Two faces of in-house counsel
The proliferation of multinational companies has led to a corresponding increase in the size and sophistication of the modern in-house legal department.
Indeed, such in-house departments have become substantial employers of lawyers in their own right. A 2007 study by Hildebrandt found that a typical US$10bn company with 20,000 employees employed 30 lawyers, had 60 legal staff in total and spent US$30m on legal advice per year. Around 40 per cent of this was spent internally, 58 per cent on external counsel.
Another key complexity that has occurred is that the ‘legal department’ is not necessarily the only department with legal responsibilities. Some companies have separate departments for dealing with corporate compliance, or ‘bulk contracts’ departments staffed by non-legal personnel.
Geographically too, the modern ‘blue-chip’ in-house legal function is also often spread across numerous locations and has a comprehensive hierarchy with global, regional and local responsibilities. A 2005 study by Martindale-Hubbell into the European corporate legal services market found that only a minority operated their legal function as a ‘single unit’. Many general counsels therefore find themselves having to grapple with managing an extended legal team well beyond the local head office with trans-national responsibilities for remote jurisdictions where there may be no dedicated in-house staff.
While the in-house legal function continues to grow in complexity, the use of preferred provider lists and law firm panels have increasingly gained interest and publicity. Client selection through the use of advanced procurement processes is of symbolic importance to the development of the sector in general.
Getting past the billable hour
It is estimated that in the UK, 90 per cent of the UK’s largest listed companies use legal panels. In the US, a 2005 study for Martindale-Hubbell by Cogent Research suggested around 80 per cent of respondents had some form of approved law firm list for both ‘high stakes’ and ‘low states’ matters. However, this picture varies according to jurisdiction and size of company. Interest in formal panels drops off significantly among European SMEs, for instance.
Internationally, arguably one of the most significant developments occurred in 1992 with the launch of the DuPont Legal Model. More recently, among the most noticeable occurrences was Tyco’s appointment of Eversheds as its sole legal advisors, replacing between 175 and 200 different firms in the process. This appointment might be considered to be at the extreme end of the general trend towards corporate counsel’s rationalisation of their advisory panels. A study in 2007 of 272 companies suggested the average number of different firms on a typical company panel had fallen from seven to less than five in just one year.
One issue that refuses to gain traction in the procurement process appears to be the use of online auction rooms and tendering systems. In 2007, General Electric dropped its experimental auction process for its European panel review. The company had previously used the panel programme for its US panel review in 2003 and UK review in 2004. While many in-house counsel have fixed budgets for their internal legal spend, cost is rarely the determining factor when considering which external law firms to instruct. This is especially true for big ticket or ‘high stakes’ work.
Time and time again, surveys show that in-house lawyers resent the billable hour but struggle to come up with a satisfactory alternative. A recent survey by accountants BDO and the UK’s Commerce and Industry Group (in-house lawyers association in England & Wales) found that 82 per cent of in-house counsels believe that hourly billing provides no incentive for firms to be efficient. Nevertheless, the same survey also showed that 97 per cent of the respondents use the hourly billing payment scheme, representing 68 per cent of their total legal spend. Hourly billing was far more popular than fixed fee schemes, used by 66 per cent of respondents. Other alternatives were even less popular.
Since innovation in the client-lawyer relationship has occurred in many different ways, and with many different levels of sophistication it is difficult to identify single prominent episodes of change as pointers for the future. Of course, the DuPont Model of law firm panel management and the Minority Corporate Counsel Association’s law firm minority monitoring scheme represent significant novelties. But are in-house counsel who insist on monthly online billing as a condition of engagement also among the true innovators? Or should credit be given to those who create crude, but effective, cost tracking systems using low-cost spreadsheets? One might also consider in-house counsel who carry out their own internal client satisfaction reviews, to monitor the effectiveness of their external legal advisers.
A new idea currently being explored is online legal networking. This aims to improve the relationship between law firms and their clients and allow members within both camps to collaborate and connect, share insights and best practices.
