The right questions – The client view on innovation

In a flagship report last year, we teamed up with BLP to assess the state of innovation in law – and the role of leaders in forcing through change within conservative law firms. We assemble a group of GCs and academics to get the client perspective

Innovation it seems is everywhere and nowhere in the legal industry these days. Given the dramatic upheaval in the global economy over the last six years and an unmistakable shift in in-house legal teams – teams that are increasingly able to take over work being unimaginatively handled by external counsel – providers are at pains to stress their progressive credentials.

Yet many clients are unconvinced that there is a willingness to improve service and efficiency, or even much change in mindset at major commercial law firms. But – as Shell’s UK legal head Michael Coates observes – are clients ‘asking the right questions’ to get what the modern general counsel (GC) wants and needs?

In the second part to our Leadership and Innovation Insight, created with Berwin Leighton Paisner, we assembled a group of experienced in-house counsel and academics to discuss where clients and providers are getting it right and what the GCs of tomorrow need to do to position themselves for the era of New Law.

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Alex Novarese, Legal Business: Let us start with the state of innovation. There are some who argue it is an amazing time of change in law but a lot of clients take a different view.

Ken Underhill, ACE: Deloitte, KPMG, PwC and EY have stolen a major march on the law firms in terms of regulation – and the quantity of regulation is ever increasing. You go to a law firm and you will get the advice. It is fine but not always pragmatic. It will cite legislation and it will go on for pages. What you want is somebody you can turn around to and say: ‘OK. Let’s put a plan together about how we are going to get this into the business and implement it.’ That is what law firms cannot do. But I could go to any one of the top four accountancy firms or consultancy firms and they all have people who can do that. With the law firms, you talk to their insurance partners about what you need. Years later I am still saying it and not getting it. You need the full service.

Benoit Belhomme, British American Tobacco: I have shared similar experiences. It is a bit like asking the turkey to vote for Christmas. We have been quite precise in terms of identifying the added value the law firms can bring us, and we maybe have been more cynical. In essence, regulatory has been almost taken away from legal. We manage it in a completely different way, by the government affairs function basically, which is very important. It is merging with legal and it is a virtual takeover of the legal function. The regulatory environment, it was felt, could easily be managed not by lawyers.

Alex Novarese: If you find that you do not get better service from law firms, how much of a response is: ‘Well, we will bulk up our team?’

Michael Coates, Shell: We try to strike a balance. We have a comparatively large in-house team – about 1,000 staff in the legal function. We will just look at each individual area; we would not necessarily bulk up staff for a short-term thing, but if we see a growing trend – for example, compliance, anti-bribery, money laundering, trade controls and those sorts of things – we would try to get ahead of the curve.

Maaike de Bie, Royal Mail: Some firms are listening though, and the change is very much driven by the in-house teams. It is difficult for advisers because they have worked in a certain way and been very profitable, and why would they pro-actively change? We actually have a fair bit of volume work and we have partnered with one of the national firms in the UK and they have come up with a really good system for our property portfolio. We own or lease close to 2,000 properties in the UK and they require a lot of management. The firm has set up a project-management-style system that is accessible not just to our lawyers but also to our surveyors and other people involved in property, and if we need to make a decision whether or not we can sell a property or if we have a lease coming up or anything else similar, we can move very quickly. I think they bought into it because we are so large and therefore they were willing to put the investment into the system and build it.

Professor Laura Empson, Cass Business School: The assumption has been that it is the law firms who are resisting change, because of concerns around profitability or just because they are old-fashioned and intransigent. There is something more fundamental going on behind that, which is about identity and lawyers’ sense of self-worth and themselves as professionals. What makes them a valuable human being and a worthwhile person is their very specialist expertise. As soon as they realise that this can all be commoditised and their work can be done by someone less well qualified, that attacks something really fundamental to them.

