A new verdict. Frustration with high legal fees and demand for local regulatory knowledge may give boutique law firms an edge with larger clients.

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1 Frustration with high legal fees and demand for local regulatory knowledge may give boutique law firms an edge with larger clients. Large companies have regularly hired large law firms and kept them on retainer to address legal needs as they arise. However, with legal expenditure continuing to rise, largely because of higher billing rates, some in-house lawyers are reconsidering how they choose and partner with outside firms. In 2016 partners at elite law firms were charging as much as US$1,500 per hour. Indeed, the 3.6% revenue growth at US law firms achieved in the first nine months of 2017 was entirely driven by rate increases, according to Citi Private Bank s annual industry report. The steady rise in legal fees and easier access to boutique firms and independent legal experts via online platforms and social networks are causing some multinationals to rethink where they send their legal work. With the pressures on budgets, those relationships come under a lot of pressure, says Michael Ellis, group general counsel at Abercrombie & Kent, a luxury global travel company. An Economist Intelligence Unit survey of 307 business leaders from the US, UK and Europe conducted in October-November 2017 and commissioned by Globality found that multinational companies are seeing benefits in working with small and medium-sized enterprises (SMEs), with fewer than 500 employees, that can offer the same quality of legal advice at more reasonable prices. A report from The Economist Intelligence Unit 1

2 The value proposition of SMEs The steady volume of mergers and acquisitions and regulatory uncertainty in the face of higher political risk in the West suggest that demand for outside legal counsel will continue to be strong. Forty per cent of survey respondents expect to increase spending on outside legal counsel five years from now. However, in-house legal teams are facing pressure today to generate more value from the resources spent on these relationships. The survey results reflected these pressures. Respondents who have primary responsibility over legal service providers at their companies say cost is the most frequently cited challenge they face in working with outside legal counsel, and it is affecting how they choose outside firms. Forty-one per cent say cost-effectiveness is a priority when choosing a service provider. As a result, some companies are turning to SMEs. Smaller firms can be more cost-effective because they have lower overheads, allowing them to charge more moderate rates. As a result, they are able to provide the same legal expertise at a lower cost. They can also often provide regional or specialised expertise because they focus on providing services in a specific community or area of the law. That can be appealing for multinational organisations that may have legal issues in different international jurisdictions. The big law firms don t seem to realise that they re charging an enormous amount of money for work that other people can provide for a lot cheaper. Michael Ellis, group general counsel at Abercrombie & Kent, London In the survey, cost and specialised skills are among the top priorities respondents cited for choosing an outside provider. Part of the job of in-house counsel is to get the best value for money spent, Mr Ellis says. As the sole counsel for a company with 2,500 employees and more than 50 offices around the world, he regularly seeks the support of outside firms. The big law firms don t seem to realise that they re charging an enormous amount of money for work that other people can provide for a lot cheaper, he says. That doesn t mean legal executives are willing to sacrifice quality for price. Rather, they are changing the way they vet and work with law firms, by assessing the quality of the talent on the team rather than brand reputation alone, Mr Ellis says. In-house counsel further recognises that the same talent no longer just resides in the big law firms but has given up the overheads and is working out of their home study at a fraction of the price. He has found that such expertise can be found in a lot of different places, including Zambia, Ecuador, Sri Lanka and the British Virgin Islands. Survey respondents say they already dedicate on average 28% of their budget for outside counsel on small law firms, 18% on freelance contributors and 13% on online platforms. Indeed, 40% say they expect spending on these smaller service providers to increase five years from now. Average percentage of annual spending on external law firms 40% 28% 18% 13% Law firms with multiple practices Law firms with a single practice Individual freelance contributors and consultants Online platforms 2

