First Law tool kit to obtain best value from lawyers

The European Lawyer - Sunday 31st October 2004

The darker side of lawyer-client relationships
Anthony Armitage examines how in-house lawyers are refining the way they outsource their legal work to private practice and asks whether creating a more competitive environment will be a help or a hindrance

(Anthony Armitage is a solicitor and director of First Law, a legal consultancy firm that advises companies and other organisations in relation to legal tender exercises and the management of lawyers and law firms. Anthony is also London Chairman of the Commerce and Industry Group, the representative body of in-house lawyers.)

When the legal counsel of an international food company recently asked me, a third party adviser, for help in appointing law firms in the UK, Germany, Portugal and Italy in relation to antitrust matters it was apparent that the traditional method of selecting external lawyers was not considered suitable.

The reason is that while the well-established and trust-based relationships corporate clients have with their lawyers work well for the core areas of legal work that account for the majority of the client’s legal spend, for the niche and infrequent disciplines that are outsourced there is rarely the same close relationship and inside knowledge. The traditional channels become even less reliable when it comes to selecting advisers in different jurisdictions. All too often clients will accept without question the recommendation of their main home jurisdiction law firm, frequently that firm’s foreign office.

Yet in-house lawyers are under increasing pressure to work to tight budgets and this is exactly where they need help in separating the softer relationship issues from value and service issues. It is no longer sufficient simply to appoint top-tier law firms as a way of validating the selection. The days of playing safe and never being criticised by the Board for instructing Clifford Chance have gone.

The profession as a whole is steadily being put under pressure to remove restrictive practices. In March 2001 the UK Office of Fair Trading issued a critical report on the lack of competition in the legal profession. Sir David Clementi’s Review followed and set as its primary object “To consider what regulatory framework would best promote competition…”. The driving force appears to be coming from the regulators, who champion the interests of consumers. It implies that the profession is unwilling or unable to implement change itself.

The findings of recent research carried out by the London Commerce and Industry Group (the in-house lawyer organisation of the Law society of England & Wales), in to the buying habits of 1,000 in house lawyers, make interesting reading in this context. Legal counsel are practitioners and consumers in one. They understand the profession whilst at the same time they are client facing and representative of the consumer.

Faced with relentless rises in headline rates charged by law firms, in house lawyers are being tasked more and more often to validate their selection. But without the transparency of an openly competitive market it is proving difficult to benchmark expertise, service levels and value. Even where existing firms are used it is becoming more and more important for the in house lawyer to justify the decision to the Board.

The fact that the in house lawyer used to work at a private practice firm actually creates more pressure to demonstrate that the decision is not coloured in any way. Although a company may have worked with a particular law firm for a long period it is unlikely that the individual lawyers in the legal department will have inherited a full understanding of that relationship.

A degree of politics is often involved in the selection of advisers which can limit the legal department’s room for manoeuvre. Most law firms are aware of this and of other types of restrictive practice and they can use them to maintain prices artificially high. The inexorable rise in law firms’ fee income will only stop when these market distortions are eliminated and firms are forced to compete openly in a wider market.

The ideal way to ensure best value is through a competitive bidding exercise where firms compete head to head and put their best offers forward which can be compared on a like-for-like basis. With this level of transparency informed decisions can be made to determine best value. However, even the legal departments of big companies have a restricted market in which to operate. Generally the largest panel will comprise no more than 10 law firms.

The request from the aforementioned international food company for help in outsourcing antitrust work followed a similar request from a US company earlier in the year involving the registration of employee share plans in Austria, Belgium, the Czech Republic, Denmark, France, Germany, Ireland, Italy, The Netherlands, Norway, Poland, Spain, Sweden, Switzerland and the United Kingdom. Although the companies operate in unrelated industry sectors and the legal work was completely different, it was the similarities in the reasons behind the two requests that illustrate why this is an important trend.

