Demand for external law firms is increasing but choosing the right law firm is more difficult than ever. Time to examine the factors determining law firm selection
Despite the pressure on in-house teams to reduce their legal spend and keep as much work in-house as possible, demand for external legal services has still managed to grow. The in-house specialists who took part in this survey spend an average of 49% of their legal budgets on external legal advice, while 44% said demand for external legal services had increased in the last year, while 40% said demand was unchanged. This is despite the fact an overwhelming 67% of respondents say their companies now have a policy of retaining more matters in-house to reduce legal spend. While the contradiction is confusing, the upshot is clear: in-house teams need their law firms now more than ever.
There are numerous reasons for this. For one, the increasing complexity and intensity of regulation in many sectors requires additional legal support. Whereas the financial services sector is heavily burdened with scrutiny from a multitude of regulators post-Lehman, the transport sector has recently been hit by a Competition Commission enquiry, with many businesses forced to revise their current processes and produce reams of technical information.
Amanda Brock, general counsel (GC) at Canonical, says the technology sector is currently in a bubble – similar to the late 1990s when there was a need for external advice – particularly for IP and M&A specialists.
Employment advice is also at a premium as many companies restructure. Businesses are still undergoing heavy structural changes implemented mostly to cut costs after 2008, which has led to a deeper need for risk management strategies and comprehensive legal advice.
Other businesses simply do not have the relevant expertise in-house to handle specialist work. When asked why matters were referred to external law firms, the majority (53%) of in-house lawyers surveyed said the matter was too complex to handle in-house as opposed to a fundamental lack of resources, which was the main reason for 29% of respondents.
Essar Energy, for example, has needed to look closely at sanctioning law recently and has turned to external experts. GC Sheena Singla can’t see the demand for external legal services waning. ‘I think this demand will continue to grow at least for the near future,’ she says. ‘I don’t think many corporates will be expanding their teams in the current climate.’
It seems demand for external legal advice is going nowhere fast but, given the pressures on corporate spending right now, law firms will benefit from reviewing their operating models to find a new approach to reconcile smaller budgets with increased workloads.
Rushad Abadan, GC for corporate and M&A at The Royal Bank of Scotland Group, says it boils down to optimising the in-house team’s business structure and thinking outside the box about the way companies buy legal services from a wide range of external advisers, including alternative providers. On the other hand, Singla suggests companies should review one-off costs as they occur, as opposed to budgeting costs at the start of the financial year. This allows the team to adapt to big costs more effectively and make changes if and when necessary.
‘I think the quality of in-house lawyers is much greater than it used to be several years ago’
Primarily though, many GCs speak of limiting their external advice to specialist areas only to help reduce costs. Others believe keeping work in-house is healthy for the business. ‘I think the quality of in-house lawyers is much greater than it used to be several years ago,’ says Deborah Prince, head of legal at the British Heart Foundation. ‘I think businesses want practical advice and are prepared to take a certain level of risk.’
Not every company has a policy of retaining matters in-house, and some are even going the other way. One full-time in-house solicitor reports that their company is proposing making them redundant as part of a restructuring, and outsourcing all legal services externally, while another says: ‘The majority of basic commercial matters can be dealt with in-house, although rising work levels may lead to this situation changing.’
‘I don’t think it is feasible to have a general principle about this; rather it is a question of determining whether each type of legal service can best and most efficiently be provided to the business by in-house lawyers or external advisers and then tailoring one’s model to take account of this,’ says Abadan.
But while external law firms are a necessary evil for most companies, it seems the formal legal panel is becoming less popular. A surprising 72% of respondents say they do not have a formal legal panel and have no plans to implement one. A selection of responses from GCs gives some insight as to why panels are not used, for example: ‘You can get better flexibility and the legal market is very price conscious so you can shop around,’ says one, while another argues: ‘Prefer to instruct an individual I know can do the job.’ These responses lend weight to a more general feeling that has long been prevalent among GCs, which is that the individual lawyer working on their tasks is far more important than the law firm, or the brand of the law firm instructed.
Finding the right firm
The need for external legal advice remains inevitable and clients can afford to be very selective about the firm they use and wield a significant amount of bargaining power. Quality of service is clearly the most important factor in choosing a law firm.
The majority of in-house lawyers surveyed chose service delivery over billing practices as more important in selecting a law firm, despite these cost-conscious times. Four-fifths of respondents rated the quality of legal advice as very important while just over two-fifths rated flexibility of billing practices as essential.
According to a range of GCs, there is always scope to implement creative structures around fees and billing, but if quality advice is missing, the relationship will fail. Price and billing methods tend to become more of a factor in the latter part of the selection process. It seems once the quality of a number of candidate firms is determined, only then will GCs attempt to drive down costs.
However, many GCs report they are struggling to find experienced lawyers who naturally deliver. Quality tends to vary not just between law firms but also between individuals at different levels in the same team.
One GC says this could be because some associates are less experienced as workflows have reduced during the downturn. Others feel there has to be more to this and one senior lawyer at an international bank takes this point further, arguing that a lot of lawyers who grew up during the boom years experienced a far easier world. The environment from the mid-90s up to 2008 was relatively benign and while some have adapted to the changes since, it is a big transition and many are not equipped for a tougher market.
