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Bring it in-house

Law Department Management
|Written By Michael Rappaport

Gone are the days when in-house counsel only managed external counsel. As companies emerge from the recession, the role of in-house counsel has expanded. Not only are corporate counsel doing more legal work in-house, they are also actively engaged on the business side.

Just ask Emily Jelich. She’s the vice president and associate general counsel at the Royal Bank of Canada. She says the RBC law group always tries to tackle legal work in-house before referring work to external counsel. At RBC, the in-house legal department even handles the preparatory and strategic work for most litigation.

Headquartered in Toronto, RBC is Canada’s largest financial institution with more than 80,000 employees worldwide. Its in-house legal team boasts 155 lawyers, an increase of 15 in the past five years. “As the company has grown, RBC has seen the value of having lawyers in-house, who have a detailed knowledge of the company and can offer more proactive, strategic advice,” Jelich says.

About eight years ago, the RBC law group implemented a set of demand management practices that have reduced external legal expenses by 20 per cent annually. The plan to bring more work in-house wasn’t just about cutting costs. Originally, the impetus for this initiative was to be able to better track legal expenses and increase efficiency and effectiveness, says Jelich, who has worked in-house at RBC for the past 16 years.

“Demonstrating value can be challenging for legal departments. We don’t have the same simple metrics of other business groups like sales,” Jelich explains. By instituting demand management guidelines, the RBC law group can select from a wide spectrum of legal service providers — such as in-house counsel, external counsel and legal process outsourcers — to put together the right mix to achieve the best outcomes. 

In determining whether to insource legal work or send it outside, the RBC law group employs the following analytical framework: First, they analyze the nature of the work, expertise required, risk involved, level or experience and availability of internal resources to match the expertise and expense of legal resources to the risk and complexity of the matter. Second, they ask if internal counsel have special expertise related to the matter. Third, they ask if it is likely that in-house counsel can resolve the matter quickly. Finally, they ask if by doing the work internally, the RBC law group can acquire valuable knowledge and experience that it can reuse for the client’s benefit.

When RBC decides to send legal work to outside providers they select from a designated list of preferred providers for each area of law. In compiling the list, the in-house department at RBC considers the nature of work, expertise required, risk involved, level or experience required, and the rates of the providers. At the beginning of each file, RBC’s in-house counsel discusses staffing with the law firm or individual lawyer selected to ensure that the proposed staffing is appropriate to the issues and risks identified. The team then enforces quotes to obtain cost certainty, avoid overruns and control and more effectively manage legal costs by ensuring financial accountability.

TransCanada Corp.’s legal department has also strived to bring legal work in-house. “We like to bring virtually any work we can in-house,” says Sean McMaster, executive vice president and general counsel at TransCanada. Based in Calgary, TransCanada is the largest natural gas pipeline company in North America. With almost 60,000 kilometres of pipelines — enough to cross Canada more than a dozen times — TransCanada transports 20 per cent of the natural gas consumed in North America.

With 4,200 employees in Canada and the U.S., TransCanada has a relatively large legal department with about 70 lawyers in-house. The legal department is divided into four groups: pipeline and regulatory law; energy and operations; M&A and financing; and corporate/commercial law.

Over the past 15 years, the company has grown rapidly through acquisitions. “We can do almost any deal in-house,” McMaster says. “We always need some external support, but we can do big chunks of major transactions in-house.”

TransCanada’s legal department includes litigation counsel, but McMaster says the company typically refers most litigation files externally. He adds the company is not very litigious and is rarely being sued or suing others. In addition, TransCanada uses external counsel for speciality matters, such as tax planning, major regulatory hearings, and really big deals.

“We don’t staff for the peak,” McMaster explains. Although TransCanada has hired contract lawyers in-house for specific projects, McMaster says that if he finds good lawyers he prefers to bring them in full time, provided he has the steady workload to support additional staff.

