More than weathering the storm

As businesses worldwide are battered by the economic downturn, some Kiwi in-house counsel are taking steps to ensure they not only survive, but thrive, Craig Sisterson discovers

It’s been said, in fact by Al Pacino in a movie set in a law firm, that the thing about pressure is that when squeezed, some people focus, and some people fold. With the economic storm putting on a massive squeeze all around the world, we’ve already seen some businesses fold. Many others are quickly trying to focus, or re-focus, changing the way they do things in order to survive.

It follows that legal teams within such businesses may also be forced to change. “Overseas, especially in the United States, the recession has had a significant impact on some in-house teams,” says Ron Pol, director of specialist legal services consultancy Team Factors Ltd. “Not only have their budgets for external legal expenditure been slashed, many face across the board budget cuts and headcount reductions internally as well.”

Pol notes such reductions mostly have nothing to do with the relative effectiveness of in-house legal teams – they’re just forced to make the same cuts as other business units as their companies try to weather the economic storm. Although such wide-ranging reductions haven’t become a trend in New Zealand, where Pol sees in-house teams mostly facing headcount freezes rather than lay-offs, the business pressures being faced in New Zealand are causing changes in the way in-house practices operate here.

Debra Blackett, General Counsel & Company Secretary for ANZ National Group, agrees. “Our business is a fundamentally different business than it was a year ago. And as an internal legal team you have to be able to deal with that, and deal with it well,” she says. “The downturn is a timely reminder that change is the only constant in corporate life… [T]he legal function needs to stay ahead of the curve to maximise its value to the business,” adds Tristan Gilbertson, Group General Counsel for Telecom.

Both Blackett and Gilbertson, who each manage sizeable teams with large external legal spends, have witnessed changes to in-house practice being brought about, or accelerated, by the economic downturn. For lawyers willing to accept change, the current recessionary climate may inspire thoughts of President John F Kennedy’s crisis advice: be aware of the danger, but also recognise the opportunity. So what are local in-house counsel doing to ensure they not only survive, but thrive?

An internal evolution
General Counsel I spoke with confirmed Pol’s observation that in-house teams here seem to have largely avoided the redundancies occurring overseas. Instead, their teams, some under headcount freeze, are searching for ongoing efficiencies and developing work practices to ensure they provide increasing value to their overall businesses both through these tough times and beyond. “For us, it’s a matter of what do we do even more prudently and carefully with the team we’ve got internally and externally,” says Steve Bielby, General Counsel for Contact Energy.

Gilbertson recently completed a review of the Telecom legal team’s structure and operations with McKinsey & Company, which found an already high degree of efficiency compared to international benchmarks and internal performance measures. “This means that we haven’t been caught by surprise by the downturn… [W]e are well positioned to continue to operate as strategic enabling partners to the business in increasingly tough times,” he says. “The key challenge is more one of continuous improvement… We have developed a transformation road map designed to drive further efficiencies and improvements into the [legal] function... The whole team has been extensively involved … and we’re all excited about executing on the plan.”

For Blackett, the economic downturn likewise hasn’t affected the size of her legal team at ANZ National, but it has fundamentally changed the type of work they’re doing. “The main thing that’s happening … is our work has changed in its nature, certainly not in its volume – we’ve had to be pretty nimble, and we’ve had to upskill ourselves on a situation which has really got no rules,” she says.

With fundamental changes hitting the world of banking, Blackett says teams such as hers have found themselves shifting from ‘business as usual’ work to a more fluid, demanding, and stressful environment. “The banking industry in particular is changing rapidly in response to an economic crisis which has its origins in the financial sector. Changes in the industry from sourcing funds domestically rather than internationally and managing the international web of government guaranteed debt has meant seismic changes to the legal framework underpinning all these arrangements, and this is work that had to be done right and done fast without the comfort of precedent to rely on.”

When international credit markets ground to a halt, Blackett’s Treasury team had to deal with a brand new regulatory environment created by myriad wholesale guarantees being offered by governments worldwide. Her other specialist teams have similarly shifted focus, delving into previously rare or non-existent areas of work. “I was talking to someone at Barclay’s Bank [recently],” she says, “who I think was right in saying that it’s like packing 10 years of experience into one year.”

At a time when many firms are low on work, Blackett and her team are working flat-out. With more work and static staffing, she is now advising her team to self-prioritise. “In an in-house team, you’ve got to be more brutal [with time],” she says, “sometimes you need to ring people up and talk to them rather than writing them a beautiful memo.”

Before the downturn hit, Blackett had already been working on two key projects, including an examination of what her legal team spent their time on, compared to what the bank’s executive management wanted the legal team to be doing, thought they were doing well, and valued them doing. From those results, Blackett will be looking to work both with her team and her panel of external legal advisers to improve value and efficiency, such as ensuring her highly experienced in-house counsel aren’t tied up with lower-level work more suited to external juniors.

Changing relationships with external providers
Similarly, Gilbertson is examining Telecom’s relationships with its external legal providers. “If anything, the downturn has validated my drive to ensure we optimise the balance between internal resourcing requirements and external spend, to deliver maximum value to our shareholders,” he says. “We only brief out by exception – since we’re a team of doers rather than managers of externals – and strict criteria must be met before anything goes out.”

Having said that, Telecom still has a significant external legal spend, instructing a panel of law firms – a panel to be reviewed at the end of the financial year. Gilbertson is expecting maximum value from those who will make up the new panel. “The most innovative and compelling value propositions will be the ones that succeed,” he says.

One such innovation becoming more prevalent overseas is the use of value-based, rather than time-based billing, notes Pol. “Cisco famously migrated three quarters of its US$125 million legal spend to fixed fees, away from hourly billing, including litigation,” he says. “Different systems not only deliver the same results at less cost for clients, done well [they] can also generate improved margins for firms,” says Pol. “Many lawyers brought up on the sacred cow of hourly billing might need to read that last sentence again.”

For Bielby and the Contact Energy legal team, value-based billing is something they have had as part of their system for several years, with key work marked up or down based on criteria which are broadly value-based. “Those sorts of systems have really come into their own in the current circumstances,” he says, noting he is looking to build even stronger relationships with Contact Energy’s current panel of external legal providers.

Another international trend is the shift towards boutique-style specialist firms with different cost structures than the market heavyweights. “Firms with great lawyers and lower cost structures suddenly have much greater attraction for in-house counsel who might not have looked beyond the big firms a few years ago,” says Pol.

Blackett, who as part of her ongoing value/efficiency projects will also review ANZ National’s external legal panel, has noticed inklings of both international trends here. “I think the rise of boutique firms over the past few years is nipping at the big firms’ heels in a way that they don’t really believe,” she says. “Smaller boutique firms, where the practitioners have a couple of decades’ experience and then have gone out on their own, are worth their weight in gold, because they’ll give your medium [matters] an effort the big firms won’t, and you get all that expertise.”

“I want our legal firms to get closer to us,” she says, before noting she might consider a smaller panel of firms willing to “share in the risk and share in the upside”.

Although Blackett isn’t looking for a generic shift to value-based billing across-the-board, some external providers are offering that option on an ad hoc basis, and she is looking to do more deals in that manner. “One of the things that will be part of the review [of the panel] will be flexibility… on commoditised work, and value-based billing – including building in premiums,” she says.

While some lawyers batten down the hatches to survive the economic storm, others are echoing JFK, and finding the opportunity amongst the danger. For Blackett, her goal is “to come out of this year with an internal and external team that are best in class”.

NZLawyer, issue 108, 20 March 2009