New cost scrutiny, new demands

We are living in complex times for industry as the world emerges from the immediate challenge of Coronavirus and takes tentative steps towards workable readjustment.

In complex times, the legal profession is essential, and therefore busy. Consider just some of these trends:

• Some 25% of the UK workforce, or 7.5m people have been enrolled on the UK’s furlough scheme. The rapid rollout has left many companies with questions which they delegated to their GCs and legal advisors. 
• With upheaval comes opportunity. Private Equity and cash-rich businesses have been positioning for significantly increased M&A in the coming 12 months as businesses divest themselves of non-core activities. In the words of EY’s Brian Salsberg, speaking at the FT’s ‘Global Boardroom’ event in mid-May, “Those with liquidity will continue to deploy.” 
• By early April, most of the UK’s Tier 1 construction firms had downed tools. Gideon Kamya-Lukoda, Associate Director at Claims and Dispute specialists HKA, writes, “The COVID-19 pandemic has exposed the relevance of [security of supply] contract commitments”; but that will be too late for some billion-pound projects.

We can expect no shortage of work for the legal profession.

But that does not mean that the purse strings are wide open. After a decade of boom years on the markets, the economy is experiencing an unparalleled correction and business is back to basics: cash is king.

PwC’s Strategy & Team advised CFOs navigating the Coronavirus crisis, “Managing liquidity is the top priority for keeping companies solvent, and liquidity analysis and planning will help that management. This can include developing a dynamic, rolling 13-week short-term cash flow forecast that can be tested against best- and worst-case scenarios”.

There are two points being made here:

• Companies are focusing on their financial runway
• And more subtly, fiscal visibility to support those hard decisions in a changing commercial environment is now non-negotiable

Which begs the question: how many legal firms could provide their clients with a 13-week rolling summary of spend? How many GCs can offer similar data to their Boards, to give them actionable management information in a time of acute unpredictability? 

Our most recent survey of a £100m subset of the UK’s  £35.1Bn legal services market found that visibility of key spend insight was significantly lacking:

• 9 out of 10 legal departments don’t know what they spent on legal fees in the previous year (let alone in the previous quarter).
• On average, it takes 93 days between law firms completing work and invoicing their clients for it – giving GCs little chance to reconcile spend.
• Alternative Fee Arrangements don’t necessarily give visibility or predictability either – our research found, for example, that one in five fixed fee matters were billed over budget.
• And where faith is put into ageing billing systems, suspect time recording behaviours have led to expensive errors. Our survey found that 2.38% of fees – or an extraordinary £800M across the industry – was billed for tasks that would normally be excluded from law firm/client agreements.

In the past five years, it has become increasingly clear that boards expect their legal teams to play a proactive role in the management of their companies. GCs have embraced this – instead of being seen as a cost centre, they know that they have an opportunity to contribute as strategic equals. They have sought to be as agile and cost-conscious as other parts of the business and – with varying degrees of success -  to expect the same agility from their law firms.

Here in 2020, with social, economic and political upheaval a certainty, that need for clarity on spend is accentuated. As we enter what many businesses anticipate will be a bear market, GCs are being asked to do more with less. There is more work than ever on the horizon but exceptional pressure to cut costs: members of internal legal teams may themselves be furloughed; yet budgets for external legal advice are not going to increase.

It is conceivable that the legal function will remain immune from cuts, especially for companies on the acquisition trail. But GCs need to know their performance against budgets month-on-month, for departmental efficiency and management agility: other parts of the business offer cost visibility, and in today’s economic environment these numbers are increasingly essential for business continuity and risk mitigation.

That monthly performance data is available. In-house legal teams and their external legal counsel sit on a treasure trove of data that can be used to bring clarity, control and confidence to their Boards. But it requires collaboration with law firms to put this data to work. The adversarial approach to billing has performed badly in the past; instead GCs must become evangelists for a new professionalism, built on transparency. Take a data-centric view which empowers both sides of the relationship to deliver. 

Legal departments have operated blindfold for many years – and when the road ahead is straight and even, that is almost possible. With a bumpy and challenging path ahead, both GCs and their law firms deserve clarity. Neither side wants nasty surprises at the billing stage, not least because those surprises will be particularly acute in a cost-conscious economic cycle. Transparency will benefit both law firms and their clients in the long-term.