Not so demanding – clients aren't pushing the legal industry forward

As someone who has worked both inside and outside the legal industry I am always baffled that clients accept practices by their advisors that they themselves consider outmoded and have long since discarded. Lawyers are not good commercial businessmen, this has been shown time and time again and is a generalisation that, even if the legal profession doesn't accept it, their clients almost unanimously do. Yet law still seems to be seen as outside the "normal" sphere of commercial influence. I sincerely hope that the economic environment forces clients to be more hardy in their criticism of legal practices as it could well relieve some of the intense frustration I feel as a commercial lawyer constrained by an archaic attitude and structure.

Northern Monkey -18 Aug 2010 | 16:32

Making a Difference

That's a grim picture you paint, Alex, and to some degree it is true, at least among some older GCs in the UK. However, you are missing out a lot of positive development.

Things that have changed:

- convergence in some cases has made a difference, for example many large firms have less clients than they did before and have deeper and better relationships with those clients, while innovations such as the Pfizer Alliance are a case in point of a 'good' panel that really works and changes behaviour.

- outsourcing to India may not have taken the world by storm, but outsourcing in general, sometimes within the same country, is developing steadily and can't be written off - and after the LSA comes into full effect in Oct 2011 more will happen in the UK with new entrants getting involved.

- law firms and clients getting together to form service agreements such as that of Eversheds and Tyco have been very successful.

- you may scoff at the moderate uptick in alternative fees, but remember the legal industry's fundamental metric is the billable hour so any increase in non-time based billing is very important.

- the work of the ACC has been pioneering - it won't change the world overnight, but as you say the legal world is conservative and what they have done with the Value Index is significant, but it will take a long time to have an impact; years probably.

Overall, these and many other developments are having a slow, incremental effect and things are changing, but you are right to be cynical, especially about the rate of change. One of the key aspects is that many GCs in the UK who are overly deferential to partners and have been a 'soft touch' for law firms belong to an earlier era, but they are still around and at major clients - and will be there probably for a good few years to come. Unlike the management in law firms, GCs don't change every few years - they stay in leadership posts and maintain old practices. Change will take time, but perhaps it will require a generational change inside the in-house world to really make a difference.

Rhubarb & Custard -19 Aug 2010 | 09:42

I am aware of the examples you cite, but they remain exceptions, not the rule. My irritation is the pretence frequently made that such cases constitute some kind of sea-change which the facts plainly don’t support this.

That said, I’d agree that the ACC’s campaign and the Pfizer Alliance have been rare cases of a respectable attempt from clients to step up and seize the initiative. Outsourcing from a client’s perspective should be an irrelevance beyond managing issues around risk, service quality and disclosure. Clients should be focusing on the final bill they get, not trying to engineer some particular kind of model among providers. I’m not even arguing that the status quo is necessarily wrong. What seems strange is that clients frequently complain about it and then do so little to reform it. Neither do I really blame the billable hour. It’s obviously true that as a model it is inherently biased against efficiency, but there is no billing model which can in of itself deliver value if the customer doesn’t police their own interests robustly.

Alex -19 Aug 2010 | 11:34

A Long Process

Question: 'Why do some GCs make a show of complaining about the cost of legal services when they do almost nothing to materially change things?'

Answer: Those that complain and do nothing are generally doing so in the same way that an employee will grumble about working conditions, but when confronted by the question: 'Why don't you leave then?' have no response in return.

Moaning about price gives a sense they are responding to the predicament they are in, effectively signing blank cheques for legal services on behalf of their company. But, the alternative - ie to do something about it does not have strong enough drivers for many GCs.

The problem is for many companies the GC is the top of the decision and accountability tree as far as legal spend is concerned. In some US companies finance directors are knocking on GC's doors and asking how they manage to be so inefficient at buying legal services - but the same does not appear to be true in the UK.

In such a scenario one has to ask what is the benefit to the GC in annoying law firms by driving down prices, demanding fixed fees, or insisting on other non-traditional methods? For many there is none. The company apparatus around them is not second-guessing their decisions, they can maintain the status quo unchallenged. The law firms they work with are doing all they can to assure the GC that the spend is justified too. The GCs themselves are busy, have a team to worry about, and ultimately they are spending other people's money (ie shareholders' money) not their own. For most GCs their salary is not directly linked to how efficient or inefficient their legal spending is. Perhaps if that changed then behaviour would change too. But that means getting C-level people into the discussion and most have other things to worry about.

In sum, GCs have neither a stick, nor a carrot to change. This is why interesting developments like that of Pfizer are so disparate, they depend on individual GCs who decide to make a stand because they can't support the status quo any longer - but these are the inspired (usually younger) minority. Overall, though, there is little incentive to change business practices unless it benefits you. For many GCs the positive/negative impacts are still too slight. They are in an accountability blind-spot and few have someone going over their spending decisions with a critical glare. Most CEOs worry about the company winning in court, not that legal spend has risen by 5% again this year.
That in turn raises the question: 'Who will put pressure on the GC to change?' Not the law firms - they don't want less fees. The CEOs? They take the GC's work on trust. The Media? Why should GCs listen? Perhaps the shareholders can help, they should pay more attention to the way money is inefficiently spent on legal fees by the company they invested their cash in.

