Procurement

Whose dime?

As Deutsche Bank baulks at paying for junior lawyers, is a tough line on ‘paying for training’ making its way across the Atlantic?

Deutsche Bank

Procurement |

Even for City lawyers used to increasingly heavy-handed tactics in panel reviews from banking groups, it proved something of a shock. News earlier this year that Deutsche Bank had notified pitching firms of its unwillingness to pay for trainees and newly-qualified lawyers during its last adviser review sent a jolt through the UK legal market. The practice of writing off the time of junior lawyers has been common for years in the US, reflecting in part higher relative salaries, charge-out rates and a propensity to clock up more tangential work as billable hours stateside.


Deutsche BankThe familiar claim from clients is that they have no interest in paying for the training of junior lawyers in the shape of an army of peripheral rookies deployed to gain experience rather than to contribute materially to client work. But in the UK, which operates substantially lower salaries during the two-year training contract period and in which billing culture has generally been less prone to including all possible hours, such tactics have been largely unheard of.

Even allowing for familiar gripes regarding profiteering law firms, high charge-out rates and over-staffing, blanket refusals to pay for trainees and junior lawyers have touched a nerve in a profession already fretting over being reshaped by technology and commoditisation. A poll of partners in Legal Week found that 57% thought the bank’s policy was unjustified, while only 2% backed the move.

Mike McQueeney, US-based deputy general counsel for litigation and regulatory affairs at Pearson, puts the case for a tough line from buyers. ‘We would rather have a second or third-year associate do the work. We would be paying for their training. We think a law firm should be absorbing that cost.’

Yet discussion on the topic with a group of in-house counsel indicates that such attitudes are far from mainstream in the UK. Andrew Carr, GC of UK-based energy company Sellafield, observes: ‘It’s caught me by surprise that people think they can get away with not paying for junior lawyers. It is really important to ensure that you’ve got good quality staff coming through. Not just in your own organisation, but also in external firms. An opportunity for a junior lawyer to be applied on value-added work, that’s a good thing.’

But with City and US law firms this year pushing through a round of potentially client-aggravating pay rises for junior solicitors, the question is whether more clients will choose to follow the German lender’s lead.

A real benefit?

For many in the industry, the crux of the matter is whether trainees and juniors contribute much to the client. Views vary, though the broad consensus is: generally yes, with the caveat that they must be deployed appropriately.

Stephen Paget-Brown, head of dispute resolution at Travers Smith, says: ‘Whether a firm is justified in charging for a particular lawyer’s work depends entirely on what the lawyer was doing. Where the client has received a real benefit I can’t see why it would be inappropriate to bill that time.’

Not all in-house counsel are convinced. McQueeney, who manages all of Pearson’s external relationships with law firms, says: ‘From my experience there’s just not as much value with the junior people.’ Even Carr stresses that clients must be wary that junior ranks are being used productively. ‘We have had situations in the past, where people have offered, and we’ve politely declined, to send trainees along to take notes in a meeting. If that was offered as a free service, that’s all well and good, but if we were made to put that into our costs structure, we wouldn’t do that.’

Carr estimates that he pays around £150-300-an-hour for junior lawyers, and says that he has seen quotes of over £1,000-an-hour for veteran partners. ‘It’s not what we pay, but I have seen them quoted.’

Indeed, one of the primary reasons for supporting the use of trainees and junior lawyers is that it allows for cheaper advisers to handle more routine work. While the long-term trend for UK in-house teams to bring work internally has undoubtedly undercut this rationale to some extent, many GCs still want the work to flow down to where it should sit naturally.

‘What I wouldn’t want to do is discourage people from giving work to junior lawyers,’ says Graeme Colquhoun, head of legal at brewer Heineken UK, articulating a common view. ‘There are plenty of tasks that they can do that are time-consuming and most cost-effectively done by people at that level.’

