Last month I had the pleasure of being on a panel in Europe with Joe Longo, the General Counsel for Asia-Pacific of Deutsche Bank AG. Joe had some particularly thought-provoking and hard-headed observations about the changing dynamics between law firms and clients. I thought it would be worth drawing Joe out a bit more extensively than was possible on our panel, so we found time recently to chat across the 12-hour timezone difference (Joe in Hong Kong, me in New York).
First, a bit of more what/where/when background on Joe.
At Deutsche Bank, Joe is responsible for the direction and coordination of legal support for the Bank’s businesses throughout Asia-Pacific. Before moving to Hong Kong in 2002, Joe was Special Counsel at Freehills (Herbert Smith Freehills) in Sydney and before that was National Enforcement Director at the Australian Securities & Investments Commission.
Earlier in his career, he specialized in corporate litigation and white collar defense while a partner at Perth, Western Australia based firm Parker & Parker (now Herbert Smith Freehills), and practiced as a corporate and banking lawyer first with Parker Chapin and later with Skadden, here in New York. Joe graduated from the University of Western Australia Law School and the Yale Law School (LL.M.) and was admitted to practice in New York in 1986.
I started by asking Joe to describe at a macro level some of the changes he’s seen since the Global Financial Crisis. What follows is my synopsis of our conversation, understanding that unless phrases are in direct quotation marks it’s not Joe’s words verbatim.
The buy-side/sell-side dynamics have changed very dramatically, although some of the trends were in place earlier. Remember that 2005-7 were really boom years for the legal industry. With the GFC, the power shifted to buy-side in a big, and permanent, way. Everything changed in 2008-’10, accompanied by lots of debate about whether this was the New Normal.
We now all accept it wasn’t a short-term dip but a long-term change in the dynamics. Inhouse departments are no longer growing and indeed are being restructured. Joe thinks that Deutsche Bank has a reputation for being a bit of a leader in how it goes about retaining law firms and get value for money (“frankly,” as he put it).
But across the corporate world, at most sophisticated corporations and major banks, the legal department is not being left to its own devices in retaining law firms. There’s far more accountability for the financial aspects of retainers or relationships. Finance departments, auditors, and others, are a lot more interested in why we chose particular firms, or one firm over another, and what did we do to satisfy ourselves that the fees are competitive.
An effective approach to this, requires one to enter the world of “procurement” with appropriate systems, processes, and documentation. Most inhouse lawyers have had little experience with this until quite recently; things have become quite a bit more sophisticated with competitive tendering, processes for getting fees paid, standardized terms and conditions for retainers, setting out, for example what the Bank will and will not pay for, and defining standards, for example, with respect to data protection.
Bruce: How do law firms react to this?
Most law firms are cooperative and it’s not as though all the changes came at once; they’ve been incremental. Most firms, frankly, wanted to continue to get work from Deutsche Bank and therefore wanted to cooperate. Sure, a few firms Deutsche Bank wanted to work with were resistant, but in general firms have cooperated.
It’s a rapidly changing area but one thing that is not changing is there’s constant downward pressure on price and fees. I don’t see any relief from that. In practical economic terms, firms wanting to obtain inflation-adjusted fee increases, without having achieved efficiencies in service, will not be given a sympathetic hearing.
Bruce: Is the pressure limited to fees or does it go beyond that?
It’s not just about the size of the fee for service, but Deutsche Bank and others are interested in the law firm’s business model: Where the work is done, how document reviews are done and by whom, what is the profile and background of the lawyers (in terms of seniority and price) that are being put on our matters. Deutsche Bank wants to understand who they’re going to work with, and that can often be in India or elsewhere – wherever data and document analysis can be done.
Deutsche Bank and other corporations are experimenting with unbundling, with contract based providers, with using secondments more frequently, and other initiatives designed to promote efficiency. It is a learning process for everyone. Frankly, Joe suspects the vast majority of the work is still done in the traditional way, approaching a single law firm to get the work done, but not for too much longer: Inhouse counsel are being pressured to be more innovative.
In short, while it’s true today that the bulk of work still goes to traditional law firms, it’s likely that an increasing share of the Bank’s total legal spend will go to non-traditional legal service providers.
Bruce: What about the high-end work?