A recent series of events bringing General Counsel and law firm Managing Partners in London, Madrid and Washington DC together, organised by Iberian Lawyer with IE Law School as part of the Lawyers’ Management Programme (LMP), indicates that since the onset of the financial crisis, the pendulum has firmly swung in favour of the buyers of legal services and away from the sellers. It is, suggest some, a total reversal of the situation seen only a few years ago at the height of the boom years
More than ever, in the face of continuing economic uncertainty, companies want their external advisers to help them overcome not only the current issues they face but also the implications of their actions; they want them to help “look around corners”. The jury is still out however on whether the full implications of the financial crisis on the legal services market heralds an evolution or revolution, but General Counsel from some of Europe’s leading corporations have warned law firms that “the party is over” – they must share the pain caused by the financial crisis with their clients.
Legal heads from companies including British Airways, Hispasat, Merrill Lynch, Morgan Stanley, Nokia Corporation and Royal Dutch Shell outlined their measures to drive down expenditure on external lawyers in a bid to ease financial pressures. These include, of course, changes to billing methods, moves towards fixed fee arrangements rather than hourly billing and significant reductions in the number of law firms they use.
Un grupo de Directores de Asesoría Jurídica y Socios Directores de despachos de abogados han recalcado en varios foros de debate que desde el comienzo de la crisis, la balanza se ha inclinado hacia los compradores de servicios jurídicos. Se trata de un cambio radical respecto a la situación que vivimos en épocas de bonanza, hace solo un par de años. Los clientes quieren que sus abogados externos cada vez más les ayuden a encontrar soluciones creativas frente a sus retos diarios, pero ello puede requerir una transformación importante por parte de algunos despachos.
Lawyers by the hour
The challenge for law firms is to determine whether the situation outlined is however a distraction from “business as usual” or represents a “new normal”, and if the latter how to react. Some clients question what the legal services market may look like once the financial crisis abates, and whether firms presently have the right leadership skills or structures to react to their changing needs or new market challengers.
Perhaps the most evident demonstration of the way in which clients increasingly now want their law firms to share their pain is to help bring the cost down of external legal services, say many. In the new environment quality is still desired. Major businesses more than ever face “mission critical” challenges, and they want the highest level of legal service, but delivered in the most efficient manner and increasingly at the best available price.
“The legal markets have seen a lot of significant change in recent years. The complexity of legal challenges has dramatically increased, and in our own oil and gas sector, areas like environmental litigation and regulatory demands have increased hugely. But on the other side we now have a lot of pressure on cost. We have traditionally used a large number of ‘global’ firms for major projects and my approach to them has been to say ‘you have had Christmas everyday for decades, but now the party is over’,” says Beat Hess, General Counsel and Company Secretary of Royal Dutch Shell.
His own legal department has therefore for the first time worked with the company’s procurement teams to better define what they want from their external lawyers and what they were willing to pay for it. The result was a reduction not only in firms’ fees but also a dramatic drop in the number of global firms used, from 60 to eight. Nokia has likewise entered into a similar process, resulting in the reduction of the firms it uses around the world from 500 to around 200.
Besides the evident loss of client mandates for many firms, perhaps the biggest casualty of the crisis to date has been law firm’s preference for the billable hour. With company executives challenging General Counsel to justify their budgets, the result has been clients asking – perhaps demanding – more transparent and creative billing systems and a move towards the use of fixed and capped fees.
The use of hourly billing may be easy to calculate for law firms but it offers little incentive for a quick resolution of a matter, say clients. Some even question whether such a system has also encouraged law firms to charge multiple clients at the same time. “I’ve always wondered why so many partners are happy to merely listen in on client conference calls,” said one in-house lawyer.
If law firms are however to respond to the need for alternative billing and fee structures they first however have to better understand their own work processes and cost structures, believe many.
Significant also is the ability of firms to deliver what the clients want, how they want it, and to do it on budget – not easy for firms that have already struggled to adopt more structured approaches. “Firm’s delivery of value, in a consistent matter, can be very difficult to manage. My lawyers do not like having arguments with other lawyers about money. Law firms have therefore to make it easier for the client, to have systems and management processes that ensure that what has been promised is being delivered,” says Maria Da Cunha, General Counsel of British Airways.
Price sensitivity does not however mean that clients are fixated only on the bottom line, General Counsel insist. What is ultimately important is that legal services are delivered efficiently.
“I do not think that the basic premise has changed between law firms and clients, but what has become more important is who we use, how we use them and how we can extract more value, respectively. It is a two way street,” says Louise Pentland, Senior Vice President and Chief Legal Officer at Nokia Corporation.