Extending corporate policies
Surveys consistently indicate that quality of service and a firm’s technical capabilities remain the most important criteria that corporate counsel use when selecting their external legal advisers. Martindale-Hubbell’s 2005 report of the European market for legal services found that quality and service (54 per cent) was the most important factor in counsel’s selection of new law firms, followed by specialist expertise (30 per cent). In the US, Martindale’s equivalent report, produced in association with Cogent Research, found much the same thing. Conversely, a 2006 report by ACC/Serengeti found that poor quality of work and results (69 per cent) and lack of responsiveness (66 per cent) was the biggest reason for firing law firms, marginally ahead of cost considerations (62 per cent).
Because law firms are principally appointed on the basis of their reputation, quality of service and expertise, it is almost inconceivable that these criteria would change in the future.
The only likely trend is towards companies considering for additional selection information, in line with their general corporate policies. For example, companies could ask for minority staffing levels, firms’ work-life balance policies, or for their commitment to pro bono work or other ‘CSR-style’ activities. From a technological point of view, access real-time billing information or precedent-know how may become an increasingly common prerequisite for selection. Nevertheless, it is unclear how much weight would ultimately be attached to such ancillary details, when assessed in relation to a firm’s perceived levels of expertise or service.
While most companies do not primarily select their legal advisers on the basis of price alone, this is often a secondary consideration. The options of investing in ‘off-shoring’ or document assembly systems therefore present general counsels with a new alternative to the traditional in-house–external law firm dilemma, should cost become an issue within their company.
In general, evidence suggests that in-house counsel have not been seduced by the desirability (or otherwise) of the ‘one-stop shop’ phenomena for multi-jurisdictional advice from global law firms. Martindale-Hubbell’s 2003 and 2005 reports on the European legal market both suggest that clients regularly use a mix of local and global firms. The key issue is always the relative strength of the local office where the legal advice is sought. This perception is also borne out by annual mergermarket.com survey data relating to large-scale mergers and acquisitions activity. While the global law firms are now present in many country’s deals league tables, the country’s leading domestic firms are also well represented.
From legal purchaser to revenue generator
According to Martindale-Hubbell’s 2006 study, 70 per cent of Europe’s mid-sized companies have no in-house legal function. It is therefore not surprising that such company management teams often play a key role in the selection of external lawyers, as there is often no one else to perform this role.
Nevertheless, anecdotal evidence suggests that general counsel generally regard external lawyer selection as part of their key role. ‘Personal’ relationships between CEOs and their external lawyers among companies with no in-house legal capacity will therefore continue. Among larger companies with a dedicated legal function, however, this will be less prevalent.
At present, one unknown quantity is the future role of the in-house procurement function in external lawyer selection. Having wrested control of legal purchasing from the company’s senior management, senior in-house counsel may be at risk of losing this role in the future to a company-wide procurement function.
The in-house legal function has always been multi-faceted: part ‘technical lawyer’, part business-enabler, part external resource co-ordinator and, increasingly, part compliance officer.
Perhaps the key question is which of the roles currently performed by the legal function will be hived off to different units in the future. With the benefits of legal privilege becoming increasingly irrelevant to many corporations, it may no longer be necessary for expensive qualified lawyers to take charge of a company’s corporate compliance programme. Also, once a company’s previously-bespoke client contracts have been standardised and rendered capable of being assembled by non-lawyers, non-legally qualified contract managers may become an increasingly recognised rival to the traditional in-house legal department.
At present, a further unknown issue is the extent to which the in-house legal function could one day become a stand-alone profit centre. Reforms in England & Wales raise the possibility of companies selling bulk legal services directly to the public (see next article ‘Billable hour melts away’). This therefore raises the possibility that an increasing number of companies will have two separate legal functions: one client-facing and revenue generating and the other, as now, a traditional “backroom” support function.
It is possible than law firms and in-house legal department will take a different approach to the trend towards standardised legal services. Law firms are likely to offer legal advice-based services, because this is where their unique skills lie. Conversely, in-house legal departments are likely to invest in services that directly generate revenue such automated drafting systems for bulk contracts, for example.
It remains to be seen whether standardised legal services offer a compelling reason for a particular company to instruct a particular law firm. As always, the key question is likely to be: is the standardised legal service better than a non-standard equivalent? Alternatively, is the standardised service cheaper than the alternative, or at least, is its cost more predictable?
James Harley is international marketing director at LexisNexis Martindale-Hubbell.
Last updated -2 April 08