Taking the legal battle in-house?

There are many business positives to be gained from a good in-house to external lawyer relationship, but there is at least as much to be learnt from the inevitable times when things go wrong. By Michael Simmons, Finers Stephens Innocent

I was extremely upset the first time that a long-standing, corporate client engaged an in-house lawyer. I viewed it as a betrayal and denial of the closeness of our relationship. Until that time, I had enjoyed unlimited access to the directors, as they had to me. Suddenly, a gatekeeper was interposed, and the whole nature of our professional relationship changed. Until that time, I had been very much the general counsel, advising on all aspects of the company’s business, as well the directors’ personal problems.

After sulking for a few days, I realised that I had to be positive about the change in the relationship, and I needed to get to know the new in-house counsel. What sort of person was he? What made him tick? Would it be possible for me to build bridges so that I could continue to act for the company, albeit on a changed basis, or were my days numbered?

I soon discovered that the in-house lawyer was as anxious to know me as I was him. He had worked for companies before, but needed help with learning about his new employers. I was able to fill in many of the gaps in his knowledge, and we soon established a very good relationship. My fees had never been an issue with the board before, but I soon discovered that he had a particular remit to control legal spending.

This meant that my time records and billings were under scrutiny with this particular client, as they had never been before. There were initially a few hiccups until we managed to establish a relationship of mutual respect and understanding.

For the first time, I was asked to give initial estimates, and I was expected to update these throughout the course of the particular engagements. If I exceeded those estimates, questions were asked, and we soon evolved a ‘swings and roundabouts’ system whereby, if there was a relatively unexplainable costs overrun on one job, I had to grin and bear it on the understanding that there would be a reasonable tolerance on my costs estimate on the next instructions. Initially, my tidy mind left me feeling uncomfortable with this relationship, but it worked, and I soon learnt to accept it for what it was: a long-term relationship with mutual tolerance and understanding on both sides.

When that particular in-house counsel moved on to another job, I was delighted to be asked by him on behalf of his new employers to quote for some of that company’s work. I was in competition in the tendering process with the incumbent lawyers together with a couple of local firms.

I was happy to win part of the tender, so that my firm was acting for this new client for some of its specialised legal work. Over the next few years, we extended our hold and eventually were acting for about 80 per cent of that company’s work. It was uneconomic for us to do some of the more local work, but the whole basis of our instructions was the relationship of trust that I had managed to build up with that particular in-house lawyer.

My subsequent relationship with the original corporate client did not go nearly so well. The next in-house lawyer was an entirely different animal. I felt that the problem was he lacked confidence and had to adopt an aggressive stance towards me. His attitude was that new brooms sweep clean.

I do not think that the instructions came from the board, but he took it upon himself to reduce the company’s legal spend by 20 per cent in the first year with similar cuts to follow in subsequent years. Having been informed of this, I immediately had to look at my firm’s economics. Our profit margins were already reasonably lean with this particular client because of the nature of the relationship with his predecessor. How much leaner could they get, before it became uneconomic to act for this company?

Before I had a serious chance to consider this question, he informed me that he was proposing to put the work of his employers out for tender generally, and that my firm was entitled to tender. For this relief, much thanks! He also told me that he intended to set up a panel of law firms to act for this particular company, so that there would be continued competition, and also so that prices could be kept to a minimum. I had a vision of a number of lawyers quarrelling like vultures over the carcass of the client.

I realised that my firm had an advantage in the tendering process, as we knew the client’s workings well and also the way that the various members of the board thought. A number were good friends, and we acted for them personally. At the same time, it soon became clear that they were adopting very much a hands-off approach to this tendering process, and it was being left to the new in-house lawyer to control the way in which things were managed.

I sat down as managing partner with my various departmental heads, and we analysed the work that we did for this particular client. We decided that certain elements of the commodity work, debt collecting particularly, were already at a marginal level only so far as profitability was concerned. Having been given every possible signal that the criteria for the tendering process was price rather than quality of work, we decided not to tender for those particular aspects of the job. It meant, of course, that the work would be split, and that part of the company’s legal instructions would of necessity go to another firm. Without being too paranoid, we felt that any other firm, once it had a toe hold, would seek to expand its work and cross-sell into other more lucrative areas. However, we decided that we would take the risk, as we could not see how we could cut our rates for that debt-collecting work. An argument was put forward that we could do that work at a loss on a swings-and-roundabouts basis. The rest of us found this unattractive, as we felt that every piece of work that we did for this client, especially under its new legal management, had to be profitable, otherwise it would be treated as the thin end of the wedge, and we might find ourselves acting increasingly on a loss-making basis for this client.

Having established the areas of the client’s business where we felt that we could still work profitably, even after relatively substantial fee cuts, we put together our tender. Fortunately, our marketing department over the years has devised certain templates and precedents, which are all on their computer system.