In the end things will change, because corporate behaviour will slowly evolve and more CEOs and shareholders will take notice of legal spend as it grows and grows, then GCs will adopt new practices simply because they don't want to stand out as someone who is not following what has become 'normal' practice. This is going to be a long process.

Rhubard & Custard -19 Aug 2010 | 13:29

Hey, you’ve got my vote. I agree with what you describe in the first two-thirds of your last comment – there is inertia here, not dynamism and change. What I don’t believe is that the situation will necessarily evolve. Why should it if the forces that have shaped the dynamic you describe above don’t also change?

To give a comparable situation from the wider business environment: for years it has been predicted that shareholders would more effectively use their power to influence the governance of the companies they own and that executive compensation would become better linked to performance. In the case of the former, it’s hard to see any real progress and in the latter the facts plainly show the situation has gotten worse over the 15 years.

There is also another issue that is rarely addressed when people talk about the evolution of the role of in-house lawyers: the law firms are evolving faster than clients. They have in many cases been more effective at getting clients to accept adapting to how they want to provide services – even if it sometimes conflicted with how clients wanted to receive them - than is generally acknowledged. It is going to take a lot more than the current pace of change in the spending habits of clients to get ahead of this thing.

Alex -19 Aug 2010 | 14:06

Clients & Legal Industry

Thanks for sharing the information to us.

warrants for arrest -20 Aug 2010 | 07:44

tadpole

As one of several very long-term abused private clients - many one time minors - I have had to rely on the things I learnt or even didn't learn over a period of three years 'up'- fifty years ago!

Then we were strongly advised to read EVERY word in EVERY document and to make certain we understood the reason for its existence. By doing this you can discover what is being deliberately withheld!

As with a lot of educational matters - like maths - standards have fallen. Lawyers are NOT business men, and know very little of the culture. Likewise they know extremely little of matters of actuarial import, or for that matter, being in conflict in certain situations - apart from their own.

The so-called self regulatory bodies are a disgrace to themselves, employing persons who fail to disclose their non-qualificational position in the subject matter.

Clients expect lawyers to do their job with professionalism. Too often lawyers fall far short of this aim and take the 'easy' route of collusion, which in criminal matters is, as I was told by a member of the Judiciary, a very serious matter. Why risk a reputation through lack of humility especially when it also involves lying to HMRC?

Leopards never change their spots and in the long-term [thirty years!] a voracious wolf will lose the protection of its sheep's clothing exposing it for what it is!

There is far too much concentration on PEP. Money is, after all, the root of all evil, but I would like enough to live above the bread line and not below it! I would be far more impressed if PEPs were halved, because then I would be aware that those lower down are more likely to be qualified and would provide better service. What is the point in communicating with, for instance, trust managers who are neither registered as solicitors or chartered accountants?!

Tim Denby -20 Aug 2010 | 10:43

Don't tap the aquarium.

Me -24 Aug 2010 | 11:43

Clients Might Not Be Necessary

Regardless of client sluggishness, the fact that incumbent firms are increasingly under competitive fire from new, nimbler challengers that are using technology also acts as a fairly powerful additional wedge to accelerate change (beyond just existing rivals).

Given that, we should actually see innovation and change tend to increase over time, independent of sluggish clients (if you believe more nimble companies will continue to enter the space). The conflict itself pushes adoption of better and more efficient practices.

Robot, Robot, and Hwang -07 Sep 2010 | 05:29

What about the little guy?

Note: I attempted to post this on the Adam Smith blog in response to a similar article, so some references may seem out of place.

I think you are largely right with respect to the large public client segment of the market. You're certainly correct that when general counsel are spending someone else's money, they have little or no incentive to innovate, as long as they stay within their budgets and stick with recognised firms. There will be a tipping point - however, when it will occur, I cannot say.

My focus is primarily on the privately owned business sector, and I can assure you that the attitude among these clients is quite different. With public companies, the safe bet is to be no worse than the other guy. With private companies, however, which are far more numerous, it's all about the bottom line. These clients cannot use their huge legal budgets as negotiating weapons to make sure that they get good value for their money. They feel far more vulnerable to unpredictable legal bills, especially when generated by firms whose principal clients operate in a different realm altogether, and six-figure legal bills are taken in stride.

For me, the question is not what existing clients are doing or demanding. The more relevant question for practitioners representing private clients is how to get more of them to use legal services in intelligent and proactive ways. Large public companies are forced to use attorneys because of their SEC requirements, and numerous other factors. Their concept of value is different. in private companies, the decision whether to use counsel, and if so, how much to pay them, lies primarily with the CEO, who is often the founder and majority if not sole stockholder. Every dollar paid to outside counsel is a dollar that could have been invested, paid to employees, or taken home. While this is literally true with large public companies, the bottom-line dollar effect of legal fees is felt indirectly, if at all, by the general counsel. Also, the larger public companies have ongoing and somewhat predictable legal needs, but the private company hopes to avoid interacting with lawyers entirely.

I would be interested to know if you or any of your readers are aware of studies or surveys that address this market and if so, what they have found.

Thomas Bowden -01 Nov 2010 | 18:19