Increasingly assertive clients are making advisers jump through more hoops to secure lucrative work. Legal Business assesses if law firms are rising to the challenge.
While the prolonged struggle for understanding between in-house counsel and their external providers has seen general counsel (GCs) lose many small battles with law firms over the years, the signs are there that clients are increasingly winning the war. After pressing for years to get value for money through sensible service delivery and flexible pricing, in-house teams are reporting greater goodwill towards their external legal providers this year, perhaps because the threat of reduced panel slots has become a reality.
There is debate over the cause of this improved relationship. With an increase in team sizes in-house (see lead feature, ‘Buy-side stories’) law firms are up against stiff competition from their own clients for legal work as an overwhelming majority of those surveyed (81%) said they had a policy of retaining more matters in-house to reduce legal spend.
Peter Rees QC, legal director at Shell, says that work levels handled internally by his 750-lawyer global team have performed a complete U-turn since 2008.
‘Our annual combined internal and external legal spend reduced by a third between 2008 and 2012 but we now retain more legal work internally,’ says Rees. ‘In 2008, we spent 35% of our annual total in-house and 65% was spent externally. In 2012, 68% went on in-house, while 32% was spent outside. We had also reduced overall spend between 2008 and 2012 by a third, so we have actually reduced spend on external work by a half.’
Nonetheless, despite the appetite for retaining matters in-house, almost half of all respondents said demand for external legal services had increased in the last year compared to 44% last year, while the number of firms that said demand had fallen has dropped from 16% last year to 15%.
The survey results suggest two reasons why legal teams may wish to keep matters in-house while the actual level of work going out has increased: internal resources have yet to match the ambitions of in-house teams and the level of disputes work has jumped. The percentage of in-house teams outsourcing work because it is too complex to handle in-house is down ten percentage points on last year to 43%, putting it almost on a par with the second most cited reason: insufficient resource in-house. Thirty-eight per cent of those surveyed gave this reason, which is up nine percentage points on 29% last year. Clearly in-house teams feel they have the technical ability to handle most matters internally but lack the manpower to properly resource it themselves.
Although M&A work remains the most frequently outsourced type of work, interestingly the percentage of GCs saying they very frequently send disputes work externally has increased twofold, to 22%. With disputes work often requiring significant resources and expertise that do not necessarily come easily in an in-house context, the message to law firms is clear: strengthen your disputes offering.
But while demand for external legal services is relatively robust, many GCs interviewed say they now prefer to have deeper relationships with fewer advisers – something that has become manifest through seemingly continual panel reviews. Monica Risam, who completed Aviva’s major panel overhaul at the end of August, says that reducing the insurer’s panel of preferred providers will drive greater value from firms.
Khasruz Zaman, head of M&A legal at Barclays, says that having gone through a process of widening the pool of preferred advisers over the course of the last couple of years – and having identified an over-dependency on one firm in particular – his department is now looking to concentrate its focus again.
And despite the desire to deepen relationships with a smaller pool of law firms, it appears clients would prefer to use fewer advisers across multiple practice areas, but not necessarily across multiple jurisdictions. Forty per cent of in-house counsel responding to the survey said they had experienced bad advice from the local office of an international firm, while 28% said they had not. Of those who had experienced bad advice, 40% said they had not used that firm again, anywhere.
‘I’ve not seen many clients at the moment buying services from a firm globally,’ says head of global legal services transformation at PwC Legal, Stephen Allen. ‘It’s just not a compelling offering. With some international firms, the quality across offices is variable as a result of separate partnerships, and the requirements in the engagement model make it all the more complicated. The sooner they become international corporates, probably the easier they’ll find it.’
Money matters
As a consequence of in-house teams bulking up their internal teams and only sending matters to law firms when they can really add value, ie disputes and M&A, it seems appropriate that as they are managing their resources more efficiently, they are getting better value for money. Ninety two per cent of all respondents assessed their preferred advisers as delivering either ‘good’ or ‘fair’ value for money.
Seventy per cent of those surveyed ranked pricing level as an ‘important’ or ‘very important’ factor in choosing a law firm. The pressure remains on in-house departments to justify their existence – as they grow, they become increasingly visible to cost-conscious chief executives and chief financial officers.
For their part, it seems that external counsel are responding well to client demands for better service.
‘Perhaps because of the type of organisation that we are, there are a lot of firms who are extremely eager to not only be on our panel but, after getting on our panel, to ensure that they get instructed on the deals that we do,’ says Barclays’ Khasruz Zaman. ‘We are pretty direct in our feedback and we will tell them exactly what we need. As a consequence, law firms normally adapt effectively to our requirements.’
