Stick or twist?

The landscape for law firms has changed significantly over the past year. David Rowe explores the timing for in-house and public-sector legal teams to go to market for external legal services.

Irish law firms have seen significant change over the past 12 months. Most firms have seen a fee-income reduction in the 10% to 20% range, and a corresponding fall in their cost base.

The year-on-year steady and gradual recovery from 2012 to 2019 came to a halt because of COVID-19, with the pendulum having swung from having difficulty in finding the people to service the work to an increased emphasis on getting new work and new clients.

In parallel with this, salaries have softened, with firms seeing the benefit of the employment subsidy schemes and, in some cases, pay reductions.

In those conditions, there is an increased anxiety and, therefore, increased competition to add good-quality, repeat and steady work to diminished work levels.

Going to market

Any organisation considering re-tendering for its legal-service requirements needs to consider a number of important issues in advance, including:

• What is the organisation’s spend on legal services – split between internal resources and external resources?
• What services are provided to the business currently, and are these going to change over the period of the re-tender, which is typically three to five years?
• Which services can an organisation provide internally, and which does it make sense to outsource?
• What proportion of the work is ad hoc, what proportion requires a high level of expertise, and what is routine?

In considering a re-tender, the in-house or public-sector solicitor needs to assess the potential changes in their organisation. New business activities and changes in the commercial landscape need to be factored in, together with changes in legislation and regulation.

What are you looking for?

Having identified the capability and capacity of the internal team and the organisation’s current and future requirements, the next stage is to look at drawing up either a tender document or a list of potential law firms to approach.

The most common mistake is to re-tender among a narrow group of firms, particularly where the requirements range from relatively straightforward to complex transactions.

Put simply, there are horses for courses, and pricing follows. Look at it in terms of ‘the five Cs’:

• Capacity – the in-house team does not have the capacity to do the work. If this involves simple routine work, the most cost-effective solution is likely to be an additional hire or a temporary employee,
• Competence – for work that the in-house team does not handle regularly, the most risk-aware and competent approach is to send the work out,
• Cost – it’s simply too expensive to do it in-house; for example, large-scale debt recovery requiring tailored software packages,
• Certification – the organisation can do the work internally, but needs an outside expert to sign it off,
• Complexity – while the internal team understands the requirement, it also understands that outside specialist knowledge is required to make the correct legal call and give advice on the matter.

Where the most relevant reasons for outsourcing are capacity, competence and cost, these are likely to lead a buyer of legal services to the cheapest competent source – that may be a locum, an additional resource or a specialist firm.

However, if certification or complexity/specialisation is needed, the organisation is buying services that are priced on value rather than volume, and can then expect to pay a higher price to an external provider.

Is the timing right?

The decision to re-tender will not be based solely on the current economics within Irish law firms. It will be based on the requirements of the entity, how the current providers are performing, the procurement process and, in the public sector, on the obligations to re-tender.

Looking at it through the eyes of the law firm, the following are the competitive issues that law firms face in early 2021:

• Staff recruitment and retention and an increased emphasis on the work/life balance,
• Falling profit margins (salaries have outgrown increases in fee income),
• Increased cashflow pressure,
• Historic unprofitable pricing arrangements – possibly a response to a previous tender, when costs were lower,
• Uneven flow of work from institutional clients – this is difficult for the law firm to resource,
• Fee income levels are at 80% to 90% of 2019, the biggest fall being in litigation.

Given the rebalancing of the challenge in getting work rather than getting resources to do the work, it is logical that this is a good time to go to the market.

However, many entities may have reached pricing arrangements with their legal panel some years ago, when prices were lower and costs (especially salary costs) have risen significantly for law firms in the interim – so the re-tender needs to be considered carefully.

Law firms highly value repeat work from regular clients, but are now more savvy when it comes to the tendering process. Inevitably, there are positives and negatives from their viewpoint.

Positives:

• Happy to discount for streams of work, but unhappy if asked for further discount at payment stage,
• Regular flow of work and regular payments are attractive,
• Three-year procurement/tender cycles are considered reasonable, as this gives some security,
• Law firms are happy to add some free extras if the overall deal is fair, and
• Allows for better staff and resource planning.

Negatives:

• Winning a tender and getting no work!
• Inflexibility on price by the tendering party, where there are clearly additional elements and extra work,
• Tenders within tenders,
• Over-onerous reporting requirements,
• Incurring administration costs or outlays that are deemed unrecoverable under the tender contract.

Companies tendering-out for services obviously need to achieve value in the current environment:

• Service levels and relationships are key,
• It is ‘horses for courses’ – buy routine services from smaller and middle-market firms, and complex services from larger ‘corporate-type’ firms,
• Understand the legal market and the pricing within it – market intelligence will save you thousands of euro,
• It is important not to end up with either too many or too few service providers,
• Volume discounts are a win/win,
• Monthly payments are a win/win,
• Long-term relationships are, generally, a win/win.

How best to work with law firms:

• Usually, it’s best to retain core/repeat services internally and to outsource specialist areas, depending on resources and capabilities,
• Law firms enjoy working with in-house and public sector lawyers – they get better briefs and a better understanding of the issues, for example, and this can be reflected in lower costs,
• Doubling up by having internal and external resources working on a task is seldom a good idea,
• Beware layering-up in law firms – too many people on the clock,
• The law firm has to be interested in you as a client.

New forms of competition

Compared with previous tendering opportunities, there will always be new forms of competition in the market, including for the incumbents.

This will include not only law firms that have been disappointed by having failed to be appointed in previous tenders, but other firms that will have developed expertise or scale that now makes them credible competitors.

In addition, overseas firms may have entered the market, while virtual firms and alliances of smaller practices are all potential contenders. More choice is likely to lead to more competition – and more competitive tendering outcomes.

Re-tendering for legal services begins with an analysis of current spend, capability and future requirements. Changes in the market over the past 12 months have improved the environment for buying; however, the real money to be saved is in buying services at the right level of the market.

New firms and new types of service provider have emerged. Combined with previously disappointed tendering partners, re-tendering looks well worthwhile in current market conditions.

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