General Counsel readily accept that certain types of legal work justify higher fees, and in the current challenging business climate having the right expertise has perhaps even increased in value. What some query is the relative monetary price law firms have traditionally fixed to different types of work. Many still under-charge for complex work, like designing the most tax-efficient corporate structures, while over-charging for the way simple matters are implemented.
“I am quite happy to pay more for a matter when it is particularly important or when I need something delivered at the last minute. I recognise also that there is a difference in relative value between a service that is delivered midweek, and one that I need over the weekend,” says Javier Folguera, General Counsel and Vice-Secretary to the Board at Hispasat.
There is recognition however of the clear difference between the legal services required to keep companies in business and their day-to-day needs. Many clients are themselves also looking at how matters are staffed, with legal departments bringing in-house more lawyers to manage routine matters or looking for more efficient ways to manage them externally.
“I think the move towards fixed fees may yet offer a tremendous opportunity, and significant profits, for those firms that are really able to master the use of technology, who invest in their know-how and really bring down their delivery costs,” says Tony Angel, Executive Managing Director EMEA, Standard and Poor’s and former Global Managing Partner of Linklaters.
There is increasing reluctance among the biggest companies to use large external teams or even qualified lawyers for what some consider paralegal issues. General counsel are looking at law firms therefore to make better use of technology or to find more effective ways to deliver services, they say. A number are already using third party providers and legal process outsourcers (LPO) for document management or commodity needs.
Thomson Reuters’ recent purchase of the India-based LPO Pangea3, suggest some, is evidence of the increasing market stratification of legal services is occurring, meaning that law firms will also have to compete with much larger and more efficient providers of commodity legal, locum and paralegal needs in the years ahead.
Law firms may not like the idea of outsourcing, but in response many are however already moving to a process of “offshoring” – moving support and back office services away from prestigious (and high cost) city centre locations in order to reduce fixed overheads.
The question many General Counsel ask is whether traditional law firms can adapt to what they believe is a changing environment. Do law firm leaders who built highly leveraged law firms in the boom years even see the need for change?
In Spain and Portugal, the leveraged model has undoubtedly worked well for partners in recent years, generating record revenues and profits. In the current climate some clients suggest however that large firms that refuse to adapt will continue to struggle to keep large teams busy and for diminishing returns.
Some firms are already however changing the way they operate, focusing on fewer clients, and developing new services in order to move up the value chain, to look over the horizon, and to reduce dependence on traditional revenue sources and billing methods. They recognise the relative value in highlighting potential areas of risks that clients may not even have considered.
Notable has been the emphasis of some on non-legal expertise. “We are not lawyers any more we are crisis managers,” one London Managing Partner recently told Iberian Lawyer.
Witness the role of Freshfields Bruckhaus Deringer in helping key client BP manage issues arising out the Gulf of Mexico oil spill, or the strategy of London-based media firm Schillings to increasingly reposition themselves as “reputation managers” for their most high value clients. In the new environment, a small firm can of course be as profitable as the largest.
Others see their legal skills as only one weapon in the armoury they can offer clients. Madrid-based Ecija specialises increasingly in niche technology and cyber protection issues – “mission critical” for clients including Banco Santander and Teléfonica, and whom the firm it is assisting across Iberia, Latin America and in the UK.
In such a context, the good news for Spanish and Portuguese law firm managers is that a better understanding of clients’ needs means a greater emphasis on relationships – an intangible that Iberian law firms have always been very careful to emphasise and manage. The “trusted adviser” may be the new strategic buzzword within some Anglo-Saxon firms, but it marks the traditional way of working for many lawyers in Barcelona, Madrid and Lisbon, who have also successfully resisted a move towards hyper-specialisation and retained their generalist approach.
With no evident swing back of the pendulum in favour of the sellers, the most obvious challenge for the established domestic corporate, dispute or finance firms is perhaps the need to assess the way they currently deliver their services, say clients.
Spain and Portugal are however perhaps unique within the European legal market in that the domestic firms remain the dominant players, but the types of efficiencies major clients now demand require significant levels of investment or sometimes geographic spread – neither cheap nor achievable overnight. In addition, the largest firms may also need to balance their ideological opposition to reducing junior lawyer numbers (who are expensive from a clients’ perspective) in favour of more experience (and valuable) lawyers.
Such a demand prompts questions not only of the ability of firms’ lawyers to help guide as well as implement clients’ strategies, but inevitably the structures in which they work – and a need to move away from traditional pyramidal structures with large teams of relatively junior (albeit to the client, expensive) associates, and the carrot and stick partnership tournament.
This may mean a mere evolution in the types of skills leading lawyers will in future require, but a revolution in the way in which they are managed. It is of course easier to want to look around corners than to actually be able to do it.