As the energy sector braces for a “lower for longer” oil price environment, companies like Shell are looking for ways to find efficiencies and cut external legal costs.
That’s why Shell’s recent global legal panel review was more comprehensive and exacting than ever before. The company went to six from 11 global firms for big-ticket work around the world. Those firms include Allen & Overy LLP, Baker & McKenzie LLP, Clifford Chance LLP, Eversheds LLP, Norton Rose Fulbright Canada LLP, and Reed Smith LLP.
“From our assessment of the firms we were working with, those were the ones with a wide enough global footprint to make sense for Shell lawyers to use wherever they are around the world,” says Gordon McCue, associate general counsel, global litigation, at Shell Canada Ltd.
McCue led the team that conducted the review process, which included people from Houston, London, and the Netherlands. McCue is responsible for ensuring Shell’s global litigation organization is effectively using all of the litigation management tools and processes that allow Shell to reduce and manage risks associated with all aspects of litigation and dispute resolution globally, in approximately 90 countries. McCue manages a team of 23 lawyers, paralegals, and other professionals in Houston and London.
The company was looking to focus its relationships and narrow the pool not just with global firms but firms it uses in all jurisdictions. Donny Ching, Shell’s legal director, wanted to simplify by reducing the number of firms overall and improve partnerships with the top six firms.
“The idea was to have a closer relationship with those firms and add value going both ways,” says McCue. “We want to give firms a window into our business world and what the challenges are to our business world.”
With litigation being such a heavy user of external counsel within Shell, it was that practice group that has led the charge of putting such programs into place.
Two years ago, the global litigation team for Shell dropped the hourly rate compensation model for external counsel firms on all matters. Then-general counsel Brad Nielson was on the verge of retirement and went out with a bang, saying in early 2014 that, as of June 1, every new matter would be on an “appropriate fee arrangement.” An hourly rate basis would require approval from him, but all indications were the answer would almost always be “no.”
“We put together a program and educated the firms we were working with about what this meant for them and how to work in an appropriate fee arrangement world,” says McCue.
The law firm review process this time around considered each firm’s diversity, data privacy, alternative or “appropriate” fee arrangements, and cybersecurity policies. On the diversity issue, firms had to provide a breakdown of their diversity profile and a plan for the future. Panel firms also have to provide quarterly business reports and that includes diversity statistics.
The six global firms won’t do all the work for Shell around the world — lawyers in the 900-plus, 45-country legal team for the company have flexibility to use others in local jurisdictions when it makes sense from an expertise and cost perspective.
THE CANADIAN PANEL
Shell has local panels established in about 11 jurisdictions. There are six Canadian firms on the panel in this country, which include global panellist Norton Rose Fulbright as well as a couple of boutique litigation firms such as Ormston List Frawley LLP and Lesperance Mendes in Vancouver, which Shell uses for matters such as environmental contamination.
“They’re more cost effective than the big firms and have the expertise on these issues,” says McCue. “There are litigation boutique firms in Calgary we regularly include in our bid processes just to make sure we’re getting a sense of what the market is, and we go with those firms if it looks like they offer the better value on a particular matter.”
Its other Canadian firms are Blake Cassels & Graydon LLP, McCarthy Tétrault LLP, McLennan Ross LLP, and Osler Hoskin & Harcourt LLP.
At the outset of its panel review process, an assessment was made of whether Shell had enough spend in the different countries in which it operates to justify the time and administrative burden of putting a local panel of law firms in place. For each country deemed to have sufficient spend, a target number of firms for the local panel was then agreed upon. With that structure in place, each of the then-250 relationship firms was invited to register in Emptoris — a sourcing tool designed by IBM that Shell’s procurement team routinely uses for purchasing goods.
“Some time and effort was expended to adapt the tool so that it fit better with our purpose of sourcing legal services,” says McCue.
After each firm was registered in Emptoris, Shell opened a questionnaire in the tool that the firms were then given a couple of weeks to respond to. The questions asked whether the firms would commit to working with Shell Legal in certain ways (e.g. deliver project plans; use appropriate fee arrangements; provide two free six-month junior lawyer secondees per year; etc.), as well as more detailed requests for information around the firms’ data privacy and cybersecurity processes and policies. With the responses to the questionnaire in hand, Shell narrowed to a shortlist of firms to continue to the next stage of the review process.
Again using Emptoris, Shell created a separate virtual reverse auction room for each jurisdiction where it had identified a need for a local panel, or where it anticipated a need to have rates in place with the firms identified for the global panel of six firms. The relevant firms were then invited to participate in the reverse auction for their jurisdiction at an appointed time. The firms were told in advance how many firms would be participating, and how many firms would be selected for the particular local panel. They were also advised that rates were only one of a number of factors to be considered when making final decisions on whom to select for the local panel.
