As general counsel respond to pressure to reduce and rationalise their choice of legal adviser, legal panels are shrinking. Philip Hoult reports on the findings of this year's Legal Week Intelligence Client Satisfaction Survey

The enthusiasm of the UK's largest companies for reviewing their panels of chosen law firms shows no signs of waning – last month National Grid became the latest FTSE 100 company to take a fresh look at its suppliers of legal services. Legal Week Intelligence's fourth annual Client Satisfaction Survey – published in October – revealed that almost 90% of FTSE 100 companies use formal panels; and none had any intention of ditching them. More importantly, the average number of advisers on all panels has fallen from seven in 2006 to between four and five.

A significant reduction, but could there be scope for further rationalisation? The survey, which polled 272 FTSE 1000 and Alternative Investment Market companies, suggests there is. It found that enforcement of panels is becoming more rigorous – almost three-quarters of respondents review their panels every two years, with nearly half reviewing them on an annual basis.

According to Paul Gilbert, founder of management consultancy LBC Wise Counsel and former general counsel at two financial services companies, the pace of consolidation could – if anything – become more dramatic. His company has worked on 21 panel reviews in 2007 and every one of them has involved a reduction in the number of advisers. "To manage more than half-a-dozen firms really well, in a way that creates value for all concerned, is nigh on impossible – to do it really well, you are looking at three to four firms. I would even encourage consideration be given to a sole appointment," he advises. Gilbert warns that general counsel are often under pressure from their company's management to reduce their panels further, quoting one chief executive who said: "My finance director has one auditor, my marketing director has one advertising agency – why does my lawyer have 24 law firms?"

Jamie Wallis, senior business development manager at Baker & McKenzie, says the shape of panels is changing as their size is reduced. "Clients have generally got better at selecting panels – they might be getting smaller, but they are still covering all the bases in terms of their requirements. They are more experienced in terms of running the selection process and ensuring that the breadth of the panel is sufficient," he adds.

Smaller panels, Gilbert says, give the in-house team a real chance to leverage value out of the relationship with external lawyers – for example, by rolling out training for colleagues and non-lawyers in the business. "General counsel need to look at value in the broader sense but also value for law firms, so you get commitment to invest in the relationship," he adds, arguing that larger panels will not sufficiently incentivise the major firms.

The survey suggests that while personal relationships remain important when selecting firms, more tangible criteria are becoming increasingly influential. The key criteria, it found, are sector expertise, past experience, general reputation and cost. "I prefer to choose people on an individual basis," said one respondent, "but we are trying to move away from that to ensure consistency of service offering."

According to Baker & McKenzie's Wallis, the challenge for all firms is to make sure that the clients understand the expertise firms have on offer. "There are increasing regulatory requirements for clients in many sectors," he says, "and they want people who have particular expertise within their sector."

The research reveals some worrying findings for firms looking to maintain their place on panels, the biggest of which must be that their performance continues to lag far behind client's expectations – most notably on quality of advice, service delivery, commercial advice and responsiveness. "Clients' expectations are growing and they are more prepared to insist on them," says Tony Williams, principal of management consultancy Jomati.

With charge-out rates increasing and media coverage of firms' high levels of profitability, it is no surprise that clients have set the bar higher. "Clients should be demanding but should not be unrealistic," argues Gilbert. "They must demand a quality service and be very explicit about what they mean. They must also be explicit about what they are offering [to firms] in return."

Another finding that should concern firms is that general counsels' satisfaction has fallen in five areas this year, most notably in terms of partner accessibility and quality of legal advice. This is countered, to an extent, by slight improvements in commercial advice, responsiveness and personal relationships.

Reasons for declining levels of satisfaction can vary, depending on a client's individual circumstances or requirements. But the fact that it has been a sellers' market for legal services may have played a part – it can be extremely hard to keep all clients happy and, for example, give them the access to partners they require when there is so much work around.

"For the past 18 months, partners – even at the biggest firms – have been over-trading," says Williams. "If the work is being pushed down the experience level, the client does not get the person they want and the person they get is not sufficiently commercial." Law firms do not always appreciate the pressures general counsel are under, he claims. These are principally three-fold: to hold or reduce their internal headcount, reduce their external legal spend and help the organisation identify and manage risk effectively. "There is a tendency that people get onto a panel and think that's it," adds Williams. "They need to understand that a panel is a pre-qualification."

This mirrors the experience of one general counsel at a European multinational. "It seems that some firms are just not that bothered once they make it onto our panel," he says. "Some firms just seem to continue to impress and go from strength to strength, really getting to know our business, while others are very lucky to last until the formal panel review rolls around. We are a very significant client for each of the firms we use, but in some cases you would not know it."

The combination of regular panel reviews and continuing levels of under-performance represents a significant opportunity for those firms that get it right. How, then, should firms be raising their game? Significantly, the report finds that listed clients of all sizes share largely the same general concerns and service expectations. Continuing to focus on the 'fundamentals' is seen as key to firms' success.

But this is not as easy as it sounds. "The difficulty is that performance is not consistent within firms," points out Williams, who cites the management of client expectations – for example when it comes to the timing of delivery of documentation – as something firms are often poor at.

Simon Davies, managing partner-elect at Linklaters, says the process is akin to airlines: "You expect to take off and land where the ticket indicates, but clients remember an awful lot more than the journey. It is the overall client experience you need to focus on – getting the law right is just the beginning. For our part we are always seeking ways to improve the client experience."

The report advises firms to ensure they can provide consistency of service during peaks of demand, and not leave the client feeling that they only matter when times are slack. "There is a danger in taking things for granted," adds Williams. "It has been a manic period but that is when the client still needs you."

Another significant area where the research suggests that firms could improve their performance is in obtaining client feedback. "Many firms do it but there is a gap between what clients expect and what firms think they want," the report found. "It is a constant refrain that many firms expect clients to adapt to their working practices, instead of the other way around." Linklaters' Davies agrees, arguing that "the time of telling the clients what they need is over".

The 2007 Client Satisfaction Survey carries a mixed message for law firms. Positions on panels are likely to become more hotly-contested than ever as firms seek the fewer, larger mandates on offer. Demand for advice in the main areas of work – corporate and finance – is expected to remain constant, while growth is predicted in regulatory and compliance, competition and intellectual property.