Legal Advice

THE CHANGING LANDSCAPE

The global banking and financial industry operates in a highly complex environment that has undergone significant transformation in the past decade. The years following the financial crisis have forced the industry to adjust to increased regulation and higher capital requirements (for banks and insurers), and intensified the need for robust business processes across the board. On top of this, customer expectations regarding service quality have skyrocketed.

As financial companies explore new technologies, uncertainty over regulations — further complicated by their forays into inorganic growth and/or geographic expansion — has elevated the role of their legal departments. Never seen as anything less than strategic, they are now viewed as even more crucial.

The purpose of legal departments is to mitigate legal risks that can cripple the business and bring serious consequences to the firm’s employees. Adapting to a rapidly changing high-risk environment goes beyond just ticking the box for compliance. While this can be expensive, the failure to comply can be even more so.

For example, in 2016, the U.K.’s Prudential Regulation Authority (PRA) issued new requirements to ensure that financial firms are able to operate during periods of stress or recovery.¹ As failure to implement these requirements could lead to a mandatory independent external review or, in the worst-case scenario, revocation of the firm’s banking license, this was not something that could be taken lightly. Initially, several companies underestimated the effort for legal compliance, leading to a last-minute scramble for external legal support, and consequently legal costs skyrocketed.

A well-planned legal procurement strategy, with an optimal mix of in-house legal teams and outsourced legal experts, can set firms apart from competitors and generate real business value. Here, the objective is to put in place the best fee arrangements and utilize innovations in technology to mitigate risks efficiently and effectively.

FACTORS TO CONSIDER WHILE STRUCTURING YOUR LEGAL TEAM

Service Delivery

We are already seeing the blurring of global borders in legal departments. Companies are handing over internal support work to, or obtaining ancillary services (dispatching letters and enclosures, transcription, research, etc.) from, legal process outsourcing (LPO) firms to achieve labor arbitrage savings. Rigid silos are being replaced by fluid structures.

Like other corporate functions, legal departments are experiencing technological disruption. Legal tech firms are at the forefront of this disruption, most commonly leveraging machine learning and artificial intelligence to perform traditional due diligence tasks such as research, reviewing documents and reading contracts.

Organizational Risks and Exposure

Decisions about budget management depend largely upon legal risks and the degree of risk exposure. An assessment of legal risk exposure must be undertaken for each area of legal risk. These risks may vary based on the company’s business (for example, retail banking and insurance firms would face quite different risks with regard to their customer profiles) and regions where it operates.² It is imperative to understand the company’s risk appetite. Some risks may be tolerated and dealt with reactively, whereas others may need to be prevented, that is, dealt with proactively. The responsibility of a general counsel (or chief legal officer) is to minimize these risks across the company through efficient investment.

In-House vs. Outsourced

The choice between in-house lawyers and external experts depends upon a number of factors, such as company policy, type of legal matters handled, etc. BFSI companies must keep these factors in mind while considering their legal outsourcing strategy:

• Skills required and availability of resources.
• Location of resources. White-collar labor rate trends are a major cost component for legal services, so think through your options: tier 1 vs. tier 2 cities or, in extreme cases, on-shore vs. near-shore vs. off-shore.
• Resource mix optimization. Work must be performed at the lowest level (paralegal, junior/senior associate, partner) possible without impacting quality.
• Demand reduction via spend controls and outside counsel policies; preference given to working with independent legal advisors over fixed-duration contracts with law firms.

HOW PROCUREMENT CAN CONTRIBUTE

A robust legal services sourcing strategy would encompass:

• Capturing expertise by outsourcing high-level, strategic work to external counsel to benefit from specialist knowledge
• Capturing efficiency by outsourcing routine/support work to external teams to benefit from legal service providers’ economies of scale

Most companies attempting to allocate projects and tasks to a mix of external counsel and in-house legal teams face these five common challenges:

• Lack of Awareness of Pricing Models: One of the basic issues in identifying the right legal mix is the lack of awareness about different types of fee arrangements — hourly, fixed, performance-based and retainer-based fees — and how each of these works.

Source: GEP Analysis

Hourly rate, or Time and Material (T&M), is a widely used model; it makes the cost comparison among different firms easier and billing more transparent. Alternative fee arrangements can be used for employment and regulatory matters, as the attorney requirement and the duration can be estimated based on past experience. The size of the company and office location are two major factors that impact legal rates and can cause a variation of up to 80-90% in prices.³

• Failure to Identify and List KPIs: Identifying the right KPIs, as well as defining the methodology to evaluate the external counsel are critical. These need to be aligned with the requirements — such as experience of partners, practice areas per client, billing per FTE, cost recovery revenue per legal case, among other things.

• Regulatory Variations: Because of different regulations across regions and countries, companies often face challenges in finding a law firm with expertise in specific practice areas.
• Finding the Right Combination: Companies may have limited appetite to explore and put in place a suitable mix of third parties that includes traditional law firms, legal tech firms and LPO providers. However, this needs to be a carefully planned, leadership-driven activity, with significant cross-departmental collaboration. Significant effort will also be needed to manage these suppliers once they are onboarded.
• Right Staffing Mix: Companies have limited visibility into the staffing mix, such as the number of partners and associates required for a case or project. Usually, the longer the matter, the less involved is senior counsel. As a percentage of total number of hours, a partner’s work drops from 50% for small matters to 37.3% of hours worked for matters greater than 1,000 hours; however, a junior associate’s time expands from 8.3% to 11.2% for such matters.⁴ Larger issues rely on junior associates to conduct large-scale tasks such as due diligence or discovery, so they require greater involvement from junior attorneys.

