Improving management of the in-house legal function. Finding efficiencies through outsourcing, IT and other methods

Session co-chairs:
Trevor Faure, general counsel EMEA, Tyco International
Adam Smith, vice president (legal) / head of M&A, EADS

Session co-hosts:
Kevin Doolan, Eversheds
John Evans, Howrey Europe

Session facilitators:
Derek Benton, director of international operations, LexisNexis Martindale-Hubbell
Leigh Dance, president, ELD International Inc

As a cost centre, the in-house legal function is often an easy target for managers looking to reduce overheads. To resist this threat, the legal function should proactively demonstrate how it adds value to the business - and saves the company money at the same time.

Taking control of external relationships

One of the most fundamental roles that an in-house legal function should perform is to manage the company’s relationships with external law firms. Where internal controls have previously been weak, or non-existent, this can present counsel with an enormous challenge. In extreme cases, counsel may discover that, collectively, individual business units may be instructing literally hundreds of law firms, with little central control over cost or quality. Often, it is not possible to turn this situation around quickly. Any counsel who faces this challenge should resign themselves to the fact that it may take several months for them to assert their authority over key stakeholders. However, the results can be extremely rewarding – the chance to create the “ideal” legal function.

Another key question that counsel must address is to decide which type of work to outsource. This decision, of course, should depend on the nature of the business, and the type of demands made on the legal function. Ideally, the skills sets of the lawyers within the legal function should match these demands as closely as possible, in order to ensure the department’s maximum efficiency. Counsel should therefore consider evaluating both the needs of the business and the skills-set of their in-house legal team, to ensure the closest possible match. This, in turn, provides an objective basis for recruiting, or disposing of, members of the in-house legal team.

In many situations, external law firms will be required, in order to “even out” peaks and troughs in demand for legal services. Many in-house legal departments will typically outsource “big ticket” M&A work, especially if the department has no capacity to offer such a service. Alternatively, the legal department may wish to dispose of tedious, routine matters, such as patent filing. Whatever the financial arguments for keeping this work in house, some legal departments chose to export such work, simply to avoid demoralising their team members. Session co-chair Adam Smith, who is a vice president (legal) and head of M&A at aerospace company EADS, is typical of this mainstream approach. “We outsource the crap and keep the fun stuff in-house,” he summarised, succinctly.

Whichever type of work they outsource, another of the key tasks that in-house counsel must perform is to maintain the company’s relationships with key outside law firms. Here, EADS’ Adam Smith has several practical suggestions for managing costs. Firstly, he insists on using ‘framework agreements’ for his major relationship firms, because these agreements can often result in volume discounts. Secondly, in order to prevent law firms from padding their teams, he insists on knowing the name of every person listed on specific projects. “If someone turns up at a meeting, and their name is not on the list, I ask them what they are doing there,” he says. Thirdly, he aims to ensure that law firms comply with the terms of their mandate on matters such as travel arrangements for meetings. Fourthly, Mr Smith says he is not afraid to ask for firms to provide some personnel free of charge. Here, one of the most obvious options is to request that one of the firm’s lawyers is seconded to his department. However, he also insists that the firm’s relationship partner does not charge by the hour for their services. Finally, Mr Smith is also strict about passing on the costs of providing legal services onto his internal clients. “If they are benefiting from doing a deal, it’s only fair that they should pay for it,” he says.

Dealing with in-house clients

Despite valiant claims that they “add value” to their business, the in-house legal function is, of course, a cost centre to the company. In addition, many business managers regard the legal department as a hindrance to the development of new products and services.

In some circumstances, this can result in a tendency towards paranoia within the corporate legal function. This, in turn, can lead to situations where the department is so desperate to prove its importance that it voluntarily takes on work that is better suited to other departments. To prevent this from happening, counsel must take a tough line with their internal client base. To do this, they must spell out clearly which tasks they can expect the legal department to perform – and which they will not. On some occasions, an internal client may ask the legal function to deal with a matter that could be better dealt with by another department. If this situation occurs, counsel should – politely but firmly – redirect the query to the relevant department. Where the matter is dealt with by legal, quality, transparency and responsiveness are paramount: the legal department should say what it is going to do, and do what it says – and always to a high standard.

