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GC MAGAZINE > In-house Survey 2014

BUSINESS THINKING | IN-HOUSE MANAGEMENT

Where next consigliere?

The in-house profession continues to grow and grow up. Yet greater responsibility and pressure to be
close to the business brings new risks. Is it time to rethink a changing role?


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

It has ushered in its pressures and challenges, but in many respects the global economic downturn has been kind to the in-house legal profession. The last six years have seen unprecedented influence and power placed in the hands of general counsel (GCs), who have generally been presiding over expanded in-house teams and served by external law firms that have struck an increasingly value-orientated attitude, where once there was high handedness and higher bills.

‘When I qualified as a lawyer in 1992, working in-house was a really shoddy option and you were never advised as a trainee or newly qualified lawyer to get a job there,’ reflects Robin Saphra, group GC at Colt Technology Services.

‘This has really changed in the last five to ten years. Driven by the economic recession, companies have become very conscious of the costs of running a legal department and so GCs have increased in importance, seen less as knowledgeable senior lawyers and more as managers of a function and of a budget.’

But as Legal Business conducts its third annual in-house survey, a bigger question is where the employed Bar goes with its new-found status and expanded resources.

Our findings demonstrate that in-housers are seeing sustained demand for their services, though there is evidence that the startling growth story Legal Business highlighted last year may have run its course. Along the way, GCs are gaining more concessions from advisers year-on-year; there is no sign of the old client/adviser dynamic returning with a reviving UK economy.

Yet senior in-housers’ closer admittance to the corporate inner circle that has underpinned this shift puts GCs in a more ambiguous position as to their duties – a tension underlined by a steady run of global scandals in which in-house lawyers have been involved over the last five years.

Ask any GC and they will usually tell you that the commercial nature of the in-house role was the main driver in their decision to leave private practice behind. And while the majority are revelling in their status as corporate confidantes, increasingly navigating the pitfalls of compliance and regulatory requirements, some parties warn about the risks this new role could bring.

For Bill Mordan, senior vice president and group GC at Reckitt Benckiser, that risk is compromising the independence of the role within the business, as the line between commercial and legal functions becomes blurred.

‘There is a storm on the horizon and I don’t think many UK in-house counsel recognise it. Where is the line? Where do we have a moral, social or legal obligation to offer testimony and evidence, and discuss things externally? Or do we just have to shut up, be quiet and only speak to our client? That is a moving target right now.’

For others, a role which has moved from a reactive function to a more engaged role, raises questions about where the responsibility of the decision-making process lies.

'The next step for me is to start reducing my in-house function by outsourcing a whole lot more to alternative providers.'
- Robin Saphra, Colt

‘There is a concern among GCs that you are on the line for everybody in an unspecified way and you are answerable to everybody in an unspecified way,’ concedes Vanessa Sharp, GC at KPMG. ‘You kind of feel like you are on the hook the whole time – that is part of the role I’m afraid.’

‘The challenge of the GC role is being more than just a lawyer and that is really left to the devices of the individual,’ argues Paul Gilbert, chief executive of the consulting firm LBC Wise Counsel and a former in-house lawyer. ‘It’s no wonder that the edges of that can look a bit too blurry for comfort, and I would certainly be an advocate of the definition being clarified.’

How important IS each of these factors in choosing a law firm?

Reaching the peak?

Our 2014 survey – which drew responses from 436 individuals at major companies operating in the UK – underlines the sustained demand for legal services, even if demand is often being met internally.

More than two thirds of respondents (71%) reported growth in the size of their in-house teams over the past five years, including 28% who have seen growth of 25% or more in headcount. This is a slight increase on our 2013 survey.

There are also other indications of rising demand, with 62% seeing an increase in their budgets over the past 12 months, against 38% seeing a fall. Forty five percent of respondents said that demand for legal services has increased, with 32% reporting it as stable and 23% seeing a decline.

This relatively upbeat picture will not be as positive for law firms as was once the case; 76% of respondents have an explicit policy of retaining work in-house. In addition, approaching two thirds of respondents (62%) spent a greater share of their budgets internally rather than sending it to law firms.

However, although these figures may seem high, both are a slight fall on our 2013 survey when 81% had a policy of holding work in-house and 68% were spending more of their budget internally, suggesting that the combination of more flexibility on rates and an uptick in transactional work is modestly benefiting external counsel.

There are some other nuances to the picture compared to last year. The Law Society’s Annual Statistical Report issued in March 2014, which includes figures up to the summer of 2013, demonstrates not only a second consecutive year of falling numbers of practising certificate holders overall, but for the first time in recent years a modest decline in the number of in-house counsel.

However, the long-term picture remains one of dramatic growth, with the in-house profession increasing annually by an average of 5.2% over the previous 15 years, against 2.4% in private practice, more than doubling the size of the in-house profession over that period. Over 20% of practising certificate-holders in 2013 worked in-house, against 14.3% in 2003. There are now 23,443 lawyers working in-house in England and Wales, including 14,819 in commerce and industry, against 90,692 in private practice to the end of July 2013. Notably, half of in-house lawyers (50.8%) in commerce and industry are women, against 45.4% in private practice.