Michael Coates: Law firms do listen; I just wonder whether they are being asked the right questions by clients. It is sometimes a bit unfair to expect them to change without necessarily them knowing what we want. I think of the appropriate fee arrangements we have at Shell. We say we want to move away from hourly rates, but to do that you need to sit down with the lawyer and explain exactly what you are hoping to achieve.

Alex Novarese: Should clients be talking to the managing partner or the senior partner?

Neville Eisenberg, Berwin Leighton Paisner: There is probably a good opportunity for a different conversation with a managing partner or a senior partner, because in those roles one sometimes has a greater degree of general business experience than the coal-face lawyers. Some of our most innovative partnering arrangements with clients have come about from conversations I have had over the years with the chief executive or head of legal, where they have been expressing frustration at something or other and I have said: ‘Well, why do we not just start with a blank piece of paper? What is your ideal scenario?’ Law firms are slowly becoming better at responding to those kinds of challenges. In terms of commoditised products, some law firms are clearly organising themselves to be able to provide that more efficiently. A bunch of law firms are now beginning to develop, small scale, the consultancy and the management-consultancy-type add-on to the service that they provide. Other firms are investing quite heavily in project management, which will generally give them a better ability to help clients implement. It is still rather small scale but picking up pace.

Alex Novarese: One of the themes of our leadership report last year was the extent to which the law firm model is a barrier to fresh thinking. What is the feeling around the table?

Ken Underhill: I do not think it is, because the consultants are structured [as partnerships] as well. A large part of it is around the charging models. I do not think I have ever used a consultant’s model that has actually tried to charge by the hour. We will agree a fixed fee and that is it. The use of the hourly charge is stymying change more than the partnership structure.

Maaike de Bie: You can still have a reasonable discussion. It is so critical that you agree scope, so it is very clear what they do, what you do and what they should not do.

Alex Novarese: The law firm complaint would be that clients might use that discussion as a proxy for lower fees when, if they want lower fees, they should just say that.

Maaike de Bie: We have done this too where we were looking at a particular deal and there were different phases to it. We asked and agreed a really good, cheap deal on the first phase with the understanding that in the second phase the fees could ramp up. There is definitely room to negotiate fees.

Laura Empson: Law firms’ commitment to charging by the hour is bound up with their professed commitment to lockstep. Both of these reveal a fundamental lack of understanding of the economics of their business. Consulting firms make a great deal of money charging on a fixed-fee basis. They have a sense of how much time their consultants are going to be spending; of how much the client will be willing to pay; and they have a sense of how much they think they are worth. It is as though the law firms are hesitant to ask those really fundamental questions: ‘How much are we really worth?’

Neville Eisenberg: It is that hesitation, but also resistance to change. To make fixed fees work, one has to think about resource in a different way, and you have to analyse the cost and project manage the assignment in a different way than working by the hour. The more fixed-fee arrangements we have, the easier it is for us to drive change within the firm, because there is that economic pressure. It is easier for us to then convince partners that they need to think much harder around making sure they have the right resource on an assignment.

Laura Empson: It is ultimately about resistance to management. What you are describing are really basic management principles that any well-run organisation should be able to implement. It’s the same reason why law firms recoil from more performance-related pay, because it requires someone somewhere to make really difficult decisions and to think very carefully about management issues.

Brona McKeown, The Co-operative Bank: It is how lawyers in law firms see themselves that absolutely resonates. They are specialists. Certainly I have need of that very specialist and urgent resource every so often, in which case I will not necessarily ask for a fixed fee. I just want the best advice I can get and to a certain extent I will pay hourly rates without argument for those kinds of moments, because I am really getting the best advice, but that is a small part of the whole spectrum of my spending.

Paul Hughes, Cranfield School of Management: I am going to come back to an earlier comment: ‘Other professional service firms innovate, so it cannot just be the partner model.’ How do you know? I have worked with quite a few and I am not entirely convinced that innovation is at the core of the DNA of a professional service firm. They tend to buy it in more than is often imagined.

