The client crunch
Date: 17 July 2008
Authors: Emma Kaye
Issue: Vol 158, Issue 7330
Categories: Features, In-House, Profession
Clients are sharpening their focus on the procurement and management of outside counsel. They are increasingly sophisticated, discriminating and demanding of their law firms and, in times of economic uncertainty, we can expect this pressure to intensify.
Clients have a clear sense of the strategic value of a matter and what they, therefore, expect of the law firms they instruct. Buying and management decisions will be dependent on how matters are categorised (high, mid and low value) and who is making the purchasing decision (the board, a specialist or the general counsel).
Clients' expectations of their lawyers for matters of critical business importance (high value matters) will be rather different to expectations for the type of work which clients see as more routine. For the business critical work, clients are looking for firms that can deliver thought leadership, demonstrable experience/reputation, a business solutions approach, excellent relationship management and high standards of service and support. By contrast, at the other end of the spectrum, for lower value work, efficiency, predictable costs (often fixed price) and a high degree of systematisation are the key factors.
Strengthening Evaluation and Selection Processes
There has never been such an intense focus on the selection of legal advisers. Panels are being rigidly enforced and law firms are increasingly subject to tough and rigorous pitches and evaluations to ensure their places.
Clients are increasingly looking to streamline their legal panels to a size that can be more easily managed and where closer relationships can be built. Panels are now being subjected to regular reviews based on a number of criteria that most commonly includes quality, efficiency, cost and increasingly diversity.
Some companies have dramatically reduced the number of law firms on their panels—one of many examples includes Land Securities Trillium (Property Company) that earlier this year reportedly carried out a review of its 36 relationship firms and subsequently reduced these relationships by two-thirds to just 12 firms. It also formed a three tier panel list where firms were selected to panels based on the strategic value of the work.
Greater Focus on Managing Legal Expenditure
Historically, legal costs were subject to less intense scrutiny but this is no longer the case. Clients have been driving down law firm costs for some years now. For example, in 2003, a relatively buoyant time in the economy, Nestle introduced its cost-cutting initiative “Running Shoes”. The initiative, which sought to cut the company's legal expenditure by 25%, proved to be successful with Nestle reporting a decline in legal spend from approximately £60m to £44m between 2003 and 2007.
In a tightening economy, with clients' own prices under pressure, the focus on costs will inevitably increase. Hence, clients will negotiate harder on all matters except for the most business critical. Clients are continuing to push for fixed fees rather than hourly charging which is often perceived to “reward inefficiency”. They are also regularly pursuing volume discount arrangements.
The client focus on expenditure is assisted by the use of technology. Technology is providing companies with greater ability to scrutinise law firm performance and billing. Barclays Bank, for example, is reported to have introduced technology to monitor the exact composition of law firm bills. The technology Barclays intends to use measures the hours recorded by every fee earner assigned to a particular matter.
Technology is also being used by some companies to facilitate competitive bidding and, in turn, it is being used as a mechanism to push down price. “E-auctions” often let participating law firms see where they are ranked against other firms in terms of price and then perhaps subsequently allow them a chance to change their bids.
Clients now have a better grasp of the value of a matter and are increasingly aware of what competitor law firms are charging.
Increase in Number of In-House Lawyers
Many companies are now opting to increase the size of their legal departments which has resulted in a range of work being retained in-house, especially lower value transactional or routine work such as commercial contracts, employment, intellectual property and property. One such company is Accenture which recently reported that it was seeking to achieve an 80:20 ratio of in-house and external work.
Not only are companies seeking to recruit more in-house lawyers they are also attracting more high-calibre lawyers and partners from leading law firms. In recent months, partners have been attracted to companies as diverse as Siemens, Pfizer and UBS.
Another way companies are increasing the size of their legal departments is through secondments. Law firms are increasingly asked to provide secondees to help secure places on panels. HSBC, for example, is reported to have approximately 50 lawyers seconded from its panel firms.
For many law firms, these times are challenging as the current economic climate leads to a reduction in the level of work and clients exercise greater power and demand in terms of service and price. On the other hand, a downturn in the economy can present opportunities for stronger and more successful law firms with the flight to quality as clients direct their matters to the strongest brands that are able to demonstrate their strength of capabilities and invest to meet ever increasing expectations.
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