3 Stronger value proposition is the most frequently chosen reason respondents say they would choose to work with SMEs instead of large law firms in the next year, cited by 54%. The benefits that SMEs bring to the table, however, extend beyond hourly rates. Factors that would lead your firm to consider hiring SMEs instead of a large law firm Stronger value proposition Identifying SMEs with the same corporate culture as my firm Easier sourcing and vetting 54% 44% 44% More tenders and/or proposals from SMEs Lower costs 43% 31% In addition to high costs, survey respondents also frequently cited lack of responsiveness (36%) and lack of familiarity with the business (35%) as challenges of working with external counsel. For smaller law firms, this could be an opportunity. Indeed, survey respondents said that in addition to a better value proposition, they would consider SMEs over large law firms in the next year if they had a similar corporate culture and it was easier to source and vet them. Top three challenges experienced with external law firms Cost Lack of responsiveness Lack of familiarity with my business Mr Ellis reports having worked with law firms in the past that never responded to his requests once a project began, and then sent invoices above the agreed quote with no explanation. That annoys me, he says. He finds that smaller firms and independent legal experts can be more responsive because they want to prove themselves as new vendors. 36% 35% 48% Smaller firms and independent legal experts can be more responsive because they want to prove themselves as new vendors. Michael Ellis, group general counsel at Abercrombie & Kent, London 3

4 Local insights Regulatory issues will be a significant concern for companies entering new markets. More than half of respondents (51%) say they will need the most support from outside counsel to deal with regulatory compliance in five years. Incompatible regulatory frameworks are also the challenge most frequently cited by respondents when sourcing legal help in foreign markets. Areas in need of support from external agencies in five years When we work in remote locations where big firms Regulatory compliance Review of contracts and other documents Trademark and patent registration don t have teams in place, it is better to go directly to a small local firm for support...with larger firms you wouldn t get the same level of attention. Maria Varsellona, chief legal officer for Nokia In these cases, small law firms can be the best choice, says Maria Varsellona, chief legal officer for Nokia. When we work in remote locations where big firms don t have teams in place, it is better to go directly to a small local firm for support, she says. This way, she works with the team directly, and often garners the support of their top talent, even on small projects. With larger firms you wouldn t get the same level of attention. She notes that larger firms will typically outsource the work to local experts on these projects, eliminating her team from that vetting process, which she sees as a risk. Instead, Ms Varsellona s team has built a network of small firms in these communities who they have vetted through past projects and recommendations from colleagues. When you know the individual talent and have established a level of trust it is easier to move forward. 4

5 Challenges still abound Finding good talent beyond big law firms can be challenging. But with online networking tools, matching platforms, and review sites, these barriers are becoming less of an issue. Multinationals also need to be certain that any new firm, big or small, will follow all local laws, and not participate in corrupt behavior that could negatively affect the business. If someone says they can get me a licence in a week, when everyone else says it will take three months, I have to be suspicious, Mr Ellis says. He mitigates this risk up front by asking detailed questions of a number of firms about how they will complete the work and the obstacles they face, before making a sourcing decision. The landscape for legal services providers is likely to evolve in the coming years, as multinationals get savvier at finding and vetting a wider array of law firms and start to recognise the cost-savings and expertise they bring to the business. About the research This report was written by The Economist Intelligence Unit. In October-November 2017 we conducted a survey of 307 corporate executives from companies headquartered in the US, UK and continental Europe. All respondents were director-level or above. They were responsible for managing relationships with external professional service providers, and their companies had a minimum of US$1bn in annual revenue. 5

6 While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. London The Adelphi 1-11 John Adam Street London WC2N 6HT United Kingdom Tel: (44.20) Fax: (44.20) New York 750 Third Avenue 5th Floor New York, NY United States Tel: (1.212) Fax: (1.212) Hong Kong 1301 Cityplaza Four 12 Taikoo Wan Road Taikoo Shing Hong Kong Tel: (852) Fax: (852) Geneva Boulevard des Tranchées Geneva Switzerland Tel: (41) Fax: (41) Dubai Office 1301a Aurora Tower Dubai Media City Dubai Tel: (971) Fax: (971) dubai@eiu.com The Economist Intelligence Unit Limited 2018