This article was written by Phillip Bantz for Corporate Counsel on September 10, 2018. The original article can be found at: https://www.law.com/corpcounsel/2018/09/10/in-germany-risk-management-needs-prompt-law-departments-to-keep-work-in-house/
Growing concerns about risk and transparency have been driving German companies with international footprints to rely more heavily on their legal departments.
And when the companies have to use outside counsel, the work is increasingly going to small panels of preferred law firms, according to a new study that hints at global trends.
The report is based on interviews with top in-house lawyers at 33 German companies, some of which are subsidiaries of multinational businesses based in Asia, Latin America and the U.S. The in-house leaders spoke with study author Mari Sako, a professor at the Saïd Business School at the University of Oxford.
Sako told Corporate Counsel that the companies were concerned about a combination of legal and nonlegal risks, such as corruption and reputation damage. As a result, she said they had a tendency to handle most legal issues in-house because it enables the legal department to better coordinate with others involved in managing these problems, such as corporate marketing and compliance.
“That’s a different incentive for insourcing than the American GCs used to give, which was the high billable hour,” added Sako, who interviewed more than 50 GCs in America and the U.K. for an earlier study published in 2010.
In the most recent study, Sako noticed in Germany “a strong current toward systematizing corporate relationships with law firms, first by establishing panels with formal law firm performance reviews, second by insisting on greater cost transparency from law firms by practicing alternative billing arrangements, and third by accessing new providers of legal services, including boutique law firms and alternative service providers.”
Companies often hire outside counsel when they lack the expertise or staff to handle an issue in-house. But there’s another reason, according to the study, which said some in-house counsel looked to outside firms for external validation, including a second opinion in an area where the law is hazy.
And when it’s time to get help from the outside, many companies aren’t letting the business side go out and hire a firm of its own choosing. The study said that practice is “quickly becoming a thing of the past.”
Instead, companies, at least those in Germany, are relying on panels of trusted outside firms. The in-house lawyers told Sako that these firms “know our business” and “get to know us better” as the relationship ages.
Companies select panel members based on their expertise and market reputation and subject the firms to periodic performance evaluations to determine whether they should continue to do business together, according to the study.
Larger companies tend to have a hierarchy of panels to select counsel on the country level as well as on European and global levels, the study said. In-house lawyers at these companies reported that they had three to 10 global firms that they used worldwide and they typically handled litigation and cross-border corporate transactions.
Other findings from the study include:
- The billable hour is still king in Germany and elsewhere, but some large companies are pushing for greater billing transparency from their outside firms. This includes knowing whether associates or partners are working on certain projects.
- Smaller companies that lack the leverage of multinational corporations are trying to lower their legal costs by seeking alternative fee arrangements, such as fixed or capped fees, from boutique law firms.
- Speaking of boutique firms, they’re apparently becoming more popular, at least in Germany. Younger lawyers have been leaving international law firms and setting up boutique practices with an eye toward flexible fee structures and tailored legal services.
Phillip Bantz is a reporter for Corporate Counsel. Follow him on Twitter @PhillipBantz.