NATIONAL POST - August 18, 2004

By Sandra Rubin, Senior Business Writer

TD Bank to cut legal costs by $75-million over three years Reduces external law firms used from more than 850 to 110

TD Bank Financial Group expects to shave $75-million off its legal costs, about 26%, over three years as a result of the large-scale beauty contest that saw it cut the number of external law firms it uses to 110 from over 850, Bob Aziz, senior vice-president and assistant general counsel, told a group of in-house counsel yesterday.

TD's move to a limited number of preferred legal suppliers -- one of the most closely watched exercises on the Street in recent years -- has forced law firms to change the way they have done business for decades.

Law firms that are on the preferred list for TD must now do things like prepare internal budgets before starting a piece of work, which sometimes entails revisiting the way they staff files in order to bring down costs. TD also required them to factor disbursements -- which Mr. Aziz said he believes are sometimes office overhead in disguise -- into their overall hourly rates.

Mr. Aziz said the bank had to act because its legal costs were skyrocketing.

"We were looking at escalating costs every year, hourly rates were going up 10% to 12% -- disproportionate to inflation," he told a panel at the Canadian Corporate Counsel Association's annual conference in Winnipeg. "We were having difficulty understanding the value proposition for all the work that was being done. And we wanted better relationships. We had 850 law firms doing work for the bank across the country, and having meaningful relationships with that many firms was impossible. So we said, we've got to get this thing under control."

Mr. Aziz said he did at least a year of internal preparation, and started by consulting the heads of the bank's business units in the various regions asking them, among other things, to give him a list of law firms that they used for things like commercial lending, and different types of litigation. Once he got the list, he asked the executives to pare it down dramatically, by over two- thirds in some instances.

In the meantime, his legal department, using Catalyst Consulting to help guide it through the process, was analyzing legal bills and figuring out what types of work it had been commissioning in the past few years, and how much time various types of work took.

TD prepared estimates of the volume of work it would require in a specific area in order to help law firms prepare their bids.

The requests for proposals went out to 150 law firms -- and invitations were limited to firms that are TD customers, "and the bank had to be their primary banker."

"So there were certain firms where there were very long-standing relationships, on an individual basis, where they weren't customers of the bank and we had to say sorry, they weren't going to get invited. Some of those were tough."

TD also supplied preferred staffing models, which stated how much of the work was to be done by partners with 15-plus years experience, how much by people in the eight to 14-year category, all the way down to zero to two years.

"That was a challenge," said Philip Moore, a partner at McCarthy Tetrault who was on the Canadian Corporate Counsel Association panel along with Mr. Aziz. McCarthys has been one of TD Bank's principal law firms for nearly 50 years.

"The more enduring challenge is that it calls for a re-engineering among responding law firms that are going to provide services to the bank," said Mr. Moore. "That re-engineering goes to who's doing what, and how they're doing it and how to budget for and plan the projects."

"And the other challenge was how to continue with investments in value that we as a firm try to provide our clients, with slimmer margins. That's just a straight business challenge."

He said some savings can be realized at a large national firm like McCarthys by outsourcing work to offices that have a lower cost structure.

Richard Stock of Catalyst, who was also on the panel, said he and TD found "that it takes somewhat less experience than is presently perhaps being paid for to get the work done.

"Somebody who was a seven- year call a few years ago is still doing the same kind of work on the file but they're a 14-year call. When we asked how much of that stuff they could get off their credenza to people that might be available and trained, we found that 20% was not a problem."

He said the other thing they found out though the whole exercise is that "in a number of firms, their teams are too big. There are too many people to do the requisite amount of work."

When the RFPs came back, there were "astoundingly different ranges in rates for the same volume of work, in the same market, for the same client. You'd get quite interesting differences in what they were willing to charge."

They decided on 110 firms, but they wanted the right teams, not just the cheapest one, so they set an economic comfort zone of 110% of the lowest bid.

Mr. Aziz said he spoke with firms outside the comfort zone, telling them they had made the approved list but were more expensive than their competitors.

Mr. Aziz said he didn't tell them they had to change their prices, just that they were giving the various TD business units a list of the five firms approved in a given area, and the weighted hourly rates of each, so they could see the differences.

He said he showed the heads of the business units the difference between rates, and "they were shocked, actually. In some cases you could see an over 200% difference between the high and the low between five firms you would consider equal. And it wasn't always the firm you'd thought would be most expensive that was. In many cases it was the firm you thought would be the cheapest that were the most expensive. I asked them [the heads of business units] whether there was a value proposition that would justify this, and more often than not they said no."

"So we went back to the firm and said: 'We're telling you you're more expensive and I'm doing that because I don't want to hear in six months you're not getting enough business from the bank and you don't know why."

Mr. Aziz said it is too early to determine how successful the exercise has been because it's really just about four months in to the process and not all the firms have installed Tymetrix, which will track time and budgets on individual files.

"All of this is not about beauty contests," Mr. Stock said. "It's about doing business differently. That's why we call it partnering."