New regulations mean more legal and compliance risks for financial institutions.
And cutting corners on legal services can prove to be very expensive.
But there are things that enterprises can do to build strong legal capabilities, without breaking the bank.
A new GEP white paper — Procurement Strategies for Legal Services in Financial Institutions — explains how you can help build a competent legal function for your enterprise, while keeping costs under check. Learn how these procurement strategies have helped two leading financial institutions save millions on legal spend.
It’s a must-read for procurement professionals in banking and financial institutions looking to deliver real strategic value to the business, beyond cost savings.
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.
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.
Points to Note
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.
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:
A robust legal services sourcing strategy would encompass:
Most companies attempting to allocate projects and tasks to a mix of external counsel and in-house legal teams face these five common challenges:
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
The strategies have been split across three categories in decreasing order of ease of implementation:
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.
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.
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
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