Opinion

In-house legal functions can be subject to directors’ whims, but this can be at the expense of efficiency

According to a recent survey by Grant Thornton, the majority of in-house lawyers think their company’s legal spend on dispute resolution will fall or remain static in the next three years. The other headline to come out of the survey is that companies look to handle their lower-value cases and use external lawyers for the larger, more complex litigation. The research concluded that this would cause lawyers to change their business model.

Companies have had an ambivalent and inconsistent approach to in-house legal departments during the past 20 years. There is a cycle that is usually based on what the financial director thinks at the time: either the flavour of the month is to cut external legal costs and reduce the amount of work sent out, which leads to hiring in a team of lawyers, or else the company has to cut costs and the in-house legal team is a substantial direct cost to be removed from the overheads.

Insurance companies are a good example. Although they are the biggest consumer of litigation services, there is little consistency among them about the desirability or otherwise of in-house legal teams. Some increasingly look to deal with claims in-house, while others have disbanded their in-house teams.

The business model discussed in Grant Thornton’s report is probably the ideal solution for companies, but it may be elusive. Low-value claims are increasingly commoditised and in-house systems ought to reduce a company’s legal spend, but the key is efficiency. Most companies are not set up to handle litigation. Handling commoditised litigation requires substantial investment in systems, training, IT and HR.

Law firms have been investing with a view to handling this type of claim. A company’s desire to remove overall costs may be disappointed unless it similarly invests. It is insufficient simply to look at legal spend. Low-value, high-volume litigation, in overall terms, can prove to be extremely expensive to the company. Leakage across a large volume of claims can extinguish any savings made on legal spend and may prove to be a false economy. I would suggest that using an efficient firm of lawyers who are paid proportionately to the value of these claims will probably lead to savings for the company in the long run.

If Grant Thornton’s views are correct and lawyers are likely to be used more in relative terms on the higher-value claims, this may disappoint companies in their pursuit of lower legal spend in any event. Although it is reported that in-house legal chiefs are increasingly unwilling to pay solicitors their infamous hourly rates, nobody has produced a sensible alternative.

Higher-value litigation can, unless it is carefully controlled by the clients and the courts, soak up a huge amount of legal fees. The courts’ attempts to bring in controls have seen limited success and have spawned satellite litigation in relation to costs.

In-house legal teams need to play a very important role in cost control. In my view, they would be better employed looking after this type of litigation than being tasked with processing the lower-value, high-volume litigation. The leakage in complex litigation can be extremely substantial here as well. In the high-volume areas, it is easier to assess law firm performance by management data.

As the research identifies, there are areas where litigation is likely to increase, for example in regulatory disputes. More importantly in my view, the volume of litigation will increase because litigation is itself a commodity that companies, including insurance companies, view as a means of making profit; and as more entrepreneurs enter the litigation market, the consequence will be that overall legal spend will increase. The challenge for lawyers is to ensure that their skills and expertise at both ends of the litigation spectrum will mean that lawyers are the consumers’ choice.