With the pressure on in-house teams to slash legal spend mounting, GCs are increasingly trying to get as much as they can from relationships with their external advisers, writes Alex Newman 

One oft-repeated adage of general counsel is that the companies they work for no longer view high in-house legal spend as an inevitable cost of doing business. More than ever, in-house legal teams are being asked to cut costs while making legal spend go further, as well as scoping out possibilities to squeeze extra value from relationships with external legal advisers.

It is a situation many GCs and various heads of legal functions have embraced. The pressures may have increased, but the trend away from the traditional professional services relationship has also empowered many in-house lawyers to see themselves as consumers with a strong hand at the negotiation table. 

A recent Legal Week survey (click here for a full list of results) of more than 120 GCs and in-house lawyers around the world found that more than a third had reduced their legal spend over the last two years, with 16% saying they had cut their spend 'substantially' – by 10% or more. And almost half (44%) predict that their legal spend will fall further over the next two years, with many aiming to cut it by more than 10%.

However, with the level of litigation rising and the costs of doing business on an increasingly international scale boosting legal spend, nearly a third of in-house counsel said they had increased the amount they spent on external legal advice, with 10% saying that it had increased by more than 10%.

In addition, almost a third estimate that the amount they spend on their external lawyers will continue to grow over the next two years – but just three respondents think that such growth will exceed 10%.

Those faced with meeting cost-cutting targets face a balancing act. Can the higher one-off costs of external advisers be mitigated by taking volume or repeat pieces of work in-house? Or does this run the risk of creating an internal legal function that is time-consuming to manage and more expensive? 

"Because of the focus on cost, there is a portion of work that GCs are prevented from bringing in-house and growing the headcount in a legal department," says Bond Pearce corporate partner Charlene Roderman (pictured, below), who until this year worked in-house, most recently as regional legal counsel for Reinsurance Group of America. "But at the same time, there is a perception that to outsource it would be expensive. That's where I hope we can open some new dialogue."

Adam McArthur, AstraZeneca senior counsel for strategic partnering and business development, adds: "It always depends on the transaction as to whether we would look to take more work in-house. In any matter, our objective is to keep both our in-house team and any external advisers pretty lean, and appropriately staffed."

Indeed, according to the GCs and in-house lawyers surveyed, bringing more work in-house is the most preferable option to help cut legal spend. Inevitably, this depends on the type and frequency of the work involved.

"I do understand the concept of bringing more work in-house and I've been in environments where hav

ing an in-house team is great for the core day-to-day work," says Roderman. "But I also see there's an opportunity to outsource where it makes financial sense – where the GC can be seen as flexible to the business. It's not always as easy as bringing more work into the business, as this can leave you with large numbers of people who don't always have work to do."

The sentiment is echoed by Palwinder Hare, head of legal – M&A/corporate at Standard Chartered Bank, who says efficiencies are contingent on the teams and practices concerned. 

"It depends on which unit you're talking about as to where you can generate efficiency, but it doesn't necessarily mean bringing the work in-house. Certainly in the M&A department, I like to keep a small, focused team of lawyers who can handle structuring and negotiation, understand our requirements, resolve issues, and drive the overall project and then ramp up with external counsel when necessary, particularly given the international scope of a lot of our deals, which require expert local knowledge."

So, with most in-house teams accepting that there will always be a degree of work they refer externally, the question is how to best control the cost of that work. Undoubtedly, practice lawyers report increasing pressure from their in-house clients to reduce their fees. And in-house lawyers have their own ideas about how this could be achieved.

Alternative billing

According to Legal Week's survey, most GCs feel the easiest way of reducing legal spend is for law firms to cut their charge-out rates and offer alternative billing. 

The hourly rate, increasingly the bete noire of the in-house community, is often perceived as an obstacle to both reducing cost and planning or projecting legal spend.

One GC surveyed says although hourly billing is still commonplace at many firms, it is "not a sensible way of doing business except for extremely high-value, cutting-edge work… increasingly, we are being asked to deal with law firms in the same way as financial advisers, ie limited fees unless the deal closes".

Network Rail GC Suzanne Wise says: "Hourly rates are counterproductive. As GC, I am trying to reduce costs and the hourly rate as a mechanism does not encourage efficiency and so works against that aim. Hourly rates are fundamentally and philosophically flawed.

"I think law firms are getting better in some areas, such as fixed fees or capped work. But at the moment, they are adopting this approach in the more predictable and safer areas. Law firms, unlike other professional advisers, are still not prepared to take a loss on a particular piece of work knowing they will be making a profit elsewhere, and do not seem to take a holistic view that would still see them make an overall profit."

However, Brian Lee, managing director at legal researcher CEB, says in-house teams need to be judicious in replacing the hourly rate with other fee arrangements. 

"People who use alternative fee arrangements often use them in the blind hope it will save them money. We found that the way an alternative fee arrangement is implemented can be just as important – if not more important – than the type of alternative fee arrangement chosen." 

Revealingly, alternative fee arrangements were a more popular way of cutting costs than using smaller, less well-known law firms or regional firms with lower charge-out rates, according to the survey. And less popular still was the idea of go-to firms referring work to lower-cost offices or paralegal centres with cheaper overheads.

Outsourcing concerns

When it comes to outsourcing, in-house lawyers are still sceptical. Just four respondents to the survey said using law firms that employ legal process outsourcers or paralegal-led centres outside the City was one of their most preferable methods to cut legal spend.

In-house lawyers were equally reticent about a new legal services venture set up by Carillion through which all of the construction company's bulk work is carried out. The construction company has recently opened up the service to other in-house teams – but more than 80% of respondents said they would be reluctant to turn to Carillion's team for advice, citing quality and breadth of knowledge as concerns.

They also raised concerns over Carillion's ability to function as an independent legal adviser. However, several would not rule out setting up their own legal services arm, or partnering with a law firm to do so, with 39% saying they would possibly look at it and 2% saying it was absolutely something they would look at.

Monitoring involvement

Another technique to address external legal spend is closely monitoring and specifying the seniority and amount of senior lawyer involvement on any given mandate. 

"On some projects," says Hare, "I will say that all I need here is a senior associate, with limited partner input. On others, it's best to do some due diligence in-house, or limit the scope of due diligence or team size. The key is to drive efficiencies rather than over-lawyering."

For Zemar Dajani, an in-house lawyer at Midgulf International, clear communication in any discussions around fee reduction, planning or capping is vital for the measures to contribute to a drop in legal spend. 

"For such an arrangement to work, the scope covering these fees must be agreed in writing to avoid any misunderstandings between the law firm and the client. If the situation changes, it is the lawyer's duty to alert clients that some of the work falls outside of the agreed scope."

Training and