'I wonder if Magic Circle firms overwork their associates and I would like to seea healthier working environment.'
- Rosemary Martin, Vodafone

If there is some evidence that the dramatic growth of the in-house profession has for now run its course, by consensus the lure of working in-house remains as strong as ever; all GCs interviewed for this article were adamant that despite an improvement in market conditions, they wouldn’t consider a move back to private practice. By the same token, they remain confident of their ability to recruit high-quality lawyers.

Richard Devereux, European labour law counsel for Intel, comments: ‘The whole legal world model is changing. People are consistently looking outside the traditional partnership box. As in-house has become a bigger game, become more sophisticated and has started to pay better than before – it’s a real alternative. The trend is here to stay.’

What has shifted over the last 12 months is that there is no longer a ready supply of experienced mid-level associates being managed out by law firms, leading to some areas where it is becoming harder to recruit.

‘If a client called us and said: “We want a lawyer with four years post-qualified experience from our industry”, we would be lucky if we managed to get a shortlist of four or five candidates,’ says Naveen Tuli, legal recruiter at Laurence Simons. ‘Everyone’s looking at that three to six-year mark – it’s a sweet spot. Candidates are still malleable; they are still learning. They can be moulded however the company wants and they are still affordable.’ However, the in-house profession may have already taken some steps to safeguard against a possible future skills shortage, observes Maud Dowding, a financial services consultant at EJ Legal.

‘There is a slight shift from GCs looking for Magic and Silver Circle lawyers to lawyers who have more commercial experience gained in-house. While top private practice lawyers tend to focus on one area of law, in-house lawyers have a broader practice and are able to advise on a wider range of products which can be more attractive to meet business needs and budget constraints.’

Such trends raise the question of whether the growth of in-house teams has plateaued, a point on which there is no clear consensus among the more than 30 senior in-house counsel interviewed for this piece.

‘It’s probably reached its peak in the US, but many European countries still have room for improvement in terms of increasing numbers,’ reflects Maria Varsellona, chief legal officer and executive vice president for Nokia.

‘Law firms are under more pressure as more work goes in-house, and they have been really slow to respond to this,’ argues Saphra.

‘From the Magic Circle down, they are still struggling to understand what their role is in the legal value chain. We have seen this market cracked open and outsourcers have come in. The whole legal services market is changing and the law firms are sitting there wondering: “What do I do now?”’

He continues: ‘The next step for me is to swing the pendulum the other way and start reducing my in-house function by outsourcing a whole lot more to these new types of organisations. For me, the law firms aren’t winning there – it’s the alternative providers.’

Saphra makes an interesting point about the potential for in-house teams to use lower-cost alternative suppliers to re-shape their teams. However, despite some high-profile early champions of the New Law brigade, among them Vodafone and BT, our survey finds considerable scepticism.

'I want to have an impact on the company. There are always risks that I have to accept – you can’t have your cake and eat it.'
- Felix Ehrat, Novartis

Asked to rate the value and contribution of such providers against a traditional law firm, 42% gave them a ranking of either ‘negative’ or ‘very negative’, against only 15% seeing them in a ‘positive’ or ‘very positive’ light.

Reckitt Benckiser’s Mordan for one doesn’t believe that alternative business structure (ABS) services will have such an impact on the size of in-house teams. He argues that further in-house growth is inevitable, yet admits that any growth we see in the future will be much more specialised as teams strive to become more efficient.

‘As businesses grow, the demands on in-house legal will grow. And there will be a proportionate increase in headcount. But it won’t be a one-for-one slope. You are going to see situations where you rely on external alternative legal suppliers, but the focus is going to be on what sort of services you deliver in a cost-effective way. Efficiency is going to be much more the word of in-house legal departments than headcount’.

LBC’s Gilbert takes a different view, predicting in-house teams will turn to ABS services due to skills shortages, rather than an aspiration to be more efficient.

‘We are probably going into a phase now of quality lawyers being thinner on the ground than they have been in the past. I don’t think there are enough trainees to go around to satisfy the in-house demand to recruit three- to six-year-qualified people,’ argues Gilbert.

‘That will create a bottleneck for talent in the future, with more thoughtfulness given to flexible resourcing such as Lawyers On Demand (LOD) and Axiom, and more use of interim, temporary-type arrangements as well.’

Vodafone group GC and company secretary Rosemary Martin, one of the most high-profile clients of Axiom, says elite law firms should take heed of initiatives such as LOD and Allen & Overy (A&O)’s Peerpoint, which uses its alumni to provide high-end contract lawyer services. ‘Maybe firms could look at what A&O has done,’ she says. ‘I wonder if Magic Circle firms overwork their associates and I would like to see a healthier working environment. That’s a comment on the law firm business model generally and I bring it up with law firms quite frequently. To convince me that a law firm was taking this issue seriously, it would have to do it earnestly, not just pay lip service to it.’

