Pendulum swings for panel firms

In-house legal departments are becoming increasingly demanding when it comes to external legal advice. They want top-quality commercial advice combined with added value – and they want it now.

Paragon Finance litigation manager Rebecca Wileman echoes all her in-house contemporaries when she says: “I'm quite prepared to sift out the dead wood” on her panel of external legal advisers if the service she receives does not come up to scratch. So, if you do not want to be the firm that is getting the axe, you must be prepared to put 110 per cent effort into the relationship.

Ultimately, the experience can be mutually beneficial – and not just financially.

When working with, or for, an in-house legal department on a project, whatever its nature, the most important element to bring to the table is an incisive knowledge of the client's business.

SmithKline Beecham senior vice-president, general counsel and company secretary, James Beery, says: “It is remarkable to me how well a partnership will work with some firms and how little others are interested.”

When pitching for work, Beery says some firms still make the mistake of not relating their service to the client's business and not offering any value on top of basic legal advice.

On the wall behind his desk, a plaque reveals SmithKline Beecham's mission statement: “To innovate, advocate, guide and protect.” If you want to act for SmithKline Beecham, it should be ingrained on your memory.

BT head of legal Alan Whitfield says: “In choosing outside teams you have to take legal expertise for granted, and if you aren't getting that then you haven't even reached the starting blocks.”

Yet in-house lawyers do not want to know the law, rather how it can be applied to benefit their company. They want “creative solutions”, says Reckitt & Coleman head of legal Guiseppe Sanna.

Such comments may bring about a “yeah, yeah, heard it all before” response from some partners, but today in-house clients are looking for new solutions to their legal needs.

Barristers are increasingly being sought as an alternative to solicitors in order to reduce costs.

One head of legal says: “Our solicitors would be miffed about it but I see [direct access] as the way things will go, perhaps with paralegal lackeys doing the leg work. Counsel cost a lot, but solicitors cost a lot more. There is a hell of a saving to be made.”

Beery says it is not all about keeping costs down. He believes building a relationship is a two-way process that needs to be cultivated.

Head of legal at AMVESCAP Graeme Proudfoot says: “It's like keeping in touch with old friends. It takes effort, but I would expect to talk to them [law firms] every few months – just enough that you have the feeling they are not only interested in talking to you when they are being paid.”

Just like in any relationship, no one likes to admit they are wrong. But Proudfoot warns: “Once you get the feeling they are spending just as much time trying to work out why it was not their fault as they are solving the problem, that is the end of the relationship.”

Communication breakdowns and leaks are probably the main reason for instructions being terminated, says Proudfoot.

“A firm that will remain nameless was instructed by us to act on a confidential merger and acquisition case. The firm, in the name of due diligence, went away to check it did not have any conflict of interest. And it found some obscure person in an obscure firm that had a vague conflict but did not know the deal was going ahead.

“The next thing we knew, we received a call from the merchant bankers to say there had been an awful leak about the deal, and it all got quite messy for a while.

“It was a reasonably sizeable deal and all deeply embarrassing, both for us and, even more so, for the firm.”

Fortunately, in this instance the firm admitted responsibility and the relationship was salvaged.

One problem, says head of legal at Zeneca Group Graeme Musker, is that when a project gets bigger, there is a possibility that raw associates who do not understand the client's sensitivities will be added to the team.

One solution, he says, is to take outside firms' younger associates on secondment for up to a year to give them a grounding in a wide range of legal topics, as well as introducing them to the culture and nature of SmithKline Beecham's business.

Stuart Wheeler, company solicitor and head of legal at National Power, says it is crucial to have a clear line to the contact partner.

One of Beery's most successful innovations is a “hotline” that gives his firm's commercial managers direct access to Linklaters & Alliance and Dibb Lupton Alsop so they can seek instant solutions to practical problems when in-house advice is not available. “This is not an academic exercise. The speed of life has changed and most law firms have realised this,” says Beery.

However, the onus is on the in-house department to prepare, train and properly instruct the external firm. Says Wheeler: “The quality of service you get is directly proportionate to the planning and preparation you devote to the instructions you give.”

Proper systems are needed to monitor costs and ensure high-quality instructions are issued to clearly define each party's role. Wheeler says: “The real secret is for the in-house team to genuinely understand the business. We are responsible for making sure external lawyers know what is, and what isn't, important.”

Graham Jones, head of legal at Norwich Union, says in-house lawyers must realise their limitations. “You must understand the limit of in-house capability and accept the fact that, on major transactions, external lawyers are best placed to handle such deals,” he says.

Yet while in-house lawyers realise their responsibilities, they remain in the driving seat. Panels are being ruthlessly culled in most sectors – “It's easier to manage four firms than 44,” says Beery – there is growing competition from barristers and an increasing amount of work is being handled internally.

Head of legal at Shell UK Richard Wiseman says: “The pendulum has swung as far as it is likely to. We are contracting work back in that we did contract out.”

ZMB survey: the facts at a glance

75 per cent of the firms questioned separated the functions of the legal director and company secretary, highlighting the importance of corporate governance.

10 per cent of legal directors are also on the main board – “yes, lawyers can progress up the management ladder but there are a limited number of opportunities,” says ZMB industry director Sally Horrox.

62 per cent of heads of legal are men, 38 per cent women. More women are reaching senior positions in industry than are attaining partnership status in law firms.

72 per cent of the staff in legal departments are men, 28 per cent women.

There was a five per cent increase in legal department salaries from 1998 to 1999 – ranging from three to 12 per cent.

General bonuses range from five to 25 per cent.

Bonuses have increased by between 25 and 40 per cent for executive positions – representing a trend towards rewarding more senior lawyers on a higher risk incentive basis.

The size of legal departments has remained fairly static.