The training point comes up, though the majority of clients in the UK still feel a need to support the long-term development of the profession. While all GCs are wary of law firms crassly assigning armies of trainees in shadowing roles to their matters, many contacted for this article cite the need to develop young lawyers.

Private practice is, after all, responsible for training the vast majority of solicitors in England and Wales, with only a handful of major bluechips, like Vodafone, BT and BG Group, regularly offering training contracts. There are currently fewer than 200 training contracts offered in-house according to Law Society figures, compared to more than 5,000 at law firms. With in-house teams still making such a marginal contribution to training lawyers, they are also benefiting from the training of law firms when they hire their mid-level associates.

whosdimeWhere the client has received a real benefit
I can’t see why it would be inappropriate to bill that time.
Stephen Paget-Brown – Travers Smith

When Legal Week polled in-house lawyers on writing off junior time, only 2% of respondents said they routinely did the same, while 12% said they did so on occasion.

Getting away with it

The backdrop, of course, to the debate about junior lawyers is familiar gripes about billing culture and the high margins law firms seek to achieve. No-one denies the reality that major law firms charge high rates, ranging from £150-an-hour for juniors in regional markets to four-figure sums for City veterans.

Legal costs specialist Jim Diamond has been perhaps the most vocal critic of billing practices, with his research arguing that Magic Circle firms have dramatically raised their benchmark rates over the last decade to often exceed £1,000-an-hour. Diamond comments: ‘They’ve got away with murder. They’ve got away with continuously expanding their rate over the last 15 years and they’ve got away with very limited transparency. I am the ghost of Christmas future. I’ve been warning the City firms for years about hitting crash load, and now it’s going to happen. Clients are not going to pay for it.’ Diamond notes that Deutsche requested copies of his research on structuring legal costs in the middle of 2016, adding: ‘They’re not stupid. When you pay £800-an-hour for a partner, you do not want to be paying newly-qualified lawyers £350-400-an-hour. Who would in their right mind?’

The recent High Court battle between Dechert and former client Eurasian Natural Resources Corporation has put the issue of fees in the headlines once more. Costs judge Master Rowley allowed for £11.6m in fees to be assessed, stating that some of Dechert’s costs estimates were ‘considerably awry on every occasion’.

A recent Thomson Reuters report found that FTSE 100 companies set aside £31bn for legal bills in 2016, up almost £6bn on the previous year (though it should be noted that provisions for legal liabilities have in recent years been sent rocketing by a wave of regulatory actions against major banks and do not always reflect actual legal spend).

‘If you look at a law firm, you might have 500 partners who are making £700,000 each,’ notes Colquhoun. ‘All of those people are making more than the chief executive at lots of big companies. You have to query whether that is reasonable.’

It is, however, widely accepted that GCs have had substantial success in curbing such excesses since the banking crisis. While talk of the £1,000-an-hour partner attracts attention, with substantial discounts achieved through panel arrangements, clients are more often paying £400-650-an-hour for partners except for the most complex matters. Furthermore, it is major banking clients wrestling with a sustained global onslaught from regulators who have led the way in extracting better terms from their advisers.

Certainly, the inflation-busting annual rises in benchmark charge-out rates that were typical of the 2000s have not returned since the banking crisis, a reality attested to by the subdued overall growth in rates seen in Legal Business 100 law firms over the last decade.

A model approach

If the debate over junior lawyer fees inevitably raises issues over high absolute rates, for many clients it also comes back to the billing model that law firms use and its potential for abuse.

While debates over incentives for inefficiency in hourly billing have been well-rehearsed, discussion over junior lawyers highlights the issue that many GCs feel is even more pressing: routine over-manning of matters and unwanted ‘Rolls-Roycing’ of routine work.

Nilema Bhakta-Jones, GC of business media company Ascential, says that the most common disagreements regarding fees revolve around ‘scope’. She adds: ‘We tell them what we want, but the scope expands way beyond what we all thought. It’s not rocket science, we negotiate a budget for the year, we need to manage the budget and every over-spend has to be justified. Understanding the importance of budgeting in their client’s world will go a long way towards operating a client-focused model.’

