Extracting greater value from dwindling resources is top of the agenda as general counsel look to flex their muscles. Welcome to our first-ever in-house survey
‘It’s just like a marriage: a relationship between a law firm and a company is one that needs to be nurtured to make sure both are on the same page.’ This comment from a law firm partner rings particularly true as we publish the results of the first-ever Legal Business and The In-House Lawyer in-house survey. In this special report, we find out whether clients believe law firms and themselves are truly on the same page.
We analysed the opinions of a diverse mix of more than 100 general counsel (GC) and in-house lawyers on the key issues affecting the way they run their teams. This section will look at some of the top-line findings of the survey, while part two will examine attitudes to choosing a law firm. Part three will look at key problems associated with billing, while part four will reveal what clients really think about how law firms deliver their services.
The majority of the GCs we surveyed were at publicly listed companies – mostly FTSE 250 or Fortune 500 – while a sizeable chunk work for private companies, and the remainder for public sector bodies or charities. But while those responding to the survey came from a diverse mix of backgrounds, a number of common themes emerged. One key message pervading the entire report is that in the current climate of needing to extract more value from fewer resources, in-house teams are being more exacting and demanding of their external legal advisers than ever before.
The challenging economic climate that followed the collapse of Lehman Brothers in 2008 had a well-documented effect on law firms, who have worked considerably harder to generate income as markets have shut down and dealflow has dried up. Finding this work has been made harder by the fact that in-house legal teams have been under pressure to handle their companies’ legal needs as cost-effectively as possible. The upshot is an inevitable shift in power from law firms to in-house teams.
Over the last two years, clients have made it their prerogative to raise the bar on the quality of service law firms provide. With budgets being squeezed across all sectors, the pressure on law firms to deliver a value service has significantly increased.
Amanda Brock, GC at IT company Canonical, believes the client has more power and the majority of in-house teams are managing more work internally to cut costs.
‘Anyone who hasn’t kept his or her legal skills honed and who has become too much of a manager may well be in trouble in this new marketplace.’
‘I have always outsourced only what was necessary in terms of expertise and risk and I think more senior lawyers are now moving towards that approach,’ she says. ‘It is becoming increasingly important for senior lawyers, heads of departments and even GCs to be prepared to get their hands dirty. Anyone who hasn’t kept his or her legal skills honed and who has become too much of a manager may well be in trouble in this new marketplace.’
Others feel greater in-house assertiveness is simply a reaction to the current economic climate, and a cyclical trend that may not be here to stay.
‘In our experience, there continues to be pressure to do more with less,’ says Rushad Abadan, GC for corporate and M&A at the The Royal Bank of Scotland Group. ‘I would not expect the pressure on legal spend to bottom out until there is less pressure on corporate top and bottom lines, which is dependent on macro-economic factors as much as anything else.’
Lisa Hart Shepherd is chief executive of legal market intelligence provider Acritas, which regularly carries out market research among GCs on behalf of law firms. She says in her experience the tendency for GCs to keep legal work in-house goes in cycles. ‘At the moment they’re on a cycle where they’re trying to do more in-house,’ she says. ‘I think like-for-like budgets have been reduced but they’re doing more, particularly regulatory and compliance work, so overall legal spend is higher. GCs are trying to cope with this increasing workload, so they’re having to do more of it in-house, as they realise that usually it is cheaper to do it in-house if they have the right expertise.’
Size and shape
Recent years have generally seen most businesses reduce employee headcount and in-house legal teams have not escaped the knife. For example Countrywide, the UK’s largest estate agency, restructured back in 2008 and cut its legal department by a third.
Gareth Williams, legal head at Countrywide, says while his company’s current business position is stronger these days, it still tries to maintain a low headcount across the board, including legal. ‘We like the option of using external legal advice,’ he says.
However, results from our survey generally suggest the size and shape of in-house legal teams has remained largely unchanged throughout the recession despite increasing demands to reduce legal teams as well as expenditure. The average in-house legal team size across all the respondents to the survey is 31, and over the last five years average team size has grown by 59%.
