In less than 12 months the market for legal services has witnessed a remarkable turnaround.
For much of 2000 and early 2001, there was a distinct feeling among in-house lawyers that their companies were being held to ransom by their external law firms.
With a continuing flood of work, even taking into account the flat capital markets and the travails of the technology sector, the firms were pretty much able to dictate terms.
The most graphic example of this was the way in which the firms were continuing to increase assistants’ pay well above inflation and equivalent pay rises in the in-house sector.
The prevailing, if unspoken, attitude among law firms was that the clients would meet the rises through higher bills.
This pressure on pay had first been felt in the US the previous year and this continued to be the case in 2001.
In March this year West Coast US firm Brobeck Phleger & Harrison raised its first year associate pay by $10,000 (£6,858) to $135,000 (£92,586).
By May, and despite increasingly vocal unease among in-house lawyers, a new benchmark salary for the top UK firms had been set at £50,000 for newly-qualified assistants.
Many of the major City practices fell into line, or close enough to it. Above inflation rises in the regions, where firms were keen to persuade their best assistants not to head to London, were also the order of the day.
The remuneration differences between working in-house and in private practice had, as a result, never been starker. A subsequent Legal Director Benchmarker survey found that the average salary for a head of legal was, at £74,000, not much more than that of a relatively junior assistant at a City firm.
The attitude of general counsel became noticeably more hostile through 2001. Although the pay rises in 2000 were acknowledged grudgingly, this time around, general counsel, both here and in the US, began to say enough was enough.
In a widely reported move, for example, the general counsel of Sun Microsystems, Michael Morris, authorised the sending of a letter to its panel in the US saying that his company would ‘disfavour’ firms that matched Brobecks’ latest rises.
Morris told Legal Director the move had struck a chord among in-house lawyers. “What gets on our nerves is the blind assumption that companies such as ours will pay those rates,” he explained at the time. “This was ridiculous – hiring a first-year lawyer at those prices, someone who has not even taken a Bar exam and probably does not even know where the men’s room is. That finds its way into the rates, no matter what they say.”
Morris’ views were shared by a large number of general counsel in the UK as well as the US. In the March issue of Legal Director, a Benchmarker survey on fees revealed that levels of dissatisfaction with bills from legal advisers had already grown dramatically.
More than one in five (21%) heads of legal reported dissatisfaction, up from just one in ten (10%) in the same survey conducted 18 months previously.
And this unrest was found to be at its greatest among companies with large in-house teams – 42% of departments with more than 11 lawyers revealed that they were dissatisfied.
Significantly, the survey also revealed growing pressure from chief executives and chief financial officers to control legal spend. The so-called ‘war for talent’, used to justify assistants’ raises and higher charge-out rates, led to heads of legal becoming even more demanding about the level of service they received from their primary law firms.
There was growing conviction that premium rates would require genuine premium service levels. There was also increasing evidence of a willingness to explore more cost-effective alternatives such as regional firms, where appropriate.
The lesson appears to have been taken on board with a Legal Director Benchmarker survey in October on client service suggesting that law firms have been raising their game.
More than half of the in-house lawyers surveyed (55%) said they were ‘very satisfied’ with the performance of their main law firms. A further four in 10 (41%) said they were ‘quite satisfied’. The ratings were much improved on a similar survey conducted in April 2000.
It was only a qualified thumbs-up, however, with respondents suggesting, unprompted, that firms still had a long way to go when it came to costs and transparency on fees.
This discord is unlikely to go away – a survey in April by Legal Director’s sister title Legal Week had already revealed that the majority of law firms were planning to increase fees by more than 5% in 2001. Some 13% of the 100 law firm leaders surveyed suggested that their fees would go up by more than 10%.
Whether they have succeeded in passing these increases across to clients remains to be seen, although reports to Legal Director suggest that, certainly earlier in the year, associate pay hikes coincided with similar hikes in hourly charge out rates.
But worsening economic conditions – even before the events of 11 September – have begun to have a major impact on the relationship between client and law firm, handing the balance of financial power back to the in-house lawyer.
Law firms used to a surfeit of work suddenly faced the prospect of missed budgets and a large number of under-utilised, but now extremely highly paid, staff.
