It is common for corporate lawyers or in-house legal advisers to use external attorneys. Why?  There are several reasons for this, most of which relate to relieving the pressure that they are under.  That pressure can be knowing the law; delivering bad news; making a tough decision; working over the weekend; bullet travelling extensively;  or simply, shouldering the load.

In-house legal advisers are also under financial pressure. Many that we have spoken to are under pressure to manage legal budgets more efficiently, be it by internal measures like reducing the size of their in-house legal team or by outsourcing less work and spending less on external law firms.   If one folds into this mix the undeniable propensity of law firms to want to increase their hourly rates each year as well as their overall profitability and fee income, then we must surely see some remarkable tensions are being created.  Something has to give.  Legal fees are definitely under pressure. If these pressures continue, and the recessionary climate in which we find ourselves gives us cause to believe that they are likely to increase, then some fundamental changes are needed.

Legal fees are definitely under pressure

Further compounding the issue is the fact that the legislative environment most companies are having to manage means that, on top of managing a limited budget, in-house legal advisers have to find ways of coping with fewer resources when faced with more and riskier legal compliance work than they have done in the past.  In order to justify outsourcing legal work, in-house legal advisers are starting to demand an ascertainable cost benefit. As clients of law firms, they are requiring more for less.

Several in-house legal advisers we have spoken to have also found it ironic that law firms have spent millions of Rands on IT to speed up their access to information, but the only way that a legal advisor can get that information is through an attorney billing them by the hour.  Many want to access that information without paying for someone’s time.  This is a phenomenon which Richard Susskind, the brilliant English commentator on the legal profession calls an “asymmetry of information”.  This arises when one party has more information than the other.  Law firms have more information than their clients about the resources needed.

Mark Chandler, the Senior Vice President and General Counsel for Cisco Systems is of the view that the very source of successful firms today – the ability to manage client access to information and require clients to use bespoke one on one systems – will be the source of failure in the future.  For him, the greatest vulnerability of a legal industry today is a failure to make information more accessible to clients, to drive models based on value and efficiency.

Cisco, a case study

In today’s times, most in-house legal departments are driven by the same need for improvements in productivity as is the rest of the company.  In many instances there is a directive that the share of revenue devoted to legal expenses get smaller.

The most powerful case study in this context is that of the in-house legal department of Cisco, one of the largest routing and switching system manufacturers in the world.  Their general counsel has publicly stated his aversion to hourly billing and about 75% of his annual spend on legal matters (US$125 million) is now on a fixed fee basis.  He says that he has 4.7 employees in his department per billion of revenue (approximately $32.8 billion in 1997) and their total legal spend  is about .38% of company revenue and non-litigation spend about .16%.  He spends about $80 million per year with outside counsel.

Interestingly, one law firm undertakes almost all of Cisco’s commercial litigation for an annual fixed fee. This shocks most litigators, because the conventional wisdom is that litigation, by its very nature, is an open-ended process and clients are asked to pay for the number of hours spent. Cisco takes a very different approach. What’s interesting about the arrangement that Cisco has with the law firm in question is that not only is the arrangement profitable for the law firm, but it only agreed to continue at the same price when the contract came up for renewal on the understanding that they could be far more heavily involved in advising at an early stage on the high-risk areas of Cisco’s business. They asked to be able to attend certain meetings, review particular documents, and be allowed a level of access in involvement that litigators would not normally enjoy prior to problems arising.

Because it is in the law firm’s interest to minimise the expense and effort expended on litigation, they had as strong an interest to Cisco in avoiding disputes and are offering what amounts to a range of legal risk management services, as well as conventional help was dispute resolution.

References

  1. Richard Susskind, “The end of lawyers? Rethinking the nature of legal services”, Oxford University Press, 2008 at page 152
  2. Read the transcript of a much cited lecture by Mark Chandler, entitled “State of technology in the law“, delivered at North Western University in January 2007 
  3. See Suskind at pages 152 and 153