Companies are changing their philosophies on whether to hire legal expertise in-house, to use outside firms, and how to balance the two.
Small or medium-sized businesses need legal help on occasion and can usually employ a single lawyer to handle most needs, and then call in specialists or firms if things get complicated. To keep an in-house legal staff small, a company might hire several outside firms based on their expertise or the range of services offered, but that’s changing across the United States and in our region. For large corporations, far-reaching commercial and operational complexities arise every day both domestically and abroad, and legal expenses can be a major budget item – even crippling.
The trend the past five to 10 years is for large corporations to bring more legal expertise in-house and to consolidate external counsel. Corporations reported in 2010 in an Association of Corporate Counsel/Serengeti Law Managing Outside Counsel Survey that they spent $1.50 on outside counsel for every $1 spent in-house. In 2004, it was $2 on outside counsel versus $1 internally.
Meanwhile, in the 2013 ACC Chief Legal Officer Survey, almost 50 percent of respondents reported expanding their in-house legal departments in 2012 and hiring new staff to accomplish their objectives. Beyond that, over 35 percent of chief legal officers (CLOs) planned to hire additional staff in the next year.
A report by the Huron Consulting Group, its 2013 Impact Benchmarking Report, spoke of “value gains and improved efficiency” among company law departments employing spend management programs that incorporate the latest best practices.
“Law departments with comprehensive management programs on average realized 30 percent lower total legal spend as a percent of company revenue, and 38 percent lower external spend as a percent of company revenue than those without comprehensive programs,” the Benchmarking Report states.
A trend to revamp the traditional relationships with legal firms is underway.
This shift toward increased hiring of in-house counselors reflects “an approach to reducing costs by increasing efficiencies, and having a firm do more than just telling you what the law is, or appear in court,” said James Merklinger, ACC’s vice president and general counsel. “The goal is to have tighter integration and collaboration between in-house staff and external firms to create a business approach and connect value with cost.
“Outside firms generally have a broader view of the legal landscape, while the in-house staff is more focused on the business at hand. The outside firm can offer information and guidance that might not fall into view of the in-house staff,” Merklinger said.
That outside firm perspective is now more important than ever, considering how many regulatory and legal changes there have been in the past five to 10 years.
Respondents to the 2013 Chief Legal Officer Survey were asked to name issues they believed had great importance. Topping that list was basic awareness of company activities that may have legal implications. Next was a “strong desire” to maintain open communications between legal departments and senior management to keep executives informed of legal developments that affect business decisions.
Third in the list was to ensure that they, as CLOs, stay up-to-date on changes in the law, meaning that proactive outside firms who add value to the relationship by sharing information figure into all these. This is amplified by survey respondents who said that over the past 12 months 77 percent of them spent most of their time advising executives and participating in strategic corporate issues.
Who stands at the bar?
Sometimes, having the brain trust in-house is more economical.
“Over the last five years, to reduce costs, we have gone away from using outside counsel to prosecute patent violations,” said Robert Patton, vice president, general counsel and secretary of Lexmark International. “Our staff of patent attorneys and a team of patent engineers handle this; but for mergers, acquisitions, debt offerings and litigation we use outside firms, just as we do for complex issues and legal work in other countries where specialists are needed. Other than patent issues, our staff is there primarily to manage, not litigate.”
For Lexmark, he went on to say, “As a technology firm, patents are very important to us. Filing a patent is very rigorous and detailed with a large discovery process. We use outside counsel to solve problems and employ their paralegals and non-practicing staff for routine work and document production. Trying to do it all in- or out-of-house is too hard to manage. Our team approach simply makes more business and economic sense.”
To further echo Merklinger’s and Patton’s thoughts about a business approach, the CLO survey also said the three top non-legal skills many CLOs seek to develop in their staffs are business management (63 percent), communication (53 percent) and project management (52 percent).
Lexmark is using outside counsel in an ongoing dispute with a parts supplier for the printer cartridge industry. On Dec. 4, attorney Steven Loy of the Stoll Keenon Ogden firm argued the matter before the U.S. Supreme Court. Lexmark’s relationship with Stoll Keenon Ogden dates to the corporation’s formation in 1991, Patton said, describing the firm as “a trusted legal advisor.”
More regulations equal more costs
Another pressing issue today is regulatory compliance. In the 2013 CLO Survey, 87 percent of respondents believe ethics and compliance to be an increasingly important issue for the CLO community and other legal professionals; more than 80 percent named government and regulatory changes as one of the leading challenges, an increase of more than 30 percentage points over 2011.
Attorney Ellen M. Sharp, vice president and special assets manager at Central Bank, included these changes in the list of things that drove up legal costs at the bank. The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most comprehensive financial regulatory reform measure taken since the Great Depression, and financial institutions now have myriad registration, reporting and disclosure requirements.
