In
our second annual in-house survey, corporate legal teams are continuing to grow amid strong demand for their counsel. How high can general counsel build their empires?
And the growth story continues. Legal Business’s second annual in-house survey confirms again that, despite the prolonged economic headwinds afflicting the UK and Western economies, in a risky and turbulent commercial environment, corporate legal teams continue to expand.
Take one finding from our research: more than two thirds of in-house lawyers report that their teams have expanded over the last five years, with 43% seeing increases of over 10%. The remainder said their team has stayed static.
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Our findings – based on responses from 347 senior in-house lawyers – certainly reflect the long-term statistical picture, which points to a major shift in the dynamics of the UK legal profession. The Law Society’s Competitiveness Audit report shows that between 2001 and 2011, the number of solicitors working in commerce and industry (C&I) grew by 137%, or 9% a year. This compared with 28.5% – or 2.5% annually – in private practice.
More recent figures demonstrate that private practice has begun to decline, contracting by 1% in 2012, in contrast with the employed sector, where C&I grew by 5%. According to the most recent figures there are 23,577 solicitors working in-house in England and Wales, including 14,691 in the private sector.
It may be somewhat galling for private practice lawyers to note but our research certainly suggests that this theme is set to continue for the foreseeable future, as major companies increasingly rely on having lawyers close to their business.
Other findings in the survey point to strong underlying demand from companies for legal services, even though it is far less clear that this will feed through to law firms.
Shell legal head Peter Rees QC comments: ‘It’s an increasingly complex world and a lot of the regulation and legislation is so industry-specific that you often need a lot of extra expertise to deal with that. Often the best response is to have lawyers in-house.’
On one level significant growth, despite prevailing gloomy market conditions, is understandable. Compared to private practice lawyers, in-house legal teams are relative latecomers and started out from a low base. June Mesrie, head of the in-house team at recruitment firm Shilton Sharpe Quarry, comments: ‘In the early ‘90s many businesses didn’t have legal teams so they were starting from scratch and so, of course, there has been growth.
‘Over the last 10-15 years most corporates and financial institutions have come to realise the benefits of having a dedicated legal team and now we see teams of more than just a sole counsel, with many hiring specialist lawyers with niche skills.’
Of course, many in-house teams outside large bluechips are still relatively small. The majority of general counsel (GCs) that took part in the survey (67%) have up to ten full-time equivalent (FTE) staff in their legal team. The second largest group, 15% of all respondents, have between 11 and 25 staff. The larger legal teams, seen at the likes of BAE, BT and Aviva, are something of a minority, though obviously have huge influence in terms of buying power. In total, nearly 9% of our responding in-house legal teams have over 100 staff. Of those, 2% have between 200 and 300 staff and 4% have more than 300.
Andrew Winterton, head of legal and compliance at easyJet, says: ‘I would argue there is room for growth. A lot of large companies still have just one or two lawyers and people still don’t know the value that a good in-house department can bring because they just go to lawyers when they have a problem and don’t have coherent internal processes and procedures to stop them getting into problems.’
However, from a base of nothing, that still means at least 7% of in-house teams are larger than many law firms in the bottom half of the Legal Business 100.
While individual growth rates in our survey can be slanted by expansion at small teams, it is clear that there is also considerable expansion at large and medium-sized companies. One medium range example is the 15-lawyer team at retail giant Westfield Group, which has roughly doubled its lawyer headcount since GC Leon Shelley joined in 2005, and is still growing.
With the UK’s real estate market making a recovery, Shelley says: ‘We have benefited greatly from a conscious decision we took a number of years ago to grow our internal legal capability and have been very successful in bringing in some very talented lawyers. If you want to drive a Ferrari fast then you need good brakes – we are the brakes.’
Speak to the modern GC and such confidence is common and increasingly palpable. Having fought hard to gain acceptance within companies, many feel that they have moved beyond the narrow technician tag that historically dogged employed lawyers.
Simon Hankey, senior client partner at executive search company Korn/Ferry International, says: ‘Legal departments are most effective when they are regarded as proactive and trusted business partners rather than reactive functions which simply deal with problems when they arise.’
Naveen Tuli, managing director at recruiters Laurence Simons, takes a similar line, arguing there is solid demand for in-house solicitors with five to eight years’ post-qualification experience. ‘That’s normally people who have had that law firm training, that’s still a preference because they have that discipline and the sort of law firm mentality. But they normally like them when they’ve had one job in-house and they usually like them when they’re making their second in-house move.’
And if the demand side of the in-house labour market has held up, supply has remained, for the time being, plentiful as law firms continue to strip down and cut back on the number of partnerships being offered.
