In the line of fire
With increasing pressure on their external spend, in-house counsel are, more than ever, re-evaluating the way they use outside counsel. Stephen Mulrenan spoke with some of Asias largest legal spenders
Just under a year ago, Linklaters Andrew Carmichael and HSBCs Kenneth Ng discussed the provision of legal services with ALB. They were responding to the results of an ALB survey that had found that only 30% of in-house counsel felt they were getting value for money from their advisers.
Carmichael offered the following explanation: "Asia is very much about getting the job done it is all about fast reactions get the job, get it worked out, documented and done, and move on to the next deal. Its the hustle hustle culture."
Well, there hasnt been too much hustling of late, with fewer jobs getting done than in previous years. And statistics at the end of 2002 proved it announced mergers and acquisitions dipped in Asia by a staggering 19.14% from 2001 levels (from US$145.29bn to US$117.49bn).
Although it was a year that included China Mobiles US$10.34bn acquisition of China Mobile Hong Kong (BVI), this was still some way short of 2001s largest deal: the US$38.13bn BHP/Billiton merger.
The slump in global stock markets, precipitated by the September 11 terrorist attacks, became a noose around the neck of those companies seeking to raise the necessary capital to fund deals.
With investor confidence at a low ebb, revenues were hit, and it was only a matter of time before this trickled down to the legal community.
Will Irving, deputy group general counsel at Telstra, says: "We have seen, in real terms, reductions in our external spend. In other words, the legal market in Australia is still relatively buoyant and over the last three or so years firms have wanted to increase their charge-out rates. Our budgets have not been going up in lockstep with that so in a sense weve got less hours that we can brief out externally."
And Telstra is not alone. Despite the fact that larger companies almost certainly possess the deeper pockets, many companies are exercising greater pressure on their external spend, which has led to them becoming far more discerning customers of legal service providers as they seek to handle more and more matters in-house. Fee and billing arrangements are under greater scrutiny than ever, with fee caps, volume discounts and panel use now the norm.
The net result is that external firms are often getting briefed either when workloads peak, for litigation, or for very specialised work.
For many of the large international law firms in Asia that rely on the big-ticket deals, staying close to key clients and being sensitive to their concerns has become imperative. The alternative is a rather humble exit from the region: just ask CMS Cameron McKenna, Cravath Swaine & Moore and Dewey Ballantine, among others.
And the largest 25 companies in the region by market capitalisation, ex-Japan, would qualify as key clients of even the most discerning international law firm.
Interestingly, just over half of the listed companies operate in the telecommunications and banking sectors sectors identified last year as among the most active.
Whether that holds true in 2003 remains to be seen but even these sectors are facing increased competition following a period of consolidation. And it is this trend, say counsel, rather than the global economic downturn that has prompted some of their recent measures.
David Kreider, general counsel at China Mobile (Hong Kong) Ltd, says: "We are trying to economise as many are in this environment. In my area there has been somewhat of a tendency to do more work in-house that might have been sent out in the past. But the measures weve taken are more about becoming a more mature, better run company with age and experience and becoming leaner and meaner in all aspects as part of the general trend of increasing competition in the markets where we operate, as opposed to a temporary phenomenon that comes and goes with economic cycles."
A large number of general counsel interviewed told ALB they had taken measures to strengthen the management of legal risk at their companies. And with annual revenue, in some cases, in the billions of dollars, this risk can be quite significant.
Measures taken include maintaining a continuous focus on internal staff quality and costs, ensuring that external advisers used are the best in their respective fields and are utilised efficiently, and the more active management of outsourced work.
David Krasnostein, chief general counsel at National Australia Bank, says:
Managing legal risk globally in a bank is probably the biggest challenge. Banks by their very nature are very risk averse. If theyre not, they go broke very quickly. But when youve got operations as far-flung as London, New York, New Zealand and branches throughout Asia, youve got huge sums of money moving at bewildering speed and your legal issues in terms of managing risk is very challenging."
