of factors in choosing a law firm, certain metrics remain easily identifiable – quality of legal advice was unsurprisingly ranked ‘very important’ by 88% of those responding. But notably there was more emphasis on market reputation this year, with nearly half of in-house counsel rating this ‘very important’ or ‘important’ compared to a third in 2014.
Similarly, having a personal relationship with the lead partner was rated four or five on a scale of 1-5 in importance by over 60% of respondents, up around ten percentage points on last year’s results. A spike in this factor can in part be attributed to the increasingly consultative nature of the relationship between law firm and client. The preference is clearly in favour of retaining vanilla matters in-house (or even using cheaper contract lawyer services) and to bring in law firms for strategic, complex, partner-driven advice on thorny issues. This is reflected in the types of law firms that clients are recommending (see ‘Buying IBM’).
Tellingly, of the reasons why in-house teams send work externally, the percentage saying that there are insufficient resources in-house has fallen from 41% last year to 34%. Similarly, the number saying that it is more cost-effective to go out of house has fallen to just 5%. The main reason companies seek law firm advice is complexity (47%).
This trend is also reflected by the types of work most commonly outsourced to law firms. In addition to the most common types of work – M&A and disputes – tax advice is sought either frequently or very frequently by 42% of respondents which, in tandem with disputes, alludes to the intensifying regulatory burden placed on corporates, and the need for specialist consultative advice.
It is clear from feedback from GCs that the continued shift towards tougher regulation across a variety of industries – particularly the Bribery Act, competition enforcement, data security, and even this year’s Modern Slavery Act – continues to be foremost in the minds of in-house teams and will continue to be an important source of work for external counsel.
Coca-Cola Enterprises vice president for legal and company secretary, Paul van Reesch, says: ‘It will be more difficult to be commercial with a slew of regulation. The shifting dynamic of the marketplace, with new regulation, means as a business the goal should be to ensure you do the right thing as an organisation. I really want to emphasise that we are a business department – we want to ensure the business does well for our shareholders.’
The Economist Group GC Oscar Grut adds: ‘We’ve got to be better educated on managing cyber security risk and providing input as crisis lawyers. We have lots of skills relevant to crisis management and we are making sure they’re developed and in a good state of readiness should a crisis arise. Those are two areas external counsel can add value and they should strive to keep abreast of changing law and regulation.’
What billing arrangements do you currently use?
Value assessment
The debate on what constitutes value-add to clients has seen many in-house counsel overhaul their external spend. Flexibility on fees remains a top priority – half of all respondents say that flexibility in billing practices is either a key or very important factor in choosing a law firm.
This can be seen from the greater variety of billing arrangements in-house teams have negotiated with their external advisers. The hourly rate is not yet dead and even the noise that surrounds its existence has started to die down. Of the survey respondents, 55% said they often use the hourly rate, up from 52% in 2014 (although 12% say they ‘never’ use hourly rates, compared to 8% last year).
Why does your firm send work to external law firms?
How do you assess your preferred law firms in terms of value for money?
How often is your legal panel reviewed?
In a recent blog post, consultant Richard Burcher of Validatum argues: ‘Like Mark Twain, news of whose death was greatly exaggerated, the billable hour persists with all the tenacity and survival skills of a cockroach emerging from a nuclear winter.’ He argues hourly rates persist because clients actually want them.
Meanwhile, fixed fees per project have seen a slight dip in popularity – 64% of in-house teams use them often compared to 69% last year – although this is still a significant majority. In a similar vein, capped fee arrangements are less used than last year, with 52% often using these rates compared to 64% last year (although the overall use by respondents occasionally or often is broadly the same: 86% versus 89% in 2014).
The Law Society chief executive Catherine Dixon, during her time as chief executive at the NHS Litigation Authority, developed a technology tool that enabled its 11-firm panel to go online and see how they were performing against a detailed set of KPIs. ‘We developed a pretty detailed [case management system] to deal with various cases, and the cost. It enabled us to see exactly how the panel firm was performing and the individual lawyers within that. All the panel firms could compare how they were doing against each other. It made things quite competitive.
‘Knowing how they were performing in terms of cost, and how quickly they were bringing a case to resolution – it was all open and transparent so they could see how they were performing against one another. If one was out of line, we would ask them to explain. They could then drill down and understand whether it was a particular case driving those costs. We were spending over £90m a year on external legal advice. Obviously driving value for money was critical. The money we were paying was sufficient to make it viable and profitable for them. It was that balance between ensuring you’re paying the right amount of money and the quality service that you want – for the taxpayer.’
It is clear that in-house counsel’s expectations of their external advisers, particularly in light of the expanding remit of GC responsibility, has shifted back and forth in recent years. Nonetheless, the mood among clients now is that law firms have in general improved their efforts and delivered improvements on service and value. The pendulum is swinging – slowly – back towards law firms. With expectations raised by more demanding, commercially aware, GCs – advisers are generally responding.
But ultimately, clients can only push this dynamic so far – offering value has to work for law firms economically as well. It is not sustainable for clients to turn to law firms only for high-level strategic advice and expect them to handle them at rates suitable for routine matters.
ITV’s group GC Andrew Garard concludes by noting how wedded law firms remain to their traditional model… for good and ill. ‘Firms have done very well by being traditional and not moving fast. If you are a law firm managing partner, you have a simple business model; you have this many associates and partners, revenue is X, multiply that by how many hours people should charge, by hourly rates, take fixed costs away, and the rest is profit for partners. But clients don’t like paying that way. Why should lawyers move away from something very easy to understand where actually they have to show they’ve skin in the game with clients? To maximise profits by being more efficient on a piece of work, why not just stick to the simple model?’ LB
sarah.downey@legalease.co.uk