LexisNexis

Effective legal spend in the pandemic era

As the Covid-19 pandemic continues to wreak havoc around the world, Lucy Trevelyan explores what effect this will have on in-house legal spend and management.

According to a report published in June, entitled Reducing Legal Spending: A Survey Of In-House Attorneys and sponsored by LegalBillReview.com, 73 per cent of in-house counsel believe their legal departments are spending too much on their outside counsel. More than half, meanwhile, report that reducing outside legal spending is a priority this year.

Lack of value for money and the excessive time taken to complete tasks were among the common complaints in-house counsel had about their external legal advisers.

Meanwhile, a separate survey by the legal website RollOnFriday revealed in July that 44 per cent of in-house lawyers predict a drop in their legal spend for 2020 and 2021 due to the pandemic. Only 19 per cent believed their spend will increase over the next 18 months, and 37 per cent felt that it will stay the same.

Budgets, the poll showed, are being cut across the board, with external legal advice being no exception as organisations battle to survive the pandemic. In-house lawyers report that as much work as possible is being brought in-house, as M&A dips, and new projects that usually require outside legal advice are put on hold.

It’s not all bad news for private practice lawyers though, with many of the surveyed in-house counsel predicting that external spend would have to increase in areas such as litigation – as disputes rise in industries such as insurance – as well as ongoing regulatory and political market-wide matters such as the benchmark interest rate LIBOR and asset disposal and management.

What’s affecting spend?

How external legal spend varies during the pandemic will depend upon the activities of an organisation, says Abhijit Mukhopadhyay, Secretary of the IBA Corporate Counsel Forum and general counsel at London-headquartered Indian conglomerate the Hinduja Group. Where businesses are thriving, like the IT industry, or where M&A activities are taking place, legal spend will continue to rise.

‘This is the time when stressed assets can be bought,’ says Mukhopadhyay. ‘If the companies have ongoing businesses, then legal spend will continue. However, if the business is down, like hospitality, airlines, etc, such spending will be greatly affected.’ 

The main factor, he says, is lack of revenue generation, but even if commercial activities are still taking place, the tendency will be to save costs as much as possible. And this situation is likely to continue until a vaccine for Covid-19 is found.

‘We need to manage legal spend more judiciously,’ believes Mukhopadhyay. ‘Where unnecessary costs can be eliminated, we should do it. Similarly, where work can be done in-house instead of outsourcing, it should be done accordingly. Better management of present resources is the key.’

‘We need to manage legal spend more judiciously. Where unnecessary costs can be eliminated, we should do it’

Abhijit Mukhopadhyay, Secretary, IBA Corporate Counsel Forum

Outside counsel, he says, needs to be innovative and bring their specialised knowledge to help businesses as they face Covid-19. They can also continue to impart knowledge for the benefit of companies through webinars, podcasts and other online mediums.

‘They also need to be cautious of their costs and where possible they should try to reduce them,’ highlights Mukhopadhyay. ‘We always assess external legal spend against the value that we receive from external legal counsel.’

This is the case, he says, irrespective of the pandemic. ‘When we get value for money we will continue to engage external legal counsels,’ he adds. ‘Cost, competency and care are the three mantras for external legal counsel to follow.’

Generally speaking, suggests Mukhopadhyay, external lawyers should aim to become an extended arm of the in-house legal department. External lawyers should understand their clients’ commercial requirements and come up with an implementation plan to achieve those objectives.

‘At the end of the day, except in case of litigation, any deal will be commercial and external lawyers need to assist in-house legal personnel to achieve the commercial goal,’ he says.

Graham Wladimiroff, Membership Officer of the IBA Corporate Counsel Forum and VP & Assistant General Counsel at Avery Dennison Hong Kong, says he saw additional spend back in March and April which centred on getting advice on companies’ immediate response to the crisis, mainly on employment law-related questions (for example, on furloughs) but also on privacy and force majeure. ‘Overall legal spend has gone down significantly in the past six months compared to past years despite the “spike” in activity mentioned,’ he says.

For Wladimiroff, the reasons for this include a mix of factors, including, for instance, that there has been less spend because of lower sales perhaps, less M&A and the travel spend will have plummeted. A reduction in headcount may also have been a measure for some companies, particularly if a company found itself in something of an existential crisis due to Covid-19, suggests Wladimiroff – adding that that’s not the case for the company he works for.

He does foresee spend increasing and gradually returning to normal levels though, as business picks up, and further returning to normal when we move beyond the present crisis.

‘The world will be a different place in certain ways, of course,’ he says. ‘Travel, for instance, is expected to remain lower in future and perhaps a different way of working will lead to lower office costs.’