Bhakta-Jones’ comments reflect the reality that many GCs are more concerned over unpredictable budgets and surprises than over billing rates in general.

Some see a move towards fixed fees or alternative billing as a means to address the problem. Jenifer Swallow, GC of money transferring service TransferWise, describes the hourly model as ‘ripe for disruption’, noting: ‘Alternative providers are experimenting with pricing models that are better suited to modern ways of working.’whosdime2

Over-spend has to be justified. Understanding the importance of budgeting will go a long way towards operating a client-focused model.
Nilema Bhakta-Jones – Ascential

Bhakta-Jones says that her business colleagues are often ‘horrified’ by the costs incurred by hourly models and argues: ‘It is far better for us as in-house counsel and budget holders to accrue for a fixed cost and deliver to that budget.’ Bhakta-Jones tends to favour alternative legal providers such as Axiom, Obelisk, and Lawyers On Demand. She adds: ‘I’m still waiting for many law firms to catch up with the real world where the hourly rate is frankly archaic.’

Certainly, the profession continues to move away from a total reliance on hourly billing. Legal Business’ 2015 in-house counsel survey, which drew responses from 450 clients, found that nearly two thirds (64%) of clients ‘often’ used fixed fees, while discounted hourly rates were used by 70%. Hourly billing is still common, however, being often used by 55% of clients, with only 12% ‘never’ using them.

Nevertheless, many clients remain sceptical over fixed fees beyond routine matters. Litigation, for example, is hard to measure on a fixed-fee basis, unless cases are separated by phases. Likewise, Carr is unconvinced regarding fixed fees, favouring a more flexible ‘capped fee’ arrangement, where he will look for the most accurate quote at the start of a job and monitor the process against that. ‘Ultimately we always look very closely at the fee narratives.’

A more nuanced point on the law firm model rarely noted by clients is that much of the ire targeted at junior lawyers is due to the vagaries of billing out junior solicitors at high relative rates while charge-out rates for partners do not reflect their cost to the firm. In short, law firms are subsidising partner time. Likewise, earnings commanded by partners at major City firms, who are often generating margins of over 40%, are the biggest element of the rates ultimately charged to clients. Logically, clients could argue they should pay less for junior lawyers and more for partners to ensure they get their work staffed at the right level.

As such, a more effective approach by sophisticated clients is to be prescriptive regarding what duties they expect to be carried out by junior lawyers and what they are not willing to pay for. A growing number of clients also put in provisions in panel terms to require law firms to push work down to the lowest appropriate staffing level.

Ultimately, there is no model of billing that cannot be gamed if that is the intention. Many partners argue – and some GCs agree – that highlighting junior lawyer rates without tackling the broader relationship and credibility of the presented bills is misconceived. ‘Law firms overcharge across the board,’ says Colquhoun. ‘It’s hard to single out junior lawyers because all I see is the final bill for the work. I wouldn’t pick on any particular category of worker to say they’re the ones that aren’t doing their job.’

One adviser to Deutsche Bank told The In-House Lawyer that such polices were ‘just for show’, adding: ‘For the purposes of presenting fee estimates, it’s a matter of the relationship between the institution and the relevant law firms as to how those numbers are presented. But the figure will be the figure.’

It should be noted that the bank’s stance is perhaps more targeted than reaction would suggest. Though the review, dubbed ‘Project Eagle’ and led by chief operating officer of legal and compliance Rose Battaglia, asked that trainees and newly-qualified lawyers would not charge for work, it is understood that such arrangements are being looked at flexibly, and that some pitching firms have negotiated to retain the ability to charge for trainees and juniors.

For GCs, much of the issue comes down to trust and proactively policing their interests to ensure that advisers are fairly resourcing their work in a broader context (see box). Conversations and judgements on rates should – and largely are – being made in the round, whether you like to drive a hard bargain like Colquhoun or, like Carr, are more concerned that your advisers are engaged and happy to take on the work. As Paget-Brown concludes: ‘If there is active engagement and active dialogue, both the firm and the client should end up feeling that a fair fee has been charged in all circumstances.’

