General counsel have been vocal in recent years about persistent problems in law firms but what about in-house teams? Legal Business talks to clients and counsel about where GCs go wrong.
It’s not hard these days to find outlets and forums for general counsel (GCs) to highlight the excesses and poor behaviour that still persist among law firms. High rates, padded bills, unresponsive service and an inability to put themselves in the position of clients are all cited repeatedly in events, surveys and coverage of the views of in-house counsel.
What happens when that scrutiny is reversed? While all indications are that the calibre, status and sheer scale of the in-house profession has materially changed over the last 15 years, there has been little focus on the persistent cultural problems and weaknesses among in-house counsel. While there is frequent and usually justified debate over the model and shortcomings of a conventional law firm, there is little if any discussion over the dominant model of corporate legal teams, even as expanding swathes of legal work are now handled by lawyers working directly for companies.
Few in the in-house community have much interest in encouraging critical scrutiny of their role, and finding accurate and comparable data on the in-house legal profession remains difficult in many contexts. Moreover, advisers, for obvious reasons, are reticent to highlight problems while regulators and professional bodies have largely ducked tackling the specific ethical considerations inherent in the dramatic expansion of the in-house Bar. There has similarly been a dearth of serious academic research into the operations of in-house legal teams.
In the interest of balance, Legal Business canvassed a sizeable pool of GCs, advisers and consultants to pick out the common themes when in-house lawyers fail to excel or even become part of the problem.
Protecting the empire
The most candid in-house counsel and observers of GCs concede that many of the cultural and operational weaknesses with corporate legal teams come from a pervasive sense of insecurity.
No matter how effective (and in many cases cost-effective) an in-house legal team is, lawyers remain a very high unit cost for companies. More to the point they work in a support function very separate from the core commercial drivers of the business. As such, many in-house teams and lawyers remain isolated, doubly so because the risk management brief of lawyers inevitably pits them against bonus-driven commercial staff. The culture of lawyers, of course, is usually pretty distinct from that of most staff in a major company.
Likewise, the emergence of sizeable in-house teams is only a recent trend and many counsel still have a challenge to win internal support. Such a dynamic can lead teams to over-compensate in the aim of securing much valued status inside the business and lead to pronounced problems.
Such attitudes also see in-house lawyers often strike a defensive pose within their organisations, seeking to protect their turf from internal challengers like compliance, finance or procurement, rather than focus on overall performance.
The desire for status can raise troubling implications in teams without a strong ethical compass from their GC or in companies with cavalier attitudes to risk. The experienced consultant Paul Gilbert, chief executive of LBC Wise Counsel, has argued that such perverse incentives have in many cases dulled the ethical and intellectual edge of in-house counsel.
There is also a growing body of evidence highlighting the potential problems and conflicts of in-house counsel seeking to become trusted advisers; at best, the near-unchallenged imperative to ‘be commercial’ raises awkward questions for independent legal counsel, charged with managing risk and keeping the company inside the law.
The report, based on interviews with in-house counsel, noted the growing string of governance failures and scandals that have involved in-house counsel in recent years and cited frequent equivocation among GCs on ethical issues.
Such behaviour can also lead to lazy thinking and unnecessary duplication of roles and responsibilities between clients and external advisers. As such, an increasingly common complaint among advisers has been instances of duplication or in-house counsel aiming to forcibly insert themselves between outside advisers and the company in a heavy-handed attempt to bolster their own role.
One partner at a US law firm says: ‘A power-crazy GC who thinks they know everything can be very obstructive and can give you poor instructions if they’re trying to impress their boss in the hope they look better. They may also not want to use you because they have their own particular firm. If the choice to use you is taken away from them, they may try and make you look bad.’
A Magic Circle partner comments on having seen teams over-reach: ‘In-house counsel are increasingly trying to internalise everything – but they don’t have the skillset. Sometimes they can do things and can’t complete them and we have to take it on because it’s not up to standard. That is a response to cost pressure. But they lack the resource or expertise. We end up absorbing the cost and that leads to some difficult conversations. It’s almost like penny wise, pound foolish – it gets done but it would have been easier if you would just be reasonable and we can take this deal forward.’
