'The Wave of the Future': Law Firm Panels Are Creating a New In-Crowd

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Credit: Marc Rosenthal[/caption] On a late June morning, Dentons’ global chairman Joe Andrew found himself pulling out of a Super 8 motel. Wind shear and microbursts had caused his flight into Denver the previous day to be rerouted to Cheyenne, Wyoming, and after a missed connection and a motel stay courtesy of United Airlines, he was on his way to a panel pitch. As one of two leaders of the largest law firm in the world, Andrew is often on the road, scoring more frequent flier miles than anyone else at Dentons. Part of that travel is checking in on the firm’s many outposts. But increasingly, Andrew says, “more and more of it is spent on these organized, competitive efforts to consolidate the number of law firms that larger companies have.” Convergence. Preferred legal networks. Law firm consolidation projects. The names may vary, but the trend is unmistakable. Corporate clients are no longer shuttling work to a sprawling, ad hoc list of firms. That’s changing the game for leadership—in even more systematic ways than Andrew waking up with a cold shower after four hours of rest in a budget hotel in the Mountain West. “Panels are the wave of the future,” says Mayer Brown chairman Paul Theiss, who takes pride in the fact that the firm currently sits on roughly 200 panels, up from 70 five years ago. To be sure, a swath of law firms turn their noses up at panels, viewing them as competing for the commodity work they wouldn’t want anyway. And in some cases there is still truth to that notion. But for other firms, particularly global providers, panel placements are a key part of their strategic growth plans. “Law firms have a choice: They can view panels as a threat, or they can view panels as an opportunity. And we’ve chosen to view that as an opportunity,” Theiss says. While the roots of the transformation extend back into the 20th century, the swing has been especially pronounced in the past decade, even amid attempts during the Great Recession’s fallout to disaggregate legal work among multiple law firms and alternative legal services providers. The global financial crisis reset the relationships between clients and firms, creating a buyers’ market. “Since then, it’s been a snowball growing larger and larger, rolling down the hill,” according to Mitch Zuklie, global chairman and CEO of Orrick, Herrington & Sutcliffe. Not only do corporate law departments want greater value and greater efficiency when paying for outside counsel, they’re also increasingly open to innovation and embracing new approaches. And the rapid growth of the Corporate Legal Operations Consortium, or CLOC, means that best practices are being shared with increasing frequency. Two thousand attendees packed the organization’s most recent meeting in Las Vegas, up from 500 just two years ago. The trend toward panels is also industry-agnostic, going well beyond the pharmaceutical and insurance companies that were early and strict adopters of the panel model. Large tech companies, manufacturing conglomerates, retailers—players in all of these arenas have worked to consolidate their outside legal spending with just a few recipients. The same goes for the insurance industry, which, according to Cozen O’Connor global insurance chair Joe Ziemianski, has relied on approved panel firms “forever.” “What’s new is an effort on the part of insurance counsels to consolidate and reduce the number of approved firms,” he explains. Law firm leaders, reacting to the emerging paradigm, are under no illusions. They recognize that savings sit at the center of the clients’ rationale. But some say the hard work of getting on these panels yields clear benefits. “We’re more enthusiastic than not,” Zuklie says. “Being a panel firm offers a distinct way to have a dialogue with thought leaders in an industry. These very sophisticated legal departments are the leading indicators of where an industry is headed. That relationship gives us the opportunity to know our client better.” Dentons is even more gung-ho. “When we formed the firm in 2009 and 2010, we did that with that backdrop,” Andrew says. “A new firm with a new name in the past might not have been competitive for 50 years because you had to build a brand. But in an era of metrics, allegedly objective evaluations, and when nonlawyer professionals get involved in the process, it means that new law firms can spring out very quickly.” 