With such networks becoming more and more common, opportunities in-house are growing. And with the increasing complexity of industry regulations, for example, the positions are becoming more and more attractive to senior private practitioners.
To prove the point, three of the four Australian banks listed have, since the start of the year, brought in high-profile practitioners from private practice: Freehills partner John OSullivan to Commonwealth Bank; Allens Arthur Robinson partner Tim LEstrange to the ANZ; and former Abbott Tout partner Richard Willcock to Westpac [the fourth, National Australia Banks David Krasnostein, is ex-Sidley Austin and Sullivan & Cromwell].
Because of their ability to lure star names these days, and due to the very real need to economise resources, companies and banks are cutting support staff focusing a great deal more on internal staff quality.
Says Telstras Irving: "Weve also focused very heavily on the nature of the team that we have. While we havent had any redundancies, we have had a very deliberate policy of if people are not performing, we will help them find roles elsewhere that are going to be more suited to their aptitude."
He adds: "All of our lawyers will have had two or three years plus at preeminent firms in Australia before coming here. In some cases, they will have had in-house experience as well."
Although Telstra has beefed up its in-house capability from the 45 lawyers it had three or four years ago to the 60 it has today, the telco outsources about 65% of its work. Although that percentage is coming down slowly as the company seeks to retain more work in-house, Irving says Telstra is not about to go from 60 lawyers to 80 lawyers and bring it down even more.
"We run a much lower ratio of in-house lawyers to staff or revenue to just about any other large telco company. We therefore outsource a relative amount more," he says.
"The reason we havent gone down that path [of hiring more lawyers] is because our lawyers are very bright, they work as hard or harder than those in private practice, we pay them accordingly, and we expect a very professional job."
Then there is the cost factor. Unwilling to over-man their in-house departments, and unwilling to accommodate some of the charge-out rates being requested, companies are scrutinizing fee and billing arrangements more than ever.
China Mobiles Kreider says: "I personally review all bids and quotes very intensively."
But while in-house counsel are now demanding a detailed breakdown from firms of where their money is going, many of those interviewed cite factors other than cost when it comes to outsourcing work.
NABs Krasnostein says: "Cost wise were extremely efficient here. Our legal fees as a percentage of the groups assets have declined over the last three years quite significantly. And we did a benchmarking study with other Australian companies a couple of years ago and we came out as one of the most efficient legal departments in Australia. With that sort of data, I think the organisation doesnt do bloody-minded cost-cutting they understand the value in it.
"But its not necessarily a cost issue as to where work goes," he adds. "The key role the in-house lawyers play is really being managers of legal risk, so its not an issue of whether its cheaper to draft a confidentiality agreement in-house or outside its more important than that in terms of what it is the lawyers are doing or should be doing."
In tough times, quality shines and the firms that have secured the most amount of work from the Top 25 reads like a whos who of the law. The most important criteria when selecting external counsel, say companies, are the usual suspects of quality, service and value.
Although most in-house counsel will have their relationship firms, this concept only stretches so far and almost all are more than willing to look elsewhere if necessary.
Although China Mobile does not operate a formal panel, Kreider says the telco does tend to deal with a handful of firms it has known since its IPO in 1997.
"We tend to stick with them because they understand our culture and operations," he says, "but on larger matters we will have beauty parades and open the floor to potential newcomers."
Telstra does operate a panel of firms, but it consists of only 11 firms with the top three getting 75-80% of the work.
NAB also operates a panel, which is set by Krasnostein and then approved by the Banks Board.
"We like to think we pick the best and brightest outside, and thats where the work goes," says Krasnostein. "We try to have two main firms so theres a bit of competition but we dont shop by brand name. So, if we go to Mallesons or Linklaters, its because of a particular individual and if theyre not free or available, or theyre on holidays or too busy or whatever, it wont necessarily stay with that firm.
"We look for the best individuals wherever we find them."
Why go in-house?
