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Pressure increases on inhouse counsel to curb legal spend

The pressure on inhouse counsel to reduce their final external legal spend, will see a greater emphasis placed on dispute avoidance in order to prevent cases from reaching litigation, according to new research conducted by Grant Thornton's Forensic and Investigations Services practice.  

The research revealed that nearly one-third (31%) of general counsel plan on increasing their spend on dispute avoidance over the next three years. Reiterating this point, the majority of the in-house lawyers surveyed (88%) expressed that their boards were 'very supportive' or 'reasonably supportive' of providing funding for dispute avoidance activity. However, the research also shows that they face considerable challenges in terms of time, internal attitudes and demonstrating their own value for money.

“We are seeing a shift in perception to 'prevention is better than cure' when it comes to disputes,” says Toni Pincott, a partner within Grant Thornton's Forensic and Investigations Services practice. “As part of this shift, inhouse counsel plan to undertake more dispute avoidance activity internally, which could result in a diminished involvement for law firms in litigation cases in the future.”

“The survey also identified that inhouse legal departments will make dispute avoidance a top priority and are now developing systems and processes to reflect this new attitude,” she continues. “However, the million dollar question is, do they have enough time to complete their current levels of work, increase their focus on dispute avoidance and find ways to show the benefits from what they have been able to achieve?”

Most companies surveyed had no way of measuring the success of their dispute avoidance activity, as most claimed it was 'too difficult', 'too subjective' or they were 'under resourced'.  However, if general counsel want to see this increased level of funding their boards are willing to offer, then they may have to consider how they can measure the accomplishments of their dispute avoidance programme.

“It will now be up to heads of legal to justify the increased resources in the disputes avoidance arena which will reach further than simply reducing external legal spend,” continues Pincott, “at some point, the costs could cross over.”

Most businesses already undertake some form of dispute avoidance, however, it is often labelled as general 'risk management'. Across all participants, it was stated that dispute resolution represents a significant portion of their legal spend, hence the re-aligned focus on dispute avoidance.

Currently, the most popular methods of dispute avoidance in the industry are: early negotiation (97%), pre-contract reviews (90%), risk audits (78%), training (71%) and compliance audits (71%). However, the views on their relative effectiveness varies.

Many inhouse legal departments commented that the best practice model for successful dispute avoidance was for inhouse lawyers to be closely involved with all aspects of the business and to be consulted at the earliest possible sign of trouble arising. This is an increasing challenge for the internal legal teams whose involvement may be seen as raising the temperature.

If inhouse legal departments had more time and resources, more than half (58%) would focus on training their colleagues to try to avoid disputes in the future. Someway behind this figure, 21% would aim to have a closer involvement in the business, 19% would spend more time on pre-contract reviews and 18% on periodic reviews. Interestingly, only 4% of respondents said they would devote more resources to focusing on better relationship management or compliance audits.

“Numerous ideas were identified by respondents on how they would utilise any additional resources that were made available to them,” says Pincott. “Inhouse counsel spend so much time fighting fires, that they have little time to devote to dispute avoidance. However, in an ideal world, training their colleagues on how to avoid disputes in the first place was the clear winner.”

So can the internal lawyer look to external support to address the challenge? Reasons cited for inhouse legal teams' reluctance to further involve external law firms in dispute avoidance include: fears of high fees, a perceived lack of knowledge about the business (whether through lack of interest or through insufficient information being given by the in-house legal team), the 'one tracked litigious mindset' and also a mistrust of lawyers' motivations. Even when a dispute is still forming, respondees are reluctant to involve external lawyers in early negotiations as it would be perceived that they were escalating the problem.

The areas of dispute avoidance law firms are currently most involved in are pre-contract reviews (48%), training (43%) and early negotiation (32%).  

Surprisingly, when in-house lawyers were asked what external law firms had done to impress them in the area of dispute avoidance, a virtually 'nil' answer was provided.  This would suggest that law firms need to promote their expertise, the additional resources they can offer and their international experience.

“Inhouse counsel perceive that dispute avoidance is their territory and, as a rule, would not consider using external support. As growth in the traditional litigation market is currently static, law firms ought be motivated to become involved in dispute avoidance, and need to promote their expertise in these areas and showcase how they can support corporate clients. They also need to rethink how they charge (or not!) for these services – this is an area where hourly rates will just not be acceptable,” says Pincott.

“Inhouse legal departments are very busy in their day-to-day roles, and while they plan on increasing their spend and time on dispute avoidance, there is still much more that they would like to do in the area, but there just isn't the time” says Pincott. “The emergence of a market gap is becoming all too clear, but the question is, will law firms fill the gap – and do they want to?”

So how can law firms help inhouse counsel? Interestingly, when questioned where external law firms could provide further support to inhouse counsel, pre-contract reviews and education/training were cited – the same two areas which law firms currently have the most experience in.

If law firms do want to play a further role in dispute avoidance, respondents of the survey suggested there were a number of areas that law firms would need to address – of which the most prominent are their fees. Inhouse lawyers already struggle to justify spend on external law firms for litigation, so it is understandable why respondents were concerned about their involvement in dispute avoidance.  

As there are a number of consultants who already operate in the disputes avoidance arena (particularly within the construction industry) law firms will need to think strategically as to how they can market their dispute avoidance experience and gain a greater market share.

“While this will be unfamiliar territory, lawyers will need to make the business case for their involvement in dispute avoidance. One point to consider would be a Clementi style model, whereby lawyers work alongside non-lawyers to provide a similar service. This type of approach would certainly go some way to addressing the cost/fees issue,” concludes Pincott.

• The next issue of Legal Technology Insider's special supplement for inhouse lawyers – Insider Corporate Legal – will be published in the New Year.