However, it seems that firms could always do more. Seventy seven per cent of those surveyed said they would prefer external advisers to proactively point out business risks rather than stick to specific instructions. ‘To stay relevant, firms need to be bringing the solutions to the client, not always waiting for the phone to ring, and to be quite innovative in terms of application of law,’ says Allen.
Chief legal officer at Bupa, Paul Newton, agrees, saying that it is time advisers were more commercially-minded: ‘It is too often the case that clients are expected to make sure costs are controlled; there are very few law firms that you feel you can trust to just get on with it without having to look over their shoulders all the time. Firms need to improve efficiency and project management, and they themselves need to put in place better controls.’
Nevertheless, client satisfaction levels have increased as regards billing. GCs are citing greater fee security through the increased use of fixed fees and discounted rates, which are the most popular billing methods, with more than two thirds of respondents saying they use both these arrangements often.
‘City lawyers used to have a reputation of getting into the office and starting the clock running. But that happens less now; there is a growing recognition in the industry that a clear billing process and discussions about costs are an important part of that relationship,’ says group GC at The Economist Oscar Grut.
But the traditional hourly rate is proving resistant to erosion, with 63% saying they often use it as a billing method, slightly up on last year’s 59%. This remains a bone of contention among many.
‘The faster we can move beyond the hourly rate the better,’ says Zaman. ‘In some ways we’re already there because internally as soon as I have a capped or fixed fee arrangement I disregard hourly rates, but it is a pervading concept and law firms still use it as the building block for working out what the capped or fixed fee should be. The debate has to be about the value of the service provided and how you avoid reverting back to hourly rates as the default position.’
However, it seems that even with a pre-agreed bill in place, clients still don’t have complete control over their finances, with the majority of respondents (67%) saying they have had disputed bills or have delayed payments to a law firm at least once or even frequently (although 33% said this had never happened). Likewise, 57% said they occasionally receive unexpected bills from law firms.
‘We are always looking to mitigate the effects of the hourly rate, which law firms use to measure their profitability,’ says deputy head of legal at The Crown Estate, Alex Peeke. ‘A good alternative could be value-based billing on transaction value, like how an architect charges a fee based on a percentage of the cost of a project. The step they’ve got to take is to accept that some transactions will be massively more profitable than others and on some you may make a notional loss, but you’ve got to see things in the round.’
Leon Shelley, GC for the UK and Europe at retail group Westfield, says that UK firms should look to American advisers to see how billing can be handled effectively. ‘US firms are far better at billing,’ he says. ‘I judge a bill by whether I get value. UK firms send time summaries, a list of hours, charge-out rates and a huge bill. US firms provide one sum they’ve calculated as fair and reasonable taking into account their relationship with the client. It’s a dynamic bill rather than a static one,’ says Shelley.
But while the hourly billing method may still grate, it seems that the resourcing of work in general is being suitably managed by firms. The overwhelming majority (81%) of respondents say that law firms are generally resourcing work at an appropriate level. And those who are involved are taking steps to manage billing.
‘Increasingly partners are quite proactive in recognising where fees have racked up and will knock some off where they think it’s excessive. That has changed over the last few years,’ says Grut.
With astute tendering processes in place, clients seem to be keeping firm control on finding the best provider for individual pieces of work. Newton, whose department challenges at least two of Bupa’s panel firms to tender for a typical transaction, says: ‘We are very robust in making sure we are using the best firm for a transaction and won’t allow relationships or ties to sway our judgement. To maximise a panel you have to maintain competitive tension.’
Nonetheless, it is unsurprising that the insurance industry would be home to GCs who promote systems that deliver cost efficiency. Group GC at Axa, Edward Davis, says outsourcing is something that he and his 34-lawyer team encourages, and predicts such arrangements will become widespread. ‘The issue with LPOs is that there isn’t the quality at the moment, but we will see a shift over the next few years to different outsourcing models,’ he comments.
‘They fall between stools,’ says Newton. ‘They’re not able to offer the quality that a traditional law firm offers and the price differentiation is not that great. I’d much rather pay for the depth and breadth of advice you get from a typical law firm.’
For Allen, whose employer PwC has operated its own legal services offering since the late 1990s, the real market changer could be alternative business structures (ABS). ‘Nobody’s quite realised what the whole point of an ABS really is – the point isn’t to get private equity money, the point is you can combine services to deliver a full solution, like an architecture and planning practice does. They can offer seamless solutions where legal is just part of that offering.’ PwC is understood to be considering its position on applying for an ABS licence.
While it’s obviously too early to judge the impact on client buying decisions of alternative legal service providers, it is worth noting that the mood among clients is that law firms have in general improved their efforts and delivered real improvements on service and value. If the bar has been raised by more demanding GCs – for now advisers are jumping higher. LB
francesca.fanshawe@legalease.co.uk