He adds that pressures may increase on in-house teams to look for automation solutions which could impact headcount at the admin and paralegal level, but it’s hard to say if automation could in fact impact headcount in a measurable way. ‘I would expect a continuing trend to having a legal operations manager in in-house departments,’ says Wladimiroff.

Finally, he says, there is a question for companies as to whether they are willing to increase their risk appetite as a way to control cost.

‘This could be a more measurable way to reduce both internal as well as external cost,’ notes Wladimiroff. ‘Not only could it mean empowering the business to complete contracts to reduce the workload for in-house counsel, it could also mean less outsourcing of work to law firms, for instance by limiting the work to be outsourced to the larger complex projects like M&A or litigation or higher risk issues like product defect claims.’

Hanim Hamzah is Senior Vice Chair of the IBA Law Firm Management Committee and Regional Managing Partner of ZICO Law Network in Singapore. She says that factors affecting in-house counsel legal spend include market uncertainty – difficulties in closing deals due to connectivity and logistics issues – and a lack of clear leadership direction, with leaders adopting as a default a wait-and-see approach.

‘I do not see this changing drastically in the near and further future because although one could be trained to lead and run businesses in a more agile manner, response will depend on the particular situation,’ she says. ‘Countries that experienced SARS more than a decade ago did not necessarily respond better than those that did not suffer from SARS. It will always be difficult to prepare for the unpredictable.’

Bringing it in-house

Tony Williams, Principal at Jomati Consultants, says it looks as though the pandemic will be impacting business for some time even if a suitable vaccine is found and rolled out. 

‘The increasing move to online commerce both B2B and B2C looks inevitable,’ he believes. ‘In addition, corporates will review their supply chains in view of the vulnerabilities exposed during the pandemic. We will also probably see some increased M&A activity as the stronger players in a sector see an opportunity to take out their weaker competitors.’

When assessing external legal spend, he says, it is appropriate to weigh up the extra value that external lawyers bring, compared to the additional cost that they incur. 

‘Accordingly, focusing on areas where the external lawyers have real experience and expertise can therefore add significant value is likely to be [how] the in-house counsel gets the most bang for his or her buck,’ says Williams. ‘It is only appropriate to use outside counsel for more routine work if they have a business and pricing model that makes them competitive as against doing that work in-house.’ 

‘It is only appropriate to use outside counsel for more routine work if they have a business and pricing model that makes them competitive as against doing that work in-house’

Tony Williams, Principal, Jomati Consultants

It is likely that in-house legal teams won’t grow in size in many organisations in the short to medium term. ‘Accordingly if more work is to be done in-house this will be achieved by the in-house team becoming more efficient, becoming more specialised and making greater use of technology,’ says Williams. 

He explains that this approach will help enable the in-house team to demonstrate their value to the wider organisation and avoid further cuts to their budget. ‘However, in many industries very adversely impacted by the pandemic some significant entrenchment of a legal team may be inevitable,’ adds Williams.

Technology and artificial intelligence may bolster the efficiency of in-house teams in a number of ways. ‘It can help to manage the workload and allocation of work,’ he says. ‘It can manage a repository of advice, guidance and documentation to avoid the same advice being requested of external lawyers on multiple occasions and it can indicate areas where demand is growing and where more focused internal resource may be appropriate.’ 

For Anthony Armitage, Group Counsel at Southern Housing Group, the volume of transactional work his companies have outsourced has remained steady, whereas litigation has seen a subtle increase.

‘The reduced visibility of our caseload, caused by homeworking limitations, and financial pinch imposed on our customers during the pandemic, have together favoured largely opportunistic claimants to lodge new claims,’ he says. ‘Spend on external counsel has risen in proportion.’

Lockdown can give rise to a perception that the in-house legal team is working to capacity, so direct referrals to law firms by other teams in the business can become more regular, adds Armitage.  

‘The housing sector is susceptible to the employment and business interruptions in other sectors,’ says Armitage. ‘Our income is derived in large part from rent and sales, so the inevitable reductions here, over which we have no direct control, need to be offset by cost-cutting elsewhere.’

With the second wave of Covid-19 arriving in many countries and a return to a form of lockdown for the foreseeable future in the UK, he doesn’t see any significant change in the short term.

‘We will get smarter at tackling legal cases, adjusting the balance of in-house and external referrals, so as to play to our respective strengths better,’ he summarises. ‘Longer term, we will have been through a kind of stress-testing exercise to learn lessons and improve the way we manage our spend.’

