Even casual readers of the financial media may have noticed a certain pattern lately. With every new report about unemployment, factory utilization or home/auto sales, forecasters and pundits alike seek to reassure us that we’re out of the Great Recession, which began in 2008. Is it back to normal yet?
In the United States, the jury’s still out about the legal industry. A couple of prominent law firms (Howrey and Dewey & LeBoeuf) folded under heavy debt burdens, while clients continue to find ever more creative ways to cut legal spending.
From Europe, meanwhile, we are getting word that in Britain, innovative firms and legal departments are engaged in a concerted campaign to transform the legal industry. It might be a different continent, with different legal traditions and infrastructure, but the question remains the same: Has the economic crisis brought about a permanent shift in the client-law firm relationship?
The answer seems to be yes. While corporate chief legal officers have always been under pressure to reduce costs and boost efficiency, the economic crisis has brought a new sense of urgency. “I’d have to say that the crisis has made the need more pronounced,” said Simon Davies, managing partner of London-based Linklaters. “There’s a great deal of pressure to make not only cost reductions, but sustainable cost reductions. That involves not only a tightening of belts, but also a changed relationship with clients.”
Another observer was more blunt. “Across the eurozone, it’s been carnage,” said Tony Williams, a principal at Jomati Consultants LLP, a London legal consultancy. Williams, former managing partner of Clifford Chance, added that transactions across the continent are way down, and there’s a surplus supply of top-quality legal talent in Europe.
As a result, “the better general counsel are canny, far more than in the U.S., in their demands,” he said. “If you’re not offering fixed-fee pricing” in Europe, Williams said, “you’ve got to have a bloody good reason. U.S. firms have gotten away with slight discounts, but then they say, ‘Please leave us alone.’ “
But while America Inc. tends to hire large law firms, the way that global companies engage firms is undergoing fundamental changes. It’s more a fitful evolution rather than full-on revolution, but the change is unmistakable. Convergence has become a best practice, and all sorts of alternative fee arrangements are, if not commonplace, at least a common part of the discussion.
That pressure applies to the continent as a whole. But some of the most innovative responses have come from companies in the United Kingdom. One of the revolutionaries is Janice More, European general counsel of the U.K. division of H.J. Heinz Co. She heads a 10-lawyer department. With such a small staff, she thought she could leverage its reach and power by that fashionable solution, the law firm panel. Her department once retained some 60 law firms; that has been slashed to two tiers. Three multinational, pan-European firms — Eversheds; Freshfields Bruckhaus Deringer; and Herbert Smith Freehills — represent the top tier; and the company uses four local firms in various jurisdictions.
The process took over a year. “We wanted to do it in three months,” said More, a soft-spoken lawyer who comes across as anything but a firebrand. The chosen firms went through several gruel­ing steps, from beauty contests to RFIs and finally RFPs.
But Heinz’s reason for winnowing down was more than a desire to have fewer firms do its work. “We wanted to access the resources the larger firms have, and which larger law departments have,” More said. “We’re not as big as Shell or the banks.”
CLOSENESS BOTH WAYS
The special relationship involved caps on fees and some freebies. More’s lawyers now get training (some free; some at a reduced rate) and specialized white papers on food law. They have access to private areas on the firms’ websites with relevant information. “We don’t get bombarded with email alerts,” More said. And the closeness goes both ways, she added; because it’s such a small panel, More and her team have schooled the firms on the ins and outs of their business.
The changes, however, aren’t limited to who gets the business. It’s also in how the work is done. And in some ways, European general counsel are embracing new models of procuring and delivering legal services. “Initially, clients weren’t managing law firms any differently, just demanding big discounts,” said Leigh Dance, executive director of the Global Counsel Leaders Circle, an organization of senior global in-house counsel. “Over time, the typically lean in-house legal teams in Europe have borrowed each other’s ideas and become far more sophisticated in how they gain value from their law firms.”
British Telecommunications PLC, for example, is taking to heart the gospel of disaggregation. The legal department of the $14 billion business (with 90,000 employees) has taken a hard look at how it does its work, and where it found extra costs, it ruthlessly squeezed them out. More work is done in-house, U.K. general counsel Christopher Fowler said. “I’d never use external lawyers, for example, for negotiations,” he said. And big firms like Freshfields still charge a premium for pension advice. Fowler’s solution? Have in-house lawyers do it.
When BT does go outside, it often farms out pieces of the work, to be coordinated in-house. Offshoring figures big in BT’s menu of outsourced work. And Fowler never agrees to an hourly rate.
BT also is trying out new arrangements, says group general counsel and corporate secretary Dan Fitz. For contract work in the United Kingdom, the company puts jobs on an online portal. A BT lawyer does triage, and the jobs usually go to legal process outsourcing outfits (LPOs). Large contracts (more than $150 million) go to firms, said Fitz, who added that his goal is to increase the percentage of work going to LPOs.
Is there any resistance? “Not at all,” Fitz said. “The London market for outside counsel has been under pressure, due to the economic crisis. Most companies here are taking a tougher line on the rates they’ll pay.”
Fitz talked about his philosophy as a client. “We’ve abandoned the concept of the market as being inside versus outside counsel,” he said. “It’s much more stratified. My job is to get the best quality at the best price, and we’re part of the supply chain.”
The result? “In 2010 we were spending about $1.5 million on external fees,” said U.K. GC Fowler, speaking of fees in that country. “Now we’re struggling if we spend $150,000.”
Many British lawyers interviewed for this article say they’re way ahead of their continental counterparts. But those counterparts aren’t necessarily sitting still, either. “It’s basic market forces,” consultant Williams said. “You’ve got oversupply, and the buyer says, ‘I’ve got the buying power.’ “
Massimo Mantovani heads the legal department of Eni SpA, Italy’s preeminent energy company. As such, he’s general counsel for a department of 400-plus lawyers, the largest department in Italy. His chosen weapons right now are secondments from firms and being a choosy, bargain-seeking shopper.
With the surplus of talent on the law firm side, he said, he can take in a lawyer to work at Eni as a secondment (right now, there are eight) on a contract basis for anywhere from 18 months to two years. Plus, when he does hire a firm, he looks for a “professore,” a prestigious legal authority not necessarily attached to a big firm with big-firm hourly rates.
Still, given the global nature of Eni’s business, Mantovani still hires large law firms for certain legal work, mainly international transactions and arbitration. But he calls the reduction in his use of outside firms “significant” — limited to once or twice a year.
Big firms are adapting. Bruno Cova, managing partner at Paul Hastings’ Milan office and a former general counsel of automaker Fiat SpA, said that in Italy, 90 percent of corporate legal work is on a fixed-fee basis. Linklaters has reorganized into industry segments, rather than the traditional legal practice areas, said managing partner Davies. And, ever mindful of costs, Linklaters has established a shared legal service team in Colchester, England, a lower-cost center about 60 miles northeast of London.
Heinz’s More said the pressure has given her a chance to examine how even big matters are handled. “You can commoditize matters beyond repetitive contracts,” she said. “You can slice and dice litigation into different parts and do different deals for different segments.”
What’s next? Companies will continue doing what they’re doing. Some of the change, Cova said, is demographic. The old guard is passing, and a newer crop of younger general counsel across Europe isn’t tied to the old way of doing things — or tied to historical relationships. “It’s good for me,” he said, “and it’s good for corporations.”
Anthony Paonita is editor in chief of NLJ affiliate Corporate Counsel. He can be contacted at firstname.lastname@example.org.