Fried, Frank, Harris, Shriver & Jacobson London finance head Stuart Brinkworth argues that issues arise precisely because some in-house lawyers lack influence within the business: ‘Sometimes they can be tucked away in a corner, in some back office justifying every expense. They’re better to be entwined in the business. Having legal as part of the business is always more constructive.’
In many cases, of course, in-house teams function as an efficient project manager of outside counsel or a bridge spanning the legal input being provided by law firms with the company-specific needs and priorities of the business on the other. Nonetheless, a growing number of law firm partners argue that the desire to be at the centre of the work can be counter-productive.
While it has become an increasingly common refrain among GCs that the job of outside counsel is to ‘make them look good’, the understandable desire to build and sustain a good internal reputation can easily tip into problematic behaviour.
Jomati Consultants founder Tony Williams says: ‘There is a tendency for in-house lawyers to want to be involved in something even if it’s quite complex. In fact they desperately want to be involved. Therefore an external lawyer who wants to take it away and not tell you anything will piss you off.’
Dotting the i
One notable strand of the boosterish narrative of the modern GC is that of the proactive client driving innovation, greater efficiency and new ways of working.
While there is undoubtedly a growing body of GCs and in-house legal teams that live up to that ideal, for the majority of time-pressed in-house counsel, evidence of fresh thinking is thin on the ground.
Billing practices are a case in point. For all the frequent complaints about hourly billing, a significant number of major UK law firms sought to expand their use of alternative and fixed-fee billing in the wake of the 2008 banking crisis only to find that clients were often wary of the challenge of moving to a new model and returned repeatedly to traditional billing.
A related factor is the fact that in-house teams – composed of teams of lawyers trained in law firms rather than driven by professional managers or staff with clear operational skills – typically undervalue process and infrastructure that could be used to drive efficiency.
A recent report by Legal Business into artificial intelligence and advanced automation found that only 11% of responding in-house teams spent more than 5% of their budgets on technology out of 637 respondents.
For all the familiar talk of ‘more for less’, in-house teams in the UK in general have adopted a strategy of retaining increasing amounts of work internally by employing more lawyers. The latest Law Society statistical report found the growth of in-house counsel continuing to outpace private practice, now constituting over 21% of the profession in England and Wales. Leaving aside the public sector, lawyers working in commerce and industry have expanded three-fold in just 15 years to around 15,000 currently.
‘There is a tendency for in-house lawyers to want to be involved even if it’s quite complex. In fact they desperately want to be involved.’
Tony Williams,
Jomati Consultants
While such dramatic expansion obviously speaks to the efficiency benefits of handling matters in-house and the general cost of outside counsel, it remains striking that GCs turn so heavily to employing lawyers rather than investing in infrastructure, technology and improving their ways of working.
By a similar token, the emergence of senior operational staff in in-house teams with skills in procurement, data, technology and process management has been slow at best.
Researching Legal Business’s 2015 GC Power List, which focused on outstanding teams, illustrated the extent to which many GCs still approach team excellence on the basis of hiring and retaining good individual lawyers rather than a broader approach. Over dozens of interviews with senior lawyers, in the majority of cases they identified strong teams as having strong individual lawyers, rather than focusing on organisational issues to any significant degree.
BT’s GC for its UK commercial legal services division, Chris Fowler, says that the telecoms giant’s legal function was a prime example of a poorly operating team prior to a substantive overhaul in 2010, facing issues over team identity, badly managed external legal spend and ill-thought out strategy. Fowler comments: ‘We didn’t even have a concept of strategy. I now see when in-house counsel go off the rails it puts external counsel in a really difficult position when trying to give the right advice – they’re damned if they do and damned if they don’t.’
Such issues also illustrate the conservatism in the in-house profession that is at least as ingrained as in legal private practice, and probably more so.
Operating in a highly fragmented but competitive and relatively transparent market, law firms have in recent years become more effective at adapting new models and innovations, among them the rapid spread of contract and flexible lawyer arms (Berwin Leighton Paisner, Allen & Overy, Eversheds, Pinsent Masons) and nearshoring as well as substantial investment in technology.
