Building bridges: Assessing the in-house/external-counsel relationship

There was a time when private-practice lawyers could name their price and expect in-house counsel to be satisfied. And then, everything changed. Caroline Poynton talks to in-house counsel at Akzo Nobel, Northern Foods and Virgin Management, as well as lawyers at Kirkpatrick & Lockhart and Eversheds, about the evolving relationship between in-house and external lawyers. Derek Benton of Martindale Hubbell and Leigh Dance of ELD International also join the debate.

The changing face of the legal profession has become a popular topic for discussion in recent years, but it is not just private practice that has witnessed such evolution.

The Enron scandal made companies more sensitive to risk, making them keen to implement clear command-and-control structures that would ensure compliance to a stricter regulatory regime.

That this would impact in-house counsel seems obvious, but the change has been dramatic. Many legal departments have become more centralised to respond better to company-wide policies and reporting mechanisms, and in-house lawyers have won the higher status and credit borne of managing a new wealth of responsibilities. Consequently, external lawyers have had to rethink their relationships with in-house, but whether they are now seeing eye-to-eye with their in-house counterparts is debatable, especially when it comes to their client-service delivery.

Jan Eijsbouts, general counsel at Akzo Nobel, Helena Samaha, group head of legal at Virgin Group, and Carol Williams, company solicitor at Northern Foods, have all experienced this transformation first hand. When a new CEO joined Northern Foods from Shell in March 2004, so came about the start of a complete restructuring of the company and a review of the services offered by its legal department. “We have undertaken a legal audit of compliance within the company and been asked to take a much more proactive role in the legal side of running the business,” she says.

Similarly, at Akzo Nobel, the legal function was a disparate service, scattered across the companies’ many divisions. Ten years ago, however, the board of management decided to switch to a global legal department that would be centralised in terms of its policies and reporting processes. While Virgin Group’s business remains more decentralised to support its entrepreneurial spirit, Samaha also says that the company has worked hard to implement clear processes and reporting lines.

Eijsbouts further explains that 20 years ago it was not unusual for lawyers to report to the senior head of finance. “Now, for the majority of the corporations we are working with, we are reporting to the CEO,” he says. The in-house counsel position has consequently become a coveted one, with its rising status well reflected in the higher compensation awarded to its practitioners. As Leigh Dance, president of ELD International, says: “Today senior counsel are more likely to be part of the executive-management team for the company – a trend that has crossed the Atlantic from the US. One proof of the increase in status is the amount of movement of senior partners from prominent law firms to choice in-house positions.”

Centralisation, together with the rising status of in-house counsel has also led to a shift in expectations, partly fuelled by better communication between legal departments. Martindale Hubbell runs around 18 ‘Counsel To Counsel’ forums a year in North America, Europe and Asia Pacific, at which corporate counsel discuss the challenges of their roles and best practice with leading external law firms. International operations director Derek Benton says that corporate-governance issues dominate many discussions in the average forum, but managing the in-house relationship with outside counsel also looms large. “Many in house want to know how others are treating the selection and verification of outside counsel,” he says. “They are also getting better at measuring and monitoring their law firms’ performance, trying to get some objective criteria together and then being open with the law firms about it.”

For law firms, of course, this means that they have had to adapt their services and approach to ensure that they can live up to the added scrutiny. Paul Smith, partner and head of the European sales team at Eversheds, recalls a time when the bills were never questioned and lawyers felt they were doing clients a favour by doing their legal work. The 1990s, however, saw major changes, the speed of which he thinks has increased over the past three or four years. “Nowadays, everything is about transparency and value for money, cost reduction and increasing use of process.”

Peter Kalis, chairman at Kirkpatrick & Lockhart LLP, goes further, saying that there is now a distinct trend towards partnering between corporations and the law firms that serve them. “These arrangements place the relationships on a more solid commercial footing than many of the more ad hoc relationships have managed to do,” he says.

For many law firms, though, it appears that there is still a long way to go before they meet their clients’ expectations. “Many firms have promised everything but deliver nothing,” says Williams. “They all sing from the same hymn sheet, saying that they’ll deliver exactly what we want. But, when you come down to the nitty gritty of actually doing the work, they give us exactly the same service as they provide to everybody else.” To illustrate her general dissatisfaction, she recalls an IP tender in which she narrowed the field down to four firms, who were all given a full briefing session on the Northern Foods portfolio. Williams wanted good, practical advice on reducing costs and gaining commercial value for the company. Instead, she was faced with disappointment and embarrassment. “Out of the four, two gave us a proper presentation, one came and did a presentation on their services and the other spoke for an hour on domain names. I was sitting in the meeting with my marketing directors who must have thought I’d lost the plot.”