30 Years in the Making In the United States, many point to DuPont as the originator of the process. During the 1990s, the chemical giant was spending $140 million a year on legal fees. “We were dealing with a tsunami of mass tort litigation, and we were not getting very good results, because everybody was basically empowered to select the firm of their choosing,” says former DuPont general counsel Tom Sager, who retired from the company in 2014 and is now a partner at Ballard Spahr. “Many times, the selection criteria had nothing to do with the trial capabilities of the firm, their cost-effectiveness, their responsiveness and the like.” Under Sager’s guidance, the company spent more than three years working to establish a slate of law firms with which it would work closely. Through a process he called “convergence,” DuPont ultimately chopped a list of 350 firms down to 34 by the middle of 1996. The company looked for law firm partners that would commit to using alternative fee arrangements, implement new technology to increase efficiencies and take steps to increase their number of women and minorities. This was important not only for normative reasons, but strategic ones, considering social biases against the chemical purveyor. “We needed to come up with not only credible, meritorious arguments for whatever we were advancing, but also we needed to connect with the audiences,” Sager says, noting that judges, juries, regulators and politicians were increasingly becoming more diverse. The next step after establishing the panel was to create a playbook—which became known throughout the industry as the DuPont Legal Model—codifying alternative fees, diversity goals and other granular elements of these relationships. Pfizer followed with its own highly publicized effort in the latter part of the last decade, creating the Pfizer Legal Alliance. Nineteen firms were selected, but the payment side of the equation took alternative fee arrangements to a new extreme. Pfizer assigned an annual fixed fee payment to each of the firms in the alliance. The approach caused problems in the long run. When deals and mass tort litigation sprawled well beyond initial expectations, law firms found themselves losing money. “[Firms would] rather negotiate on a deal-by-deal billing basis,” Michael Caplan, the current chief operating officer of Goodwin Procter, says. Other jurisdictions around the world have gone through a similar transformation, some starting even earlier. According to Dentons’ Andrew, it’s likely that a 50-year-old partner in Australia has only ever operated in such an environment. “There were objective ways to look at how one should choose law firms before any companies or U.S. citizens got involved,” he says. “There’s no one corporation or one law firm that started the trend.” Andrew adds that the change was often motivated around the world by businesses being dependent on cross-border operations, making it harder for them to rely on informal networks to select attorneys. Australia, for example, saw its banks globalize years ago, while small countries birthed businesses that had no choice but to sprawl across the world as they expanded, like the Netherlands’ Royal Dutch Shell. “From each country’s perspective, they will name general counsel of corporations, professors and consultants,” Andrew contends. “They each have an origin story about panels: The French have a story, the Australians have a story, the Chinese have their story.” Stories aside, Eversheds Sutherland executive partner Ian Gray, who oversees the firm’s global client strategy and its European operations from his perch in London, notes that the larger and more international a U.K. business is, the more likely it is to assemble a panel, and American companies operating overseas have followed suit. “They want to ensure that, whether the practice area is litigation, corporate or whatever, they can introduce their business people to a law firm that will be consistent in the way they engage and offer legal advice,” Andrew says. “I think that is even more important when you stretch to different languages and different cultures across Europe, the Middle East and Africa.” Trust the Process For corporate law departments, establishing a panel—and ending relationships with what might be dozens of law firms—isn’t a process to be taken lightly. It can be just as upending for the in-house legal teams as the law firms. In-house counsel are used to working with certain lawyers and can be skeptical of the new firms they are forced to work with. Often it takes an outside jolt, like the arrival of a new general counsel or a larger restructuring of the business, to implement a panel review. At medical technology giant Medtronic, both of these were in play when the company started formulating its own shortlist of outside counsel in 2014. General counsel Brad Lerman had just arrived from Fannie Mae, and the company was in the middle of a $42.9 billion tie-up with Covidien, the largest combination in medtech history. “It gave us the perfect opportunity to reimagine how we were doing things,” Lerman says. Between the two businesses, there were between 30 and 40 law firms in the mix, and they were joined by new firms in the request for proposal process. Over a period that approached nine months, the company drafted internal scorecards, gauging the firms’ capabilities and how well they might work together. Ultimately, the Medtronic Preferred Provider Program emerged from the process with nine firms, a number that later grew to 10. The scale is different at manufacturing conglomerate 3M, which also assembled its first panel in 2014 and built a second one in 2017. The company once worked with over 300 