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September 17, 2010 5:10 PM

LETTER FROM LONDON: Europe's GCs Warn of More Pressure on Fees

Posted by Chris Johnson

Some of Europe's most senior general counsel have warned law firms to expect a lasting shake-up in how they're retained and paid. Convening for a breakfast roundtable at London's College of Law yesterday, legal heads from major corporations including Royal Dutch Shell plc, Nokia Corporation, and British Airways plc emphasized their intention to drive further changes in billing methods, as the balance of power between clients and their attorneys continues to shift.

"Like many other companies, we face a lot of pressure with costs. We realize that they are too high and that they have to come down," said Beat Hess, legal director and group executive committee member at Royal Dutch Shell. "I've been saying that for years, but it's felt like I've been preaching at a graveyard: There are plenty of people down there, but nobody's listening. Law firms have had Christmas every day for decades now, but the party is over."

Despite operating with an in-house team that numbers 1,000 staff and 800 lawyers, 50 percent of Shell's legal budget has been going to external counsel. To trim this expenditure, the oil and gas giant recently completed a review that cut its list of outside firms from 60 to just eight--a move that Hess said helped the company "to bring our costs down significantly in a very short time."

Louise Pentland, senior vice president and chief legal officer at Finnish communications company Nokia, faced an even more daunting task: to slash a list of more than 500 law firms in 130 countries by half.

"We looked at what we do strategically with firms. It's not just about cash, it's about value," Pentland explained. The comprehensive review, which took a full 18 months to complete, also saw the introduction of new software to help the legal team manage the voluminous invoices that flood in from law firms.

Facing ever-increasing competition as a result of falling demand for their services during the financial crisis, lowballing by law firms has become rife, the GCs said. Many firms are aggressively undercutting their rivals. Hess revealed that one law firm even offered to work for Shell unpaid for three months in an attempt to get its foot in the door. "Of course, we agreed," he said.

Also under debate at the panel was the concept of hourly billing, which during the financial crisis has come under increased scrutiny from clients. Although most attendees agreed that contracts between firms and clients must allow for some degree of flexibility--particularly on large, complex projects, where it's hard to accurately predict how much work will be required--the overwhelming consensus was that law firms will have to get used to caps, fixed rates, and other alternative fee arrangements.

"I hate the hourly billing model," said British Airways general counsel Maria de Cunha. "It has its place and is going to stay, but I don't buy into the supposed difficulty of doing things on a fixed basis, as I've done it quite successfully for years."

BA's de Cunha said that 70 percent of the U.K. airline's legal work is conducted under fixed fees. "I don't want to micromanage my advisers--I'm only interested in the value and the result," she said. "[Fixed fee arrangements] require having invested time in a firm and that they've invested time in you, as both sides need to know what they're getting for their money, but it means I don't need to worry about things like how many people they send to a meeting. The price is set--it's up to them how they manage the process."

Fixed fees remain a sensitive issue for law firms. Tony Angel, who spent ten years as managing partner of Linklaters before leaving to become executive managing director for EMEA at ratings agency Standard and Poor's in June 2008, admitted that law firms see the move away from hourly billing as "a major threat, rather than a major opportunity to be more effective and efficient than the competition."

One former managing partner of a large international U.K. firm, who wished to remain anonymous, told The Am Law Daily that he was practically "impeached" by the board when he suggested introducing new IT systems that would allow the firm to more efficiently service its clients. "They asked why we would want to spend all that money to get less fees from clients."

With the boot now firmly on the other foot, firms may find themselves left with little choice.

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The hourly rate is being dragged, kicking and screaming, towards its grave. In my experience most senior counsel have spent time in private practice and are well aware of the problems with this type of charging. What is now different is that there is a critical mass of clients giving the same message, which is driving change. In some senses the recession has accelerated this trend.

When I was inhouse, the vast majority of my legal budget was spent on services with other charging mechanisms. The argument that legal work is so complex and so variable that hourly rate is the only way to charge for it doesn't hold up. If IT providers can deliver hugely complex implementations at a fixed price, and manage it through change control, with a bit of work and good use of management information, law firms can do similar.

Fixed fees are in turn one of the factors leading to commoditisation of legal services .

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