Those at the forefront of the pay wars were among those to suffer the most. In the US, Brobecks implemented a voluntary redundancy programme that has been accepted by 84 associates. Another Silicon Valley firm, the Venture Law Group, has recently announced plans to cut salaries for first-year associates to $100,000 (£70,596) – still high, but the move was a marked turnabout from the firm’s stance last year.
In the UK the economy has proved, so far, to be more robust. Nevertheless, there is considerable unease among law firms that they may have overstretched themselves.
Masons, DJ Freeman and the London offices of Brobeck Hale and Dorr are among the UK firms to have made lawyers redundant. Few doubt that others will follow, as firms become, frankly, increasingly grateful for any titbits of work that are sent their way. Mid-year reviews of assistants’ pay have either been cancelled or there has been no appetite for any increases.
Of course, in-house counsel are not immune from these economic pressures themselves. In June, the in-house team at Cable & Wireless was cut by 25% as the global communications company implemented 2,700 job losses across the board in response to the economic downturn. Lucent Technologies was another to cut back its legal team, both globally and in the UK.
Specialist legal recruiters were meanwhile reporting a hiring freeze across a wide range of industries.
Despite this, general counsel appear relatively confident that their position is secure. If there are to be cutbacks, the sense is that it will only be a question of degree and that the days when whole legal departments are shut down are gone.
When asked in last month’s Benchmarker survey how much pressure there was to outsource the legal department, most respondents felt that there was little.
Asked to measure on a scale of one (no pressure at all) to 10 (a great deal of pressure), the average score was less than three.
The reaction of Canada Life’s executive director for legal services, Bruno Geiringer, was typical. Geiringer argued that the pressure to outsource legal services was “a sign of the 1980s and ’90s”.
“In-house lawyers are now much better prepared to justify their existence and provide documentary evidence of the benefits,” he argued. “We are looking at creating value and there is also a better quality of person coming in-house from private practice.”
That may be true, but a closer look at the survey results suggests that some in-house teams are at least beginning to feel the bite. Twenty-two heads of legal said their company had outsourced some or part of the legal function in the last five years and 11 said they had plans to outsource in the next 12 months.
With such an uncertain business environment in 2002, there could not be a better time for the new breed of in-house lawyer to prove its worth.
The opportunity to extract better value from external law firms and to show the cost-effectiveness of handling matters in-house has never been greater.
Whether the board will appreciate this remains a moot point, as the glass ceiling preventing the appointment of lawyers to director level continues to persist.
There was welcome evidence in 2001, however, that slowly but surely, legal directors’ voices are being heard at board level.
In a Legal Director Benchmarker survey into risk management in May, 39% of respondents said that their influence on the board’s approach to risk management had increased following the publication of the Turnbull report into corporate governance and internal control.
This was particularly true of the largest companies surveyed – those with more than 2,000 employees – where the percentage rose to nearly two in three (64%).
This represents a vital opportunity for in-house lawyers to win the confidence of the board and, perhaps, make the breakthrough appointment as a director.
As Vanni Treves, the Macfarlanes partner charged as chairman with implementing a rescue plan at troubled Equitable Life, told Legal Director shortly after his appointment, it is still a surprise that more practising lawyers, whether in-house or in private practice, do not sit at board level.
“They can add huge value,” he said. “As business life becomes more complicated, with greater regulation, it is more and more likely institutions will realise senior lawyers should be part of the executive team.”
If this proves to be the case and if the UK economy continues to weather the economic storm, the outlook for in-house lawyers appears to be good.
The outlook will be even better if the recommendations of the Office of Fair Trading (OFT) report into competition in the professions – published in March – are implemented.
The OFT called for the relaxation on competition grounds of the Law Society rules preventing employed solicitors acting for people other than their employers.
Although this is thought to be most appropriate for businesses looking to handle high volume, low-complexity work such as conveyancing and certain types of litigation, it nevertheless should allow lawyers to become core parts of the business and not simply cost-centres.
We will know in 2002 whether this major change will become reality. As for 2001, in the space of just 12 months the market for legal services has become much more of a buyer’s market than a seller’s.
While it may have been, for many, a difficult year, there are grounds for optimism that the rising profile and influence of in-house lawyers is set to continue.
Key Benchmarker findings in 2001
February: Movers and Shakers (Pinsent Curtis Biddle)
More than three in four senior in-house lawyers play a role in the business strategy of their companies. One out of three have a seat on the company’s management board. The average legal department spends £617,000 per annum on law firm fees.