‘Markets were booming with law firms feeding at the troughs,’ says the banking GC. ‘There was lots of work coming in, with senior lawyers having the luxury of sitting back a bit and not doing very much. The younger partners became very good at paper pushing and getting things done but not necessarily coming through in an environment where they could advise clients and manage relationships.’
‘It’s not just about doing the work that comes in, it’s about developing the relationship with the client in the broadest sense and not all law firms are good at this’
They also argue that too many firms have great partners at the top and then a vacuum in the middle, creating a lost generation of effective law firm leaders.
‘It’s not just about doing the work that comes in, it’s about developing the relationship with the client in the broadest sense and not all law firms are good at this – it is not a given. What the crisis has sorted out is who my trusted advisers are and who have failed to deliver. The crisis has differentiated the good from the bad and the strong from the weak. Right now, it’s all about getting back to real lawyering.’
Essar Energy’s in-house team spends a lot of time ensuring it receives a continuity of quality advice from the same individual throughout the entire matter.
‘Because of my experience in private practice, I like to ensure in my business the individuals I hire are committed and fully available to advise on the matter from beginning to end,’ says Singla. ‘I keep a very close eye on all my legal matters and external services. I don’t think this is something that has evolved post-Lehman, I think this is good practice regardless.’
Nevertheless, there will always be variations in quality within law firms and among teams. As Monica Risam, European GC at Aviva, says, not every lawyer at a Magic Circle firm is excellent. The fact that lawyers generally move around from firm to firm also plays a part in quality variation.
It appears from the survey findings that quality is not a given and finding the right lawyer in this climate seems more difficult than might be believed. One GC says law firms commonly headhunt lawyers recommended by their clients, which boosts firm attractiveness while meeting client demand. Although this could be the route to targeting quality service through preferred lawyers, this type of activity appears to be limited to certain practice areas only, such as private equity and leveraged finance.
‘Law firms need to make sure they have the best people,’ says Risam. ‘I don’t feel I have the leverage to dictate to a firm who they should or should not hire, though I have been asked.’
Taking a punt
The natural instinct of a lot of large organisations is to use the big firms – adopting the ‘no-one gets fired for hiring IBM’ principle – but a growing number of clients are increasingly interested in what boutique firms can offer. The advantage of using this type of firm is they usually offer real expertise in specific niche areas and clients get better
hands-on lawyering instead of an individual from a large firm, as these firms tend to be partner-driven with very low gearing. As overheads are lower, boutique firms often offer much better rates than large law firms, which leaves scope for boutique firms to snap up greater market share, but within reason. Using a new firm, regardless of the reputation of its lawyers, is always a gamble.
Nearly half (44%) of GC respondents said using a firm experienced in similar matters was very important in law firm selection. Perhaps now is not the time to be taking risks in choosing unfamiliar firms. Then again, this could mean GCs are limiting themselves and not making best use of their budgets by opting for apparently safer options. The expectation is that more work will move away from the very top firms as the second tier have the advantage of price.
Singla says it depends on how much a GC trusts the adviser. Clients have to weigh up dealing with a known lawyer from a bigger firm against someone new, bearing in mind business risk. Abadan has a similar view but feels transactional, litigation and regulatory matters carry greater legal and reputational risk so he looks for lawyers equipped with the necessary scale and expertise to undertake that work. But if the boutique firm offers this, it would not be a constraint for him.
However, for a business like Aviva, there is more value to be gained through maintaining a relationship with an established insurance law firm. This way, the client can get a volume discount, provided the firm is being used across multiple practice areas, as opposed to boutique firms that would be cheaper individually but more expensive collectively.
‘It is not just quality and billing practice that are important. I would add responsiveness, a relationship-driven approach, the right resourcing mix and cost competitiveness as key factors as well’
Brock also thinks larger firms have more to offer and says ‘nobody wants to pay for a law firm’s learning’. For Canonical, it is vital external lawyers have the appropriate experience in new technology sectors, such as open-source software.
Other GCs believe there are additional factors that are equally as important when selecting a firm. ‘It would be arbitrary to assign percentages; it is not just quality and billing practice that are important. I would add responsiveness, a relationship-driven approach, the right resourcing mix and cost competitiveness as key factors as well,’ says Abadan.
Equally interesting in law firm selection are the factors in-house teams have identified as not important. Two areas surprisingly irrelevant in law firm selection are the international network and the ancillary services offered by law firms (such as secondments). While we look at problems associated with the international networks in part IV of this survey (see ‘Money for nothing’) it is interesting that offering up secondees and providing seminars and briefings are things clients naturally expect from law firms and are not factors they particularly consider when choosing who to instruct.
Clearly, there is a growing trend for in-house teams to take the lead on making sure the right service is delivered. Quality certainly isn’t a given but perhaps those firms that master the art of guaranteeing it will have a distinct advantage. But quality means different things to different GCs. For some, quality is about responsiveness, turnaround times and communication as much as the actual product. Increasingly though, excellent service delivery and quality advice wrapped up together will win over any in-house team.