Of course, one of the most fundamental roles of the in-house legal function is to offer accurate and practical legal advice. But credibility is not always guaranteed by advising on complex or obscure areas of law. Instead, credibility can be enhanced by recruiting new lawyers that people enjoy working with, or by asking business managers intelligent and relevant questions. Often, it is better to gain credibility as high up within the company as possible, and allow your reputation to “cascade” down. One speaker suggested that it was essential for the legal function to promote its own activities to other departments, in order to demonstrate how it was assisting the business achieve its objectives. The legal department therefore produced a “yearly highlights” newsletter, showcasing its key activities during the past 12 months.

Another way that in-house can build credibility with key business managers is by demonstrating a willingness to make the “tough calls” - with or without the support of outside counsel. On occasions, in-house lawyers must be willing to disagree with senior-decision makers, even if they are basing their judgments on partial or incomplete information. Indeed, this is the inevitable consequence of the trend towards the legal function being asked to take on a more strategic role. Of course, the flip side of this approach is that counsel must prepared to be dismissed if it can be proved that their judgement call is defective.

Nevertheless, just because a legal department is a specialist function, it does not mean that it should remain aloof from the other business units. Indeed, it is normally advisable for a company’s legal team to make a comprehensive commitment to understand their business operates. To achieve this objective, counsel may wish to attend one of the company’s in-house sales, marketing or graduate induction courses. Alternatively, they could teach themselves how to read a profit and loss account – it does not take long, and can greatly enhance your credibility.

In addition the legal function, like any other department, should be willing to hold itself open to scrutiny. For example, the department may consider offering to conduct regular “client satisfaction” surveys, where in-house clients can pass judgment on their performance. Alternatively, the legal function could undertake to improve its performance by, for example, guaranteeing to reduce the amount of time it takes to review and sign-off contracts. Of course, counsel should avoid making unrealistic promises that cannot be delivered. Nevertheless, offering tangible delivery targets – with self-imposed penalties for non-compliance – may go some way to improving a legal department’s reputation as a roadblock to innovation.

The use of metrics

As an overhead function, in-house legal departments are perennially under pressure to cut costs and reduce headcounts. To guard against this, counsel should produce objective “metrics”. These metrics can be used to prove the value of the legal department, in a language that business managers understand. For stressed-out counsel, who may argue that they do not have time to collate such figures, it is worth remembering that other departments almost certainly will do.

At its most basic level, the cost of employing an in-house lawyer can be compared with the average cost of engaging an external law firm. More sophisticated metrics can prove the added value of employing an in-house counsel. For example, the cost of employing extra legal staff can be compared with the savings attributed to a reduction of fines for the late filings of official documents, or a reduction in penalty clause pay-outs for non-compliance of agreed contracts. One counsel recalled how the legal department had identified potential costs savings running into millions of dollars from taking a lead on this issue alone.

Where a company’s legal department feels it is under pressure to reduce its headcount, one of the ways it can prove its value is to benchmark itself against its peers. For example, it can compare the total number of lawyers that it employs with other companies in the same or similar sectors. Although competing companies may be a different size, the ‘number of in-house lawyers per US$ billion turnover’ ratio evens out this variance. Comparative headcount data on rival companies is often easy to come by, and will typically appear in ‘industry sector’ focus reports produced by the international legal press.

Alternatively, the legal function can quantify the scope of its coverage by reviewing the number of lawyers per jurisdiction, industry sector or legal specialism. This review can help highlight possible gaps in legal coverage, such as in relation to contract review, employment practices or IP enforcement. In some cases, the results of this analysis may prove startling. Nevertheless, this information can be useful when asking for additional resources: put simply, if a company does not have adequate legal coverage, it is difficult to argue that it can be sure that they are fully compliant.

When assessing the legal risks associated with specific jurisdictions, counsel must be inventive when attempting to assign figures to those markets. One tool for allowing counsel to evaluate the legal risks associated with a particular jurisdiction are the statistics produced by the anti-corruption pressure group, Transparency International. By plotting the likelihood that the company will experience corruption against the number of in-house lawyers serving in those jurisdictions, it is possible to devise a simple index of the legal risk the company is likely to be exposed to in those markets.

