Seven lessons for law firms seeking stronger ties with in-house counsel

In the latest of a series of articles on the recent World Masters of Law Firm Management conference in Sydney, ALMJ reports on the key messages from presenter Maria Polczynski, Head of Group Legal at Bendigo and Adelaide Bank, on the changing relationship between law firms and in-house counsel.

Maria Polczynski doesn’t profess to have all the answers about the evolving dynamic between external law firms and in-house counsel. However, she understands one important fact – the landscape has changed irrevocably and it will never go back to the way of the past. The good news is that both in-house legal teams and smart, progressive law firms can benefit from new opportunities in this new era.

Addressing attendees at the World Masters recently, Polczynski outlined how the Bendigo and Adelaide Bank in-house legal team decided five years ago to implement a strategy to promote more cost-effective external legal services for the bank, including through value-based pricing, in the tough, post-GFC environment.

New terms of engagement

One of the main tasks at Bendigo and Adelaide Bank has been reframing the terms of engagement with its external legal service providers. After several iterations, the in-house team now insists on firms providing the responsible legal manager with a scope of work and a value-based price for the matter. The key change is that firms are no longer given an option to explain why value-based pricing is not appropriate. A pilot program was set up with five firms that agreed to test this approach.

Polczynski says it came with a caveat that if some work was undertaken by a firm that was not pre-priced or pre-agreed that “of course we will pay something for the work done”. “But what we’ll pay has nothing to do with billable hours and rates,” she says. “That’s not relevant to us.”

Three-pillar approach

Ultimately, all five pilot firms continue to operate under this value-based pricing agreement with the bank, with three moving to more intensive relationships – and the bank has moved from 100 per cent time-charging in 2010 to 0 per cent of its institutional panel work today, excluding some insurer-driven work. Transactional lending and recoveries work is undertaken by other panels, where time charging is still used, but it is conceding ground to pre-agreed fixed pricing.

A three-pillar approach has emerged through which Bendigo and Adelaide Bank uses its trio of inner-circle firms; a select group of niche providers as required (including the other two pilot firms, as well as some niche firms that are adopting more progressive models, such as SwitchLegal); and a range of market disrupters that can be used in the main for low-cost legal products and services. This model has seen the bank engage with a range of innovative new service providers such as Plexus (for product-specific electronic solutions); AdventBalance and Plexus (legal leasing); NuLegal (legal process outsourcing); Allygroup (legal management consultancy) and Dazychain (practice and vendor-management tools).

Polczynski says this “unbundling” model has resulted in greater efficiencies and allowed the bank to source providers who deliver the best value possible. It has also led to a change in pricing mindset and switched the focus to getting the best results for her business rather than debating fee structures with traditional firms. “I don’t care about 10 per cent off your hourly rates … It’s irrelevant to us,” she says. “It isn’t about your efforts. We want you to focus on our business.” At the same time, Polczynski says her in-house team is forging very strong relationships with its selected partners. “Trust is the biggest thing when you’re choosing a high-value-adding service provider.”

Magnificent seven

Five years into Bendigo and Adelaide Bank’s rethink of its legal services delivery model, Polczynski and her team have learnt some valuable lessons. Following are seven of those lessons.

1. Realise that ‘value’ is very ambiguous

Traditionally, according to Polczynski, law firms have framed value around delivering benefits to clients such as expertise and strategic insights; contacts and market knowledge; around-the-clock availability; trusted advice; and strong outcomes. For corporate clients today, however, value is all about the benefits they derive from legal services relative to the price they pay. While that correlation is now a “no-brainer”, she says the real issue is that too many private practitioners think that the value of what they are delivering is self-evident – or at least intrinsically contained in what is delivered. However, there is a major shift occurring because clients have obligations to get the best return they can, and they have other options these days.

The focus for law firms, Polczynski argues, should be on the impact that their advice can have on their clients’ businesses. “If you can improve our shareholder profit, net of your charge to us, we’re listening,” she says. “But if you can’t and we’re going to be worse off over all, we’re just not connecting.”

2. Talk to firms and address their reaction to the new model

There is a fear factor for law firms when they hear clients asking for pre-agreed fixed prices, with many thinking it is just a tactic to hammer them on fees. Polczynski understands such concerns and says her in-house team has been very conscious of explaining the rationale behind its changes. “We are trying very respectfully and sincerely to come up with a situation where our firms want to do our work and individuals within the firms want to do our work,” she says. “Bendigo and Adelaide Bank is all about sustainability and being there for the long haul, so we want to have sustainable relationships with our law firms.”

In the quest for mutual fairness, up-front conversations at the start of a legal matter are the key. “Scope until you are completely and utterly sick of it,” Polczynski says. Then make sure both parties clearly understand each other’s position, and keep reviewing the situation during cases to ensure that objectives are still aligned. There should not be a sense that in-house counsel are holding a gun to the head of their external law firms. There should be an overlapping sweet spot between the law firm’s offering and price, and the client’s need for a successful outcome.