In comparison the relatively opaque in-house market, lacking anything near the transparency of private practice, is poor at spreading fresh ideas.
Conservatism also has a more direct and lasting impact on the profession: many in-house teams insist on instructing expensive leading City law firms even for relatively straightforward work.
While this practice has clearly broken down somewhat since the banking crisis, it has been an open secret in the profession that GCs will often continue instructing big brand law firms rather than take the personal career risk of instructing a far cheaper adviser in case something goes wrong.
The pain of panels
If there is an obvious point of tension between clients and law firms it is unsurprisingly focused on panels. It is hard to muster much sympathy for well-heeled advisers anguished at the concept of formal terms and benchmarks to regulate their services and allow GCs to ensure some genuine competition.
But while the logic of pushing robustly for the best deal is inarguable, there are two areas in which panels have had less constructive results: the encouragement of bureaucracy and the growth of a freebie culture.
‘When in-house counsel go off the rails it puts external counsel in a really difficult position when trying to give the right advice – they’re damned if they do and damned if they don’t.’
Chris Fowler, BT
The core complaint about red tape and panels is that, without tight management, they encourage an expensive pitching process, which is ultimately a cost feeding back to the client and industry.
While such processes work well when proportionate to the value of work being distributed, a frequent complaint among advisers is the level of process required to make it onto panels that then generate little in return. Such complaints have been common on FTSE 100 panels for years.
One finance partner at a Magic Circle firm says: ‘Panel appointments can cost more in revenue terms to you than not getting a place at all. The quid pro quo relationship doesn’t seem to apply anymore; in-house have taken it to the extreme.’
In this regard, there has been some progress in recent years, partly as advisers have moved to reduce panels to get better rates in return for bulk discounts or single supplier terms, while law firms have been more selective in pitching for bluechip panels, avoiding companies with a reputation for putting firms on their roster without giving out much work.
Travers Smith private equity head Paul Dolman comments: ‘You need to be pretty sure that you want this client – pitch preparation, if done properly, takes a heck of a lot of time, putting it together alone can take up to 100 chargeable hours when you have added in everyone’s time. When you’re asked to pitch, you need to assess whether there’s a level playing field or whether you are being used as a stalking horse to keep the incumbent honest on fees and whether, if successful, it makes economic sense.’
By consensus, tensions over heavy-handed panels have been most often directed towards the banking sector, which has in recent years become tougher on terms, more prescriptive and been used tactically in the view of many advisers to conflict out law firms.
A more pervading issue impacting the relationship between advisers and clients is the prevalence of ‘value-added’ services – corporate speak for supplying free or heavily discounted services as part of the contractual relationship.
What was originally an informal part of the long-term relationship management between clients and law firms during a period in which the relationship between client and counsel stretched back decades has become increasingly problematic in the age of tougher panels. Such ‘value-adds’ typically focus on secondees, client training and the provision of briefing material, though they can also take other forms.
The oddity of providing such ‘bundled’ services without an accurate market price at a time when clients are supposed to be pressing their advisers for transparency and efficiency is rarely commented on. It is an irony that in the age of supposedly disaggregated legal services, law firms are under so much pressure to throw in additional services for free.
Tensions have focused particularly on the issue of secondments, with banks making increasingly heavy demands for loaned lawyers since the banking crisis to cover bulging compliance workloads amid a period of cost-cutting.
In the wake of the financial crisis it was not unusual for banks to have over 25% of their legal teams drawn from secondments, though legal advisers have generally pushed back in recent years against such demands.
While it is widely agreed on both sides that well-managed secondments are a useful means of helping clients with short-term cover and building relationships, when relied on heavily they cause problems for both adviser and in-house teams.
A US firm corporate partner observes: ‘What can get frustrating is that a lot of voices on the other end of the phone are often secondees. They don’t appear to have supervision. Clients are often guilty of using secondees as employee replacements – they are untrained and left to their own devices.’
