For outside counsel of international supply chain company DHL Supply Chain Americas, life may feel a little different come the start of 2018. Especially if they haven't been paying attention to the changes that general counsel Mark Smolik has made since he took over the fast-growing legal department eight years ago.

But the changes that Smolik is making (more on that below) should be less alarming to law firms and their management than the changes that he and other general counsel say they aren't seeing from their outside counsel.

We spoke with several law department leaders about the advice they have for outside counsel, and the overwhelming theme was a desire for their outside firms to be more proactive—on everything from pitching for work and offering innovative solutions to simply asking their clients how the firms could be more effective. These GCs were absolute about the trend of more work becoming commoditized, more work going in-house and an overall shrinking of the pie for law firms. What they don't want to do is figure out how to solve that problem for firms. But they will increasingly be proactive themselves when it comes to telling their outside counsel how they are performing.

Smolik joined a seven-member legal team when he came to DHL. Since then he has grown it to 58 lawyers and staff, all while reducing the overall legal spend for the company. (He declined to say how much.) Procurement is more involved in selecting the company's outside counsel. The 2,200 commercial contracts that used to be farmed out to outside counsel are now handled internally, as is most of the company's real estate and employment work.

Beginning in 2018, the company's billing guidelines will change as well. The new guidelines will clearly delineate what the company will pay for, and what it won't.

Another change, which Smolik says his legal operations team pushed for, now requires all requests for billing increases to be approved by the general counsel, not the in-house lawyer in charge of the outside counsel relationship. “What we want to make clear to our firms, if you have an issue with regard to what we are going to pay, just take it up with the GC, don't run it through the staff or the legal ops people,” Smolik says.
The new billing guidelines are part of the formalization in 2018 of a long-standing process

Smolik has used to grade his outside law firms. In 2014 he started mandatory annual performance reviews for outside counsel, and 2018 will mark the first year where the target metrics are clearly delineated in an online system that Smolik helped develop, a software tool known as Qualmet. The key performance indicators are meant to offer corporate law departments the ability to offer consistent and objective feedback and to measure a law firm's value and success over time.

For Smolik and other general counsel, a common wish is for their outside law firms to take more initiative when it comes to adopting innovation and proposing an alternative value proposition.

“The key message to the law firms: Don't be afraid to ask to have the conversation, especially when it comes to value,” Smolik says. “If you are looking for insight into what the [industrywide] change is all about, first just start with your top 10 clients by revenue. Don't take them to golf. Go visit them. Sit down and have those conversations. Don't put your head in the sand. The data doesn't lie.”

Although it's getting to be that time of year where law firms send out their new billing rates for the coming year, Smolik warns firms not to do that until they have spoken with their clients about what those clients feel is appropriate.

He actively encourages other companies to use Qualmet, and some are. Others, like Google and GE, he says, have created their own internal software to do the same thing. “I don't care if you do it on a spreadsheet or napkin,” Smolik says: The important thing is to collect the data.

For Martha Wyrsch, general counsel of Sempra Energy in San Diego, the process is a bit less formal from a technological standpoint, but mandatory all the same. She uses SurveyMonkey to query business and legal professionals within Sempra who have used a specific firm about their experience with the outside counsel. She also surveys the law firms for their perspective on the relationship. Each of the company's 20 main outside law firms are assigned a Sempra in-house lawyer, who meets with the firm regularly. Wyrsch talks with the firms regularly to inform them of the company's quarterly financial reports and other business news. An official review takes place annually; Wyrsch says many of the firms found it rare to have such a yearly review.

The biggest metric Wyrsch is tracking is collaboration. When she joined Sempra in 2012, the company had 420 law firms on its books, with the top 20 firms getting about 40 percent of the company's outside legal work. She quickly moved to institute a “community of counsel,” some 20 firms of varying sizes, including some minority- and women-owned law firms. Those 20 firms now handle about 85 percent of Sempra's outside legal needs. Using a dashboard to track outside counsel spend, Wyrsch has a clear insight on the savings, noting the overall legal costs for the company, including the 120-member legal department, are lower than when she started.

“They need to collaborate with each other, because on big, complex matters you often have to engage more than one firm for the skill set,” Wyrsch says of her community of counsel. “We want people who are willing to spend the time and be willing to be part of our community at Sempra, [and] help us find opportunities and identify risks beyond the work they are doing on a regular day-to-day basis.”

In late September, Sempra held its third annual “community of counsel” meeting, in which the relationship partner and an up-and-coming lawyer from each of the 20 community firms come to Sempra for a daylong conference and dinner to learn more about the business and one another.

Chase Me, Not the Trend

The last decade has been an “extraordinary run” for the many law firms representing financial services clients on litigation and regulatory matters since the financial crisis hit in 2007, Morgan Stanley general counsel Eric Grossman says.

But that work, including litigation related to mortgage-backed securities and later scandals such as Libor and forex, is drying up, he warns.

“The problem with some big firms, in part, is they are always chasing the last trend,” Grossman says. “But it's clear to me, as I look across the horizon of big law firms, lots of firms are still kind of gearing up for a period that I think is now waning.”

Sure, another big scandal could hit, generating a wave of work for lawyers, but Grossman says that the representation of the financial services industry has materially changed for good. Even deal work is being done more often in-house as more of it has become “plain vanilla” legal issues rather than sophisticated finance offerings, he says.

“My firm, we have a dozen firms that are doing litigation/regulatory/internal investigation work,” Grossman says. “I'm not going to be able to feed a dozen firms going forward.”

