Growing pains

At a recent conference held by the Association of Corporate Counsel (ACC), the growth of globalisation was identified as the biggest challenge facing the legal functions of multinational companies.

By Paul Smith, partner, Eversheds LLP

The past two years have seen a major shift in the sourcing of legal services by in-house lawyers, as they cope with the expansion of their businesses internationally. The main trends are the allocation of work on a regional basis rather than on a country basis; the involvement of procurement professionals; more panel reductions; the global economic slowdown; the need for ever-wider geographic coverage; and the fundamental importance of compliance.

In the past decisions as to which external lawyers to use were usually made on a country by country basis. Multinational companies now divide the world into geographic regions, be it Europe, Middle East and Africa (EMEA), Latin America, the US or Asia. Increasingly, there is an emphasis on emerging markets, such as Brazil, Russia, India and China (BRIC) or even a concentration on ‘rapidly emerging markets’. Decisions on which lawyers to use are taken by reference to those geographic regions; the decision makers often being based outside the jurisdictions where the work is actually done. As businesses expand internationally, and in the case of the US and Europe the money flows to the east, the demands on the in-house legal team are for more work to be done outside their home region. There is often a mismatch between resources at HQ and where the demands for legal services are created. For law firms with offices in just one jurisdiction, these are challenging times as they struggle to match their offering to the needs of such clients.

Eversheds and the New York Chapter of the Association of Corporate Counsel (ACC) recently hosted a conference in New York on the subject of multinational companies structuring and managing their legal function for the future. Over 100 leading heads of legal departments from (mainly Global 500) companies were in attendance, and they were surveyed as to what the key challenges were. The survey revealed that what most impacts their work now is the pace and scope of global growth.
The fast pace of globalisation, and the complexity and diversity of risks and demands this throws up, was the top issue.

Following the conference Tom Sabatino, general counsel of Schering-Plough, said: “Over the last year we’ve had anecdotal evidence from clients that their global demands are mushrooming, whether in Abu Dhabi or Bucharest or China. At this conference, we saw broad consensus on a global tipping point. Mix global growth with pressure on costs with aggressive regulatory enforcement, with the economic downturn – that’s a heady cocktail for in-house lawyers”.

An audience response system was used to survey the conference attendees, of whom 36 per cent were counsel of companies with more than $10bn in turnover, and 34 per cent had $1-10bn in turnover. Some 85 per cent of the respondents were corporate counsel, with 62 per cent in a Chief Legal Officer role. While 84 per cent of the counsel viewed their companies as very global, most said that their legal department was ill prepared for the challenge. On a scale of one to five (five being the most capable), more than 40 per cent responded with a ‘one’ or ‘two’ regarding their corporate legal function’s readiness to meet the company’s global demands. When asked which countries or regions caused the most concern for management of risks and disputes, China was the top choice for 35 per cent, followed by the US for 17 per cent and Russia for 14.5 per cent. Aggregated, the BRIC countries represented the greatest concern for 61 per cent of the corporate lawyers.

Tom Sabatino further stated: “Our struggle is neither unique nor insurmountable – globalisation has brought many opportunities to our businesses. As in-house lawyers, we need, and want, to be fully integrated w ith the business and provide the legal infrastructure required to be successful in all markets in which we operate”.

Verdict on law firms
Although global issues led the agenda, in-house counsel were also critical of their law firms. 44.6 per cent said their law firms rate ‘three’ (with one the lowest and five the highest) in understanding their business and its constraints, and another 38 per cent gave their law firms a one or two rating. Respondents resoundingly found their law firms highly inefficient, with 87 per cent giving their law firms just a one or two for efficiency, and not a single in-house lawyer rating them as four or five. Half also rated their law firms as just one or two when it came to “preparing comprehensible estimates and budgets and following them”, and 18 per cent gave their law firms a ‘four’ or ‘five’ score. Conference speaker Jeffrey Carr, general counsel of FMC Technologies, commented: “It is time to engage our firms in meaningful dialogue about how to get back to providing value. We need our law firm partners/providers to be successful and profitable. They need to change their business model to focus on profits as opposed to top-line revenue growth in a cost-plus world.”

In spite of concerns about law firms’ inefficiency and discussion that the billable hour is often the culprit, when asked if the billable hour would disappear during their career, 71 per cent said: “No, because it is simply too ingrained.” Only 21 per cent answered ‘yes’, it would disappear. “In-house counsel forums such as this one give us useful feedback, and while many of the attendees didn’t see the billable hour going away, the ACC is committed to developing a set of best practices that include alternatives to the much-reviled billable hour,” said ACC President Frederick J Krebs. “We have a group of leading in-house counsel from around the country considering a number of options, including alternative fee structures, early case assessment and better use of technologies.”

In addition to globalisation, another key trend has been that of the involvement of procurement professionals in sourcing external legal work. Once the sole preserve of in-house counsel, the selection of external counsel has come under the scrutiny of procurement professionals within companies. Viewed as material supply contracts, the appointment of lawyers is treated in a similar way to the purchase of computers or office stationery. The balance of power varies enormously among multinational companies between the in-house lawyers and procurement professionals.

