Lexpert Magazine

66 LEXPERT MAGAZINE | JANUARY/FEBRUARY 2017 BY RICHARD STOCK | COLUMNS | Richard Stock, M.A., FCIS, CMC, is a partner in Catalyst Consulting. The firm has consulted to more than 250 law departments over 20 years. Reach him at (416) 367-4447 or at rstock@catalystlegal.com. From Vendor to Strategic Partner I RECENTLY READ Ben Heineman's e Inside Counsel Revolution. As the for- mer GC for General Electric and a prolific writer, he covered a lot of ground. One sec- tion concerned e Global Legal Organ- ization of the Future; its chapter on Law Firms and Alternatives is of particular inter- est because it provides the best description of the continuum of practices and relation- ships that law departments have had with external counsel that I have seen in 20 years. Heineman traces the evolution of the corporate law department's relationship with law firms as five phases stretch- ing over the past 25 years. ese sometimes overlapping phases are worth examining in order to give law firms and GCs an idea of where they are in the continuum. e first phase of corporate law department responses is, 'We hire lawyers, not law firms.' As companies began to populate their law departments with special- ists, these individuals in turn selected exter- nal counsel in an ad hoc fashion based on their networks. At the same time, inside counsel began to take on some of the com- plex work themselves, especially when the critical mass of work made it cost-effective to do so. For some law departments the 1980s was the beginning of the movement away from being a collection of commer- cial generalists acting as sole practitioners. Even today, too many law departments believe that this is the best business model to serve their corporations. Moreover, per- haps encouraged by law firm colleagues, they continue to believe that you hire the lawyer and not the firm. e second phase of managing the rela- tionship with external counsel, Heineman wrote, was to "make competition more systematic" with a clear objective of cost reduction. Outside counsel guidelines were introduced but tended to focus on disburse- ments. e competitive aspects took the form of invitational requests to a small num- ber of firms proposing fees on a matter-by- matter basis. Over time, informal requests evolved into formal RFPs, and in a few cases reverse auctions. Blended rates and dis- counts, both variations of hourly rates, were secured. Invoices became more detailed and task-based. Institutional consumers of legal services, such as banks, insurance and utility companies, did formalize processes, but did not systematically negotiate reduced fees or venture into alternative fee arrangements, with the exception of fixed fees for com- modity work. e third phase reflects the transition from relational to transactional retention of external counsel. Heineman refers to the era of "preferred providers," when implicit preferences for law firms and key lawyers became more explicit. e largest volumes and the most interesting work continue to flow to traditional legal providers, and it appears that relationships and a good track record continue to trump price. Law de- partments do not have the analytical tools or appetite to parse law firm prices, so it fol- lows that they cannot determine how much more they are paying than they could pay to other panel firms. More than 80 per cent of Canadian law departments are operating at phase-two and phase-three levels when re- taining external counsel. In phase four, the company commits a volume of work for several years in ex- change for a flat annual fee. e company secures budget predictability and the firm has regular cash flow. Some Canadian com- panies have had such arrangements in place for 10 years, typically as a series of three- to four-year agreements. Adjustment clauses to recognize significant variations in vol- ume and matter complexity are included to minimize the risks of paying too much or for unacceptable losses for the law firm. Collar arrangements of 15 per cent are usually sufficient for the firm to secure a predictable flow of work and to stimulate efficiency in the law firm. It followed natur- ally that fixed fees morphed into hybrid fees: a fixed-fee amount and a variable portion tied to key per- formance indicators. ese arrange- ments are still rare today, however. Heineman describes phase five as the ef- fort by corporate legal departments to inte- grate more completely with law firms and make them strategic advisors. Goals and objectives are set for matters as well as for the portfolio of work. Joint law department and law firm teams select the optimal con- figuration of fees for the matter or perhaps for a book of business. is type of inte- gration can incorporate LEAN initiatives, improving relationships with business units in the company, managing the network of local counsel, and facilitating detailed re- ports on legal services delivery. GCs and law firms should agree on the cornerstones of strategic partnerships if they are to achieve their full potential. A new book plots the law firm's management of external counsel, in five stages, over nearly three decades LAW DEPARTMENTS 'HEINEMAN traces the evolution of the corporate law department's relationships with law firms as five phases over 25 years, showing firms and GCs where they are in the continuum'

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