A Magic Circle finance partner adds: ‘Secondments always have a range – firms will place stars who need to broaden out or associates who are treading water – so you might get a quality issue associated with that. They also have access to information at their firm, so sometimes their response and practice style will be built around that. That can be frustrating when you think: “Why are we talking about this stuff? This is not how this institution has done deals before.”’
That much of the criticism focused on in-house teams is directed at banks is no coincidence. For years such institutions had a privileged position and helped to drive the profitability of major law firms and so have more of a reputation for indulging in heavy-handed tactics with advisers. Their scale, complexity and regulatory exposure – tied with recent pressure on their cost base – makes them particularly prone to such problems.
Stewarts Law head of commercial litigation Clive Zietman, who is currently representing claimants in the high-profile Royal Bank of Scotland ‘rights issue’ litigation, says: ‘In-house lawyers are under severe pressure. They often end up referring work out to external lawyers because, given the weight of litigation and regulatory work that they are burdened with, they often need to offload the pressure, because they are often are under-resourced. The huge amounts of regulation in many spheres of business activity have left in-house teams very concerned about what the next regulatory nightmare might be. I have the impression that banking in-house lawyers are particularly under pressure, such that they cannot respond quickly and they cannot meet deadlines. They are especially weighed down by large-scale consumer complaints, such as mis-selling cases where they have retained the work in-house to avoid the cost of external lawyers.’
Growing up
Many of the problematic behaviours among in-house counsel come from clients not taking responsibility for their buying decisions. Some elements of this are built into the model, in that you have in-house teams as agents spending other people’s money. There is also the nature of having legal professionals instruct other legal professionals, which is prone to encouraging professional deference and squeezes out fresh thinking.
At root, GCs, even at major companies with significant buying power and resources, still have a tendency to discuss law firms as if they have not in large part evolved to meet the buying decisions of their own market.
‘The huge amounts of regulation in many spheres of business activity have left in-house teams very concerned about what the next regulatory nightmare might be.’
Clive Zietman, Stewarts Law
Many of the practices of law firms on billing, staff and culture have either been endorsed or at least tolerated by major clients, sometimes because they were in the interest of in-house teams, even if less obviously the sponsoring employer. Clients in the main get the law firms they deserve.
For example, clients increasingly complain of having to ‘pay for the training’ of junior lawyers, though in-house teams themselves train only a tiny number of lawyers and directly recruit from law firms. Such complaints come though it is clear that the primary driver of law firm costs is high relative profitability and the remuneration of partners, though clients typically get partners at effectively discounted rates relative to their experience.
While such complaints are nothing new, similar tensions are currently building over attempts by law firms to put in place more flexible working and curb the excesses of the long-hours culture. By consensus, though GCs often talk in favour of such initiatives, advisers increasingly note they remain intolerant when it comes to anything less than immediate turnaround on their matters.
In many regards, real progress in-house will come when this branch of the profession demonstrates the confidence and maturity to be more self-critical and forward thinking.
The alternative for in-house teams that fail to move with the times could be as gloomy as for legal advisers clinging to the pre-2008 lawyer/client dynamic. In-house teams look to be prime candidates for outsourcing or ‘disruption’ as alternative legal providers that have models based on lower costs and more directly handling the processes and contract management of an in-house team assert themselves. Law firms are not culturally, organisationally or economically geared up to take over entire legal teams but some of the providers like Axiom and Riverview Law and the contract lawyer businesses of law firms, such as Berwin Leighton Paisner’s Lawyers On Demand, can much more easily assume that role.
Coca-Cola Enterprises vice president for legal and company secretary, Paul van Reesch, says: ‘The model has changed from trying to get the best price to the recognition of neutral value… everyone has to benefit from the relationship – how can I demand they turn something around in 24 hours if they don’t feel it’s mutually beneficial?’
Fowler brings it back to the need for the modern GC to live up to the sales pitch of sophisticated governance. ‘Where in-house throw work over the wall because they can’t cope is poor management. The instructions are not controlled, no thought [has] gone into the arrangement and therefore, how can a law firm be efficient or consistent if they can’t get proper instructions? Where things go horribly wrong is where, quite frankly, the legal function isn’t in control.’ LB
sarah.downey@legalease.co.uk