On a related theme, it is possible to create a ‘risk profile’, which identifies the key areas of legal risk, and ranks them in order of importance. Using this metric, some issue may produce a high volume of legal disputes, but each individual issue would be of low value. At the other end of the scale are the “bet the company” legal matters. These legal matters may only occur very occasionally, but can determine the very future of the company. By calculating the company’s legal risk profile, decisions can be made on how best to allocate resources to deal with those risks.

Managing costs

Occasionally, it may be impossible for the legal department to manage their legal spend on external counsel. Business managers may simply decide that “money is no object”, and instruct external lawyers accordingly.

Picking up on a comment that in-house counsel tended to doubt their ability to control budget on “big ticket” M&A or litigation matters, John Evans, a litigation partner at the London office of Howrey, suggested that controls can and should be applied even in complex, high-value, “bet the company” litigation.

Mr Evans said that, in such matters, there are always some elements which are commoditisable and some which are not. The commoditisable elements cry out for control, the non-commoditisable elements rightly command a premium. Giving a practical example of this approach, he recalled a lengthy product liability instruction which continued for more than 15 years. From commencement, litigation was regarded as inevitable - the only uncertainty related to when it would begin. However, the firm took advantage of the “shadow battle” time to develop a structure which empowered lawyers and paralegals to their use time efficiently. During this time, they undertook comprehensive preparatory work for a multi-pronged defence. Sample exercises were conducted, and the conclusions extrapolated. This allowed costs to be accurately predicted, and budgeted for on a straight line basis. This structure also contained a contingency, in case preparation time should be reduced – mainly because litigation had begun. If this event occurred, a simple increase in manpower would accelerate the project’s completion. This would raise monthly – but not aggregate – costs.

What is more, the lessons learned in this case proved invaluable when managing the UK aspects of a complex multinational insolvency. In this matter, all fees were subject to audit by a fee auditor appointed by the US Bankruptcy Court. Through careful monitoring of resource allocation in relation both commoditisable and non-commoditisable elements, to the recovery rate, post-audit, exceeded 99.5 per cent.

From a law firm perspective, some firms are now willing to operate on a either a fixed-fee, or “monitored fee” basis. However, in return for this – more risky – billing structure, such firms will typically expect a detailed project plan from their in-house counsel partners. Eversheds’ head of client services, Kevin Doolan, says his firm’s project plan typically extends to 25 pages – amounting to significant investment in time by all parties. However, the flip side of this is a very high level of budgetary accuracy. “When using this system, around 80 per cent of the matters we advise on come in within 10 per cent of the estimated budget,” he says. Mr Doolan says he has noticed a real change in partners’ behaviour since introducing this new system, with a far greater emphasis on cost management. “Using this system, we have a monthly budget,” he continues. “If a matter starts going over budget, we will ask they client whether they wish to pull back on the expenditure.”

Another way in which in-house legal departments can drive down on costs is by making non-legal functions aware of the legal implications of their decisions. For example, one in-house counsel recalled that their marketing department had a tendency to be over-zealous with their registration of trademarks. To reign in this questionable expenditure, the department was made to pay the cost of registration, and also to provide an estimate of the likely revenues resulting from the trade mark registration. Not surprisingly, once these reforms took effect, the number of new trade mark registrations dropped dramatically.

Takeaways

■ One on the most fundamental roles of the in-house legal functions is to manage relationships with external law firms. No matter how much of a challenge it is to assert your authority, you must ensure you fulfil this basic obligation.

■ Establish which roles the legal function should be expected to perform, and which are best provided by other departments. Avoid being subject to “mission” creep, especially if you are not guaranteed additional funding.

■ Prove your worth by providing internal clients with tangible metrics showing how you add value to the business. Do not be afraid to offer to benchmark your own performance against key performance targets. But it is not the legal department’s job to be popular – on occasions, you will be expected to stand up to business managers.

■ Managing external costs should be a key part of the counsel’s role. With strategic planning and willing law firms, even “big ticket” matters can be subject to rigorous cost control.

Last updated - 23 April 09

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