So who will get the Morgan Stanley work that remains? Hint: Grossman says he'd love more robust secondment arrangements with his outside counsel. He admits this wish is a bit self-serving, but argues the benefits are just as strong for the firm that lends Morgan Stanley a lawyer. It stands to gain either a lawyer steeped in knowledge of Morgan Stanley, who thus becomes a go-to outside counsel, or an alum who stays with Morgan Stanley but will likely refer work back to the firm.

Morgan Stanley's legal department has about 400 practicing lawyers, and could easily use 50 more, Grossman says, but there's no budget for such hires. That's 50 opportunities for law firms to invest in Morgan Stanley, or at least charge at a task-based rate to have one of their lawyers work in the department. Grossman says he's surprised that law firms aren't offering this: If he asks, they may say yes, but they aren't asking him.

Mind Your 10-Ks and Qs

Having previously served as president at Vestas American Wind Systems and Duke Energy Gas Transmission, Sempra's Wyrsch also has a strong sense of what it takes to run a business, and she wants her outside counsel to share that understanding.

“They should view themselves as our trusted advisers and our collaborators, and that means they really need to understand the business,” Wyrsch says. “Read our 10-Ks and Qs, be on our earnings calls, understand the risks and opportunities [facing the company] and bring that broad knowledge to the table when they sit down to work with us.”

Wyrsch says that she really values creativity in outside counsel and those lawyers who think beyond the legal issue at hand to consider the business implications. She also appreciates law firms who come to her with pre-packaged solutions for managing costs, such as offering a more efficient, cost-effective e-discovery solution for complex litigation.

One recent example was the litigation that Sempra faced over a natural gas leak at subsidiary SoCalGas' Aliso Canyon underground storage facility. Sempra turned to a firm that uses contract attorneys and has internal tools to manage e-discovery at a lower cost, Wyrsch says. That kind of efficiency was part of the profile Sempra sought when reviewing current and prospective firms for that piece of litigation.

“One of the things we interviewed for was how sophisticated they are at managing this kind of work at the lowest cost possible,” Wyrsch says of the firms Sempra considered to handle the Aliso matter. “I think if firms aren't doing that, they are really missing an opportunity to market themselves in a way that is quite” unique.

For Robert Bostrom, general counsel of clothing retailer Abercrombie & Fitch, the onus is on the outside law firms to make the change he wants to see. He encourages firms not just to embrace, but be a leader in, technology, artificial intelligence and measures to make the outside counsel relationship cheaper, more efficient and more user-friendly.

“Don't make us initiate it, you bring it to us,” Bostrom says. “Generally, I don't see a whole lot of innovation. I don't see a whole lot of change in the way [law firms] think or act.”

Both Bostrom and Smolik say firms shouldn't wait for the phone to ring. If a law firm sees a company's board is going through a difficult situation, reach out, Bostrom says.

“Initiate a call and bring some value-add,” Bostrom says, though he recognizes that doesn't fit well with most firms' billable-hour model. “That requires someone to put in their own time.

That's a huge differentiator. That's what I think people want, in addition to being the greatest lawyer in the world,” he says.

To illustrate, Bostrom cites the time when, as general counsel at Freddie Mac, he had to hire a firm to handle a major piece of litigation. Brand-name firms came in with glossy brochures, touting how many lawyers they had and how many similar cases they'd handled. But none of them addressed the complaint filed against Freddie Mac. Then a smaller firm came in with a draft motion to dismiss and spent the hour talking about their theory of his case rather than themselves. Guess who got the work?

The scenario is similar to a situation Smolik says he found himself in when a major suit was filed against the company in Columbus, Ohio. Of the firms that pitched, it was the firm that sent a one-page background memo—covering the judge, plaintiff, plaintiff's counsel, how the judge has ruled, the proposed strategy for the case, and a budget—that got the work. The memo was drafted by the firm's librarian, Smolik says: It didn't take a lot of time from the firm's lawyers, and it got that firm the assignment.

Smolik says if he were a managing partner of a law firm, he would have his lawyers identify what changes are coming down the pike and for what clients, and he would have them start setting up meetings.
“Seek an opportunity to say 'We have heard about the change, see what you are doing, can we talk about it from a business perspective, what are they, where are we falling short and, most importantly, what are we doing to meet and exceed those expectations,'” Smolik suggests.

The Future as Your Clients See It

Bostrom cautions that GCs shouldn't take demands too far. When he first joined Abercrombie, a corporate-wide cost-reduction effort was underway and the “bean counters” were telling Bostrom that the law firms' rates were too high because their real estate costs were too high. Bostrom says he told the accountants he wasn't going to tell his law firms how to run their business. He might use a different firm (the customer is always right, after all), but he won't micromanage the firms' business decisions. That's where a firm should push back, he says.

There will be certain areas where law firms should push back based on individualized circumstances, Smolik says, but they shouldn't push back on innovation as a whole.

For some GCs, however, there remains the feeling that certain firms will be immune from the innovation discussion altogether.

“The elite 20-25 can probably get away with it because whether it's the end of the world or the bet-the-company kind of thing, you gotta go where you've gotta go,” Bostrom says. “People will say that's not the case, but it is.”

Grossman disagrees, at least when it comes to the long-term ability of those firms to avoid the innovation discussion. He says that the high-end boutique firms (think Wachtell, Lipton, Rosen & Katz or Cravath, Swaine & Moore) will be fine because they don't “have 1,000 lawyers to feed.” And the rest of the elite firms may be able to ignore shifting paradigms in the delivery of legal services for four or five more years, Grossman predicts. But the premium work is moving away from financial services into other areas, like technology.

“Long term, they're going to get crushed,” he says.

The same debate that is happening within law firms over the true depth of legal innovation is happening among GCs, albeit tilting more toward the change-is-coming argument.
What seems to be unanimous is that, for proactive law firms, the opportunities are there for the taking.