When the clients call the shots
The use of protocols in the insurance industry has undoubtedly helped drive down costs. It has also been extremely controversial. But when used well, writes Philip Hoult, protocols can be a tool for any in-house counsel looking to extract value for money from their law firms
Mention the word ‘protocol’ to law firms in certain industry sectors, most notably defendant insurance litigation, and you are likely to get a frosty response.In the hands of the major insurance companies, protocols or ‘service level agreements’ – call them what you will – have proved to be a powerful weapon in the armoury of a company that is looking to make significant savings on its legal spend. Together with other measures such as panel reviews and legal audits, nearly all the major players in the industry have used them to drive down costs.Surprisingly, given this success, the use of protocols outside the world of insurance is not as widespread as you might imagine.Many in-house lawyers will justifiably argue that their experience in instructing outside counsel and their long history of using particular firms obviates the need for such an agreement.“I tend to know the people we deal with,” says Riccardo Nardi, head of legal at the Association of British Travel Agents (Abta). “They know what we expect and where we are coming from as we put substantial amounts of business their way. In our organisation, although we have a relatively large legal spend, the majority of work tends to be controlled be me.”While this approach is entirely understandable, for many other businesses the case for using protocols is more compelling. This is not least because it puts the power in the relationship where it should be – on the client’s side.According to Anthony Armitage, chief executive of legal audit and tendering company First Law, too many clients continue to accept the law firm-drafted client engagement letter as the basis on which the relationship will be set. As he points out, such client engagement letters will rarely favour the client. “The reason we use protocols is because firms are very poor at setting service standards themselves,” he says. “Client engagement letters are not in fact anything like a client letter – they are more like a law firm letter.”When Armitage launched First Law two years ago, he decided that to work its online legal tendering offering depended on drafting ‘a very robust’ client-based protocol. This would provide the basis on which law firms would work for clients using the service to put work out to tender online. “Firms do not enter these agreements unless they are forced to,” Armitage points out, explaining that the greatest resistance has come from a small number of firms – notably those in the magic circle. By and large, however, firms have been prepared to work on this basis even though it would not be their preference.Since its launch, First Law has subsequently drafted protocols for clients such as the General Medical Council and a number of local government bodies.For major companies such as the insurers, who are spending millions of pounds a year on external legal fees, another key objective of a protocol is to ensure a consistent service across their panels of law firms.They view the way their firms handle projects or cases as crucial – it is not just a question of technical expertise. While a law firm might have done a technically excellent job, the case might have been a financial disaster for the insurer because the it was settled three months later than it should have been.So what should a well-drafted protocol cover? That is pretty much up to the business in question and what it can persuade its firms to sign up to. Some service agreements, such as that used by leisure group Bass (now known as Six Continents), have gone as far as to place limits on the hours law firms could require assistants to put in when working on the company’s deals. This was based on the belief that if required to work longer hours, the lawyers would become increasingly inefficient and more likely to make mistakes. Although protocols can cover a huge range of areas and be tailored to the needs of individual companies or government bodies, the fundamental aspects common to them all are billing, reporting and speed of service. Clearly the basis on which law firms invoice will be a key component, covering what the company will and will not pay for. First Law’s Armitage says that in this way a well-drafted protocol can prevent law firms using the ‘tricks of the trade’ such as excessive disbursements and travel costs and the inclusion of expenses that are properly part of the law firm’s own costs.They can also cover the use of different fee structures, such as project fees, discounts, blended rates and fixed fees, to be used on particular jobs.But for companies to extract value for money, as opposed to simply driving down costs protocols should cover more than simply the basis for billing. They can also used to extract improved performance – setting out response times, the required availability of nominated fee earners and methods of communication.For Andrew Waugh, group general counsel at Pochins, putting in place a more streamlined communication process was an essential feature of the construction company’s new protocol. “It is not necessarily because people are poor at their job – it is just pressures of work mean that sometimes information is not shared as it should be,” Waugh points out. “We said ‘let’s try and cut that duplication out’.”As a result the company has introduced single points of contact on both sides through which information should be channelled. (See box, page 27.)Using protocols is not without its dangers, however. The most obvious lesson to be learned from their use in the insurance industry is the damage that can be wrought to the relationship with external firms.The industry-wide changes have forced insurance law firms to merge – and in some cases demerge – and move out of high-cost City bases in a bid to survive under tough economic conditions.With the process driven by supply chain professionals from management consultants such as Andersen Consulting, rather than the traditional claims managers, many insurance law firms complain that they are treated in the same way as if the services they provide are the equivalent of consumer goods. It leaves a bitter taste.Martin Staples, senior partner of leading insurance firm Vizards Wyeth, says that too often protocols have been used as a crude measure on which to screw down on fees, despite protestations by insurers that the aim is to cut costs, but at the same time to allow firms to continue to make the same amount of money.“The difficulty is that the general liability industry has many problems – it really needs to be charging proper premiums,” he says. “But the easiest thing is to hammer people who are supplying.”While recognising that the process is important to insurers, he says that the balance has been tipped and not enough account is taken of the talent that is brought to bear.“The trouble is, if you drive costs down, the solicitors can only then afford to employ much less qualified people,” he adds, pointing out that with commercial firms taking newly-qualified lawyers on at £45,000 it is almost impossible for defendant firms to compete. “If the insurers really think it is to the benefit of both parties, that is barmy.”As a result, insurers may be paying out less, but they are in danger of losing out on quality.By contrast, Staples says, many of the large corporate clients who have arranged their own captive insurance are using protocols and service agreements for the right reasons. For them it is a question of brand protection, so they have major concerns about the quality of lawyers that an insurance company might want them to use when defending their cases.Overcoming law firms’ understandable scepticism about the true purpose of a protocol may prove to be the difference between simply making cost-savings and extracting real value for money. Rather than using financial penalties as the stick to wield should a protocol be breached, which can be counter-productive, it would be better to incentivise the firms in question. Bruno Geiringer, director of legal services at Canada Life, has used protocols in the past. Although he says that he has moved on now that the ground rules for performance have been long established, he believes that general counsel should reward good performance as the quid pro quo.“If they do it the way you want it then they should get their bills paid promptly,” he points out. “Cashflow is terribly important for law firms, with practice managers putting pressure on partners to get their bills paid. It is a pressure point you can use as an in-house lawyer.”This is a carrot that Pochins’ Waugh was also keen to dangle when it started considering the implementation of a protocol.Waugh says that, while the aim of the company’s new protocol is to drive down costs, the company’s law firms stand to benefit from an improved recovery rate. As a result they will not have to write off substantial amounts of time on projects as they may have been forced to do in the past.Unlike in the insurance industry, where law firms say the demands are all one way, Waugh says he was also particularly keen to ensure that his external counsel felt it was a positive process.“If a firm criticises us and that brings our bills down, it helps us and the firm will get its bills paid,” he points out.By becoming a better client through the use of protocols, companies could genuinely extract benefits for both themselves and their external counsel.Better services from motivated law firms for lower costs may not be so difficult to achieve after all.
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