New kids on the block get tough

Big companies are becoming sophisticated buyers of legal services. Stronger relationships between clients and firms and tighter control of costs, has resulted in a virtual freezing of firms' fees. Such developments promise to make the next recession much tougher than the last for law firms.

The reason for this, as testified by the success of Legal Monte Carlo '98, is the irresistible rise of the in-house lawyer.

As one in-house delegate, Michael Ashley-Brown of property developer Canary Wharf Ltd, said at the conference: “Only the kidders know when they are being kidded.” With these poachers-turned-gamekeepers now in the driving seat, firms are serving a much more astute and demanding client base than ever before.'

“The in-house lawyer has come of age as a purchaser of legal services,” says Paul Gilbert, chairman of the Law Society's commerce and industry group.

Gilbert, as head of legal at mortgage lender Cheltenham & Gloucester, restructured C&G's panel 18 months ago from around 30 firms to just five – Eversheds, Addleshaw Booth & Co, Dibb Lupton Alsop, Salans Hertzfeld Heilbronn HRK and Edge Ellison.

“I wanted some added value for the work that we were getting,” Gilbert explains. “I wanted proper relationships with the firms, too.”

This approach to panels is now increasingly common among FTSE 100 companies, which control some #.5bn of legal spend. It means a tough control on quality and cost.

Firms that can meet the keener demands of clients can do well, by capturing more of the business.

But those who fail to win the work lose out on two counts: a diminishing portfolio of clients, and a market-driven downward pressure on fees.

“Customer pressure has maintained the status quo [on fees],” says Ian Powell, director of intellectual property at brewing giant Bass, where several billion pounds worth of disposals and acquisitions kept City lawyers busy last year.

“What we have seen is a gradually more refined way of doing business with legal advisers,” he says.

Companies pay more attention to their legal bills by monitoring costs and firms' performance. Alan Whitfield, in-house solicitor at British Telecom, says: “We watch our overall spend.

“This is all part of good management in a legal department and the firms know what to expect from us.”

With a 100-strong in-house team, BT handles much of its routine work, while outsourcing on major corporate matters. “It's because we do manage what's going on that firms know they can't rip us off,” says Whitfield.

One legal director of a FTSE 100 company, who asked not to be named, says: “If someone consistently overcharges us, they won't get much work from us in the future.

“We have pretty big muscle, so it would be pretty stupid not to use it.”

The virtues now expected of law firms include value for money, transparency on costs, and a business-like efficiency matching that of the client.

Younger, more entrepreneurial, FTSE companies demand an even tougher control on fees, especially where gearing may be high and where shareholder value might be created by a series of costly acquisitions.

“Lawyers have to remember that the money for their fees is coming from our customers,” says Derek Scott, company secretary at Stagecoach, the acquisitive Perth-based transport group.

“Our own transaction costs are very low, so we find it difficult to deal with people who value their time at hundreds of pounds an hour,” says Scott.

Law firms rarely associate rises in fees with corresponding rises in productivity, it seems.

Scott says: “If fees are to go up, we would want to see something coming back in terms of productivity.”

Another gripe is that the adversarial nature of private practice lawyers adds to costs. “If a deal can be agreed with a handshake, it's annoying when lawyers begin sparring with each other,” adds Scott.

Small panels of law firms seem to be the best way of ensuring delivery of the service clients want.

It is significant that half of the largest UK companies that The Lawyer spoke to have set up their own panels, many during the last couple of years.

Another good example is retail group Kingfisher, which owns high street names Woolworths, Comet and Superdrug. Kingfisher created a financial model based on firms' hourly rates and then agreed set rates with its firms when it set up a panel two years ago. It uses 11 firms compared with the 40 or more used previously.

“We're committed to building quality working relationships with our lawyers, where each party understands what the other party needs,” says company secretary Helen Jones. “While this is really important, I can't afford to ignore costs,” she adds.

Kingfisher wanted to know what it was being charged for, and struck agreements to ensure the firms would not charge for brief phone calls or copying – the sort of minor disbursements which, when tagged onto a bill, tend to astound many clients.

Ian Powell of Bass, which spent #1.8bn buying Intercontinental Hotels earlier this year, says companies are now more up-front about deals on fees.

But he also praises law firms for suggesting novel fee structures, which can involve discounted hourly rates, success fees and capped fees.

“We're seeing increasingly sophisticated use of this menu-pricing, which in turn requires good in-house management for it to work well,” he says.

With the UK heading for an economic downturn, and with uncertainty over global markets, law firms that do not adapt to a flexible approach will struggle to survive.