In house lawyers are not fundamentally changing the way they outsource. They still rely on established methods to extract best value and a high standard of service from firms that they instruct. It is already widely recognised already, for example, that tools such as law firm directories can help create a robust audit trail. The food company and the US company, however, were looking for something more to supplement and enhance the decision making process.

As the interface between the Board and the company’s external adviser, the in house lawyer has to maintain a delicate balance between the demands of the Board and professional responsibilities. Educating the Board that it is not always the best option to appoint the large firms, and reducing the natural sense of fear about using the better buys, will in itself promote competition.

After all, in house lawyers are not necessarily trained in procurement skills. When it comes to seeking legal advice outside their own areas of expertise, a degree of independent expertise can alleviate any sense of professional embarrassment over talking about ‘dirty’ subjects like money and service.

So, was I able to offer any value added advice to those companies? Quite easily, yes. The process starts with an understanding of the client and the work. In turning this into a specification to put out to law firms, I always follow the principle of ‘less is more’. Only supply the information which the law firm needs and only seek information which is not available elsewhere. Brochures about the firm and its departments will invariably state how proud the firm is about itself, but will add little to your understanding of the services they actually provide.

For example, do you know the hourly rates for all levels of fee earner and what is the firm’s attitude to fixed and capped fee arrangements? Is the firm transparent in its policies on charging for photocopying and travel? Do you have the opportunity to negotiate terms of engagement and the ongoing legal services protocol? This kind of information is often not volunteered and the enthusiasm with which it is disclosed can be a useful gauge of the firm’s likely attitude towards you as a client in the future.

A common complaint I have heard from clients is that they regularly have to battle with firms to obtain properly itemised invoices. Consider introducing a billing guide procedure whereby panel lawyers must provide comprehensive billing information in a form approved by you before they can issue an invoice. A billing guide system prevents arguments over bills and can save internal management resources to the tune of two or three working days a month.

A fast track dispute resolution procedure that allows the parties to refer disputes arising under the protocol to an independent third party for expert determination or mediation can act as a deterrent and dramatically reduces the risk of disputes escalating. The UK’s Centre for Effective Dispute Resolution (CEDR) extols the virtues of suchalternative dispute resolution methods like this and the message is being increasingly heeded by the English courts.

Overall, the in house lawyer’s objectives in outsourcing any legal work will be to obtain best value by negotiating capped and fixed fee structures, to ensure a high standard of service through the application of a legal services protocol and to identify appropriate legal expertise through merit based selection techniques.

These principles of best practice are no doubt well understood by clients and law firms alike. On the darker side sits the issue of anticompetitive behaviour. Articles 82 and 83 of the EC are directly concerned with activities which restrict competition and has been enforced against many high profile European companies. Some may be surprised to learn that the rules apply equally to law firms and barristers and the dispute last year in the UK between the Family Law Bar Association and a consortium of local authorities in Greater Manchester illustrates the potential of this legislation to impact on the lawyer-client retainer.

In that case a number of individual barristers’ chambers had been approached by the consortium of Councils to negotiate fee rates for child care work. The Family Law Bar Association intervened and notified the consortium that its members would not agree the proposed rates. The consortium was advised that the FLBA was in breach of Section 2 of the Act. Although no further action has yet been taken, this episode serves as an important lesson to all lawyers that they are not immune or somehow protected from the competitive forces that other business throughout Europe face.

I have sat as an independent assessor on over 100 legal tender interview panels. This has given me a unique insight into law firm selection techniques and the application of competition principles. Any buyer of legal services needs to be armed with a high degree of market intelligence to achieve best value from the process. However, the reluctance of many law firms to volunteer the adoption of risk sharing fee structures and the frequent requirement of confidentiality regarding the details of discounted rates or ‘special deals’ means that competition is distorted.

The London Commerce and Industry Group’s research indicates that in house lawyers would welcome an industry standard tool kit to optimise the procurement of external legal services. By sharing know-how and intelligence in this way, bargaining power becomes stronger and more effective. But most importantly, perhaps, it will liberate the operation of market forces in the buying and selling process.