Procurement Strategies for Selecting Legal Firms

The strategies have been split across three categories in decreasing order of ease of implementation:

QUICK WINS

• Analyze Consolidated Spend Trends:
  • Scrutinize combined legal spend cube by law firm, practice area and geography
  • Benchmark rates by level and spending levels
• Harmonize Rate Cards:
  • Conduct external and internal (across incumbent suppliers) benchmarking
  • Lead direct negotiations for preferred rates with law firms with whom spend is high

STRATEGIC SOURCING

• Establish Preferred Legal Panel: Consolidate law firms into a multi-tiered panel by practice area tiers for strategic, routine and niche matters
• Standardize Processes: Drive process efficiencies and compliance through process and policy standardization
• Evaluate Resource Optimization Trends: Shift to near-shore, off-shore or alternative legal service providers for low-risk activities

TRANSFORMATIVE IDEAS

• Push Legal Partners Toward Greater Productivity: Evaluate legal tech and LPO alternatives and require law firms to invest in the same models as productivity enhancers
• Consolidate Legal Technology Platforms: Rationalize IT systems and software to eliminate redundancies, and renegotiate terms based on increased volumes and leverage

PROCUREMENT’S ROLE IN BUILDING A STRATEGIC LEGAL FUNCTION

Outsourcing legal services in the BFSI space is not a new phenomenon, but in the past decade, more and more financial firms have started exploring this option. The nature of the outsourced tasks has evolved, and the supplier landscape under consideration has expanded beyond traditional law firms to technological disrupters.

As business models become more complex, it is crucial that legal departments keep pace — and not necessarily by creating large in-house legal teams. A judicious selection of the right mix of suppliers, coupled with awareness and appropriate employment of technology (both in-house and by leveraging suppliers’ capabilities), will help BFSI companies achieve optimal value from their legal services providers.

Procurement departments should be key partners in developing new models — ones that combine the expertise of the best law firms, cost efficiencies offered by legal tech firms and LPOs, and a robust in-house legal team — to drive strategic value while controlling the overall cost of the legal function.

CASE STUDIES

These case studies show how two banks implemented a well-thought-out approach to improve the management of their legal departments and drive value beyond cost savings.

TOP U.K. BANK STEMS RISING LEGAL COSTS, CUTS COST BY 13%

Background

A top-tier U.K. bank that offers retail and professional services wanted to curb escalating legal fees. The bank, which had more than 100 legal vendors and an annual legal spend of over $70 million, decided to centralize legal operations and create a long-term strategic sourcing plan to replace the ad-hoc approach to legal spend.

What the Bank Did

• Roped in experts for a detailed spend analysis
• Carried out supply market analysis (supplier profiling, capability assessment) for new, well-vetted participants
• Baselined pre-existing suppliers and identified strong new law firm candidates
• Established robust RFP process with multi-round negotiations
• Conducted both quantitative (rates, volumes, etc.) and qualitative (SLAs, relationships, responsiveness, etc.) assessments
• Established mandatory supplier panel policies with strong compliance control mechanism

Results

• The bank increased savings through reduced rates, volume rebates, improved services (e.g., free interns), better invoicing and expense controls, and cost (rate hike) avoidance. It achieved 13% cost reduction on addressable spend of $40 million
• Created a preferred supplier panel of 30 law firms, including specialist firms
• Revised systems and processes to ensure compliance, billing transparency and consistency

AUSTRALIAN BANK CONSOLIDATES LEGAL OPERATIONS, ALIGNS IT WITH BUSINESS GOALS

Background

A leading Australian bank was using multiple, siloed systems and manual processes to manage legal matters, billing, litigation holds and legal spend, which limited visibility and affected legal expense management. The bank decided to streamline and integrate its legal operations with assistance from external procurement experts.

What the Bank Did

• Evaluated over 30 small- to mid-sized law firms from a qualitative standpoint with help of a procurement service provider
• Built a competency matrix to manage the legal department’s operating model so it delivers faster, more effective and integrated services, along with risk monitoring
• Conducted company-wide surveys, which, along with external benchmarking, uncovered misalignment between the organization’s business model and the legal department’s operating model

Results

• Launched integrated enterprise-wide legal matter management and e-billing system for a “single source of truth”
• Implemented a program to competitively bid case matters of over $250,000 via reverse auction
• Achieved over $1 million savings by transitioning to fixed fee and value-based compensation models
• Established inter-departmental collaboration between procurement and legal teams

References

1. These guidelines, called Operational Continuity in Resolution (OCIR), necessitated that financial firms remediate their contracts and put in place strict Service Level Agreements (SLAs) with a number of third parties (so as to ensure continuity of supply), as well as restructure their “critical” shared services.
2. Firms can choose to handle this differently: for example, many financial services firms have adopted the General Data Protection Regulation (GDPR) — a European regulation — as their “global baseline” because of its authority
3. GEP Analysis
4. GEP Analysis