This criticism, which touches on the personal impact of an ineffectual law-firm approach, is a reminder of another problem that still affects many in-house to external lawyer relationships, that is the perceived arrogance of external lawyers. For instance, Dance says: “Amazingly, there are still many private-practice lawyers out there with the attitude that they just know better than their clients.” Williams agrees: “They’re certainly not as patronising as they [external lawyers] once were, but I still think there is the view that you should be pleased to receive whatever they deign to give you.”

It’s a bleak appraisal of the situation and begs the question of what law firms can do to improve the picture. Thankfully, Williams does have some good news about firms such as Walker Morris and Andrew Jackson & Co, which she says have proved themselves to be both cost effective and commercially minded. Indeed, this latter point appears to be the key requirement of in-house counsel as they repeat a now-familiar mantra of wanting to work with external lawyers who understand the particular needs of their business. For example, Samaha says that Virgin Group is very under-resourced by way of in-house legal capability. “We need a real appreciation of how limited our resources are and law firms should strive to behave as an extension of the legal team that we have across the group.” To achieve this, firms need to know the business and, most critically, Samaha says, think commercially and strategically.

Many in-house legal departments are small, but Williams thinks firms also need to remember they are dealing with people that do not need to be lectured on the law. It is a very different proposition to serving a client that does not have the advantage of an in-house function. “We can get a book out and look up the law ourselves,” she says. “What we want is the benefit of the expertise and experience that we haven’t got in-house, to give us practical advice, with the emphasis on commercial.”

The obvious conclusion for law firms is summed up by Eijsbouts, who says that external lawyers must better align their organisation and their capacities to the particular needs of their clients. “That isn’t always easy because clients vary in their approaches, so law firms have to be flexible with their standard package to meet the different requirements of any particular corporation,” he says. Most of all, he thinks that such a tailored approach requires a paradigm shift in the role of the lawyer, from ad hoc adviser during the course of a project to strategic partner.

Indeed, such change gives more sense to the buzzword of the moment: value-added. The provision by law firms of value-added services has become a key client expectation, but it only really makes sense in the context of this strategic partnership. Samaha describes value-added services as including the provision of good lawyers on secondments or getting external lawyers to make tailored presentations to in-house legal teams or non-legal project teams, individually or as part of a group-wide forum, “just to keep them abreast of what is going on”. For other companies, the definitions might differ, but Samaha neatly sums up the key point when she says she wants external lawyers to behave as if they were an extension of the internal legal function. A piecemeal approach would make this impossible.

Eijsbouts has a similar view: “We would like to go for long-term relationships, especially in areas where we see outside lawyers as extensions to our own bread-and-butter work. We would like them to align to our policies and services, and share their knowledge and experience with us.” Such knowledge sharing could be as simple as sending through relevant information on developments in the general market as and when, but the real benefit for Akzo Nobel comes from law firms becoming a plugged-in source of information, tailored to the company’s particular needs.

Knowledge sharing is only part of the equation, however, and client calls for innovative charging mechanisms suggest an equally ingrained requirement for team work. There remains some disagreement as to the best billing mechanism, with Williams preferring the chargeable hour, subject to a full breakdown and review of the work undertaken, before the bill is delivered. She says this makes it easier to compare costs between firms and enables her to retain greater control over each project. For a growing number of clients, however, fixed or capped-fee is proving very popular. As Samaha says: “One of the things that lawyers have to tackle is this perception that every minute has to be paid for. If they can’t convince their clients that they’re not just in it to meet their billing targets, but are going to make that extra effort to get to know the clients and their businesses, then they’re going to constantly face this criticism.” It is an argument that neatly reinforces the partnership approach.

No strategic partnership could work, however, from such a one-sided standpoint and clients are equally appearing to acknowledge the importance of their own efforts in embedding the relationship. “Companies have to let their outside counsel into the business,” says Benton, “finding that accommodation between the two parties to share the information more openly.” Samaha also argues that in-house counsel have to open up their businesses to external lawyers if they want them to really understand their business processes. This could include inviting them to visit their offices, an important means for developing a good level of understanding between businesses. Samaha encourages such meetings but admits that some Virgin Group companies are reluctant to extend such invites, perhaps due to fears regarding costs – another good argument for rethinking the billable-hour model. From the external perspective, Smith also recalls some law-firm responses to such invites. “The in-house lawyer of a major client invited their six firms of lawyers to visit their headquarters. We went along to the meeting and there were only two firms there. The others couldn’t see the point in giving up a day to come and talk about the relationship.” Such examples may seem insignificant, but if such attempts fail, for whatever reason, any hopes for a true partnership are quenched from the start.

