Counsel to Counsel Forum - London

Procurement meets the corporate law function: Happy marriage or culture clash?

Session chairs:
Richard Tapp, director of legal services and company secretary, Carillion plc
Andrew Parker, general counsel, BT Retail

Session co-hosts:
Paul Smith, Stephen Hopkins, Eversheds LLP UK
Mark Chidley, DLA Piper LLP UK

Session facilitator:
Leigh Dance, principal, ELD International Inc

Participants at previous Counsel to Counsel events had raised the possibility that corporate procurement departments may attempt to take the lead in the selection of external law firms. This C2C event discussed counsels’ experiences of such a development, and debated how they could ensure such a process would run as smoothly as possible.

A welcome development?

To some extent, it is logical that a company’s procurement function should try to take part in the selection of law firm advisers. External lawyers are an expensive resource, and it is part of the procurement department’s remit to drive down the cost of such suppliers.

However, several in-house and private practice lawyers said they did not particularly welcome this development. Several in-house lawyers at the meeting said they regarded it as an unnecessary and unwelcome incursion into their job description. Private practice lawyers, meanwhile, did not think it was helpful to be forced to pitch for work within the constraints of an Excel spreadsheet – a common requirement when dealing with commodity purchasing.

More tangibly, neither group of lawyers understood how the procurement function could “add value” to the law firm selection process. In contrast with the purchase of physical goods, a procurement department is not normally capable of making a value judgement about the “quality” of a firm’s legal expertise. In addition, a relentless focus on “cost per hour” ignores the intangible value of law firms’ technical competencies, or their willingness to provide ancillary support services, such as secondments or training materials.

Nevertheless, several speakers – both private practice and in-house – said that the involvement of procurement in the selection of outside lawyers was certainly a growing phenomenon. Indeed, Paul Smith, a partner and board member of Eversheds LLP, told the meeting that the company’s procurement department is involved in every single “request for proposal” (RPF) that he is currently working on. “Some RFPs are a curious hybrid between the legal and procurement departments – and it’s clear there’s an ongoing ‘healthy’ debate between them,” he said. “Other RFPs are run entirely by procurement, with no involvement from the legal department whatsoever.”

For an increasing number of in-house counsel, the issue is therefore not whether procurement should be involved in the selection of outside lawyers – it is how best to make use of them.

One way in which the procurement department may be useful is as a support function. In particular, they can provide administrative and data-gathering support when a law firm panel is either being established or rationalised. The department may also provide dedicated tendering software, “best practice” checklists, or assistance with fee negotiations.

Invariably, the procurement function tends to gather information from law firms regarding their rates and fee structures. That is simply what they do, and counsel may be well advised to let them get on with it. Nevertheless, even if the legal team does not intend to base their recruitment selection on price alone, this information is normally useful to have at their disposal. One in-house speaker recalled how their procurement department had “beat law firms up” on price while producing a shortlist of potential advisers, but had then left the final decision on which firm the company should instruct to the in-house legal function. For in-house counsels, this two-stage approach has a certain Machiavellian appeal: it provides them with the opportunity to play “good cop” to the procurement department’s “bad cop”.

However traumatic the involvement of the procurement department may be in law firm selection, counsel should be reassured that the pain is normally short-lived. Once the selection of outside lawyers is complete, both sets of lawyers can concentrate on building a cordial working relationship. “When it’s all over, the procurement department magically disappears,” said one private practice lawyer, wearily. “Perhaps they go off to organise the purchasing of paperclips.”

Reducing costs

Cost control is normally an essential part of the in-house legal function. Nevertheless, in some instances, the identification of a company’s total legal expenditure may be a daunting challenge. Where a company is decentralised, or the central legal function has historically been weak, individual business units may instruct external law firms independently. Crucially, such expenditure may not be recorded in the company’s accounting systems as a legal expense – instead, it may be designated a “consultancy” or “transaction” fee. “When I began to look into my company’s legal spend, estimates provided by the business units and the accounts department varied very significantly,” recalled session co-chair Richard Tapp, who works for Carillion plc.