Maaike de Bie: I worked briefly in-house in a consultancy firm so I saw how they operated, and they know their cost structures inside out. It is that knowledge and taking that into their fee structures, and also being willing to take a risk on a deal.

Paul Hughes: If you go and talk to the strategy guys in PwC they will say: ‘The biggest problem we have is we do not have any bloody innovation round here.’ But you go and talk across the firm – there is lots of innovation. Part of it is that diversity within large consultancies that means lots is often going on. But also part of it is the fact that they ‘get’ business models. We did some work with a law firm. It was fascinating, almost as an ethnographic study, for good and ill. We helped them recognise that they were able to go to one of their clients and say: ‘You spend all this money on litigation and we know why you are having to spend it. You could spend two-thirds of that with us and we could make all that litigation go away.’ If they thought like a consulting firm, they would be saying: ‘This is great. We can spend a third of the man-hours for two-thirds of the fee. The job is a good ‘un.’ We got them to work it up as a business case and they could not pull the trigger on it. They were scared of that change.

That is my question: how are you bringing heat to that conversation to force that change to happen? Because the capability could be there if you asked for it.

Brona McKeown: If I was the GC of that business I would be fuming with [the law firm] if I thought that discussion had gone on about my business and they had not told me.

Benoit Belhomme: As a client, this is not really practical to go and audit your own law firm to find out what their cost base is. It is not what you are designed for. We use procurement, but one of the few markets procurement does not really understand and still cannot get its teeth into is legal.

Paul Hughes: You need to find the person or people who know the answer to your problem, because they will be in your own organisation. But you are absolutely right: in certain organisations procurement can behave in a horrible way.

Nayeem Syed, Thomson Reuters: Deciding what legal resource mix is best to address a legal or regulatory issue is arguably the modern GC’s most important function. Going forward, the role is to be much more the manager of the global risk management supply chain. They are asked to help identify and manage risk for their organisations and to do that, they get a certain budget. They are best placed to decide how much of that work is done in-house, but they must ensure it is done right. We should improve or acquire the skills necessary to be able to say: ‘Technically, I know what needs to be done, and know how to achieve that outcome using the range of available service provider options.’

Alex Novarese: I am surprised that procurement professionals have not become much more embedded with in-house legal teams. Is that about control or a turf war?

Benoit Belhomme: My experience has been that somehow it is the one market that they do not understand. I do not know if it is the opacity of the model of law firms versus consultants or other parts of what they source for the company, but we had an experience where we went for it – we just said, ‘Trust the procurement function’ – and the outcome was shocking, to be honest.

Caroline Hill, Legal Business: Procurement specialists are very good at the process; they are not very good at the final selection. If you work well with them, they can take some of the grunt work and then you make the final decision.

Laura Empson: I see a tremendous opportunity for GCs to be part of the leadership constellation and to be an important voice at that table. That opportunity is often missed.

Michael Coates: It is incumbent on us as lawyers to take the space. We do have a different perspective. Boards that are all composed of the same type of thinking can lead to groupthink. Lawyers have an eye to risk that other directors might not have. I, for example, am on the board of Shell UK, so I am a lawyer on the board acting as a lawyer but also as a director. There are some different opinions about whether lawyers should be on boards or not. There is a potential for conflict, but you just have to manage it. You need only look to the US to see how powerful general counsel can actually be.

My last job before this one was working for the CEO of Shell as essentially his bag carrier – as an executive assistant. That was, essentially, a non-legal role. It is very rare for companies to trust a lawyer in that sort of job.

Brona McKeown: There is also an appetite question as to whether an individual lawyer sees their role as to give the choices and then retreat or whether to give the choices but follow it up with: ‘There is a bunch of stuff here that is do-able but I do not actually think it’s the right thing to do. I recommend x.’ That is still a Rubicon that lots of lawyers do not want to cross. Lawyers miss the chance to be business advisers if we just say: ‘I have given the business all the choices, it is up to them to do what they want to do.’ I don’t think that is actually giving advice.

