The Lawyer reported last week on Shell’s announcement that it has reduced the number of preferred advisers on its global legal panel to six. This is the first Shell panel selection process since the company hired pricing analyst Vincent Cordo in May 2015 on a legal costs management mandate.. According to Shell’s general counsel for disputes, Gordon McCue, the new panel arrangements are designed to “align our interests better with our law firms and put in place a partnership with them that adds value both ways”.
The Lawyer reported that Shell ran a multi-stage process to select the six law firms for its global legal panel. This process clearly emphasised legal costs management as a key criterion. In the first stage, candidate firms were asked to pitch on what they would be willing to provide in the form of free secondees and “advice hotlines” for Shell lawyers to external counsel “without the clock running”. In the second stage, firms were required to participate in a competitive “online rate auction” in relation to hourly rates for certain types of work. Notably, both of the initial stages therefore used legal costs management filters to select firms. Firms were filtered in the first stage according to the type and volume of legal costs the firm was willing to waive for free. Firms were filtered in the second stage based on the discount the firm was willing to apply to its standard rates.
Legal costs management considerations are, and should be, important to large consumers of legal services when selecting law firms. As a team of former litigators-turned-financiers, we are well attuned to the financial constraints of even the largest multinationals – particularly having devoted our own legal careers to the kinds of international dispute most prone to escalating costs. Organisations like Shell have a duty to their shareholders to get the right quality and mix of legal services at the best price, and panel processes are an effective way of achieving this. Moreover, competition between law firms for a share of Shell’s legal work is healthy, ensuring that firms consistently deliver high quality legal services efficiently and at competitive prices. However, an overemphasis on legal costs management in panel selection processes can serve to undermine service quality and damage productive client/lawyer relationships in the pursuit of short term cost savings. In particular, auction-style processes that treat legal services as a homogeneous commodity can encourage a “race to the bottom” that damages longstanding lawyer-client relationships. When repeated, these processes place incumbent panel firms under constant pressure to continually provide more for less (or indeed, for nothing) to keep their place.
Many in-house legal departments are now operating under demanding legal costs management targets and overall budgets. In-house teams in oil and gas companies may be feeling this pressure more acutely than most due to the low price of oil. However, continually squeezing panel law firms on price risks damaging valuable lawyer-client relationships, just as other “quick fix” measures such as large reductions in in-house head count (as exemplified by Lloyds Banking Group in March 2016) can result in the loss of valuable institutional know-how. In-house teams are better served by fostering strong long term relationships with a group of trusted external legal advisers who best know their business and who can best help them achieve their objectives. This requires assessment to be made of potential panel firms on criteria that focus on quality and usability, as well as price.
General counsel and CFOs should consider collaboration with litigation finance firms as the primary path to legal costs management. Financing litigation with non-recourse third party funding can reduce a company’s external litigation fee spend (the largest single pillar of legal costs management for most in-house teams), freeing up legal budgets to support in-house payroll and alleviating price tension in the arrangements with key legal advisers.
Litigation funding firms enable companies to achieve the strategic and financial benefits of pursuing commercial claims without using their own financial resources. Litigation finance arrangements can remove the entire financial liability of legal claims – both current liability (monthly legal fees and disbursements) and future (adverse cost liability) – from the business, thereby easing pressure on budgets. Some litigation finance arrangements go further in that they enable the client to realise a portion of the value of a possible future award prior to the final adjudication of their claim. Further, litigation finance can reverse the doubled-side unfavorable accounting treatment of litigation. Under UK and US accounting rules litigation claims, which are in essence “receivables”, are not recorded as an asset on the balance sheet so cash spent pursuing claims must be “expensed” as incurred (rather than “capitalized”) reducing net earnings. The double blow to the company’s accounts arises because any recovery following an award of damages is treated as “one off”, “below the line” income. Most litigation finance is non-recourse meaning that the benefits of litigation finance can be “booked” by the company as soon as funding is agreed.
Squeezing panel law firms periodically on fees does not “add value both ways” and is unlikely to create valuable long-term partnerships between in-house teams and law firms that are in the business’ long-term interests. General counsel and CFOs should consider other means, including litigation finance, to achieve these legal costs management objectives.