Brock suggests team size has been affected more in heavily regulated sectors where there are significant levels of recruitment, such as financial services. But one banking GC says most legal teams are fairly stable in size while the majority of banks have shrunk in overall headcount, which subsequently alters the employee ratios.
There is a limit to how much in-house teams can be pruned, especially within organisations such as banks, where the in-house function is so vital. Although markets have slowed down and in-house teams are seeing as little corporate and finance transactional work as law firms, there has been a marked shift towards crisis management work, especially dispute resolution and restructuring.
‘Legal teams have needed to adapt to this even if it hasn’t, in some cases, impacted significantly on total lawyer numbers.’
Abadan says the size and shape of the legal team needs to adapt to the business requirements. ‘It would appear that many large banks have had to tweak or, in some cases, substantially revise their business models and footprints to take account of new market realities and regulation,’ he says. ‘Legal teams have needed to adapt to this even if it hasn’t, in some cases, impacted significantly on total lawyer numbers.’
As companies try to navigate the current economic and regulatory pressures, it is crucial legal departments have the appropriate resources that optimise good service delivery. Given that many businesses are struggling with the transition to such stringent and tight regulatory reforms, perhaps now is not the safest time to be cutting back on in-house legal resources.
One in-house lawyer from a global investment bank says: ‘There is the burden of increased regulatory enquiries and all the new legislation coming in from Europe and the US, such as the Dodd-Frank Act and the Volcker Rule. Therefore, legal spend within banks has not really altered; it’s what the spend comprises that has changed.’
There are other sectors that have seen their legal teams expand. One example is technology company Dyson, which has recently acquired a group of specialist intellectual property lawyers bringing the team total up to 40. Dyson appointed five specialists in the last year, one IP and two commercial lawyers in their domestic headquarters in the UK and two in the US. The company also transferred an existing lawyer from its headquarters to Singapore as part of its expansion.
It is no surprise that demand in the area of technology and intellectual property has picked up, as the need to protect IP rights takes on new significance during a downturn. Dyson group general counsel Martin Bowen says lawyer numbers have increased to keep pace with demand but the company prefers to nurture its own lawyers and therefore tries to recruit those with minimal post-qualification experience.
Budget time
As global GCs have largely kept the size and shape of their teams intact, legal budgets are also largely unchanged. Half of all in-house lawyers surveyed said their budget for legal services is unchanged this year, with only 20% saying it has decreased. Average annual legal spend across all respondents is £1.85m.
Countrywide’s Williams says his in-house team has a core budget that only fluctuates in certain cases. Other than that, budgets have remained the same.
‘If there is a particularly complex piece of work, I tend to charge that as an extraordinary action at the start of the year. We don’t have this large artificial pot, but in saying that, we aren’t relaxed or complacent. I will get involved in negotiating terms and the finance director of the operating division will have faith in my expertise that it is the right firm and the right deal,’ he says.
The swathe of structural and regulatory reform in the new economic environment has led to a large proportion of legal budgets being spent on regulatory matters, and not just in financial services. GCs across myriad industry sectors including healthcare, agriculture, energy, nuclear and life sciences report a surge in contentious and regulatory work. The inevitable scrutiny and attendant legal work that comes with a more sophisticated regulatory environment has subsequently caused legal budgets to grow.
Nevertheless, in house-teams are spending with great caution and report generally that the cutting-back of legal spend is yet to peak. With the increased focus on cost-cutting measures, GCs are naturally negotiating hard on price and are constantly seeking discounts.
‘Speaking to my contemporaries, I’m genuinely surprised that spending hasn’t gone down actually,’ says Deborah Prince, head of legal at the British Heart Foundation. ‘With businesses cutting back, generally, there’s been a blanket reduction – a 10 to 20% cut across the board – and that includes legal.’
But on the whole, in-house legal teams are continuing to spend big on external legal services. The average percentage of legal budget spent on external law firms is 49% among respondents. GCs report that where businesses have seen a reduction in external spending it is typically down to a decrease in business activity, as a number of law firms are still benefiting from high levels of legal spend across certain sectors, particularly in technology (especially IP) and disputes.