Alex Novarese: How much do you think about gaining influence as a general counsel?

Benoit Belhomme: We had a very interesting experience at BAT about ten years ago, when we found the state of the legal department was very much old-fashioned advice; the image of the department was quite bad. We organised a global conference and we had a video of the feedback from everyone from top to bottom in the organisation. It was deliberately provoking. We launched this concept of ‘Legal means business’.

Laura Empson: That is fascinating, because it goes back to some research that I have done looking at the rise of the management functions within law firms – the HR function, the finance function, the marketing function, etc – and understanding how those functions and certain individuals leading those functions have become extremely powerful within certain law firms. One of the themes we have identified in this study is about making the peripheral central. It is about how to take something which is seen as out there and saying: ‘It should be front of mind for a lot of people.’ The second theme is ensuring that your specialist expertise is known and is understood, and that you are speaking in a language that resonates with the professionals you are serving.

The third element is developing social capital, which is exactly what you were talking about, Michael. You become embedded and absolutely essential, someone that people want to turn to, not just feel they have to turn to.

Benoit Belhomme: But the key element for that, to underpin this, was not making the function different than others. There is always a tendency that legal is somehow different.

Ken Underhill: A resolution to that issue is to embed the department within the business. Give each head of a business a lawyer and make sure he has an office no more than one office away from his, and then the other lawyers for that function or business would sit with the business guys in the open plan area. It can instantly transform that relationship.

Caroline Hill: Laura, you asked a question about status and the immediate reaction was to talk about interaction with the board and the quality of the advice, but what a lot of it comes down to is the management of the team, does it not, and your positioning and structuring?

Laura Empson: And you get status from managing the team in a really effective way.

Caroline Hill: Yes, but people do not always differentiate. You immediately think, ‘It is how I advise’ but actually a lot of it is how you position the whole team and how you have a grown-up relationship with the board.

Brona McKeown: Absolutely. If the only person who can advise the board is you, you have a problem, so you have to feel that a bunch of people in your team could have a direct line of advice to the CEO and not worry about it. If the only person who can deal with the exec and the seniors is you, you have failed.

Neville Eisenberg: Often a crisis in a company provides an interesting opportunity for the GC to elevate their importance. Even if the crisis passes quite quickly, that can then turn into a permanent enhancement of the role.

Those GCs who do perform that enhanced, board-level role usually interact with us in a different way. They have higher expectations of their own team and that translates into a higher expectation that we, the external lawyers, will equally deal with them in a different way. They have much higher expectations on us to improve our understanding of the business issues, not just the legal issues. It is not just about the GC having made it on to the board; it has all kinds of quite positive effects later.

Alex Novarese: Do we need an operations head – a COO – for the in-house legal team, especially when you get to large plcs? Would that be a step forward?

Nayeem Syed: It’s useful to recall why we enter into an in-house organisation and what they really need us for. At a high level, it’s to help them do strong business safely. At a more granular level, if you are in a heavily regulated environment, you are helping them navigate; if you are in a high-growth environment, it is about perhaps helping structure transactions, maybe doing even more brokering than purely lawyering and, therefore, your commercial acumen and negotiation skills are more at play there. One of the most impactful books I have read is The Trusted Advisor by [US academic] David Maister. It provides a framework to evolve to provide exactly the kind of professional support colleagues in your organisation will really value.

Ultimately, you develop those relationships where they instinctively come to ask you what you think about an issue. Your value is in being able to weigh up the many different competing risks and opportunities and explain – in a business-focused way – the best route to an optimum outcome.

Alex Novarese: I often hear general counsel say things like, ‘It is great when the business says, “I forget that you are a lawyer”.’ That strikes me as an odd aspiration. Should it not be about making the business feel differently about who you are as a lawyer?