Polczynski is more than happy to pay a premium for elite legal work, and she does not want to take calls from partners who feel guilty because a job has taken less time and resources than originally expected. If the agreed legal outcome has been met, she is content. “I don’t care about how much time it takes you to do something. It isn’t about your inputs.  It is about the impact of your outputs on our business.”

3. Recognise the three phases of pricing engagement

With pricing engagement, the Bendigo legal team has found three distinct phases in the evolution of its discussions with service providers:

• seeking price certainty and cost-benefit sensitivity;
• engaging in deeper discussions to enhance mutual understanding and trust; and
• aligning interests, which also aligns incentives for continuous improvement.

According to Polczynski, one of the major benefits of such pricing discussions is that law firms and clients enter into fantastic conversations that help both entities better understand each other. “And it just grows the mutual trust, understanding and collaboration so much better.” With interests aligned, there is the real possibility of pursuing continuous improvement that delivers the best outcomes for the least inconvenience to both sides.

Polczynski says traditional law firms often express the view to her that, while they charge based on billable hours, they are sensitive about fees and understand that clients want lower prices. Her rebuttal is that while firms’ honour is engaged in performing legal work cost-effectively, their reward model (that is, working more hours and getting a higher fee) is not consistent with that aim. The advantage for law firms that change tack is that fixed fees force them to better understand the difference between the price they are charging and the actual cost of production. “Suddenly you’re incentivised to reduce your cost of production and that enhances your profit,” Polczynski says.

4. Understand the mindset opposing fixed prices – and move beyond it

Polczynski says there is a common mindset in mainstream law firms that “we’re lawyers and we do the legal stuff” – and that so long as they are busy doing good legal work they should be guaranteed of being profitable. Yet other businesses do not have such certainty – they have to satisfy customers and ensure they get desired outcomes from a product or service, regardless of how many hours it takes.

In many cases the result of such a mindset in legal practices is that they focus on the law, rather than re-engineering the legal process to cut waste and inefficiency. They are risk-averse and put off change because they have never had to do it before and they don’t know how to go about it. The truth, though, is that legal service delivery has changed and law firms must come on board if they hope to stay relevant.

5. Expect more from a client than just payment

Polczynski says a whole range of “assumptions” are in play when law firms determine their fees. Partners often argue that these issues are outside their control – an attitude that she says is “really unhelpful”. She encourages firms and clients to collaborate to see what issues can be managed – and how. This helps ensure value is derived from the legal team. Firms should also consider sharing risks with their clients through pricing.

Drawing on her own experience, she says in-house teams are less inclined to waste the time of external law firms if they are not locked into a fee based on billable hours. “We may respect your time more when we’re not paying you by the hour because we have a deal based on mutual expectations – including that we won’t waste your time – and now our honour is engaged,” Polczynski explains.

6. Work in trusted relationships

Above all, Polczynski encourages mutual trust between external law firms and their in-house colleagues, particularly when experimenting with new models. Open conversations can help build such faith, while acknowledging mistakes and overcoming them will help build an even stronger rapport. Polczynski’s managing director is happy for her team to experiment with different legal services delivery options, to “fail fast” and to learn from the experience and improve processes and outcomes. “If you’ve got a client that is happy to engage with you and has a trusted relationship with you that wants to make it up as you go, consider that as a badge of honour and a badge of trust. Acknowledge that you will both make mistakes … but working through those mistakes actually reinforces the trust and makes it an even more trusted relationship.”

7. Acknowledge that we’re all in the same space

Polczynski says businesses and law firms are still trying to work out how to best re-engineer legal services delivery to ensure it is truly value-adding. She urges law firm partners to abandon the thought that they have to meet every component of the “waterfall of legal demand”. By the same token, they should not think that all they have to do is a small, high-value piece of legal work. Part of the modern-day job is to help your client or in-house legal team to work out how to deliver more in a better way. Polczynski says there are great opportunities for law firms that do so. “Find a client that wants to do it because in a couple of years so many clients will want to do it and they’ll expect you to know how.”

Maria Polczynski is Head of Group Legal at Bendigo and Adelaide Bank and was named the 2012 Corporate Lawyer of the Year by the Australian Corporate Lawyers Association. Since joining the bank in 2009, she has actively promoted the effectiveness of Group Legal, establishing better management and information sharing and re-focusing the team on the most value-adding work. Prior to joining the bank, she was a retail banking partner at Henry Davis York in Sydney.

In an Australian-first, Bendigo and Adelaide Bank Group Legal was named in May this year by the US-based Association of Corporate Counsel as one of 12 in-house legal teams in the world to be ACC 2015 Value Champions.