At the top table

Perhaps one reason why New Law has been relatively slow to engage in-house counsel is that they are increasingly focused inward, in many cases now treating external advisers as contractors of limited scope, or even an afterthought. Despite the widely differing industries of the senior counsel we interviewed for this survey, the one thing they all agree on is that getting to the heart of the business engages them the most.

‘We are getting closer to the business all the time,’ says Graeme Colquhoun, head of legal at Heineken UK. ‘When I started ten years ago we were doing corporate transactions. Over the years we’ve done fewer and fewer of those deals. We are in among all different parts of the business – places we never were ten years ago.’

Leon Shelley, UK and European GC and company secretary at Westfield Shoppingtowns, agrees. ‘I do very little law these days. Most of it is commercial, corporate, running transactions – not just on the execution side, but also negotiation and being the main point of contact on transactions. There is definitely a bit of morphing into a new role, which is a crossover between GC and corporate development.’

This shift towards more complex transactional work has been welcomed by an in-house community that sees itself now as more of a member of the C-suite as opposed to the traditional legal function with a narrowly defined remit focused on contracts and legal risk.

‘When you are in-house you are at the table as a business partner as much as a lawyer and you see the follow-through on legal advice,’ argues Devereux. ‘It’s not like an external opinion being given and then you wait for some reaction or no reaction. You actually hear the reaction, you hear it very forcefully and you are in the middle of it.’

An interesting and as yet little explored issue given this dynamic will be the full implications for GCs of the material shift in their role as they are pressed to become closer to the business with all the potential ethical challenges that can pose.

'There will be GCs in the next five years who find themselves serving prison sentences for things that have happened in the past and that will serve as a wake-up call for the entire profession.'
- Paul Gilbert, LBC

With increased expectation comes increased exposure to risk and there is an argument to be made that the in-house community is not fully prepared for this; certainly there has been little debate on the evolving ethics or regulation of in-house counsel.

‘There is pressure to be commercial and yet be professionally independent and objective,’ argues Richard Moorhead, professor of law and professional ethics at UCL.

‘We have seen some interesting problems over the last few years: General Motors, Standard Chartered Bank and the emerging story on the News of the World all involving in-house lawyers to a varying degree. It’s the classic lawyer answer: I advise and the client decides. That is a big problem for them. Conduct risk and responsibility for their decisions is something they are not really prepared for.’

By the same token, there has been limited debate on what the remit and role of the modern, business-facing GC should be beyond a celebration of their new-found clout. When this question is put to the in-house community, there is an acceptance of greater risk and work pressure, yet opinion remains sharply divided on what action – if any – should be taken to address the potential pitfalls.

‘I always give the analogy that just because something is a legal requirement doesn’t mean it’s the responsibility of the legal department. For example, putting money in a parking meter is a legal requirement to pay for your parking. But you don’t hire a lawyer to come and put the money in for you. It’s an area that’s unclear, but I wouldn’t know how to get it clearer,’ comments Saphra.

Devereux takes the line that it is up to the GC themselves to draw the line between what is a legal decision and what is a commercial one.

‘It’s important that the in-house group knows what its charter is and knows where the delineation is. I know there is some greyness – many times the decision is legal’s or legal is a co-decider – but very often we have pushed back to the business and we’ll say: “No this is your decision, it’s not ours.” We won’t do their business work for them.’

How often does your legal function outsource work to law firms in the following areas?

Yet Felix Ehrat, group GC at Novartis, believes that accountability is all part of the role – if GCs want to be commercial, then they need to accept greater commercial responsibility and risk too.

‘I want to have an impact on the company and the business, and I want to be involved. And, yes, there are always risks that I have to accept – I’m accountable for whatever I contribute – you can’t have your cake and eat it.’

Yet if the existence of risk is widely accepted as another part of an expanding job – then this is a risk that hasn’t been fully explored yet. The emergence of a sizeable in-house Bar is a very recent trend in the UK, after all.

Moorhead acknowledges this and calls for serious debate about the necessary guidance and regulation targeted at in-house counsel.

He comments: ‘There are literally hundreds and hundreds of in-house lawyers and yet the professional regulator pays them no extra attention at all. There is a case for saying: “Actually, it is time to have a debate about whether there should be a separate code for in-house lawyers or whether there needs to be more guidance within existing laws for them.”’

Gilbert picks up the theme: ‘The Law Society and the Solicitors Regulation Authority should be clearer about what they think the role of a GC is. That would set up a debate and debate is always good for clarifying one’s position. In the next five to ten years teams will have a sharper view of their ethical responsibilities because they will have to. But I also suspect there will be GCs in the next five years who find themselves serving prison sentences for things that have happened in the past and that will serve as a wake-up call for the entire profession.’

For the moment, in-house counsel remain focused on their hard-won influence. But the price of that admission to the top table may not be apparent for years to come. LB

kathryn.mccann@legalease.co.uk

The In-House Lawyer Survey – Methodology

Our annual in-house lawyer survey was conducted online through July to early September. The results reported here are based on 436 individual responses from companies active in the UK. Forty three percent of respondents worked at major listed companies, including 23% in the FTSE 100. Fifty percent of respondents spent over £1m annually on legal fees.