Elizabeth Campetti, Coca-Cola Enterprises: When you look at finance, it is not uncommon for chief financial officers to become the general manager or the chief executive, but for general counsel this is far less common. It is partly reticence on our part to say: ‘Yes, we are willing to give up the fact that we are a lawyer.’ Michael is unusual in that he was willing to stop being a lawyer for a while and go and do something else and had confidence he could then come back and be a lawyer. Within our organisation, within all the other functions, people move around all the time. They try something new; they get to know the business better. Within the legal team, it is very unusual. We have done it in the past and we try to do it more, but it is unusual.

Caroline Hill: It is also about having a grown-up relationship. Lawyers sometimes fall into this trap of a child/parent relationship, especially when it comes to things like budget, when they say: ‘You must do more for less.’ Rather than standing up to them and saying: ‘What do you want us to give up?’

Michael Coates: The business likes metrics. Telling them that we are wonderful without providing any evidence for that is difficult. ‘How much have you saved?’; ‘How much money did we win in that case?’ It is very difficult to quantify, but that is the language they speak.

Brona McKeown: A few years ago I had a litigation budget for professional negligence claims and my FD was looking at it with a glint in his eye. I got my litigation team to go away and pull 40 files and trace how long each claim took, how much we spent externally and how much had been recovered. There was a number: ‘Pounds spent; got back x’. I went to the FD saying: ‘If you want to cut the budget, your call, because for every pound of it, we can get you back x.’ And he said: ‘Okay, then. You can keep the budget.’ I was saying: ‘But do you not want me to prove it?’ He said: ‘Brona, if you came in and told me that, you can prove it. You can keep the budget. And, by the way, could we recover more if we spent more?’ Once we had cracked that, that budget got left alone. I tracked it and we could give choices: ‘Do you want it faster? If you want it faster, you will get back less.’

Alex Novarese: I just want to get a few experiences of in-house legal teams changing how they do things or pushing for improvements.

Elizabeth Campetti: We have launched an app, which, when you have a sales force out on the road trying to get access to legal information, is a quick, easy way for them to access our know-how and guides, and contact us very quickly and easily. We try to be very open in our messaging to the business when we are doing something. When we have rolled out a document-retention policy, we have tried to model the approach of a marketing team. We are no way as creative as they are, but we will use the electronic message boards within our HQ and our manufacturing sites to say: ‘Hey! Document-retention policy. It is here.’ We sent everyone a text message on their phones saying: ‘The legal team have just launched this. Have a look.’ We try to employ the tools that are already within the business. There are a lot of materials in business which legal teams do not necessarily think are relevant to them because they are the purveyors of legal knowledge; they could not possibly bring themselves down to the level of an app and a text message, which is a shame.

Alex Novarese: So it is getting in front of people, partly?

Elizabeth Campetti: It really works. In terms of working with external counsel, we have recently done a tender. We were quite open. We said to the people we were asking to come and pitch to us: ‘What do you think we need? What do you think you could do to help us?’ We have pretty much found universally when we have ever asked anything of our external legal counsel no-one has ever come back and said: ‘No way; we are not willing to try that.’

Nothing that we have done I would say is particularly out there or left field. It is just all little things that you think: ‘Oh, maybe if I tried this it would work better.’

Benoit Belhomme: We have done what you have done but despite these tools that we can put in place, it is still down to the individual leadership. The sourcing of your talent is the key. If you hire the wrong people, you can make all the tools you want; the people are not going to want to be proactive.

Paul Hughes: It comes back to the role and how you understand and articulate and execute what you see the role being. What has been really heart-warming for me as somebody who spends a large part of his life talking to GCs is all the bits are there; it is just about helping or encouraging you to have more of these sorts of conversations. It is just encouraging you to build the confidence that you are an intrinsic part of the business. That is the point I would just want to end on and encourage you to really believe, because I think you are. LB

alex.novarese@legalease.co.uk

 

Further reading:

• The partnership dilemma – A special report on leadership in law in the age of disruption