The legal department at Hudson’s Bay Co., the parent company of the Bay, Zellers, Home Outfitters and Fields, may be small, but it punches above its weight. HBC’s legal department has only six full-time lawyers in-house, despite having more than 70,000 employees. Nonetheless, HBC has brought significant legal work in-house “largely as a cost-saving initiative,” according to David Pickwoad, the company’s vice president of legal services.

HBC’s legal department is divided into two groups: corporate/commercial law and real estate/leasing. The department has recently added an employment/labour lawyer to handle the preliminary stages of employment/labour law matters and an additional corporate/commercial lawyer. 

“In-house counsel at HBC participate in regular business meetings and discussions. We learn the business inside and out and assist on day-to-day matters,” Pickwoad says. “We’re in the loop. We can provide advice about potential issues at an early stage, before they become more serious.”

The evolution of the legal departments at RBC, TransCanada and HBC reflect a wider trend. A recent survey of almost 175 chief legal officers in the U.S. by Altman Weil shows that companies are increasingly reliant on in-house counsel. According to the survey conducted in September 2010, 63 per cent of chief legal officers indicated that they had increased their internal budgets from 2009 to 2010. Forty-one per cent said they planned to hire new in-house lawyers in the next 12 months. In the same time period, 29 per cent planned to decrease their use of outside counsel.

John Ohnjec, division director, Robert Half Legal, a leading recruitment agency, says the hiring boom in corporate legal departments south of the border mirrors the situation in Canada. However, he notes in-house departments are increasingly experimenting with alternative staffing arrangements, project-specific lawyers, part-time, and contract lawyers. A number of firms across Canada, including Robert Half Legal, LexLocom, Cognition LLP, and Delegatus Legal Services Inc. now specialize in placing in-house counsel on an as-needed basis.

Insourcing isn’t the only practice in-house departments have embraced to save money. Scott Ewart, a legal consultant at Helix Legal, says that in-house departments are increasingly outsourcing basic legal work, such as document review, to lower cost legal service providers. “In the U.S. and U.K. much more low-level work is being outsourced, but the trend is catching on here, too. The overall mix for the provision of legal work is changing. Companies are bringing some work inside to reduce costs and sending commoditized work to low-cost providers.” 

Insourcing may make sense and save dollars, but not all companies are eager to add in-house lawyers to their payroll. Richard Stock, the founding partner at Catalyst Consulting, which advises law firms and legal departments, says that companies are still reluctant to hire more in-house lawyers. “Companies are not willing to spend money to save money,” he says. He notes it only takes bringing inside 600 to 700 hours of legal work to hit the break-even point for adding a lawyer in-house. 

Stock says the growth of in-house departments is not primarily driven by financial considerations. Rather, companies have begun to “recognize the strategic value in-house counsel can bring to [the] company.”

Published in May 2011, a recent study by Deloitte on the expanding role of corporate counsel in Canada globally supports Stock’s viewpoint. According to the study, corporate counsel’s level of responsibility in Canada has almost doubled over time. Five years ago, only a third (33 per cent) of respondents were involved in strategic development compared to almost two-thirds (62 per cent) today. Similar trends were seen in the Canadian respondents’ responsibility for ethics and whistleblowing, which rose to 63 per cent from 37 per cent five years ago. As the role of general counsel rises in prominence, the role of external law firms declines. Today, when Canadian companies experience serious regulatory or legal issues, they almost always (97 per cent) consult corporate counsel first, compared to their global counterparts at 81 per cent. Only 72 per cent of corporate counsel believe they were the first point of contact five years ago.

Despite the trend of insourcing more work, Stock says the pattern of work that is referred outside has not changed significantly. “More than half of all work sent to external counsel is in litigation. The remainder is mostly comprised of big deals and mergers and acquisitions which involve a large number of lawyers for a short period of time and specialty work, which requires expertise in narrow domains.”

While in-house counsel may be doing more work internally, external counsel aren’t out of a job — yet.

Correction: The story incorrectly stated that HBC has more than 70,000 employees. In fact, HBC has approximately 50,000 employees.