firms, and the latest panel is down to 55. For firms aiming to land on a panel, the effort can be draining. Even before submitting an RFP response, they must do the leg work to understand the business and how they can add value. Then comes drafting the document. “These RFPs are granular, and they’re very comprehensive,” Craig Circosta, who leads the mergers and acquisitions group at Ballard Spahr, says. “The ones that we submit are in the hundreds and hundreds of pages, even without the attorney bios, so it’s a lot of work.” When 3M assembled its second panel in 2017, the company recognized that it had sought too much information the first time and refined the process to focus on 12 areas fundamental to the relationship. “It was a pretty work-intensive requirement on the part of the firms, as well as for us,” 3M associate general counsel and managing counsel Maureen Harms says. The company also initiated a two-step process, starting with a broader request for information used to determine the firms that would participate in the RFP. All of these mechanisms are in service of answering crucial questions for the potential—or existing—client. Zuklie lists a smattering: “How do you manage projects? What kind of staffing do you bring? How do you innovate? Do you bring a diverse team? How do you make sure that our data is secure? Will you share risk?” Once a firm gets on a panel, the next worry is staying there. Some companies, like Medtronic, will review the performance of their panel firms on an annual basis; for others, the term is two or three years. In the U.K., Barclays just finished its final panel review in favor of an ongoing assessment process. The new lineup of firms will run for three years, and the assessment process will give the bank more flexibility to manage the size and composition of the panel, with firms added and removed on an ad hoc basis. One Fortune 500 company, which assembled its panel of three firms in 2016, has yet to conduct a formal review. “When I mentioned it to my GC, he said, ‘Why would we want to review them?’ because we’re so happy. We feel like we’re just gaining momentum,” says a top administrator in that company’s legal department. Even when reviews occur at set intervals, if firms and clients handle the relationship well, they’ll be building a robust partnership in which both parties know exactly where they stand at any time. After three-plus years, Medtronic has not eliminated a single firm from its panel. “These are built around sharing details about how you’re doing,” Zuklie says. “I don’t think you’ll be surprised. That dialogue is real.” One element of the process does give attorneys pause, though: when clients make panel firms fight over the work coming their way. Reverse auctions, in which panel firms must bid against each other, are by no means ubiquitous. But many companies do make firms compete to lower their rates in exchange for greater priority. Circosta notes that his Ballard Spahr partner Sager, formerly of DuPont, is no fan of the process: “He calls it a race to the bottom.” But Ballard Spahr still doesn’t turn its back on them. “We certainly do our damnedest to win that auction,” Circosta says. Zuklie is another skeptic, noting that companies should be careful about how they deploy the tool. “If you’re looking for commodity work, maybe reverse auctions are efficient ways to get the services delivered,” he says. “They’re not the way to develop a lasting relationship.” Beyond Savings To be sure, the promise of savings and predictability of legal bills provides a huge incentive for businesses to reconfigure how they approach outside counsel. But it’s not the only benefit. “This is not a network that’s designed to squeeze costs and result in the lowest prices,” Lerman says. “If we wanted to do that, we could do that.” Instead, in-house attorneys, like their law firm counterparts, are quick to highlight the relationship-building benefits of panels. According to Lerman, Medtronic’s panel is built on a simple proposition: “mutual responsibility and mutual accountability.” Consequently, the company promises its 10 network firms that they will receive 80 percent of its spending, shares its economic numbers as fully as possible and gives outside attorneys the opportunity to know leaders within the company. Firms are welcome at all times to ask for more work or to work in additional areas. Firm leaders like Caplan at Goodwin Procter agree with that premise. “The panels are based on true partnership, if you do them right,” he says. “They’re based on relationships; they’re based on risk management.” It’s when those relationships and the loyalty they’re supposed to engender are ignored that players on the law firm side wind up with a sour taste in their mouths. They’ve spent months putting the proposal together, and after being selected have agreed to indemnity and to eliminating conflicts. Then, silence. “If in six months we don’t have any business, then there’s no loyalty,” Caplan says. Another knock is that panels are used to push down rates, only to give the most lucrative, rate-insensitive work to firms