As Tuli adds: ‘Going in-house is a popular move, some people have become disillusioned with law firms and the idea of partnership doesn’t appeal to them. There’s something that doesn’t appeal to them despite the monetary rewards and in-house, to an extent, has sort of come up to speed on salaries.’
Our survey underlines the general trend of growth at legal teams, with 41% of survey respondents reporting increases in their budgets, while over a third (37%) said their budget had stayed static against 2012. Less than a quarter of teams (22%) said their budget had decreased.
Nineteen per cent of respondents said their budget has increased by up to 10%. However, 12% of legal teams have been awarded an increase of between 11% and 25%; a further 7% have achieved an increase of 26-50%. At the top end, 3% have been awarded an increase of more than 50%.
The result suggests a more confident outlook than last year, when 30.8% of respondents reported increases, and just under half had static legal spends.
At Big Four accountancy group EY, where the ten FTE-lawyer team is in the process of hiring another lawyer and a paralegal, GC Lisa Cameron comments on the reasons to expand: ‘Our client handlers are so busy it’s a case of saying “We can get another lawyer or we can outsource” – and we’re definitely getting additional budget.’
Rees at Shell, likewise, sees the development of in-house as sustainable. ‘[Growth will not be] as dramatic as the last couple of years because we had a bit of catching up to do but certainly there is a trend to do more internally than externally. If the economies are going to improve over the next five to ten years, which we hope is likely to happen, then that is likely to increase need for legal support.’
Reaching peak
As with any sharp growth, a number of questions emerge. Is it sustainable? When will it peak? Is it likely that the pendulum will swing the other way in the short or even medium term?
With in-house teams in the ascendancy and having fought for a place in the corporate hierarchy, such questions are often treated as vaguely heretical. However, in an article for Legal Business in September, Scott Gibson, co-founder of legal recruitment consultancy Edwards Gibson, argued that the decade-long expansion of C&I teams has largely run its course and may be set to fall back as external advisers reassert their clout amid an economic revival.
‘In purely economic terms, supply and demand dynamics have reduced the cost of lawyers,’ writes Gibson. ‘However, as the number of lawyers (and law firms) shrinks, C&I may face its own Götterdämmerung.’
On the basis that the growth of in-house legal capability has been underpinned by proven cost savings, any significant increase in those costs would mean pressure from finance directors to take a look at cheaper alternatives.
However, our survey and the comments of senior lawyers do underline the extent to which in-house legal teams are facing very substantial demand for their services, even if a more robust in-house community is much more inclined to push for a better deal when it meets that demand with external counsel.
Nearly half of respondents (48%) said that demand for external legal services had increased within their organisation over the last 12 months, against only 15% who said that it had decreased.
That bodes well for external advisers. But not perhaps as well as it may seem. An overwhelming majority of respondents (81%), said they had a policy of retaining more matters in-house to reduce legal spend. This is a notable increase on our 2012 report, when 67% of respondents said they had such a policy.
It appears clear that there has been a fundamental shift in the buying habits of major companies in favour of expanding amounts of legal work handled internally, allowing corporate legal teams to both grow and to begin building up specialist skill-sets that would have once been the preserve of private practice.
Edward Davis, group GC at insurance group Axa, is one of many legal heads actively focusing on keeping work in-house: ‘As a group we’re just trying to manage the business when things are pretty tight and I think that just reflects the more challenging economy, so we’re just trying to manage the business within its means.’
‘We’re very focused on cost,’ says GC for Aviva Group, Monica Risam, ‘We’ve got very good, savvy lawyers so our starting premise is always “can we do it ourselves?” Even when we go externally it’s very much incumbent on in-house counsel to actively and tightly manage external counsel to keep spend down.’
But not everyone is convinced that the cost-conscious mood of GCs will be enough to protect all corporate legal teams from cost cutting down the road.
PwC Legal head of legal services transformation Stephen Allen comments: ‘I wonder if we are starting to peak. At the moment the legal industry is focused on cost delivery, and while [legal consultant Richard] Susskind was right to point out that needs to be revised, it’s not the only way of driving legal value. The problem is that people are so fixated on that and that it obviously makes commercial sense and is cheaper to have in-house, but now I think, firstly, that [in-house teams have become] too big, and also, secondly, if you’re looking at chief executive announcements, the market wants to know there is headcount reduction. Therefore it’s going to be difficult for GCs to justify to a chief executive who has promised reduction that they need to increase lawyer counts.’
Room to flourish
GCs are almost evangelical in their belief that in-house teams will continue to expand and there is plenty of anecdotal evidence to support that conviction.