In-house roles are attracting senior private practitioners with increasing frequency. But the job description is often a lot broader from that found in a law firm. We discover what lured our Top 25
Other than being the senior in-house figure in their respective companies,
David Kreider, Will Irving, David Krasnostein, Dick Thurston, John Fast, John OSullivan, Tim LEstrange and Richard Willcock all have something in common: at one time or other, they have all made the move from private practice.
And the companies they now work for also have at least one thing in common: CEOs that are very supportive of their Legal Groups.
This is no coincidence. Gone are the days when companies would house single individuals to manage legal risk. With globalization has come greater complexity and with it a need for more specialized advice and greater critical mass.
The in-house departments at the Top 25 companies in Asia run into the tens, and in some cases, the hundreds. CEOs have been convinced to fund their legal departments appropriately and this has opened windows of opportunity that previously have been closed.
And a career in the corporate sector can offer the following benefits working in a more commercial environment, being involved in deals from beginning to end, working closely with commercial managers towards business objectives, and contributing towards the strategic direction of the company.
With the partnership path in private practice often requiring grueling hours over many years, consideration of a career in-house has never seemed more attractive.
David Krasnostein, chief general counsel at National Australia Bank, says: "The quality of the lawyers in-house are excellent nowadays. The attraction of working in-house is high and I think the quality of life in the private law firms has deteriorated significantly over the years, so were able to hire absolutely first class lawyers."
Before taking the top job at NAB, Krasnostein had a stint in-house with Telstra and, before that, practised with Sidley Austin Brown & Wood in Washington DC and Sullivan & Cromwell in New York.
"When I came back from America," he says, "there was one general counsel of an Australian company who had been a partner in a private law firm. And now, if you look at say the top 10 companies, almost all of them have general counsels who were partners of major law firms."
He adds: "That makes a big difference. They attract high quality lawyers who create a professional internal atmosphere thats very comparable to private law firms. So youve got fantastic work, you dont have to chase clients, you dont have to fill out time sheets, and theyre professionally managed departments so youve got good career opportunities. It is just a superior place to be compared to private practice."
Krasnostein admits remuneration played a key role in his decision to move from the government-owned Telstra to NAB and back to the banking industry (where he had experience while in private practice).
"In Australia, theres only about three or four top in-house legal jobs and you have to think very carefully when they come along."
But, he says, prior to its privatisation, Telstra was a great learning curve for a lawyer enjoying his first in-house role.
"It was a phenomenal experience, to say the least. When I arrived [in 1993], there were 12 lawyers in the company and I hired something like 15 in about an 18-month period and we had something like 4,000 lawsuits running. It was a very interesting company to be a lawyer in."
Although a company with origins dating back to 1901, Telstra wasnt incorporated as an Australian public limited liability company until November 1991. "For a hundred years it had been immune from suit effectively," says Krasnostein. "And in the space of a couple of years, it had lost its crown immunity and was in competition. So it was a lawyers dream and probably a companys nightmare to manage all the legal risks that were materializing."
In late 1996, Mallesons Stephen Jaques managing partner in Melbourne Bruce Ackhurst became group general counsel at the telco a role that has since expanded to incorporate commercial responsibility for Telstras wholesale, Internet, directories and media businesses.
"Bruce has, for a long time, been in that trusted adviser category as far as the CEO is concerned," says deputy group general counsel Will Irving. "He still does wear his legal hat occasionally but it probably only takes up 5% of his time."
But Irving, who dons the company legal hat for the remaining 95% of the time, says it would be a mistake to think a corporate career offered an easier option for a lawyer.
"We do get our pound of flesh," he says, "but we also have people who want the pound of flesh. Theyre coming in here because of the sort of work theyre going to get. They know theyre going to work hard, learn a lot and get great experience. And they will use it as a springboard to other things."
At any one time, Telstras in-house capability is boosted by some 20 to 30 secondees from those law firms it uses heavily.
Says Irving: "The vast bulk of the people in here have been in on secondment before they come in so we get to try before we buy."