Externally, law firms’ billing practices can also cause headaches for in-house counsel. One in-house speaker recalled how one firm, who worked for the company’s property management department, had attempted to recover legal expenses accumulated over a seven-year period. Not only was the counsel disinclined to pay very old bills on principle, it also transpired that the majority of the items were not legally recoverable. The initial mandate had specifically required that all expenditure over a fixed sum must be approved by the legal department in advance – and no such permission had ever been asked for or granted. Counsels faced with similar claims are therefore advised to consult the firm’s original mandate – it may assist them in their negotiating position.

During the course of the meeting, several counsels provided “best practice” suggestions on how they could take control of their external legal spend. Firstly, in order to rectify the mis-recording of external legal fees, it is normally easier to rely on figures provided by “known” law firm advisers, rather than the company’s own accounts department. Secondly, it is not necessary to develop complex or expensive recording systems in order to monitor such costs. Where the legal department relies on a small number of sophisticated law firms, these firms will normally be able to provide a complete billing breakdown, using whatever selection criteria the in-house legal function requires. This could include costs per jurisdiction, by task performed or individual personnel. Alternatively, the legal function may wish to create a simple database to capture this data internally. One speaker from a major PLC recalled how his department used a “glorified Microsoft Access database”, which was perfectly adequate for their needs. Such a database can either be updated by a single dedicated administrator, or independently by all departments that are permitted to consult outside lawyers.

Once legal costs are accurately recorded, it is possible to produce a strategy for effective cost reduction. For example, many law firms will offer a bulk discount, once legal spend has reached a prescribed level. By capturing billing information correctly, the in-house legal department can “shunt” work to such firms, rather than other panel members. (It is worth noting that, even if when firms do offer bulk discounts, they may be reluctant to mention that the discount trigger is approaching.) Secondly, by capturing costs data, in-house lawyers can carry out a sophisticated analysis of key areas of external legal expense. For example, once external legal spend consistently reaches a certain threshold, it may be more cost-effective to add additional in-house capacity, rather than to continue to outsource the work to outside law firms.

Maintaining a law firm panel

It is generally accepted that the use of a panel of external legal advisers is a practical way of reducing overheads and improving client satisfaction. At the meeting, various speakers estimated that they had reduced their external spend between 20–40 per cent as a direct result of such a review. In addition to headline cost reduction, a panel reduction can have additional, non-financial, benefits. Internally, it can “free up” a great deal of management time, which the in-house counsel may have previously devoted to managing relationships and strategy orientation. Externally, it increases the value of deal-flow to all remaining panel firms. This makes the company a proportionally more important customer for the firm, which may well result in a better quality of service.

Of course, it is worth noting that a new or refreshed panel system does not automatically result in a reduction of headline hourly rates charged by panel firm members. If, during a review process, the counsel’s office discovers that their company uses low-cost, but not highly regarded, local firms (perhaps for legacy reasons), they may decide to consolidate all external advice with more expensive, but better quality, firms. Nevertheless, while these firms may have a more expensive hourly rate than their competitors, it may be possible to reduce overall legal spend on this advice. For example, the replacement firms may use more sophisticated technology, or offer a more cost-effective mix of partners and associates. In addition, an improved level of industry specialisation may allow them to carry out their work more quickly, or with less supervision.

Nevertheless, for some large or diversified companies, it may not be possible to reduce the number of law firms the company instructs below a certain number. As Jonathan Marsh, head of the M&A and finance legal department at Total SA, explained, the large international law firms are simply not present in many of his company’s key jurisdictions. “We have operations in more than 120 countries, so it’s difficult to envisage a small panel of firms to do all our work,” he says. By way of example: “The international firms aren’t present in Canada or Australia.” As a compromise, Mr Marsh has compiled a list of 12 approved international firms, which act on all major cross-border transactions or arbitrations. Where these firms are not present in specific jurisdictions, Mr Marsh reserves the right to instruct local practices. Alternatively, in-house counsel may decide to appoint one keynote legal adviser, who is tasked with co-ordinating the compilation of cross-border advice from all international jurisdictions.