Effective legal spend

Armitage would advocate a number of principal measures to better control legal spend. Firstly, manage a wider range of outsourced legal services directly through the legal team, and secondly give the legal team a more regular voice at executive level. Thirdly, introduce tighter control of budgets, and finally, operate a sustained communications plan across the business to raise and maintain awareness of in-house counsels’ role, function and capability.

When assessing external legal spend, he says, the CEO of a company should be viewed as the ship’s captain, and the legal team as the navigator.

‘In-house counsel should be on the bridge. We need to understand how the big decisions are reached and the drivers behind them, so we can help steer a safe passage through the stormy legal waters of the Covid-19 pandemic,’ believes Armitage. ‘In-house counsel has great versatility, with a deep understanding of the needs of the business.’

‘In-house counsel should be on the bridge. We need to understand how the big decisions are reached and the drivers behind them’

Anthony Armitage, Group Counsel, Southern Housing Group

He says that in this context, it is the decisions from the legal team, on how and when to instruct external counsel, which matter and these decisions will directly impact on legal spend.

It is tempting for businesses to cut legal services budgets during a crisis, but spending a little more now will save a lot more later, says Armitage.

With in-house teams facing cuts, intelligent working can help them economise. Armitage explains that shifting the focus from performing legal work to managing instructions with outside counsel can reap rewards that far outstrip the savings from simply replacing outside counsel with in-house counsel.

‘Triage advice from the in-house team is the bedrock for effective collaboration,’ he says. ‘Keeping with the same imagery, by moving away from the coal face we can manage the mining operations expertly, drawing on our knowledge and experience from years of working as miners ourselves.’

In-house counsel has a symbiotic relationship with outside counsel, delivering a service that is greater than the sum of its parts, believes Armitage. ‘This is not a zero sum game. Factors like capacity, expertise and support are put into the mix to determine the balance of work that is outsourced. This is teamwork of the highest order. A well-managed legal instruction between professionals generates the most value to both partners.’

A greater profile

Suzanne Horne, a partner at Paul Hastings based in London, says a recent study conducted by her firm found that over the course of the pandemic, 71 per cent of in-house legal teams said they had seen a greater involvement in strategic decision-making at executive and board level.

‘This is because they are at the epicentre of action plans to accelerate and implement proposals, and in some cases, rethinking the overall business strategy,’ she explains.

‘Based upon our recent discussions with a broad range of clients, it is also evident that the pandemic has given the in-house team the opportunity to showcase their broad legal skill-set,’ she adds. ‘Therefore, in-house has taken a key role in problem solving for their businesses.’

‘It is evident that the pandemic has given the in-house team the opportunity to showcase their broad legal skill-set’

Suzanne Horne, Partner, Paul Hastings

Compliance and regulation are issues that are currently at the forefront of most businesses’ minds, she says, ‘so having a counsel that can provide quick risk-based advice, highlight potential issues or, better still, advise ways in which a business can take early steps to save later effort – and money – is a huge benefit to businesses’.

The firm’s study showed that there is an expectation that companies will keep more work in-house in the future, she says.

‘One of the effects of this increase in work is that approximately two-thirds of respondents either thought that the size of their team would increase or stay the same,’ says Horne. ‘But this also results in a number of concerns for in-house. For example, how to manage an increased workload, “doing more for less” and the inability for in-house to switch off or differentiate between work and home life due to the virtual world of work.’  

Technology has kept so many businesses (and their legal teams) functioning through the pandemic. Paul Hastings’ study revealed that the pandemic has accelerated the plans of 30 per cent of general counsels, heads of legal and chief legal officers to invest in technology.

‘Looking ahead, if organisations can implement technology which allows automation of basic tasks, in-house lawyers will be able to spend more time adding value on complex work and business critical issues, ultimately leading to the upskilling of that team to partner with other senior leaders in the business,’ says Horne. ‘In turn, this may result in the profile of in-house lawyers becoming even more senior.’

There could be drawbacks as well as benefits, however, particularly when it comes to Artificial Intelligence (AI) solutions. Some companies are concerned that they’re yet to see tangible benefits of implementing AI solutions, and may view AI as a luxury that they cannot afford under the economic strain of the pandemic.

Horne says that others voice concerns about how implementing AI may result in more time being spent by in-house lawyers within the realm of cyber security and compliance, tackling data security, privacy and the protection of confidential information or restricted by the lack of flexibility from tech-generated outcomes which do not allow much thinking outside the box.

Horne highlights that there are also concerns in relation to tech and AI on the impact on human agency, with a significant number of lawyers expecting that AI will replace roles both within in-house teams and across businesses more broadly. ‘Therefore, there is a balance to be struck and not all in-house teams are at the same stage of the tech and AI journey,’ she concludes.