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GC MAGAZINE > In-house Survey 2014

BUSINESS THINKING | IN-HOUSE MANAGEMENT

Getting with the programme

For years clients have decried advisers’ poor attitude to flexibility and value. Our third in-house lawyer
survey shows the message is getting through at last


I N - H O U S E     S U R V E Y     2 0 1 4

Deborah Prince, head of legal and company secretary at the British Heart Foundation, who is forthright in her views on questionable behaviour by external advisers, recalls a recent incident with a law firm that she swears she will never use again. Responding to a request to work on a high-value contract, the firm sent back an excessively long document, containing endless provisions on issues that were never going to be a concern.

Says Prince: ‘I very strongly got the impression that they just didn’t have enough work and were stringing it out, thinking they could get away with it. They said: “Oh well, you know we’ve given you a Rolls-Royce service.” I don’t want a bloody Rolls-Royce service! I’m quite happy with a bus-pass service if it gets me to where I want to go.’

Fortunately, the above incident is becoming less common and does not reflect the overall sentiment among general counsel (GC). Our third annual in-house survey finds that, after years of grousing, clients are in a more positive mindset about external counsel. Our 436 respondents at major companies reported a second year of substantive progress from advisers on costs, value and service. As KPMG’s GC Vanessa Sharp says: ‘We can moan about the UK firms but they have got a lot better. Larger firms do recognise that they have to think about value billing, fixed price, stages of cost… most of them will offer some kind of free “X” number of hours through consultations or secondments… although they don’t have any fat in the system to offer that.’

What billing arrangements do you currently use?

Mixed bag

The consensus within the in-house community is that law firms have in general improved considerably in recent years on service delivery and providing value for money. An estimated 62% of survey respondents view law firms positively on value, 33% as fair, and only 5% negatively, constituting a marked improvement on last year’s results, when just over half (52%) viewed law firms favourably for value.

It is clear that frequently reappraised legal panels and the increasing trend among clients to reduce their roster of retained law firms significantly – in a few cases even down to just one firm – has had an effect. Lloyds Banking Group deputy GC Kate Cheetham, who is currently involved in the process of reviewing the bank’s legal panel, says: ‘Firms have changed quite significantly. We now have a very strong strategic partnership with the core firms we use – they understand what we want, they understand what we are prepared to pay for, they are more innovative and, significantly, they understand what is important to us in a way they didn’t before.’

However, in-house perception over the attitude and approach adopted by external counsel is still varied. ‘From a responsiveness point of view, we see a real mix,’ says Rob Booth, head of legal at The Crown Estate. ‘Some of our firms have raised their game but you never quite know whether that’s a conscious increase in responsiveness or whether some are just not as busy. Where value is concerned, there is still a long way to go. There’s a mix of firms that get value right and others who don’t do this well at all. I would see this with top City firms.’

Booth is not alone in his thinking. Some advisers are finding the changing demands for legal services more difficult to deal with than others. Clients say that in the struggle to retain old business and attract the new, certain top City firms remain begrudging of having to handle less sophisticated work.

‘Some of the top City firms are really wrestling with how they can do commoditised work which they never previously wanted to do because other non-Magic Circle firms are willing to get their hands dirty to build relationships,’ says Graeme Colquhoun, Heineken UK’s head of legal. ‘Doing this allows those bigger firms access to bigger work but it’s a real challenge for them.’

The brewing giant’s current preferred advisers have more reason than most to prove their mettle. Colquhoun favours the one-stop-shop route for the bulk of Heineken UK’s legal work, and at the time of going to press was due to announce a sole legal adviser in a bid to cut down on external legal spend.

He adds: ‘I’ve never doubted that every single lawyer we’ve ever instructed is trying 100% and doing their best. I would say in the last few years, some have really begun to understand the priorities of the clients. There’s a continuum where firms staff themselves up with expert lawyers and expect people to arrive at the door. Others are really trying to make it as easy as they can to deal with clients and give them exactly what they need and not what the law firm wants to offer.’

‘We now have a very strong strategic partnership with our
core firms – they understand what we want and what we are prepared to pay for.’

- Kate Cheetham, Lloyds

Made to measure

In line with an improvement from law firms in terms of responsiveness and value for money, a number of GCs note an increased willingness to discuss flexible fee arrangements and move away from the standard hourly rate. Harkand group GC Jacqueline Hill, who recently departed her role as GC for Gazprom Marketing & Trading, says: ‘We tend to instruct second and lower-tier firms to mitigate our costs, but when dealing with the Magic Circle, we’ve negotiated rates and free training for lawyers and clients. Training can be really beneficial in developing the business, helping clients to understand the risks that the business faces, which in turn aids the legal and compliance team enormously in getting clients engaged in mitigating those risks.’