When a law firm is appointed to a company’s approved panel, the consensus of the meeting was that company is morally obliged to treat their law firm advisers in an honourable manner. The firm may have sacrificed the opportunity to act for competitors as a result of its appointment, so counsel should provide it with a reasonable level of work. And, while it may be tempting to constantly bear down on rates, in-house counsel should resist the temptation to engage in macho posturing. “I know of one person who used to try to cut each bill in half, even if the cost was totally justified,” said one in-house speaker. In their initial engagement letter, in-counsels often explicitly state which ancillary services, such as training, project or document management, they expect their law firms to provide. “If you don’t instruct a firm properly, you’ll get charged, and it’ll be your problem,” the speaker continued.

Counsel should also be aware of the consequences of trying to hold law firms to long-term but uncompetitive rates, perhaps negotiated during a period of economic downturn. While firms will continue to honour such rates, they may also switch their more experienced and efficient staff away from the company, and towards more profitable clients. In such circumstances, it may be necessary to yield on rates in order to maintain an efficient level of service. The only other practical alternative is to transfer to another firm, with all the initial hassle that entails.

In relation to charge-out structures, all parties agreed that the billable hour had the potential to be a byword for inefficiency. As a result, various alternatives were suggested. These included success fees (especially in relation to corporate deal-making), or performance bonuses – perhaps based on client-satisfaction surveys or specified service level improvements. One counsel mentioned that “fixed fee” work often proved to be anything but – the specific matter would invariably be regarded “exceptional”, they said.

Where the billable hour is required, many counsels try to insist on reliable cost estimates. However, such estimates depend on two things. Firstly, in-house counsel must be able to predict the scope of the project accurately, so the firm has a reasonable understanding of the work required. Secondly, the law firm must be able to understand the client’s key commercial objectives – otherwise they may go off on an expensive tangent. “We do offer estimates for our work, but we need to obtain a profile of a company’s key drivers first,” commented Eversheds’ client management partner, Stephen Hopkins.

Managing internal legal costs

Most in-house legal functions are in the invidious position of finding they have to demonstrate their value to the business. As one speaker told the meeting, “good administration is invisible”. Any attempt to quantify the “value” placed on legal compliance is, at best, a guesstimate – whereas the tangible cost of employing in-house lawyers is not.

Invariably, at some time in their careers legal counsel can expect to take part in an internal cost-cutting programme. Fortunately, several participants at the meeting had already gone through such a process, and were able to offer practical advice on what should be done.

As a starting point, it is vital that skills of the in-house legal team should closely match the needs of the business. In-house lawyers are most productive where they are fully engaged on matters that are directly related to their employers’ core functions. Where in-house lawyers’ skills are generic, or only required periodically, it may be more efficient to outsource their role to an external law firm.

Secondly, it should be accepted that all legal work has an inherent “value”. For this reason, several in-house counsels suggested it was important to move away from seniority-based pay for corporate counsel, and towards pay based on an honest assessment of the skills necessary to perform a given task. “Using an appraisal scheme, I’ve taken out 30 per cent of my costs within 18 months – despite having no compulsory redundancies,” one in-house counsel told the meeting. At times, this approach may require short-term brutality. Nevertheless, the cheque-book is always a powerful tool, which companies can use to persuade expensive, but not cost-effective, lawyers to seek alternative employment.

Finally, where it is vital to protect qualified lawyers from departmental budget cuts, in-house counsel should be willing to sacrifice support staff. One in-house lawyer recalled how, when reviewing the results of an internal survey, they discovered that most of their in-house lawyers said they had enough time during their day to do all of their work. As a result, the counsel purchased digital dictation software, and axed half the department’s secretaries. “We delivered what we needed to do, and we never looked back,” they recalled.

Takeaways

■ Where the involvement of the procurement department is inevitable, decide whether you want to look on it as a short-term support function or a long-term partner resource.

■ Taking control of a legal budget may be difficult, but the rewards are normally worth it. A simple Access database may allow you to identify significant potential cost savings.

■ Creating a panel of approved firms can help drive down overall legal costs – even if individual items become more expensive. Try to resist the urge to pay less than market value – the quality of advice may suffer.

■ Take a hard-headed approach to internal costs. Are employees overpaid or underworked? Can they be cost-effectively outsourced, or replaced with new technology?

Last updated -22 January 08

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