The in-house equation

There was a time when private-practice lawyers dealt first hand with the directors at their client company, but with rising responsibilities among in-house counsel, it is now far more likely that the relationship will hinge on the satisfaction or otherwise of the in-house lawyer. It is a testing but potentially profitable development for both parties. By Caroline Poynton

Law firms are striving to become more sophisticated in the way they deliver their legal services, as they face fierce competition and ever tighter legal budgets among clients. Proof of this could be seen at Ark Group’s ‘Strategic Marketing for the Legal Profession’ conference of 26-27 September 2005. A panel of in-house lawyers answered questions from law firms, covering a range of legal-service-delivery issues, but the main law-firm concerns surrounded the nature of outstanding service; how firms can get to know their clients better; and what clients understand by the term ‘added value’ (see box one). Such questions to the panel reflect a prevailing view that firms need to work increasingly hard to differentiate themselves in a market where there is little to distinguish one technically excellent firm from another.

This is all well and good. But according to recent Acritas research (see box two), a staggering 20 per cent of UK in-house counsel cited lack of communication as a major frustration when dealing with external counsel. Keith Donald, who has board responsibility for legal affairs at Coors Brewers, the UK’s second largest brewer, says: “At Coors, we use external lawyers to cover peaks in work load and to get specialist knowledge to complement our in-house expertise. But I’m always surprised when I’ve spent £1-£2m with a law firm, and nobody calls me up to ask if they can come in and get feedback.” While the statistics suggest that law firms are getting better at responding to their client’s needs, it is still surprising that such a basic thing as keeping in touch is letting down a significant minority of law firms; it is enough, at least, to raise questions of what else might be going wrong and why.

The fundamental problem at the heart of better client-relationship management seems to lie in a paradox. Very simply, many in-house counsel, particularly in multinational companies, still favour choosing and working with individuals, while law firms are striving to move away from the individual to provide a holistic service to clients. “If a good lawyer who I highly rate leaves firm A to go to firm B, then I will go to firm B. I instruct experienced individuals and I follow the individuals,” says Stanley Williams, former director of legal affairs and company secretary at BSI (recently retired) and now chairman of the Commerce & Industry Group. Donald agrees, citing as an example his 15-16 year relationship with employment lawyer Fraser Younson who, over the years, he followed from Baker & McKenzie to McDermott Will & Emery.

Meanwhile, law firms are striving to build brand and profile, getting partners and fee earners to collaborate to deliver a more complete and consistent service with good market recognition. At the same conference mentioned above, a separate panel session focused on how firms can better cross-sell their services to clients, with a focus on better knowledge sharing, both about clients and their own internal capabilities. But Donald says that he doesn’t want to be cross-sold. He wants to choose the lawyers he works with. And everything he says is reminiscent of Richard Wiseman of Shell, who told Managing Partner in October 20031 that “for most law firms, marketing efforts go straight down the drain”. The point is surely whether law firms are getting ahead of themselves and forgetting that it is the basic individual level of service that counts. In terms of management, this would mean that it is the recruitment and retention that is key, rather than marketing or business-development activities.

Such a view, however, is overly simplistic. While some traditions remain, both private-practice lawyers and their in-house counterparts have faced structural changes in recent years that have impacted the way services are managed on both sides. Roger Zair, head of professional practices at Grant Thornton describes a split in the legal profession between income firms and capital-value businesses. “For certain law firms, if key individuals walk out, the firm struggles to maintain a practice. I would call this an income firm – because it is the ability to generate income today. The capital-value firm, however, is essentially independent of key individuals. That doesn’t mean that you don’t need key people doing critical functions, but the point is you can substitute one good individual for another,” he says. This interchangeability also creates a recognisable and predictable income stream, albeit subject to market volatility, that makes a business attractive to outside investors.

The capital-value firm equates to the rise of volume-driven businesses among law firms specialising in areas such as conveyancing, remortgaging and personal injury. These are also the firms at the consumer end of the market that will be most significantly affected by the Clementi review. “You will end up with a very small number of very big volume businesses and some of those will be owned by building societies, insurance companies and banks, because they will see it as a natural extension of what they already do. And you may just find that there are a few law firms that become national brands in their own right for mass-market business,” says Zair.