The same of course holds true for them, which is just as well, says Irving, as an in-house role may not be suitable for everybody.
"We dont think running an internal-type law firm is the most effective way to operate," he says. "The business will often try and rely on the lawyers to do a hell of a lot more than just being lawyers because theyve got great project management skills, good attention to detail, and they understand the business very well. For these reasons, the legal work will, in some cases, expand to fill the number of lawyers available to do it."
Irving adds: "We have three to five years of the best and the brightest and Im expecting the group to turnover. What is a challenge for them on day one when they arrive is not a challenge by year two or three.
"We go through internal restructures every 12 months or so. We need people who are going to be highly adaptable and flexible and not worry about hanging on to their little patch of turf but think about their next opportunity."
The in-house recruitment market is quiet at the moment, partly because cautious in-house counsel are not moving (which means there is no need for backfill) and partly because the number of new companies entering the region has fallen.
China Mobile (Hong Kong) Ltd
Name: David L Kreider
Title: general counsel, China Mobile (Hong Kong) Ltd
Number of years with your present employer: four
Previous employers: Brown & Wood (HK); Securities and Futures Commission (HK); Securities and Exchange Commission (US); Winthrop Stimson Putnam & Roberts (US)
Total number of lawyers / total number of non-lawyers in your in-house team: while I am the sole legal professional based in-house in Hong Kong, we maintain small legal teams in various of our 21 operating subsidiaries in Mainland China
Top practice areas that occupy the time of your in-house team: securities; public company regulation; corporate governance; contracts
Top commercial law firms to whom you have outsourced most work over the past 12 months: Linklaters & Alliance; Sullivan & Cromwell
Top criteria for selecting external counsel: the right firm brand; the right team of lawyers on the ground in Hong Kong; quality of work-product
What measures have you taken as an in-house team in order to ride the recent downturn in economic fortunes: Mainland Chinas economy has maintained a faster rate of growth than many other regions in the world, and the demand for telecommunications services remains strong as was shown by our 2002 financial results released on 18 March
To what extent has your role as general counsel changed in relation to the above question ie breakdown of your management and legal responsibilities: virtually all areas of our business, including the legal function, have become more challenging and competitive in post-WTO China
Kookmin Bank
Name: Chang Eun Ko
Title: general manager / attorney (lawyer of Korean Bar Association), Kookmin Bank
Number of years with your present employer: four
Previous employers: Aram Law Firm; H&C Bank
Total number of lawyers / total number of non-lawyers in your in-house team: six lawyers (Korean Bar four, American Bar two), 15 non-lawyers
Top practice areas that occupy the time of your in-house team: (1) management of regulations (2) suits (3) contract examinations (4) legal advice for employees (5) legal counseling for customers
Fastest growing practice area for your department: (1) suits (2) legal advice for employees
Top practice areas outsourced to commercial law firms: (1) suits (2) legal opinion
Top commercial law firms to whom you have outsourced most work over the past 12 months: (1) Row & Yang (Hwa Beak) (2) Woo Bang (Yoon & Partners) (3) Woo Yun Kang Jeong & Han (4) Shin & Kim
Top criteria for selecting external counsel: (1) propriety (2) cost (3) balance of distribution
What measures have you taken as an in-house team in order to ride the recent downturn in economic fortunes: strength of legal risk management
To what extent has your role as general counsel changed in relation to the above question i.e. breakdown of your management and legal responsibilities: the role as general counsel has increased in bank management
In-house team mechanics
The trend of managing more work in-house has meant that many of the Top 25 companies maintain in-house teams larger than the firms to whom they outsource work. We find out how they function
National Australia Bank houses 180 members of staff in its in-house legal team, including a staggering 120 lawyers. If it was a private law firm that would, according to ALB50 statistics [ALB, March 2003], make it the largest law firm in Indonesia, Pakistan, Sri Lanka, Thailand and Vietnam, the second largest in India, Malaysia, the Philippines and Taiwan, and the 46th largest firm in Asia.
