It is not just the banks that are getting bigger – everything is. During the past few years the business community has witnessed bigger deals and, in simple terms, the establishment of fewer companies.
Consolidation is the word. Industry giants are coming together in multibillion pound deals that are making the multimillion pound deals look positively small fry.
Just look at some recent examples. Last year, Wal-Mart bought Asda for £6.7bn, creating the world’s largest retailer in the process. And in this year alone, SmithKline Beecham and Glaxo Wellcome joined forces in a £114bn marriage and United Biscuits was bought for £1.26bn. Then there were major deals for AOL and Time Warner, NatWest and Bank of Scotland, and Vodafone, Mannesmann and Orange – the list goes on.
Globalisation, the interplay between the US and Europe, and a strong pound are creating an altogether different playing field. And, of course, the dotcom culture is also having a considerable impact on the business world. In the past couple of years there has been a mini-revolution in IT. Dotcoms are raiding staff and pulling off record-breaking IPOs, everyone has a PC and email is now commonplace.
Certain sectors have been hit harder than others by the dotcom revolution. The two most notable are retail and heavy industry. As the Arcadia Group’s latest results show, the internet is affecting the high street as consumers demand new ways to buy new products. Arcadia reported an £8m loss, will close 400 shops and drop a brand.
Nearly all of the major supermarkets, clothes shops and other high street outlets have online offerings. But they are not competing against only each other. Internet companies, which have lower overheads and investors whipped into a frenzy, are proving to be a serious threat. The market may have been a little shaky recently, with Boo.com the latest e-commerce casualty, but there is no doubt that this sector is a major rival for retail.
And the dotcom culture is also threatening heavy industry, which investors seem to have forgotten exists. The traditional manufacturing and engineering sectors are being forced to adjust and adapt as they fight to compete with the younger, sexier companies.
The effect on firms advising these industries is twofold. On one level, firms have to make sure that they understand the new economy as well as the more traditional sectors. Most in-house lawyers told The Lawyer throughout the Sector Insight series that a practitioner with a business-like approach who can understand and act on these new developments, is as important as a technically competent practitioner.
But the changing business climate is having the most impact on costs. Sectors such as insurance and retail banking, which adopt a panel approach to legal services, are tightening their belts against increasing competition. And as consolidation continues unabated, there is less work for fewer firms. This has put a great deal of pressure on firms to offer lower prices.
Insurance is one sector that has leaped ahead in the race for cheaper legal services. Over the past year, as insurance firms continued merging, specialist firms faced harsh panel cuts. On top of this, clients have started using auditors to ensure costs are kept to a bare minimum.
Only last month, Axa Insurance demanded rebates from its firms after the company found it had been overcharged on litigation claims work. The insurer is also understood to have objected to paying for partner supervision (The Lawyer, 29 May).
But while no in-house lawyer would ever admit that they are happy to pay top dollar all the time, the insurance sector is fairly unique in its demands for the cheapest possible fees. While the other industries are very aware of costs, most are happy to pay for good service, believing that is where the value lies. Somerfield company solicitor Susy Jepson stressed this, referring to cost considerations as “value for money – not cheap, but value”.
The emphasis on proven value perhaps goes some way in explaining why not one sector claims to rely solely on formal beauty parades to draw up a panel. They are used rarely and even then, few people have good things to say about them.
Paul Gilbert, head of legal and group company secretary at insurer United Friendly, told The Lawyer: “I think it is a little bit pretentious for people to sit there like Little Lord Fauntleroys and choose a firm. I do not like beauty parades, they are artificial. It is not the best way of establishing the credibility of a firm.”
Much of this aversion to beauty parades comes down to marketing and the fact that most people are simply not interested. As one in-house lawyer said: “The trouble with the word ‘branding’ is that it implies that hiring a law firm is like buying a Gucci bag and it isn’t.”
In-house lawyers prefer to rely on reputation, word-of-mouth and referrals when buying legal services because, as most agree, this is the only way to really know what you are buying.
The majority of senior in-house lawyers look for relationships with individuals rather than one firm. While a lot are loyal to firms, many more say that they want to establish a one-to-one relationship with a lawyer. This means that moving firms to follow a partner is not uncommon.
But not every sector eschewed marketing in favour of building personal relationships. There is a unique feeling in the investment banking sector that marketing plays an important role. In complex deals clients want a well-known name, or more specifically a brand, on the prospectus.
On the whole, this level of marketing has been working unintentionally for several years. The City firms already have established reputations and brands that people can immediately identify with. It is the IBM syndrome – no one was ever sacked for hiring a City firm.
One in-house lawyer said: “Using a big City firm is fairly significant. If they can get around then they are going to be known and that is going to be advantageous for us.”
How to break into that branded circle, regardless of the sector, is something smaller niche firms and regional players have to address. It is here that traditional marketing methods can work. Some in-house practitioners said that looking at a firm’s literature, be it online or through traditional booklets and seminars, can give an indication of the firm’s understanding of the sector, a crucial element when purchasing external legal services.
Regional and niche firms can also break into different sectors simply because they charge less. Greatly reduced fees are tempting a variety of companies to take specialist, non-M&A work – employment, pensions and licensing, for example – out of the City. As one in-house lawyer explained: “The price of legal services is becoming more and more important. We are a relatively small property company and we still spent £2m on legal costs last year.”
And a variety of sectors recognise that as more partners take the lifestyle option of heading for the regions, companies can pick up City expertise for provincial rates.
But business and industry is not just looking towards the regions. It is also having to look outside the UK. Companies are becoming more global as they consolidate and continue their search for new customers. And by extension, companies need international external legal coverage, as well as sound UK relationships.
Relying on their own knowledge of local markets and contacts is not a viable option for in-house teams choosing firms in far-flung jurisdictions. It is often the only time that directories are consulted.
Former ICI deputy general counsel Bob Peters, who has since left for Rowe & Maw, said: “I do not think [directories] have got much value for ourselves. We occasionally use them to find an overseas jurisdiction where we do not have cover, but that is rare.”
Often in-house teams will go to their UK counsel for an opinion on which non-domestic firm to use. One lawyer said: “We have offices all over Europe and we want the best firm in each location. We sometimes use Clifford Chance in Spain but that is because it is the best firm there. It is horses for courses.”
With so much going on it is nothing less than a roller coaster ride for firms whatever sector they serve. There is not one industry or business sector that is immune to change, be it in the laws governing it, such as media and IT, or the impact of dotcoms, globalisation, the interplay between the US, UK and Europe, consolidation or stringent cost-cutting.
Global banking giant Barclays is the latest to radically change its panel. Last week, it abandoned its core ‘Matrix’ panel in favour of a 14-strong mandatory line-up for the entire UK group. The next stage will be to make this an international panel of firms.
But there is a universal requirement from in-house teams, whatever business they are in and however well their sector is doing, and that is that the lawyers they instruct must understand their businesses.
Provided firms can do this, be it through specialist individual lawyers who provide one-on-one relationships or international reputation and expertise, they may just be able to hang on in there.