While Zair thinks that such change will little impact the firms at the commercial end of the market, he agrees that there are implications and parallel developments that are notable. For instance, the move by many firms to convert to limited-liability partnership has flushed out structural issues, forcing firms to better analyse the nature of their businesses. “I was recently working with a 25-partner law firm, which was considering converting to LLP. This actually raised the fact that they have a capital-value business within the firm. They had previously thought of themselves as a very traditional law firm,” says Zair. The firm will now not only convert to LLP, but will own a subsidiary, either a limited company or a subsidiary LLP, which will exist as a separate entity.

This example demonstrates a new level of business introspection in the legal profession that is necessarily changing the traditional law-firm model, but it is not only the law firms that are reviewing the nature and structure of their businesses; the in-house-counsel role has also dramatically changed, as has the way in which clients buy legal services. “The in-house counsel is now more of a business ‘wise owl’ than just a legal adviser,” says Williams. “And in my case, it’s actually been recognised as such, so that I’ve been running a function that includes property, risk management and compliance, corporate governance, and all the things that a board of director looks for in terms of assurance.” Similarly, earlier this year Coors Brewers broadened the role of legal services director to business services director, with Donald taking responsibility for four business functions: legal, HR, communications and property.

The broader roles also mean greater control of external counsel and thelegal budget, which has caused some consternation among lawyers who were previously used to dealing direct with the management board2. “There can be tension between private practice and in-house lawyers, and it is unfortunate when it happens,” says Williams. “I think it is terribly important that the in-house counsel has the full confidence of the board so that any legal work comes under his or her umbrella. If the board or any other part of the business starts instructing private practice around that person, then you’ve got the recipe for a bad relationship.”

Of course, there has also been much debate surrounding procurement techniques, with many in-house counsel now asking external firms to pitch for a place on their law-firm panels. Nor has it been uncommon for in-house counsel to reduce the numbers of firms on their panels, with the aim of achieving greater cost efficiencies. Tim Nightingale, founding director of Nisus Consulting, argues that such procurement activities will commoditise the service and lead to poor advice and service, suggesting that law firms can only beat back the procurement experts by managing costs and demonstrating value. Many in-house counsel will also continue to base their choice of external counsel on existing relationships. “In-house counsel have been trained in private practice and many will have been with the largest firms. They have lots of experience of different lawyers and firms,” says Nightingale. But even if some firms continue to win work via their connections with in-house counsel, there is no doubt that the competitive pitching process is here to stay. And neither in-house counsel nor the law firms pitching for work against their competitors can afford to think merely in the individual lawyer to in-house context. For law firms, in particular, the pitching process reinforces the need to collaborate in integrated business units that are able to sell and cross-sell not only their service capabilities, but also their lawyers.

So, in this brave new world of change where the in-house counsel is business adviser and decision maker for the client, and law firms are rapidly moving from partnership cultures to morecorporate/business-oriented models, there also needs to be some rethink as to how in-house and external lawyers continue to build profitable relationships, without forgetting the basic service requirements that often matter most.

For a start, many in-house counsel welcome the idea of external counsel replicating the corporate world. Christopher Morgan, company solicitor at Honda Motor Europe describes the typical business model, where somebody joins a company with a finance degree, but ends up working in marketing or HR before they ever get to the finance department. “They develop people to understand all aspects of the business,” he says. He also mentions that the Honda’s current head of HR is an accountant with no background in HR – her career with the company started in business development and training activities. “I don’t see why law firms shouldn’t be doing the same thing. It comes down to developing your trainees into partners – by giving them the right start and support during their careers to gain rounded business experience that will enable them to excel,” he says.

But while in-house counsel often relish the variety of their roles over the specialising demands of private practice, the technical expertise required of external lawyers means that specialism is unlikely die out any time soon. One popular way of getting round this narrow view, however, is to enable private-practice lawyers to better understand the client business via sabbaticals. “In my previous role at International Water, we were overloaded with work and we got a couple of secondees, working with us for three to four months to help us out,” says Donald. “It was a revelation to them to see the wide variety of work that we do.”