Each auction was set to run for 30 minutes. Once the auction opened, the firms would submit bids for the hourly rates for lawyers at the various experience levels set. Once they had successfully submitted a bid, the firm would see their relative ranking among all of the firms bidding (but not the identity of the other bidders) at each experience level (e.g. lawyer two to four years post-qualified experience — $150/hour = rank three of eight). The firms could then reduce the amounts they bid to improve their relative rank at each experience level. This continued for roughly an hour until the online auction closed (and the auctions would not close until 60 seconds passed without a new bid being entered).
In most cases, Shell was able to obtain substantial reductions from the rates put in place in 2013, and averaged about 18-per-cent reductions overall.
“While we acknowledge that success, keep firmly in mind that hourly rates, no matter how low, are but one part of the value equation; much more important is to get a handle on and drive our external counsel to deliver the same high-quality legal services more efficiently [i.e., bill fewer hours]. We do this through the use of appropriate fee arrangements grounded by realistic legal project plans and management,” says McCue.
Shell has a strong “appropriate fee arrangement” program and a competitive bidding process — it doesn’t just award matters to panel firms automatically. New matters have to go out to at least three firms to be bid on and for a proposal of how the firm would deal with it.
There are no hard cost reduction targets in place, either, but McCue says the goal is to use AFAs to find efficiencies that will result in lower overall costs.
“In the last year, we saw pretty dramatic reductions in cost for the global litigation group,” he says. “What we want is for the lawyers to have a commercial mindset in how they approach sourcing legal services. We don’t want them restricted to just the panel list but want them to test the market by having a non-panel firm come in and bid on a matter as well.”
However, if all things are equal, Shell will go with its panel firm. But in a situation where the non-panel firm is truly competitive, the legal team can make the decision to go off-panel.
“That’s the drive for commercial mindset — it’s no longer a world where we provide our in-house lawyers with a long list of lawyers they can choose from,” says McCue. “We’re in a tight cost environment and under a lot of pressure from our businesses to reduce our cost, and one way to do that is to be more commercial about everything we do. If we’re going to spend money, we want to make sure we’re spending it wisely.”
McCue is quick to note the rate auction has to be understood in the context of the AFAs. It may have seemed to some of the firms that asking them to compete on an hourly fee was counterintuitive to the push for AFAs, but there was a method to Shell’s request.
“We explained to firms that we are committed to AFAs and every new matter has to be on an AFA, but we had a rate auction because we have found in negotiating AFAs that because of the way law firm compensation structures exist they always drive back to hourly rates. So it was in our interest to make sure we had the best hourly rates in place with the firms because those are the building blocks for the AFAs put in place.”
On occasion, McCue says, the appropriate fee arrangement is still an hourly rate and Shell wanted to have the best compensation rates in place for when those situations arose.
“Some of the firms pushed back saying, ‘I thought we are in an AFA world?’ We are, but until the majority of the law firms out there have a compensation structure that doesn’t drive off of the hourly rates, we’re kind of stuck with putting that in place and working on AFAs on top of it.”
Shell chose to set hourly rates with its panel firms for three primary reasons: 1) hourly rates are still a part of some forms of AFA it uses (capped fees, risk collars, etc.); 2) like it or not, the hourly rate is still typically used by the law firms as the building block on which they calculate the pricing for AFAs, as they calculate how much time they expect it will take to complete a given task/project in an efficient manner, and what an acceptable level of remuneration for that delivery is; and 3) there will be times when the hourly rate is the “appropriate” fee arrangement, and Shell does not want to be paying a firm’s rack rates on those occasions.
Shell put these new rates in place with the panel firms selected for the next two-year period, and will revisit the need for hourly rates in two years’ time (the new Framework Agreements run through to 2020).
McCue admits there was “a lot of anxiety” around the entire process with the law firms.
“Shell’s a big client for many of them and knowing we were reducing our numbers dramatically in this way means I had a lot of phone calls with relationship partners during and after the panel was announced,” he says.
Over the years, Shell has gathered a massive amount of data on litigation fees through the department’s matter management system — TeamConnect from Mitra-tech. The company has used the system in the U.S. since 2002 and since 2012 globally.
“It provides a lot of data to help us improve our pricing and improve the way we manage matters,” says McCue.
In the last two years, the trend Shell has been seeing is that the firms with good legal project management are the firms that do well under AFAs. “Legal project management is key for us,” says McCue.