How in-house counsel can best manage a law firm change

Over 75 percent of companies have long-established relationships with primary law firms and local counsel. Banks, insurance companies, and utilities have worked with law firm panels for over 25 years. Legal expertise and service levels are, by and large, meeting the expectations of most companies. However, companies with more specialized or modest legal spend are much more informal about securing and pricing legal services.

Still, things are changing for companies great and small. Relationship partners retire from preferred firms. General counsel move on more frequently. Companies merge and divest. The procurement/strategic sourcing team is always enthusiastic about introducing more structure, process, and economic targets when the company retains counsel. Collaborative technologies and alternative fee arrangements have made it irresistible, if not inevitable, to assure leading practices in managing the legal services portfolio.

Unsurprisingly, too few law firms initiate the business-to-business dialogue with key clients. Companies regularly craft requests for proposals (RFPs) for legal services to reset the relationship on all dimensions: the number of firms, different work intake and allocation protocols, collaborative technologies, management of the “legal supply chain,” including local counsel, pricing, and innovation. At times, the RFPs are bilateral, while, at other times, they are high-stakes competitive processes that are disruptive and can result in long-term value propositions for the client that differ dramatically from the status quo.

Threshold factors and RFPs result in companies reducing and changing the configuration of their primary law firms. More than 70 percent of the work referred to firms by corporate law departments is some form of litigation or labour and employment work. Regular commercial work is typically much more cost-effective to in-source, while complex transactions and financings are referred to firms with the bench strength for the work.

I am regularly asked whether there are best practices governing how a company should replace one firm with another. When hourly billing was the order of the day, a law firm could be phased out over a few months, and new work allocated to the successful firms. Companies are better now at projecting the scope of work for multiple matters, specialties and regions. Many are prepared to make commitments of three to five years in return for stable legal teams and predictable pricing that is non-hourly. Without exception, law departments want to rid themselves of the administrative work that comes with retaining firms and processing fees in traditional ways.

It follows that companies do not wish to pay a fixed fee to one firm, which will overlap with fees paid to firms being transitioned out. At times, a network of local counsel is replaced with a new network. Other times, primary firms are replaced, even for strategic matters.

Companies are migrating from the traditional model of a panel of firms (“I select the lawyer – not the firm”) to more structured business-to-business models. There are two ways to manage the transition. The first is to designate one or two firms as primary national, primary regional (e.g. the Americas), or primary global counsel. These firms are asked to review all active files with the company and then propose a fast-track (four-to-six weeks) transition of the files. Usually, some files will remain with legacy counsel until a particular milestone is reached or even until they are closed. These “carve-outs” are estimated for fees, and the fixed fee of the primary firm is adjusted accordingly.

The second approach to manage the transition to a new configuration of external counsel is to have the primary firms immediately “oversee” legacy firms' work and the matter budgets, receive and approve their invoices, and pay them from the fixed fee they are receiving. This creates a better balance of incentives for the company and for primary and local counsel to quickly reach a new equilibrium in legal services delivery, fees, and administration.

This latter approach has a beneficial side-effect. Individual members of law departments and business units form attachments to legacy counsel. Professional relationships, especially those that are effective, are difficult to disrupt. Some rank-and-file members of corporate law departments will passively resist changes to established legal services delivery arrangements. A managed transition prompts a dialogue for new expectations and introduces new players with a more business-like framework.

General counsel should insist on a clear transition plan with legacy firms. The plan should be fast-tracked in its execution, minimize duplication of fees, and minimize administrative time from lawyers and others in the company to develop and implement it. The best law firms should be tasked with proposing the details of transition plans and evaluated on their success for seamlessly doing so.

Adapted from R. Stock, Lexpert Nov-Dec., 2016