While good for the client, sending fee-earning lawyers to a client for months at a time may not prove financially feasible, especially for smaller firms. But Morgan has a solution in the idea of the mini-sabbatical. “Up to three years PQE, private-practice lawyers are still in training. Law firms should therefore be willing to cut their billable-hours target to, say, 1,000, allocating 500 additional hours to business-development activities,” he says. This would allow junior lawyers to develop relationships with clients. “They’re not with the client all the time and they are still doing fee-earning work, but they are devoting time to travel and speak to clients, understanding their business and maybe getting involved in training programmes that the client is running,” he says. Most importantly, Morgan thinks this will not only improve the client’s relationship with a law firm, but it will also become an important development opportunity for junior lawyers, who will take such client-relationship skills into their future roles as potential partners in the firm.

While the idea of a sabbatical is not new, the concept of mini sabbaticals where the junior lawyer retains a fee-earning role could have potential for both law firm and client. But it requires the willingness and cooperation of the client and law firm, if it is to work.

This may seem obvious, but law-firm clients are probably more aware than ever of the work they need to do to support the in-house to external client relationship. “I think it can sometimes come across that it’s always the fault of the external lawyers if things don’t work out, and there can be an assumption that in-house are paragons of virtue,” says Williams. “But in-house counsel have to give firms a clear understanding of what is expected of them, or frustration will potentially build up.” Donald goes further, saying that in-house counsel can act as a catalyst for improving the company’s business relationship with external counsel. “Specialist departments in the company, such as the brand sponsorship team, may feel that they’re not making their point clearly to the external lawyers. They can ring up one of our in-house team who does marketing/sponsorship work, and he/she can explain those concerns to the external lawyers. That’s how the relationship works,” he says.

As for the external law firms, the billable hour will remain a challenge for some time to come. On one side, stringent fee-earning targets will always limit the extent to which lawyers have time to get to know their clients’ businesses. On the other, lawyers are increasingly expected to demonstrate a commercial approach and a real understanding of their clients’ needs. Some firms are considering alternative forms of billing – for instance, fixed or capped rates. It is not a solution that will suit all law-firm clients and it could be a risky strategy for firms that are inexperienced in planning work to fixed costs, but Williams argues that this is an area once again where in-house have some responsibility to make it work. “I’ve always been interested in looking at alternative forms of billing and I think firms will increasingly move away from the chargeable hour,” he says. “But both parties have to be comfortable with the outcome. Sometimes you can have a fixed arrangement that then turns sour on the law firm. You’ve got to be sensible and review it, if it gets out of hand. If a litigation or contentious matter suddenly deviates from the original objective, then both parties have got to respond to it.”

Collectively, the comments above suggest the possibilities of truly harmonious relationships between in-house and external counsel, but there are occasions when tensions will build or the aims and objectives of the two parties will diverge. Good communication seems the obvious key to reconciling such differences and as long as there is a willingness on both sides to go the extra mile, the prospects will be good for a profitable long-term partnership.

There will, however, be further change to manage. While many in-house counsel will continue to base their choice of external firm on individual lawyers with whom they have built a relationship, others will look to procurement processes whereby firms pitch for work on a highly competitive stage. This requires firms to continue the work they have already started in managing their firms as modern businesses, where they can demonstrate value and commercial thinking, and where the lawyers are able to sell their abilities and the services of the firm as a whole. Combined with the general movement in the legal profession to more corporate structures, enlivened by the LLP debate and the Clementi review, the law firms of the future will inevitably have to prepare for further change.

What is promising, however, is the extent to which in-house counsel seem willing to share the responsibilities of building a good relationship with external counsel. Where there has been some fear from traditional law firms of the changes that in-house counsel have wrought upon the law firm to client relationship, there may in fact be a distinct advantage of having an informed and business-minded in-house lawyer at the helm, where objectives and outcomes can be more easily agreed and reviewed. Indeed, with accommodation and flexibility on both sides, the future must surely look bright.