The key factor in the minds of many in-house counsel is the global shift towards tougher and more prescriptive regulation in many sectors. Directors now have far more personal liability from regulatory risk. A related trend has been a more proactive stance for regulators and prosecutors in threatening or pursuing corporate indictments against companies or senior officers. This has had a focal point in the UK with the controversial introduction of the Bribery Act and the increasingly aggressive international enforcement of the US Foreign Corrupt Practices Act.
Throw in tougher competition enforcement, more onerous employment and data security laws, the growing propensity of regulators to co-operate across borders and the wave of regulation facing the banking industry and it is not hard to see why there has been a greater willingness from companies to invest in their legal teams.
Rising litigation risk has been another boon to in-house legal teams, with bluechips in sectors like life sciences, finance, telecoms and information technology becoming increasingly adept at monitoring and managing their litigation risk. This has led to investment in in-house dispute teams and companies becoming better able to quantify their success in resolving and managing disputes, giving GCs a benchmark to manage their costs and demonstrate savings to the business in avoiding disputes. For example, at BAE the legal team has doubled and compliance has quadrupled since 2008 and its litigation bill has dropped by 80%.
But in many respects, it is probably high-profile corporate scandals such as the ongoing investigation into manipulation of the interbank interest rate Libor that brings home the personal risks to C-suite executives and has helped shift in-house from necessary evil to just plain necessary.
My friend, complexity
But while there is confidence that there are underlying forces supporting the long-term growth in-house, there is a realisation among legal teams that they will have to be more flexible in how they handle their work. This pressure is highlighted by the advent of alternative business structures (ABS) and the emergence of lower cost external providers of legal services than traditional law firms.
If alternative, low-cost providers were to become a significant force in the corporate legal market, it seems likely this would change the cost equation for in-house teams, since a major plank of expansion of employed solicitors relies on them being cheaper than instructing an external provider.
There is an acknowledgement from many GCs of the need to investigate other, more imaginative means of handling volume tasks such as contract review or due diligence. Already law firms are offering project-based services, with new offerings from Eversheds in the form of its consultancy arm Eversheds Agile, Pinsent Masons’ contract lawyer service Vario and Berwin Leighton Paisner’s long-established Lawyers On Demand, which in August Financial Times GC Tim Bratton joined as practice development director. Other non-law firm providers to gain attention include Axiom Law, Riverview Law and Obelisk.
Different in-house models are also evolving. At Deutsche Bank, the bank has already set up its own equivalent to nearshoring, opening a lower-cost office in Berlin in which legal staff undertaking commoditised work are housed.
Recent years have seen other legal teams including BT, Carillion and Rio Tinto experiment with outsourcing and other means of providing legal services for lower costs.
Part of the drive from GCs to lower costs comes from pressing traditional advisers to provide a better deal. Our research shows, for example, that two thirds of respondents ‘often’ agree work with advisers on a fixed fee per project basis, even more than the 62% of respondents who said that they often used the hourly rate for their work. Discounted rates and capped fees were also both popular, being regularly used by 68% and 48% of respondents.
Opinions remain divided over the extent to which alternative providers will be competing for GCs’ budgets.
Mark Smith, practice area director for in-house at LexisNexisPSL, concedes that adoption of alternative providers like legal process outsourcing has been slow but predicts it will accelerate. ‘Once people get comfortable with process engineering and the packaging up of work, these types of work in my experience tend to find a natural geography depending on the type of work.’
Smith also mentions a point echoed by many: that the expansion of in-house legal teams will lead to more pressure to measure and benchmark their performance in ways that can be judged by their employers.
Risam acknowledges the pressure to justify their costs: ‘Internally we have our own systems and people we have to deliver to, like our transformation team, who are going through and looking at cost reduction throughout Aviva. Our contribution to these initiatives is to run a tightly managed function in terms of internal cost control and external counsel management.’
It should be stressed that even observers like PwC’s Allen, who question whether in-house teams have over-expanded, agree the long-term growth in complexity and risk in modern business will underwrite the development of the in-house Bar. ‘Regulatory is what’s driving legal demand, and I think it’s not just going to carry on increasing, it’s going to exponentially increase, we’re on a curve-up model rather than a straight-line model.’
Newton argues this shift will not only support the growth of legal teams, it will increasingly change the character of the job and shape the evolution of the role of senior in-house lawyer. ‘As the world becomes more complicated and regulated, the role of lawyer within organisations will continue to increase but it will be a different type of role than lawyers traditionally had in-house. The role of lawyer now is more about risk management, enabling the business to maximise opportunities within organisations’ risk appetite, about opportunity maximisation rather than providing transactional advice and general advice and support.’
It seems that risk – the condition to which lawyers are famously averse – is increasingly set to be the in-house profession’s best friend for years to come. LB
caroline.hill@legalease.co.uk
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