It was necessary to tailor the written presentation in such a way as not to repeat what was already very well known to the company, even though we had to treat the new in-house lawyer as someone who might not be so well educated in our firm’s ways. This required something of a delicate balancing exercise, as we did not want to be seen to be blowing our own trumpet unnecessarily, when certain aspects of the quality and scope of our service was so well known for so many years to this particular client.

We adopted the old adage in our presentation that you stress the benefits to the client rather than boast about the services that are provided.

Although I was very much the client partner and the person always brought in to troubleshoot when anything went wrong, I was, nevertheless, doing less actual work for the client, largely because of my management responsibilities. The client work had been delegated very effectively either to our departmental heads, or certain of the more active partners in those particular departments. It was therefore agreed that I should take something of a back seat on the oral presentation, which was to follow the written one. My role was only to act to introduce the various protagonists from within the firm, and effectively to sum up at the end. We expected to receive a large number of questions, but these were to be left to the people from within the firm, who were actually doing the work. I was to curb my tendency to dominate and speak far too much.

We realised that the schedule of fees was going to be the key document. Up to this point, we had always charged the client on the basis of an hourly rate with fee earners’ charge-out rates being agreed in advance. These were sometimes less than our normal hourly rates, and I would negotiate these with the previous in-house lawyer without much difficulty.

We realised that an open-ended hourly rate with different charge-out rates based on seniority and expertise would probably be unattractive to the new in-house lawyer. Our discussion ranged through blended hourly rates, where we offered a rate for the job without reference to seniority and expertise. The onus would be on us to make this profitable, as our natural tendency would be to have the work done by lower paid fee earners, but militating against this was the need to do the job properly and efficiently, which might require more senior personnel. If we were charging a blended hourly rate, then it was important that the choice of personnel was under our control, but we could not be sure of this, as the new in-house lawyer had already indicated that he wanted the say in which lawyers did the job.

We then discussed the possibility of fixed fees. As we had already agreed to abandon the company’s debt collection from our tendering process, which was the most commodity-based work, we did not think that much of the work lent itself readily to fixed fees. Certain employment advice could perhaps come under this category, but, as soon as matters went to the tribunal or to other litigation, we did not see how we could make fixed fees work economically in our favour. In other words, if we agreed fixed fees, they would almost certainly work against us, especially bearing in mind the seeming hostile personality of the new in-house lawyer of the company.

We did discuss at some length the possibility of charging lower hourly rates coupled with a success fee. When we were acting for the company as defendant, this would be based on an agreed amount by way of damages and, if we were able to negotiate anything less, we would receive a percentage. It was obviously far easier to negotiate a success fee when the company was the plaintiff, as it would be a straight percentage of recoveries.

All in all, we felt that we did not want to complicate too much the fee structure and, after much soul searching, we decided to go in with hourly rates only, with the proviso that we would offer a blended hourly rate for certain specific commodity services, provided that the control of the personnel involved on that work was left to us. At the higher level of work, by contrast, we were happy to leave the choice of the lawyer doing the work to the company’s in-house lawyer.

I have to say that the time that we spent on preparing the tender, both written and oral, was far too long. We were keen to retain this client, if at all possible, although we realised that we were going to have problems with the in-house lawyer.

The written tender was submitted in good time, and the oral presentation seemed to work reasonably well. As I was not too actively engaged, I had the opportunity of sitting back and watching the body language of the people representing the company. The two directors, financial and personnel, were clearly sympathetic to us, but I noted the absence of the managing director. Clearly he had abdicated the choice to the in-house lawyer, who was very much in control of the whole process, especially the questioning. I did not like the look of his body language at all. I felt that he was prejudiced against us. This came out very much in the questioning, which was hostile in the extreme.

I am happy to say that my partners and lawyers involved dealt, at least in my view, very well with that hostile questioning and did not lose their cool.

We had a meeting after the oral presentation, but I have to say that the mood was pessimistic. We knew the identity of one of our competitors, but not the other two firms. We had been told that there were four of us in all.

The wait was an anxious one, and I have to say that I expected very little. It transpired that I was right. I was called by the managing director, and I went to see him. He was flanked by the in-house lawyer, who had what I considered to be an unpleasant smirk on his face. We had lost the business. The managing director did his best to soften the blow, and I have to say that I have retained his personal work to this day, but we lost that company’s work and, with the benefit of hindsight, I do not think that we ever had a chance to retain it. It transpired that the in-house lawyer had trained a number of years ago with the successful law firm, and in truth we were playing throughout with the dice loaded against us.

I have spent a considerable time dealing with the unsuccessful aspect of this case study, and perhaps not enough time dealing with the more successful side. There are some cautionary tales to be learnt from my experience though. I leave them to you to consider. I hope that you can learn from my mistakes.

Michael Simmons is a consultant at Finers Stephens Innocent on professional practice problems. He can be contacted at msimmons@fsilaw.co.uk