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 Pressure and Predictability

Author:  Richard G. Stock     Lexpert, October 2010, Vol 11, No 10

I recently helped edit a comprehensive survey of 160 corporate and government legal departments. The participants were based in Australia and New Zealand, yet 46 % reported that part of their department was either headquartered elsewhere in the world (Shell, Siemens) or, like BHP Billiton, deployed some of its legal department in other parts of the world. While the findings are likely to be similar in North America and Europe, it is the ensuing debate about the highlights which I found interesting.

Presenting such a report for a couple of hours to Chief Legal Officers quickly tells you what is in on everyone’s mind. The most pressing issue for legal departments by a factor of 2 is workloads / time pressures. Average work weeks for departments were reported in the 48 – 52-hour range. Some 53 % of companies expected moderate or significant growth in the size of the department in the near future, down from 65 % who expected growth two years ago. Drivers for growth range widely from expansion of the business, regulatory reform, and cost savings on external fees.

Work Pressures

Fewer than 25 % of the General Counsel I met said that they prepared multi-year forecasts for legal services that contained detail about the volume (hours) of legal work and by specialization / complexity for each business unit for the next 2-3 years. Resource pressures seem to be discussed at budget time with headcount requests. These are not always successful. Almost none of the GCs were able to profile their department’s practice patterns. Planning and management of legal services delivery are at best incremental and reactive/responsive for most CLOs.

My conversation with GCs turned to “efficiency” in legal departments. Almost none of the companies in the benchmarking survey reported having formal protocols in place detailing when legal should (and should not) be consulted by business units, what preparations business units should make and what access and turnaround standards would apply. Small wonder that experienced lawyers feel increased pressure to continuously triage strategic, operational and non-legal requests for services. For the most part, no guidance is provided to the consumer of legal services inside the company.

Most legal departments are populated by counsel with at least 10 years of experience. In the case of the 160 companies in this survey, 72% were senior counsel. Their work comes directly from their internal users (“clients”) and often goes out without further review. No one comes along to review and advise them on their practice and administrative management habits. More often than not, members of the legal department are left to sort out (read sink or swim) their workloads and workflows as long as their clients are satisfied.

My consulting experience suggests that efficiency is the pre-requisite to effectiveness for a busy legal department. Little or no guidance to the legal consumer, poor time management skills, and no criteria to segregate important work from urgent work invariably translates into a legal department suffering from time pressures. There is no catching up to a somewhat chaotic, endless demand by putting in more hours. Providing the guidance, the skills and the criteria will generate 15 % capacity for the legal department – the equivalent of 1 725 hours from five lawyers working a 50-hour week.

What to do with the freed-up capacity? Some would say in-source expensive and complex work from law firms. Assuming the previously-mentioned, multi-year forecast for legal services is in place, then in-sourcing work averaging $ 400 / hour without adding anyone to the legal department saves serious money. If the work is not there to be in-sourced from law firms because it is mostly litigation or specialized (tax, IP, labour) work, then a few other options are available.

In the case of the 5-lawyer department freeing up 1 750 hours, then a re-distribution of the work of one of the 5 lawyers to the remaining 4 lawyers frees up a position to create a new specialty – perhaps a litigation manager or a labour / employment or regulatory specialist, or even an experienced corporate / commercial paralegal. It is invasive and disruptive to “re-engineer” a legal department in this way. Yet, it allows the department to take on complex, strategic work that has higher visibility in the company, it provides an intellectual and professional challenge for senior counsel who are increasingly expensive, and it saves money for the organization.

Predictability for External Legal Spend

By a wide margin, CLOs want predictability of their external legal spend more than they want to reduce the cost of external counsel. Only 17 % of the 160 companies reported that their primary firms were more competent than that firm’s nearest competition. 75 % reported they expected to review their law firm arrangements in the next two years and 72 % report no significant barriers to changing firms.

It gets more interesting. 49 % said they received no rebates or discounts from their firms. Only 20 % reported that they expected their fees to be primarily non-hourly in the next two years. The study goes on to find that 40 % of legal departments have achieved little or no cost reductions in the last 2 years, 18 % achieved 6 – 10 %, and the others achieved more than 10 %.

Only 13.6 % of legal departments reported they regularly use fixed fees for stages of matters. A larger proportion, but still only 31 %, makes regular use of matter budgets. Most admit that they request fee estimates, but these are neither detailed nor regular. More work is needed on both sides when those that do request budgets report that their law firms are on or below budget only 60 % of the time. The irony is that 55 % of the companies said that the most important way a law firm can improve its working relationships is to be more concerned with costs.

There are national and global law firms out there that have decided they can increase market share by providing both predictability and a reduction of total legal spend for their corporate and institutional clients. They invest heavily in training partners and in acquiring or building software that make them and their clients much more proficient and accurate at defining the scope for all phases of complex work, and then pricing it accordingly. They are making themselves and their clients more accountable and cost-effective for the consumption of legal services. It is up to CLOs to seek out these firms and take advantage of these opportunities in the market today.

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