Actively Managing Relationships with Law Firms
Author: Richard Stock - Lexpert (May 2007 at p. 107)
It does not happen very often that the General Counsel of a corporate or institutional legal department will want to replace a preferred law firm. Typically, fewer than 5 firms deliver at least 80 % of the legal work for companies with a national reach. Over the last 10 years, many companies have consolidated the number of firms to create their preferred lists, but only a few have done this using a documented and formal process.
There are a handful of reasons or circumstances that stimulate a review. First, a new General Counsel arrives on the scene and uses the opportunity to shake things up with the established firms. Second, the law firm relationship partner retires or moves to another firm and the replacement has not been groomed by the law firm to transition into the relationship. The chemistry is just not there.
Third, although it may be a rare occurrence, the law firm drops the ball on a few important files. In these cases, the legal department will shift work to the remaining preferred firms. Fourth, the company wants the legal department to contribute its fair share of cost savings to the company by moving beyond the usual discount arrangements with its firms. Many General Counsel have read or heard enough about processes to review legal service delivery, about legal project management, and about alternative fee arrangements and so are more inclined to initiate changes. In most circumstances, the savings will range from 15 % to 25 % on projected legal spend. The economy has not been kind to most companies or to all levels of government. So, more recently, savings are featured as a higher priority and a key performance indicator for legal departments.
Pfizer Inc. launched its "Legal Alliance Program" in 2009. The objectives were to “foster trust and collaboration, promote proactive solutions-based lawyering, and re-configure the value paradigm.” Ellen Rosenthal is Pfizer’s Chief Counsel for the program. She has written and spoken about it frequently. The alliance covers at least 75 % of legal spend and applies to Pfizer in the US and internationally.
I have seen other arrangements in Canada (HIROC) and in Australia (Telstra) where firms receive an annual fixed fee to cover all matters for broad baskets of work. But these agreements are often restricted to just one firm. Covering a number of jurisdictions and various legal specialties is quite another challenge. Pfizer has innovated by applying a fixed fee for dynamic portfolios of legal work to 19 firms.
Its Alliance Steering Committee is designed to keep the portfolios balanced and the annual fee paid to each firm fair. The legal department uses tracking tools and data analysis to monitor activity levels as work goes out and bills are received. Pfizer realized that it was not enough to rely only on law firm feedback as a way to adjust the allocation for a firm. Because of this, the Steering Committee oversees and works to adjust the allocation of files streams essential to the success of the arrangement with each law firm.
Meetings are held with firms to address specific or systemic issues that crop up with the arrangements. Interestingly, Pfizer does not want to receive shadow hourly bills in the belief that these do not reflect the real value received from law firms. The Steering Committee represents different parts of the legal department, and in turn those parts support different business units. It makes sense for the committee to serve as the deterrent to referring legal work to other than alliance firms. Sometimes, it makes sense to do refer work to other than alliance firms, but the committee must approve it. This type of mechanism and vigilance are important because they underpin the trust that the law firms must have if the relationship with Pfizer is to work over the long term. Otherwise, the fee will be viewed as a cap with no upside when in fact it is possible to be paid more than the annual fee when results are exceptional.
More and more organizations spend tens of millions on external counsel each year. They do so globally and in multiple jurisdictions. Firms can receive work from many individuals within the company. In cases like banks and insurance companies, the files are not channelled through the legal department. It is essential that business units support the principles and protocols underpinning alliance and partnering arrangements for legal services.
The largest legal departments designate one of their members to oversee innovative arrangements with law firms. Procurement departments and RFPs can help with data analysis and tracking. But only the legal department can oversee file allocation and maintain lasting relationships with preferred law firms. Doing this across provinces, states and countries requires a permanent investment in people and systems, especially when the fee arrangement is not hourly-based. A network of relationships with law firms must be actively managed if alliance and partnering arrangements are to endure. Doing so proficiently constitutes an important core competency for senior in-house counsel, much more so than it has been in recent years.