Cost-cutting culture has hit the banking industry. Seeking to restore return on equity to pre–2008 crisis levels, banks are regularly making cost-cutting pledges to shareholders. Traditionally, the legal function was largely immune from such cost-cutting efforts. However, today’s environment of increasing regulation means that legal is a huge cost. Legal can represent as much as five to eight percent of a bank’s total external spend – sometimes even more than major categories such as Information Technology (IT) hardware and software combined, according to our internal research.
Given the publicly stated targets, banks must include legal on their cost-cutting agendas.
So far, banks seeking to proactively reduce legal spend have focused primarily on slimming legal panels – their approved list of external legal providers – and negotiating rate-card reductions; for example, Lloyds Bank and General Electric (GE) have both recently cut their panels, with rumors of especially aggressive rate negotiations by GE. Although this approach is a step in the right direction, it suffers from a zero-sum nature in which banks’ savings come only through reductions in law firms’ margins. Some may even try to shore up revenue by billing more hours at partner rates.
Significant cost reductions must involve a more fundamental shift in banks’ approach to legal spending, essentially a re-thinking of the operating model for delivering legal services. How does a bank’s general counsel assign work, leverage alternative delivery channels and create more total value? Here are three suggestions:
Allocate work smartly. Asking several key questions can help allocate legal work smartly: How complex is the work? What is the strategic impact? What are the financial, reputational and operational risks? Is this a recurrent activity or is it the first time we are undertaking the work?
After all, regardless of rate schedules, one of the best ways to cut costs is to use less expensive resources for simple tasks. Custom legal advice does indeed require top-notch external talent, but routine tasks such as contract review or discovery can be handled internally or through less expensive firms on the panel, if the bank’s general counsel has a firm, process-based perspective on how the bank’s legal work disaggregates into tasks and activities.
Of course, banks deal with a large variety of legal matters, so this latent matter-level knowledge needs to be explicitly unlocked. As doctors do during triage, banks need a disciplined, rigorous process to address matters as they arise. The bank can then use this clear internal decision-making process, with governance, to assess each matter, thus ensuring that each panel referral is both necessary and appropriate.
Because a general counsel is busy addressing a shifting regulatory landscape, responsibility for maintaining process rigor may well fall on the legal function’s operating officer or administrative chief-of-staff. This role, increasing in prominence, bears a dual responsibility of ensuring the smooth fulfillment of the expanding legal obligations while addressing the bottom line – counteracting the common tendency that “lawyers like to hire other lawyers.”
Establish an appropriate panel. Panel reviews should not center solely on reducing rate cards. Law firms, like other organizations, possess specific strengths and core capabilities. To increase total value, banks must match these strengths to their needs. The first step involves mapping the legal supply market, and not with arcane descriptions such as “silver circle”or “tier 2” but instead relying on metrics such as profit per-equity partner, revenue and reputation index. General counsel should also challenge the bank’s prevailing views by insisting on objectivity when assessing capabilities.
The second step is to negotiate holistically with panel firms, discussing not just their rate cards but also their resource mix and potential alternative billing arrangements, such as fixed fees, blended rates and risk sharing. In preparation for these negotiations, some of our clients have even developed multiple matter scenarios with specific staffing guidelines for each.
Leverage alternative delivery channels. The legal industry is poised for a transformation similar to that faced by IT. There are legal offshoring centers, onshoring centers, and numerous legal process outsourcing (LPO) firms. The popular press is already talking about a glut of lawyers and we believe it’s only a matter of time before some major law firm reduces in-house staff in order to adopt a more networked business model.
Despite the hype, however, most of these trends are still in their infancy. Banks should proceed with caution because the promise of efficiency should not come at the cost of quality; re-work can be doubly expensive while adding cycle time. Encouraging panel firms to increase use of LPO providers is an intriguing step, as is the Royal Bank of Scotland’s decision to appoint an LPO provider to its legal panel.
The next step, however, is for banks to position themselves to extract maximum value from these new opportunities. This can best be accomplished by gaining experience in disaggregating matters and assigning each to the most appropriate delivery channel. In other words, alternative channels will be a great way to drive improved efficiency while giving full consideration to the level of risk and business impact but the biggest and quickest benefits will come only to those banks that do the background labor required to allocate work smartly.
Mr. Singh is a New York-based partner at A.T. Kearney,the global management consulting firm. Mr. Dassu is a London-based principal and Mr. Nathoo is a London-based manager. They can be reached at [email protected], [email protected] and [email protected] respectively.