‘The only thing people can do is manage things properly and monitor global fee arrangements so they are being leveraged correctly,’ says one GC. ‘I have always seen spending on external legal services increase and the only reason it may be going down is if new business activity has reduced. But it’s still very buoyant – a number of law firms are still benefiting from high levels of legal spend by the banks.’
Valued approach
While legal spend generally has not reduced, GCs and heads of legal are focusing much harder on how legal spend is allocated. Part II of this survey will look at in-house teams’ attitudes to choosing external law firms but the overriding message is that there is a stronger focus than ever on optimising value from spend.
Law firms need to articulate and deliver methods of providing value to clients and assess whether or not their current service strategy is providing clients with the quality of service they expect. The trick is justifying to the client that it would make more sense to use a law firm than retain a matter in-house.
Brock argues the challenge for law firms is to truly break the mould and deliver certainty that the services they provide actually add value.
‘It is a difficult time to be a law firm,’ she says. ‘Their old models won’t work in the future. Some of the really innovative firms, like Pinsent Masons, are looking at new ways to charge and work in partnership with their clients, but it’s hard for them to put these new models in place when often we in-housers don’t know how to measure their true value.’
For Williams, adding value is all about shared risk. For example, if work on a specific project goes over its anticipated spend, then there should be huge discounts on the fee. ‘It’s like a taxi cab,’ he says. ‘You can sit in a cab in the middle of a snowstorm and the meter’s running but the cab is just sitting there and there’s nothing you can do about it. That happens with litigation and corporate transaction work – things happen, and no-one anticipates it. That’s when shared risk comes into play.’
GCs report many firms are attempting to jump aboard the innovation bandwagon by offering incentives such as discounted rates, 24-hour helplines and complimentary advice to satisfy client expectations.
‘We are, however, always pushing firms to do more as we were facing a lot of cost constraints internally and undergoing a restructure. Since 2008, everybody has been stretched.’
‘The firms that want to maintain their relationships are trying to be more amenable to their clients so are offering things like discounts,’ says Monica Risam, European GC at Aviva. ‘I don’t know what else they can do without pricing themselves into a hole where they’re not actually making a profit. We are, however, always pushing firms to do more as we were facing a lot of cost constraints internally and undergoing a restructure. Since 2008, everybody has been stretched.’
Some GCs suggest discounts, secondees and free advice fall into the category of business incentives rather than providing a quality service. Despite the constant focus on squeezing law firms on price, many feel the old maxim ‘you get what you pay for’ still applies.
‘Maybe people aren’t being completely honest. If you work in a highly regulated area and you need to get the advice, at the end of the day, you have to pay for it,’ says Prince.
It is clear GCs have been forced to take greater responsibility for managing their relationships with external law firms. While the law firms have paid lip service to providing value, they will not truly deliver unless pushed. The increase in demand for legal services in an atmosphere of intense regulatory scrutiny has to be matched with static budgets. This perfect storm means not only are fees brought to the fore, but issues such as the quality of advice and the presence of the right lawyer are also critical for many in-house teams. While many law firms are trying to be innovative in dealing with these concerns, GCs have taken it upon themselves to be proactive.
Risam explains the power of an in-house team over a law firm is directly proportional to the amount of work allocated to the firm. If the work is increased, the in-house team has a greater chance of leveraging more value. This way, legal spend can be monitored and controlled more efficiently, and highlights those areas where spending can be reduced or increased. Effectively, there can be a clear reward for loyalty with a particular law firm.
Primarily, in-house teams need to ensure processes and workload are being managed properly and fee arrangements are being correctly leveraged. Many GCs have already adopted a case-by-case approach and realise that the micro, rather than macro, approach to managing external legal services is the most effective one.
In-house Survey Averages
Average annual legal budget: £1.85m
Average percentage of budget spent externally: 49%
Average percentage change in team size over 5 years: 59%
Average team size: 31