In extreme examples, the procurement professionals run the entire process of lawyer selection, where law firms submit their hourly rates by category of lawyer and the cheapest firm is chosen. Responding to the tender involves the law firm doing no more than completing an Excel spreadsheet and supplying their hourly rates. Happily such examples are rare, and in practice the selection process is carried out as a joint project between the legal departments and the procurement department. Unlike purchasing stationery, the issues of risk, expertise and trust are critical to the appointment of external law firms. However, it is vital that lawyers who respond to tenders where the procurement function is involved, understand the language and issues of both professions. The lawyers principally want quality and expertise, whereas the procurement professionals want hard data to compare prices between the potential suppliers – and will expect to see a focus on numbers, evidence of process, accountability and metrics to demonstrate increased efficiencies.

The trend for multinational companies to reduce the number of firms they use continues unabated. Starting with the DuPont Legal Model in the early 1990s, law departments have realised that they can more easily manage law firms and their costs by having fewer firms to deal with. This process of ‘convergence’ has been followed by many companies. Combined with ‘partnering’ with these firms, this has involved greater emphasis on controlling costs, budgeting, project management, the use of technology in managing the relationship and the sharing of risk and reward. In a true partnering relationship, both parties appreciate that they have a long-term interest in the financial success of each others’ business. This process of convergence entered a new phase last year when Tyco replaced over 280 existing law firms it used with one firm for the whole EMEA region, covering over 38 countries. Following a competitive tender involving both the Tyco in-house legal and procurement teams, Eversheds was appointed as the sole provider for the vast majority of Tyco’s legal work. In the US, it outsourced all its product liability to one firm and all its corporate work to another. This was followed by a number of other multinational companies moving to the ‘single firm’ concept. The Linde Group, a German gas and engineering group, put 80 per cent of its worldwide work to one firm. Honeywell replaced its existing firms and went to one firm in EMEA as did Brady Corporation.

Law firms that traditionally won business because of reputation and contacts find themselves having to
play by new rules. Another example is Pfizer Inc. In 2006, the company reduced its existing law firms by 80 per cent in a convergence programme called P3. In 2008 it went further still, and replaced the 10 surviving employment law firms from the P3 project with just one for all its US work. Pfizer gave almost all its US employment work to Jackson Lewis for two years. In return, the firm agreed to an annual cap on its fees. In the area of product liability, Pfizer went through a nine-month selection process and reduced the number of firms it used from 100 to 24. The company then went on to reduce the number of firms used for commercial, intellectual property, asbestos, real estate and government affairs.

Underlying these trends in the global sourcing of legal services has been the rapid emergence of legal compliance as a key concern for in-house lawyers. The well publicised Enron scandal among others led to greater regulation of businesses, and in the US to the introduction of the Sarbanes-Oxley Act (SOX). Compliance as a topic, however, is much wider than SOX, and in-house lawyers are under great pressure to ensure that wherever in the world their company does business, it is in compliance with local laws and regulations.

When moving to the ‘single firm’ concept, compliance was critical to Tyco’s decision-making process. Using one firm simplified the process of identifying, monitoring and reporting potential non-compliance across the world. Compliance is a vast topic, and law firms that can provide expertise and reassurance on global compliance will be in a superior competitive position. A far from exhaustive list of the topics to be covered would be:

Money laundering;
Bribery and corruption;
Export controls;
Fraud;
Insider dealing;
Environmental and health and safety;
Competition law;
Governance;
Labour laws;
Financial reporting;
Director/shareholder relations;
Consumer protection;
Government contracting.

As the storm clouds gather in the global economy, in-house lawyers are under far greater pressure to manage and reduce external legal costs. The debate, however, is much more than simply lowering fees, it is a fundamental reassessment of the law firm business model. In September 2008, the leading international in-house counsel association, the ACC, will announce its ‘Value Challenge’ – subtitled ‘Re-connecting legal costs to value’. The ACC defines the ‘problem’ as being that many traditional law firm business models, and many of the approaches to lawyer training and cost management, are not aligned with what corporate clients want and need: value-driven, high-quality legal services that deliver solutions for a recoverable cost and develop lawyers as counsellors (not just content providers), advocates (not just process-doers) and professional partners.

The ACC declares its mission as being to launch an initiative to reconnect value and costs for legal services, namely:

Promote dialogue among corporate counsel, law firms, law schools and others who are interested in driving an alignment and focus on value;
Develop methodologies and metrics that corporate counsel can use to assess the strengths and weaknesses of law firm vendors;
Create tools that in-house counsel and firms can share to drive change in the performance
of value-based legal services;
Enhance awareness and communicate success stores in achieving value and alignment.

The ACC describes its mission as nothing less than a “revolution” in the legal-services market. The outcome of that revolution as the chief buyer of legal services in the world will be nothing short of major structural changes in the international legal world.

Paul Smith is a partner at Eversheds LLP. He can be contacted at: paulsmith@eversheds.com