Indeed, the survey findings give credence to claims that the once dominant hourly billing is rapidly losing its grip on the industry. Nearly half of respondents never use hourly billing or only use it occasionally, a notable shift on last year’s results, which recorded it was still used ‘often’ over 60% of the time.

Royal Mail Group GC, Neil Harnby, says: ‘Having now bought millions of pounds worth of legal services over the last five years as a general counsel, both in the UK and abroad, I believe that law firms much prefer still to rely on charging out their lawyers by the hour and that’s not really surprising when their business models, economics and budgets (and time recording systems) are built exactly on that basis. For the meter to start ticking as soon as I or my legal directors pick up the phone seeking advice is not the Royal Mail way in the private sector.’

In contrast, fixed fees are growing in popularity. More than two thirds (69%) of respondents are using this method ‘often’, which constitutes a slight increase on last year. Discounted fees fared even better, with 74% of respondents saying they use this billing method ‘often’ while capped fees are often employed by 63% of all respondents. This is arguably a contradiction as discounts are typically based on an hourly model.

‘Gone are the days when you could simply bring in massive teams and run up so many billable hours without reference to cost.’
- Carol Hui, Heathrow Airport Holdings

Leon Shelley, European GC and company secretary for Westfield Shoppingtowns, says that while he still prefers the traditional hourly rate, the biggest change he has seen in external advisers is they have become increasingly sensitive and attuned to whether they provide value for money.

‘They are more flexible in terms of writing off time where there was no output at the end of a piece of work,’ he says. ‘There is much more focus on value for money than before’.

He adds: ‘It’s not about the law firm any more. It’s about finding the right team in a law firm. Often we have three different law firms working on a transaction and, in fact, they work better together than when there is one law firm.’

And while there will always be room within the in-house budget for contentious work that requires greater resource and top-level expertise, the overall objective is demonstrating prudence. Such is the cost and resource burden faced by in-house teams, opportunities for law firms will become increasingly coveted.

Nowhere is this more apparent than with the single-supplier advisory model, or at least the preference to have deeper relationships with fewer advisers. Pioneered by global security systems company Tyco International seven years ago, the model hasn’t yet been widely embraced, although it has become popular with several high-profile clients. Last October also saw Pinsent Masons secure a fixed-fee, single-supplier contract, with energy giant E.ON appointing the firm as sole legal adviser for general matters, following a similar deal Pinsents agreed with Balfour Beatty earlier in 2013.

Having renewed its contract with Eversheds in September, Tyco’s EMEA GC David Symonds accepts that the model isn’t for everyone. ‘It worked for Tyco at the time principally because as a legal function in EMEA, we have no real control at all over external spend in terms of what was being outsourced to which firms. The Eversheds deal enabled us to get some control and since 2007 we have seen a reduction in spend with Eversheds which helps me immensely and meets my costs target. In some ways, perversely, Eversheds is quite happy with that, largely because on the back of our relationship they have been able to go into the marketplace and negotiate with a number of clients a variation on our relationship.’

‘Gone are the days when you could simply bring in massive teams and run up so many billable hours without reference to cost.’
- Carol Hui, Heathrow Airport Holdings

If the single-supplier arrangement is slowly gaining ground, interest in alternative providers of legal services is, as it was last year, decidedly tepid. Just 15% of clients were positive about the role these suppliers can play, while 45% were negative and 43% largely ambivalent. It has become clear that while the alternative providers have worked hard to win over the in-house community, old attitudes die hard as one survey response demonstrates: ‘I do not think non-law firm providers will be able to provide the same service as a traditional law firm. I do not think you will attract the same calibre of staff at a non-law firm provider.’

However, another in-house specialist notes: ‘It’s not always a question of a like-for-like replacement, eg using legal process outsourcing successfully depends on more than cost; and using Axiom or equivalent on retainer is also not often a true comparison with a law firm. However, these additional options are a great development for in-house counsel.’

Heathrow Airport Holdings GC Carol Hui, who pushed through a substantive overhaul of her legal team and now consequently relies less on outside counsel, says: ‘Gone are the days when you could simply bring in massive teams and run up so many billable hours without reference to cost. Ultimately GCs are responsible for the bottom line. Getting the job done was the only thing that mattered years ago, and now the GC looks at everything holistically from job completion, to time, to costs, to budgeting. For external counsel, those who are client-focused will understand that.’

It seems such considerations are increasingly taking hold at advisers, including the major City law firms that traditionally were seen as the least responsive on value. With law firms having given up hopes of a rapid return to the boom-time conditions and pricing, advisers are striking an increasingly progressive line with clients. The buyer’s market looks here to stay for a good while yet. LB

sarah.downey@legalease.co.uk