“We have an inside compliance department, and they now rely far more on outside counsel to help them meet our compliance requirements,” Sharp said.
Beyond that, she said, the downturn in the economy “caused our legal costs and workload to rise due to more litigation related to bad loans, and due to litigation against us.” This occurred even though Central Bank has an excellent record as a lender and successfully defended itself against lending lawsuits.
“Like many other locally- and regionally-owned banks,” Sharp said, “we were the subject of litigation due to the actions of banks far from Lexington, and our outside counsel was very valuable to us during that period.”
History, billing and alternate fees
Sharp, like other respondents, talked about the importance of their relationship with outside counsel.
“We have a core of two or three trusted outside legal advisors, and we count on them to be proactive and head off problems as much as possible,” she said. “Our main firm for complex litigation has been with us for quite some time. Knowing our history and the current state of things helps all of them guide us on the right path and avoid wasted time and money. That ‘institutional memory’ is very valuable to all of us.”
Deena Ombres, associate general counsel and privacy officer at ResCare Inc. in Louisville, also values the long-term relationship her company has with its outside counsel and says it’s also a matter of economy.
“They know you and your company, and it shortens the learning curve when new matters arise, and that means more efficiency,” Ombres said. “It makes billing reviews easier, too, because you each better understand what is going on with the other, and communication is easier. Large companies will always have in-house counsel, so it’s a balancing act between in- and out-of-house responsibilities and budgets. Each company finds its own best balance.”
Ombres is also vice chair of the Kentucky Bar Association’s Corporate House Counsel Section.
Both Sharp and Ombres emphasize the need for accurate, detailed billing. In Sharp’s case, for instance, every loan has a number and all work done must be tied back to that loan. For Ombres, the use of standardized billing codes creates more detailed invoices that enhance cost accounting. This shortens the time they spend reviewing invoices and reconciling them with internal financial controls. Both agree that cost accountability is more important now as companies work to cut costs in an increasingly litigious world.
Alternate fee arrangements are more common now, too.
“Whereas many firms still work on hourly billing with companies,” Merklinger said, “some companies have arrangements that provide mixed rates for certain work, or a fixed fee. For instance, electronic content management and document production services might get a flat fee, but litigation is rarely ever billed any way but by the hour.”
He attributes that to the increase in the amount of material in cases – especially anti-trust and Department of Justice responses – and the wider variety of documents required.
“It used to be that it was legal-sized, double-spaced documents, some photocopies and a few other items, and that was it,” Merklinger said. “These days, besides the standard paper and physical documents, you might have video, digital images, a variety of electronic documents, electronic billing records, sound recordings and other evidentiary material. It all must be managed, cataloged, filed and distributed. It’s a much bigger job these days.”
Another interesting trend is that more non-legal and paralegal personnel are being employed. For instance, there is an upswing in the number of people hired as paralegals and people who do a sort of legal project management.
The project manager’s job is to track all aspects of each piece of legal work, including assignments, schedules, communications, documents, roadblocks, deadlines and more. Some law firms or companies employ litigation managers who manage a lawyer or legal team responsible for bringing or defending a civil lawsuit, although they are rarely used for criminal cases. (The lead attorney is usually the manager.) At times they are responsible for coordinating multiple firms brought in to work on a case. They are often attorneys themselves, but many start as paralegals or have specific legal education.
This new development is attributed to the way corporate law departments are moving more of the high-value or on-going strategic work in-house. Having personnel who understand the mechanics of the legal system and know a company from the inside is usually more cost-effective than hiring external personnel.
This point is highlighted by another measurement in the 2013 ACC CLO Survey: 75 percent of CLOs reported using outside counsel spending as a way to evaluate the effectiveness and efficiency of their own law departments. Further, only 20 percent of in-house respondents turned to outside counsel for tax issues versus 30 percent in 2006 and 31 percent in 2004.
Uninterrupted motion and forward thinking
With the business world moving ever faster and the need to manage information being much more important, companies are working to enhance their competitiveness by investing more in their in-house intellectual capital. By moving more functions that were traditionally outsourced into their own offices, they shorten the reaction times; it allows them to keep the process moving forward instead of waiting for a response from others. Even if only a portion of the process moves forward while waiting for a complete answer, it is still progress and more productive time and profits are captured.
This also means that outside counsel must improve their processes to provide maximum ROI on the capital companies invest in them. They must think harder about relationship management and find ways to be more proactive, supportive and conscious of things that add value to both sides of the equation. They must scan the legal horizon, spot potential hazards and warn their clients. The phrase “counselor” has never had more meaning than it does today.
Frank Goad is a correspondent for The Lane Report. He can be reached at [email protected].