More in-house cutting firms loose: study

More general counsel decided to cut ties with their external law firms this year compared to 2012, highlighting price and budget reduction among the top reasons.

In fact, one-third of the world’s largest companies dropped a law firm in the last year, up from 30 per cent last year, according to U.K.-based legal market researcher Acritas in its report “Winning and Losing Business: Clients’ Candid Views on Why They Hire and Fire Their Law Firms.”

The study also illustrates a shift away from top “prestige” providers with three of the top four most-fired firms being “market-leading, premium global practices.”

The research was conducted among 968 senior in-house lawyers in $50-million-plus revenue organizations in all industry sectors globally (10 per cent came from Canada). The telephone interviews formed part of Acritas’ wider annual Sharplegal study of legal market trends, now in its seventh year.

Of those interviewed, 26 per cent of in-house lawyers said price and budget reduction drove their decision to seek alternative outside counsel. While 20 per cent said they parted ways because a project ended (such as a litigation file), 19 per cent said they fired their external lawyers because they were simply too expensive. The rest said it was because it was a one-off, someone at the firm left, or conflicts.

“There is better value elsewhere. We want to consolidate from 60 firms down to 20 firms,” one chief legal officer from the energy sector in Canada told Acritas.

Cost and budget have definitely become a major factor says Grant Borbridge, vice president legal and general counsel, MEG Energy Corp., who was formerly with Emergo Group Inc. He says pressure on in-house departments is driving many decisions to cut ties with outside firms.

“Without a doubt, I think in-house department budgets are tight and even if a budget doesn’t change, the expectation is the in-house group will do more with the same amount of money,” says Borbridge.

According to the study, using in-house lawyers to do work that would have traditionally been outsourced amounts to seven per cent of law firm “dismissals.”

Given those pressures, the in-house departments have to adjust who they are using or why they are using them to ensure they make budget. “It’s not a pleasant discussion to have when you blow the budget,” adds Borbridge.

Of those surveyed, 17 per cent said they had fired their law firm because they were slow or provided poor service.

“When it happens it’s one of the most uncomfortable discussions a person has to have in the in-house role because there’s only one way to go with it: ‘You’re not providing good service and we have to improve what’s happening here or I have to make a change.’ From a business point of view, sometimes it has to be spoken about,” he says.

However it’s an area entirely under law firm control, says Elizabeth Duffy, Acritas’ vice president for the U.S.

“These are things they can do something about so to be fired on service failings is just a shame but not surprising,” she says.

Concerns about poor communication or taking an inefficient path can be a deal breaker over time.

“It comes down to making the client feel valued. If you’ve asked your service provider for something and they take three days to get back to you, it gives you the impression they don’t really care about you, your business, or the pressures facing you,” she says.

If that behaviour becomes chronic, it becomes damaging to the relationship, adds Duffy. Often that is being detected in billing practices. Duffy says clients are driving change in the profession through the choices they’re making around the kinds of firms they are hiring for particular work.

“I’ve discontinued using firms and shifted to other firms when I’ve looked at bills that are clearly just billing and not providing value. Whenever I see a partner billing regularly a couple of hours every bill for things like reviewing correspondence — whenever there are a lot of people touching the file and docketing,” says Cheryl Foy, university secretary and general counsel with the University of Ontario Institute of Technology.

“There have been a couple of examples in my career where it’s just been clear to me that my client, before they had in-house counsel, was being taken advantage of and I won’t use the firm,” she adds.

When it came to hiring law firms, in-house counsel gave a range of reasons for the choices they make reflecting a need for specialist expertise as well as a propensity to spend their budget with the firms they like and feel represent good value. Of all surveyed, 37 per cent were influenced by subject matter expertise.

Borbridge agrees subject matter expertise is a key driver.

He recently had a discussion with his new in-house team of six lawyers at MEG Energy about the law firms the company uses.

“When I arrived at MEG one of the first discussions we had was what law firms do you use? I asked, ‘Are you happy with what they’re doing? Do you use more than one law firm?’ — all of that.”

MEG Energy uses four firms but one more than the others.

“They use four because they find with the various areas of practice work using those four firms enables us to get the subject matter expertise we need no matter what we’re dealing with,” he says.

Acritas also refers to “international challenger brand” law firms that have a global footprint and are aggressively pursuing greater market share beyond the traditional U.K. “Magic Circle” firms.

“There are so many more clients today who have international needs and it’s really opened up the international work,” Duffy says.

Borbridge says if working for an internationally focused business there are benefits to having continuity between a provider in Canada and provider elsewhere.

“But that can be attained in many ways,” he says. “You don’t have to achieve that through a Dentons or a Norton Rose; it can be achieved through Lex Mundi or groups like that.”

During his time at Emergo, Borbridge says he did hire law firms in various countries where the company didn’t have a presence. Instead of using a big international firm he drew on an association of independent law firms.

“If we were looking at an investment it was helpful with Lex Mundi to go into their network and get an introduction to the counsel we wanted to use in a different country,” he says. “Do I need to use a firm that has offices all around the world if I’m working at a primarily Canadian-focused company? Absolutely not. I don’t want to necessarily pay a premium to have that access when I’m not going to use it.”

With more work being brought in-house, law firms will need to work on maintaining relationships with in-house to keep what work they still have coming to them.

“In some cases bringing work in house will reduce the work firms get but when I do go out it’s for specialized work I need and sometimes overflow,” says Foy.

So what can firms do to help retention of clients? Acritas offered this advice:

•    Review your billing strategy: With 19 per cent of clients firing their firms based on expenses, it’s often the small stuff that can rile up a client.
•    Work on building client relationship while it’s strong in case one area of work ends.
•    Conduct regular, formal client feedback interviews and maintain good client communication.

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