outside the panel matrix. But at the same time, more firm leaders are citing the need to be on panels in order to be considered for those larger matters in the first place. And these relationships can be resilient enough that firms won’t take offense if a business goes off-panel to resolve a particular issue. “It is a little frustrating, but I think we certainly understand that the client has reasons to depart from the panel, and at the heart of the prefered provider network, there is a mutual trust and collaborative factor,” Circosta says. “We feel that if a client looks outside the panel, they’re doing so for a legitimate business reason.” Business leaders also relish using their panel relationships to get firms to provide other “value-added” services. Ballard Spahr’s attorneys will often visit a client’s legal department to set up a CLE or arrange a pro bono opportunity, either independently or with other panel firms. Caplan describes sharing Goodwin Procter’s project management expertise and innovations with clients. “Our partners love that, because we don’t charge for that, we’re sharing our business of law expertise in areas that they also need help in operationally,” he says. “It just grows the relationship so that they will utilize our lawyers for true revenue-generating work.” 3M sees an opportunity to push firms on their innovation processes, asking them to step up their information technology applications or use of artificial intelligence, for example. “The whole area is changing so quickly that we can ask them to demonstrate a level of cost-effectiveness, efficiency and speed,” Harms says. And just as increasing diversity was on DuPont’s agenda over two decades ago, companies continue to look to use their panel process to leverage greater inclusion in their partner firms. One standout is Microsoft, which through its Law Firm Diversity Program offers bonuses to its 15 panel firms if they increase diversity in three leadership areas. The company revamped the process to focus more on leadership in 2015. “They are absolutely causing firms to make more thoughtful choices about who leads the relationship,” says Zuklie. His firm, Orrick, has been recognized as one of the company’s top performers in the area. Global Winners From more miles on the road to more internal meetings, the rise in panels is unquestionably altering how firms do business. Circosta describes the establishment of “strategic account management teams” that meet monthly to allow key attorneys for a client to discuss what they’re doing, how they can be more efficient and what they can share with the client. At Mayer Brown, it’s reflected in the firm’s overarching strategy. “We view the whole question of panels and the panel process and what we see the clients doing as part and parcel of putting clients at the center of our strategy,” Theiss says. But there’s a paradox that few are willing to talk about directly. Regardless of their other expectations, clients are clearly seeking to save money with panels. Meanwhile, law firms have to put out cash and invest in new processes—and often specialized nonlawyer professionals—to grow their business or even to keep long-standing clients on board. “It’s reapplying for your job,” Circosta says. “You either go with the flow and compete or you lose the existing relationship.” Andrew, at Dentons, is explicit about the transformation: “This is a massive additional cost structure for big law firms.” Partners and practice leaders aren’t just on the road to panel pitches. They’re also showing up on clients’ doorsteps for summits—sometimes held twice a year—where they’re asked to play nice with firms that are typically their natural competitors. Firms have staffed up on those nonlawyers who are guiding the RFP process. Planning pro bono programs or CLE sessions to make a client happy exerts a pull on resources that would otherwise be extended elsewhere. And committing to alternative fee arrangements does mean that lawyers are working for less (barring staffing restructuring), even if they’re being assured of a greater volume of work. Andrew argues that as a global behemoth, Dentons is in an ideal position to absorb those costs while reaping the benefits. “The larger firms, because we’re spreading that over more partners, have an advantage over the smaller firms,” he says. Gray, at fellow global heavyweight Eversheds, offers a similarly upbeat take. “We see this as a great opportunity,” he says, pointing to the firm’s presence on Avis Budget Group’s seven-member global panel, down from nearly 700 firms. (Dentons is also on the list.) He also namechecks DLA Piper and Baker McKenzie as firms finding success in this new world, offering American corporate counsel a consistent solution in Europe. Pulling in to the Denver airport after his night at the Super 8, Andrew has a final thought. “The rise of Dentons and the other global law firms, this has all benefited by—we’re calling them panels—but writ large, the search for objective indicia to evaluate them,” he says. “That process has been very, very helpful for the biggest firms in the world.”