While David Krasnostein, chief general counsel at the Bank, is the sole legal professional based in-house in Hong Kong, the department maintains small legal teams across its 21 operating subsidiaries in Mainland China.
Such decentralisation is clearly a sign of the times. Gone are the days when companies would house single individuals to manage legal risk. In-house departments now resemble modern law firms, both in terms of numbers and structure.
And together with pressures brought on by the recent economic downturn, this has placed a greater onus on departments to review and improve their structures with a view to rationalising.
BHP Billiton houses the second largest number of lawyers and management of the companys legal group is also delegated, with interaction occurring through regional counsel and regular meetings with team members in the various offices.
Chief legal counsel John Fast says: "The internal legal group has developed more structure and therefore is more empowered to undertake its own management, particularly through the appointment of regional counsel with regional responsibilities. The role remains focused on managing risk and delivering successful outcomes, both in new and legacy matters, while maintaining tight control over costs."
And the same story can be found at Telstra. While group general counsel Bruce Ackhurst has commercial responsibility for Telstras wholesale, Internet, directories and media businesses, deputy general counsel Will Irving is his direct report in charge of the 60-lawyer legal team. A general counsel, who reports to Irving, heads up each business unit.
There is also the team of lawyers at joint venture partner Reach.
And with the company seeking growth opportunities in Asia and more specifically China with deals such as its PCCW strategic alliance, Irving fully expects there to be a need for more legal bodies on the ground.
Despite having an external budget of between A$40m and A$60m (US$27-US$40m), Telstra enjoys a reputation for tight budget management and uses its size to its advantage.
"We have more market clout perhaps than other corporates," says Irving, "so we make sure that really do run a very tight ship. To be frank, that causes a bit of grief occasionally.
"We have a very good relationship with our firms," he adds, "but its a rigorous one."
An integral part of the companys tight budget management involves what Irving describes as a "bottom-up budget" process.
"We do quite a detailed demand forecasting exercise each time we go and set the budget, in terms of what each of our business units are forecasting for their levels of activity," he says.
The Legal Group adds value to the business, says Irving, in that it provides advice to the company rather than to individual mangers.
"As a result of that," he says, "we largely have control of our own budget rather than individual businesses funding individual matters. But whatever we cant fund out of what we get allocated we will go back to the business and say, if you want to do x, y and z in addition, you will need to fund that out of your separate budgets.
"We will look at what we think is of higher importance for the corporation as a whole in terms of its risk management, its legal position and furthering its commercial interests. If we think there are nice-to-haves but not critical, they will tend to be the first things that the businesses will pay for."
And control over the legal budget can sometimes mean, in cases of priority conflicts between management, the businesses will often have to feed-fund the initial legal work while feasibility studies are completed.
"Its a way of balancing the consequence between them not chasing every wild idea they have and getting us to do a whole heap of work thats not going to proceed into something thats going to end up coming to fruition," says Irving.
Being majority owned by the Australian Government, Telstra is in a somewhat unique position when it comes to competition. As a result of that, the company has enjoyed large economies of scale in scope by having one or two firms that really know it intimately.
"And we found that we in fact drive far more efficiency through that process than necessarily through competition on an hourly-rate basis," says Irving.
That said, if the company is a firms biggest client it does expect to get the best deal. And it has recently put in measures to ensure this is so by drawing on some of its IT resources.
Irving says: "We have pre-agreed estimates for all the work that gets briefed out. We have an electronic billing system. The firms cant bill over the estimate. So, weve locked in a lot of discipline there. And, by having that estimate process for every single matter that gets briefed out, we actually drive a lot of efficiency because the firms have to stop and think before-hand, and so do we, about what work really needs to happen and when."
So much efficiency in fact that Irving claims to have shaved at least 10% off his bill, in its first year of use, when looking at like-for-like matters.
And thats something thats unlikely to be ignored by any board of directors.