References:

1. ‘Industry roundtable: A question of Value, published in Managing Partner, October 2003

2. See article on page 19 of this issue

Sidebar one: Client satisfaction benchmark survey
Recent research by Acritas shows in-house legal counsel across the UK reporting higher satisfaction levels with the service provided by their external counsel in 2005 than were observed last year. The Acritas Legal Benchmark surveys a cross section of senior level buyers of legal services in the UK on an annual basis, measuring satisfaction levels on a number of key service-delivery components.

Key findings

Average overall satisfaction levels have improved by five per cent;
Improved overall client satisfaction is attributed to improvements in a range of areas, including law firms’ demonstration of understanding client needs and their ability to ‘do what they say they will’;
‘Doing what they say they will’ is consistently cited among the most important factors contributing to the client experience and, while professional-service firms have in the past received widespread criticism for failure to deliver on their promises, it seems that external providers are now making real efforts to turn client perceptions around. In many cases, firms are able to address any issues they may have in relation to delivery on promises simply by paying greater attention to managing expectations upfront and focussing on effective, regular communications with clients;
Twenty per cent of UK in-house legal cite lack of communication as a major frustration when dealing with external counsel;
Poor accessibility and lack of responsiveness are also major frustrations – cited by 11 per cent and six per cent respectively, a symptom of being over-stretched and lack of delegation;
As seen in the past two years, poor billing procedures are still a major concern for 15 per cent of in-house counsel, but scores out of ten on clarity of billing suggests average performance has improved in this area;
Seventeen per cent of UK in-house counsel still perceive external counsel to be too expensive and 30 per cent also identified cost control and value for money as a key area for future focus;
Added value means different things to different people – the majority correlate added value with non-charged-for services such as extra advice, secondments, training, legal updates or events; a minority perceive added value to be about offering creative or innovative advice or generally helping the business;
The only area in which the legal sector has failed to improve performance according to the study is in pre-empting upcoming issues. This is closely linked to the high-satisfaction drivers of pro-activity and adding value, so therefore worthy of future focus.

For further information, contact Lisa Hart on 0191 2090808 or lhart@acritas.com.

Sidebar two: Understanding the client
The following questions were asked by law firms in a panel session at the ‘Strategic Marketing for the Legal Profession conference’ of 26-27 September. The answers represent the consensus response by the in-house counsel panellists.

Are law firms really delivering an outstanding service?
There was general agreement that outstanding service is rare, but this led to a discussion of what ‘outstanding’ really means. One panellist said that good service really just boils down to three things: content, time and cost. All panellists agreed, however, that outstanding service is a two-way process, with the client equally responsible in communicating with external lawyers to build long-term relationships.

What practical steps can firms take to get to know businesses better?
Again, panellists thought the key to this was in building direct relationships, with responsibilities on both sides to share information. One panellist, in particular, supported the idea of firms reducing the billable-hour targets of junior lawyers, so they could spend time on business development – for example, via a mini sabbatical with the client company.

What are the ideal sources of information on clients?
Panellists agreed that there is nothing better than face-to-face contact. For example, it was suggested that firms should call a potential client before pitching to discuss the business and how the firm can best present its ideas.

With whom should client-review meetings be conducted?
The trend among panellists appears to be to meet with the managing partner/senior partner or partner once or twice a year. Beyond that, they are happy to deal with a senior associate or a more junior lawyer. One panellist suggested that independent people can be very useful for facilitating feedback.

What is added value?
Panellists agreed that added value could mean a range of things from a law firm reconciling the accounts every month and informing the client, to providing free training or tailored newsletters. One panellist didn’t like the term, however, saying that he expects a ‘Rolls Royce’ service as a given, for the huge amount of money he pays to external firms.

How often do you benchmark your firms against each other in between panel reviews?
While some panellists felt that the relationship was about individuals, which would not lead to benchmarking firms as such, other panellists suggested that comparisons are made every day, as the client meets different fee earners or firms, or reads an article about another firm.