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The challenges and conflicts of farming out legal work

A key role of in-house legal counsel is to decide when, why, and where to farm out legal work. At times, the appropriate and most efficient thing to do is to retain the work in-house. In other instances, necessity dictates it be referred out; however, the selection of external legal advisors can be fraught with conflict.

Requests for proposals can provide an objective, predictable, fair process for selecting the optimum legal partner(s). However, RFPs have downsides and, at the end of the day, even when an RFP is used, companies sometimes make their decisions based on qualitative and subjective grounds.

Need to farm out legal work

Uncertainty in the world’s economy has led to significant turnover in the general counsel ranks at some of the largest companies in Canada. This turnover appears to have undermined many long-term personal relationships between law firms and clients. As a result, new relationships between in-house and external counsel have been forged.

Globalization combined with the growing complexity of corporate governance and regulatory compliance is forcing in-house counsel to revaluate skill mix between in-house legal staff and external legal advisers. As law firms merge, they are better equipped to offer full services to meet their client’s needs.

General counsel have taken on a more active, direct role in formulating corporate strategy and policies rather than merely designing compliance programs and serving an educative role. Often, however, the GC’s position as the corporation’s top compliance officer conflicts with his or her responsibility to defend corporate actions such that the corporation is required to involve an external, impartial firm to provide direction.

Sometimes DIY is best

Providing legal advice requires a solid understanding of the client’s business, strategic direction, products and services, the ecosystem in which it competes, and its path to monetization. Law firms often fail to invest the time required to thoroughly understand their client’s needs, resulting in the decision to keep legal work in-house.

Deadlines in providing legal services are sometimes missed, and when the draft agreement or opinion is produced, clients realize the relationship partner failed to accurately convey the business objectives to the junior partner, associate, or student who actually carried out the work. When deadlines loom, work is kept in-house because GCs feel in the time it would take to properly instruct external counsel it’s better just to roll up one’s shirt sleeves and do the work internally.

Legal work often needs to be farmed out because in-house counsel is conflicted, and independent counsel is required to provide cold impartiality. On the other hand, the degree and regularity of those conflicts can be mitigated against and perhaps eliminated altogether through new, emerging models.

For example, it has been advocated, as a good governance practice, that a public company’s board of directors should be involved in the selection, retention, and compensation of the general counsel and that general counsel should meet regularly (e.g., monthly) and in executive session with a committee of independent directors to communicate concerns regarding legal compliance matters and to evaluate the general counsel’s own compliance. This practice may lessen the need to involve external legal advisers.

At times, however, legal work needs to be farmed out. There are numerous potential conflicts and challenges in doing so.

Challenges and conflicts in farming out legal work

Perhaps the most important challenge and greatest source of conflict in choosing an external legal supplier is loyalty.

Personal loyalties between in-house and external counsel at a personal level are often forged in fire, as a result of doing battle together for many years, perhaps because the firm will always be remembered for pulling a rabbit out of a hat, going to the wall on closing a transaction, or otherwise doing the impossible.

Services above and beyond the norm are expected to be paid back by loyalty and ongoing business. Shrinking legal budgets, however, are increasingly causing companies to force firms to compete for their business. Particularly south of the border, firms are being asked to reduce their billing rates by a given percentage year after year.

Loyalty is going the way of the dodo in the minds of many clients. To take personal relationships out of the equations, companies are increasingly turning to RFPs.

Sometimes, the fear exists that external counsel may outshine in-house counsel, jeopardizing not only the latter’s authority within the firm but potentially also threatening their livelihood. Being able to control to whom work is referred rather than surrendering the decision to an RFP is unfortunately sometimes done for less than altruistic reasons.

There are many reasons why in-house counsel may resist using RFPs. The process may, in the opinion of some, be too mathematical, scientific, and lead to unwanted results.

For in-house counsel, the process requires a considerable amount of tedious work, and they may not get exactly what they want in the end.

Disappointingly, the winning law firm may argue that certain items fall outside the scope of the RFP. Some law firms complain that RFPs are often too vague, with too many assumptions that can lead to misunderstandings down the road. Or, conversely, they’re too prescriptive, which can hamper creativity and innovation.

Often, and perhaps not surprisingly, the outcome of the process is not identifying the most suitable partner on the whole but rather the law firm that has developed the greatest expertise in responding to RFPs.

Some firms use “RFP proposal managers” who are so far removed from the dynamics required to make the relationship between internal and external legal counsel successful that the selection of the winning bidder is often unsatisfactory. The process can break down even further if the client decides to involve or defer some or all of the decision to a corporate procurement officer.

RFPs can also create headaches for law firms. Some firms, for example, provide “brochure” responses to RFPs, by essentially regurgitating the marketing collateral found on their web sites. Others provide more or different information than has been requested, meaning that the submissions turn out not to be “apples to apples.”

Law firms should ask themselves at least some of the following questions:

•    Can you provide the required services profitably?

•    If cost sensitivity is an overriding consideration, do you want to outbid all comers for perhaps only a small sliver of diminishing and uncollectable dollars?

•    Are you being used as a stalking horse?

•    Are you comfortable with the liability risks of representing a client whose legal work is fragmented to the point that you cannot see the big picture?

    

You may recall that some of the firms that represented Enron complained that not only was Enron’s external legal work fragmented but, within Enron, lawyers who worked on securities disclosure questions were in a separate department from the lawyers in the corporate finance transaction who worked on special purpose entities transactions.

A not insignificant number of law firms have, as a result, refused to respond to RFPs, and many in-house counsel abhor using them. They would much rather either pay loyalty to the “guy who brung you” or “shop around” and run “beauty contests” by meeting formally or informally with potential suitors.

A less structured process may provide better matching when it comes to matters such as soft or people skills, considerations such as the particular standing of a law firm or a partner in the eyes of the courts, an appreciation of their true interest in doing business together and understanding your business needs, the value of their insights with regard to your most pressing concerns, etc., and other criteria that are difficult to gauge within the context of an RFP.

Sometimes, the old adage “if it ain’t broke, don’t fix it” makes eminent sense.

  • Manager, Legal Business Solutions

    Jason Moyse
    Interesting article Renato.

    One of the key developments is to seek outside assistance on panel selection based on analytics, bill review and understanding of key practice areas. As a board member or shareholder - that's the type of process rigour I would expect.

    The legal department is not immune from sound procurement practices -- and relying on 'relationships' is not necessarily appropriate -- particularly for routine work that is not capable of being conducted in-house for various reasons -- including bandwidth and reduced headcount.

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