Nevertheless, the prospects are that clients will be increasingly rigorous with advisers on how their matters are resourced at all levels. While Legal Week’s survey found that 49% of clients were against Deutsche Bank’s policy, a third (34%) thought it a good idea.

The UK 50’s billing practices – graded by clients

If appropriate staffing, accuracy and transparency are the hallmarks of a happy client, there is some data to draw on as a guide for general counsel. The Client Intelligence Unit, a sister research business of Legal Business, polled more than 9,000 clients worldwide during 2016 to produce a wealth of benchmarking data on law firms, grading advisers from one to ten. The research includes responses from more than 2,000 UK-based clients.

As expected, regional and mid-tier law firms score better on appropriate resourcing of work than leading City firms. For example, across the UK top 50, those who score well above average for appropriate resourcing included Hill Dickinson, Shoosmiths, Burges Salmon and Weightmans. City law firms to excel on this measure include Berwin Leighton Paisner, Hogan Lovells, Ashurst and RPC.

The figures indicate that insurance-focused advisers, who work for some of the most rigorous and cost-conscious clients, lead the way in providing value. Magic Circle trio Slaughter and May, Freshfields Bruckhaus Deringer and Clifford Chance (CC) did, however, narrowly beat the average grade of 7.59 out of ten across the UK top 50. A comparable picture is seen on billing accuracy, with Magic Circle firms being indifferent performers according to clients and only CC and Linklaters scraping past the top 50 average of 7.51/10. Seven firms scored 8/10 or better on billing accuracy: Hill Dickinson, Holman Fenwick Willan, Kennedys, RPC, Bond Dickinson, Gateley and Nabarro.

Source: The Client Intelligence Report

Law firm Appropriate resourcing of the team Billing accuracy: transparency and timeliness
Hill Dickinson 8.29 8.81
Holman Fenwick Willan 7.86 8.57
Weightmans 8.25 7.92
Kennedys 7.84 8.3
Gowlings WLG 8.1 7.86
RPC 7.96 8
Blake Morgan 8 7.94
Berwin Leighton Paisner 8 7.91
Shoosmiths 8.08 7.79
Bond Dickinson 7.83 8.04
Hogan Lovells 7.87 7.97
Nabarro 7.64 8.1
Burges Salmon 7.93 7.67
Gateley 7.5 8
Osborne Clarke 7.79 7.7
Stephenson Harwood 7.82 7.64
Bird & Bird 7.64 7.79
DLA Piper 7.61 7.69
Ince & Co 7.78 7.44
Olswang 7.52 7.69
Travers Smith 7.73 7.47
Ashurst 7.8 7.39
Clyde & Co 7.78 7.38
Clifford Chance 7.6 7.55
Linklaters 7.53 7.58
Macfarlanes 7.74 7.35
Freshfields Bruckhaus Deringer 7.62 7.41
Simmons & Simmons 7.75 7.28
Fieldfisher 7.74 7.26
Mills & Reeve 7.73 7.23
Slaughter and May 7.67 7.28
Allen & Overy 7.58 7.37
CMS 7.45 7.4
Herbert Smith Freehills 7.44 7.39
Norton Rose Fulbright 7.31 7.51
Pinsent Masons 7.42 7.3
Withers 7.35 7.35
DWF 7.55 7.1
TLT 7.13 7.5
Eversheds 7.31 7.3
Taylor Wessing 7.25 7.28
Charles Russell Speechlys 7 7.33
Mishcon de Reya 7.45 6.73
Irwin Mitchell 6.91 7
Watson Farley & Williams 7.14 6.71
Addleshaw Goddard 6.84 6.81
Trowers & Hamlins 6 6.4

tom.baker@legalease.co.uk