Client companies are complaining that their law firms are willing to drop them like hot bricks the minute a more lucrative client comes along. And the worst culprits are the global players that undertake the international mergers. Sound business sense or cynical manoeuvres? Mary Mullally reports
|January 24, 2001 at 07:03 PM
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The venue is the annual conference of the European chapter of the American Corporate Counsel Association in Barcelona. The scene is a roundtable conference of head directors of leading European companies. The topic is purchasing legal services in the new economy. And the temperature is rising as in-house counsel discuss their relegation in the battle to claim the biggest and best global clients.Instead of being valued clients, a number are now finding that they are pawns in a game where law firms have little hesitation in dropping them when a better client emerges from a merger. Politely put, a conflict of interest. Founding member of the European chapter, Michel Cloes, is speaking about the impact of the global law firm and how the big firms resolve such conflicts. Even if this does not happen, the risk is that the company might not be big enough to remain a valued client of the firm and find itself short-changed in the service department. And British firms are the worst offenders, he claims.“During the British expansion, I have seen huge conflict of interest situations arise through mega-mergers. And who rules in the new mega-firms? In my view, Britannia rules,” Cloes said. Bitter experience informed Cloes’ comments. As European counsel for Dana, he found that long-term continental advisers have sidelined the company – on no less than three occasions in the last year – following link-ups with UK firms. And the reason given was client conflict.A $13bn (£8.6bn) Ohio-based automotive company with 80 manufacturing sites and 20,000 employees in Europe, Dana’s work is not small beer. But Cloes said law firms are sidelining legal advisers in favour of what they consider to be more lucrative work. “The open policy of some of the mega firms is to go for the big deals and neglect the ‘small fry’,” he said.As a consequence, although Dana had a policy of instructing one law firm in each jurisdiction, Cloes is now moving away from the mega firms to instruct a range of firms in each region.One former head of legal at a UK-based European clearing house says his group realised it was “too small a client” for the global players some time ago. It directed the work away to the smaller firms. “It was not a conflict situation,” he says, but “more that the firms were interested only in the big clients. It is hard to get the quality and attention from the firms since all they want is to work for the top-named clients.”The global firms deny that preferential treatment is given to clients of the UK/US firms where a conflict arises between existing clients of their European partners but, given the choice, they will favour the bigger players.Chris Perrin, partner and deputy chief operating officer at Clifford Chance, says that, far from favouring its own clients, Clifford Chance was careful to preserve the Puender relationships, when the two firms merged in 2000. “I do not think it is true that we favoured the clients of Clifford Chance. We had to turn away a significant amount of work from inherited Clifford Chance clients to accommodate Puender relationships,” he says. Freshfields chief executive Alan Peck agrees. He says his firm was careful to take on board the sensitivities of the clients of its continental partners when it merged with German firms Bruckhaus Westrick Heller Loeber and Deringer Tessin. “If there is a conflict between two legacy clients then I am awfully conscious about the wider implications,” Peck says.However, he concedes “obviously, in reality, we assess which client is going to make more money for the firm,” he says. “I cannot say we ignore the commercial interests of the firm… surprisingly, we are running a business.”And therein lies the rub.In reality, any perceived bias reflects global firms’ desire to restrict their work to multinational deals rather than a xenophobic preference for all that is UK.During the last decade the top-tier UK firms have adopted an increasingly strategic approach to the type of work they take on board. Clifford Chance is a case in point. Three years ago the firm put in place a 10-year plan to provide a corporate commercial service for multinational clients in its bid to become ‘the world’s premier law firm’.As part of the plan Clifford Chance said it would divide clients into three categories, with top priority given to multinationals and governments, followed by the major corporates. Bottom of the heap were the smaller corporates, whose activities are confined to one jurisdiction. At the time of the Puender merger last year, sources say the firm identified nine major international banks as priority clients. Perrin denies this denotes a pecking order, however. “It is so we can work out priorities,” he says, “but the firm is keen to work for smaller clients just as much as multinationals. If it is an important job for the client we try to do it.”Last year the firm set up four clearance centres to deal with global conflicts. Every new piece of work must be passed by the panel before the partner can take it on.According to Perrin, there has been interest from other law firms moving into the global market. To date, three law firms have sought advice from Clifford Chance on how to set up a similar clearance system.One of the functions of the clearance centres is to assess the significance of the client. The clearance centre is quite good at ‘sussing out’ whether it will be an important deal needing a major role. If they suspect there is another client with a bigger interest they will normally have a word with the head of the practice area to help decide whether to accept the job or not.“It may come down to value and client relationship,” Perrin says. “If we think a major client of the firm would want to instruct us and they have not phoned us yet, we would probably avoid taking on a small role for a new client that will get in the way of the other relationship.”Other firms are less circumspect. “We want to do the mega deals. If they do not want us to do the mega deals they should not come to us,” says one partner at a global firm. UK clients are more familiar with this than their European counterparts. They have adapted by adopting a two-tier approach to external advisers, instructing the top tier firms on the big deals, says Freshfields’ Peck. “The UK market is more segmented than the European market,” he says. “The magic circle firms are increasingly taking on only the mega deals – other work goes to niche practices or to firms that can provide effective back-up and on-going advice.”But as the UK and US firms move into the European market, so continental clients are beginning to learn the hard way that they are only interested in the bigger work. Until recently it has been common practice for in-house counsel on the continent to develop a one-to-one, full-service relationship with one law firm.For the clients on the continent who expected the global players to continue to provide a full service after the merger with their advisers, there is little comfort.As Clifford Chance’s wish list shows, the global firms aim at the big financial institutions. Their merger partners in Europe generally act for the large corporations on the other side of the deal. Given the choice, who are they expected to opt for?Little surprise then that some of the long-term clients of its merger partners on the continent feel that they are slowly but surely being dropped.There is also the question of fees. Clients are reporting across-the-board increases in charge-out rates when their European advisers link up with UK and US firms. If the client is not sidelined by conflicts, then the increase in fees is likely to force a reassessment of where the legal work should go.Clients who once considered themselves a big cheese to their long-term advisers are suddenly finding in the new global world that they are ranked on the lower rungs of the firm’s priorities.Whatever UK firms say, clients will still see the Anglo-Saxon prejudice unless firms become more transparent about the process. Part of the problem is that clients are often effectively sacked without the firm giving a reason. Poor management means the firm can find that the client has become resentful.Gary Rinck, general counsel to media giant the Pearson Group, says firms must be careful not to alienate clients in the process. “Law firms must realise that clients need continuity – a sunset period before they are dropped – that ensures goodwill towards lawyers.”But, as a client, what can you do?Vote with your feet, says Stuart Benson of legal management consultants Edge International. “There is a surplus of work and firms can pick and choose clients, but this is not always going to be the case. The tide will turn. The bubble will burst and law firms will be looking for more work.”Today’s large clients may not be the source of the lucrative work in the future, so firms should be careful not to alienate the bread-and-butter corporate clients.A sobering thought for the global players is that many of today’s big corporations did not exist four years ago.As the continental European corporations move away from their traditional advisers to mid-tier firms, the question is whether they will continue to instruct those firms if the economic climate changes.
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