For all the challenges of bringing in-house counsel and their external lawyers closer together, there are signs that some firms are making a real effort to change. According to a ‘Top of Mind’ survey, commissioned by Kirkpatrick & Lockhart and conducted by independent research professionals¹, most senior in-house counsel at Fortune 500 and 1,000 companies are satisfied that the services delivered by outside counsel are good value. That is despite the amount spent on external lawyers appears to be increasing.

With Kirkpatrick & Lockhart, Kalis thinks there is a simple key to such satisfaction. “We stress the fundamentals of client service, as there is no amount of glitz that can overcome the enduringly bad impressions that arise from poor client service,” he says. Behind this, communication and identifying with the concerns of in-house counsel have been important strategies for understanding the marketplace and meeting client needs.

On the other side of the pond, Eversheds had the early advantage of being the first foreign firm to join the DuPont partnering network, which Smith says opened the firm’s eyes to new ways of practising law and delivering client services. “The DuPont legal model was about saving money and that included in-house lawyers, external lawyers and the amount of money the company was paying out in claims,” he says. Through that experience, the firm embraced partnering with its clients at a very early stage. It not only led to implementing a CRM programme for key clients, but also to rethinking the firm’s whole business model. For example, the firm has a legal-resources group based in Cardiff, which historically did volume work, such as re-mortgaging for financial institutions. It was seen as a separate part of the business, but this process approach is now seen as critical to delivering the mainstream legal services to clients that are both cost efficient and effective. As Smith says: “Some legal work you do is rocket science, but the reality is that much of legal work is standard and capable of commoditisation. You will always have lawyers saying that what they do is special, complicated and technical, but you can’t survive if you have people round the corner saying that they have broken down the tasks into the difficult and process parts. We’ve come up with a solution that is half the price of the traditional model.”

In terms of cost, Eversheds has also tried to become as flexible as possible to meet clients’ changing needs. Smith criticises firms that react in the traditional way to competition by reducing prices and doing the work at a loss. “They miss the whole point of the changes in the market, which is that hourly rates are becoming a thing of the past.” Much of the firm’s billing is now fixed fee and lawyers have learnt to estimate costs and use spreadsheets and historical figures to understand the range of fees charged for particular types of work. “With corporate work, we’ve developed a tool where we can sit with the client, price the job and press a button at the end, which will tell us how much it will cost,” he says. Obviously, the challenge is sticking to that, but it is a practice that demonstrates the firm’s willingness to work with clients in an open and transparent manner.

Such strategies at Eversheds represent a move by law firms into the business world, where the traditional legal model has little role, unless it can prove its worth in concrete facts and figures. Commoditisation looms large, supported by internal processes and procedures that make lawyers more efficient and market driven. Business, rather than law, has become the watchword of the day. But, for many firms, such developments are difficult to embrace. Williams hits the nail on the head when she says that lawyers don’t want to become business people because “that’s all a bit dirty and unsavoury”, and Smith admits that he has spoken to lawyers who think that recent changes “all rather smack of trade”. But for those that are reluctant to adapt, there are clear and present dangers. The past couple of years have seen a couple of major US law firms disappear virtually overnight. And in the UK, US firms have been very successful, taking away some of the top-tier work that the magic-circle firms aspire to win. With a grave shortage of cross-border M&A deals, magic-circle profits dropped last year, and while it may be naïve to think that these firms won’t survive, there is good reason to think they are feeling the squeeze, as firms below them continue to offer something different.

For in-house and external counsel, many things are in a state of flux as business adapts to changing market conditions. For many, that has meant coming closer together, forming strategic partnerships based on shared knowledge and expertise. On both sides of the fence, lawyers have had to become more open, transforming what was once a strained relationship between in-house and private practice into one of mutual respect and understanding. Beneath these more personalised partnerships, however, there is sign that whole business models in law firms will need to be rethought. And, for some, it will come down to the well known maxim: change or die.

Reference:

Full details of the ‘Top of mind’ survey can be found at www.kl.com