Outside Counsel Management – Is It Simply Enough to Change Law Firms to Save Cost?

By Amit Alagh

The last few months have seen companies such as RBS, Novartis, and Lloyds Banking Group review their law firm panels. We might assume this common practice is meant to reduce costs.  But GCR’s 2012 Legal Budget Diagnostic shows that the median legal department budget increased by 10.7% in 2011, driven in part by increases in outside counsel spending and according to our Real Rate Report, a 5.1% increase in lawyer’s rates. Our traditional practices – including law firm panel reviews – have done little to stem the tide of legal fees.

We have to ask ourselves, to what extent is this sustainable? For how much longer can in-house legal departments seek budget increases to satisfy outside legal spend?

The Challenge

The reasons for the continued increase in external legal spend are unclear and defy the logic of market forces that as suppliers (law firms) increase, costs decrease. Part of the problem can be attributed to:

• Legal function inertia,
• Fear of being out-of-touch with current legal trends and developments,
• Traditional law firms holding a grip on their customers instead of the other way around, and
• In-house legal teams not possessing the right skills.

General counsel, up to now, have rarely challenged the imbalance of power in the relationship. Our members tell us that general counsel lack good insight, benchmarks, and examples on how to make changes in their relationship with law firms. This is where we are focusing our support.

Our research on ‘Five Forces That Will Change Legal’ indicated that the role of legal functions is evolving.  There is a shift from fire-fighting to proactive issue spotting and notably an increase in the requirement for specialist lawyers to tackle issues such as data privacy, corporate transparency, and cross-border regulatory issues.

It is unsurprising that such challenges have forced in-house legal departments to re-evaluate their head count. Thirty-nine percent of legal departments expect to hire additional staff in 2013, and 55% of legal departments expect to remain at the same level of FTEs.

The increase in hiring may be a signal to law firms that increases in law firm billings will not be tolerated and general counsel are ready to build world class in-house legal teams who are:

• Accessible,
• Proactive,
• Partners to the business, and
• Solution-oriented.

These attributes have been consistently outlined in our Business Alignment Tool as those demanded by internal clients of their in-house legal teams.

Approaches to Managing Outside Counsel Spend

CEB research indicates that the most effective approaches to managing outside counsel spend include the following:

• Ascertaining in-house legal department skill set:  A primary reason for using external counsel is that in-house legal functions do not possess the right skills to get the job done. Our research has shown that it is good practice to partner with the business to understand where future workflow lies and prepare accordingly through upskilling team members to handle emerging practice areas.
• Soliciting competitive bids for legal work:  Cultural inertia is one of the main reasons General Counsel resist changing law firms. Little do they realize this inertia is costing them dearly. Seeking out competitive bids can result in finding qualified yet smaller firms, located in lower-cost markets, often offering better value for money.
• Devising billing and staffing guidelines for outside counsel: Our members have benefited from revising their billing policies with law firms to set expectations for day-to-day matter management. Examples of expectations include agreeing on thresholds for the law firms to notify the general counsel or to seek approval before changing agreed staffing or strategy, filing motions, or increasing the agreed budget.
• Setting up alternative fee arrangements: Not all legal work is weighted equally. Our members have found that applying different fee arrangements for different types of work results in law firm cost savings.
• Exploring alternatives to law firm services:  The last few years have seen the law firm monopoly on legal services eroded. Some of this can be attributed to:
  • General Counsel bringing more work in-house through know-how providers e.g Practical Law Company, LexisPSL
  • General Counsel making greater use of technology innovation, particularly in the tendering process, and
  • The deregulation of legal markets, particularly in the UK, where regulatory change has enabled non-lawyers to control and own law firms. This has resulted in new entrants to the market able to carry out legal work.

What is CEB doing for its members?

• Ascertaining in-house legal department skill set: CEB has launched a lawyer skill diagnostic that helps general counsel develop their department’s in-house lawyer staff.
• Selecting Counsel and Building Relationships:  CEB members have access to a step by step RFP toolkit to find new law firms as well as guidance on helping manage their relationship with law firms more effectively. Members can also avail themselves of our checklist, outlining the 14 most effective law firm cost-reduction strategies
• Setting expectations for day to day management: CEB research has shown the best companies set out their expectations of law firms early on in the relationship; in order to help our members, we have prepared an outside counsel billing and staffing policy generator.
• Providing guidance on alternative fee arrangements: CEB has put together guidance on exploring alternative fee arrangements as opposed to relying on the traditional hourly rate model.
• Exploring alternatives to law firm services: Large law firms are no longer the dominant provider of legal services. CEB has put together guidance on exploring alternatives to large law firm services in order to obtain better value for money.
• General Counsel bringing more work in-house through know-how providers e.g Practical Law Company, LexisPSL
• General Counsel making greater use of technology innovation, particularly in the tendering process, and
• The deregulation of legal markets, particularly in the UK, where regulatory change has enabled non-lawyers to control and own law firms. This has resulted in new entrants to the market able to carry out legal work.