1. NAIMAN CLARKEIN-HOUSE SURVEY 2010The best legal opportunities

2. NAIMAN CLARKE IN-HOUSE SURVEY 20101. INTRODUCTION AND METHODOLOGYUnlike many developed economies Australia has been fortunate in sidestepping a technical recession,but while a sense of optimism is returning to economic commentary recent events indicate that a return torobust growth is still a way off.The Global Financial Crisis has tested many businesses and their In-house legal departments like fewevents in recent history. The inaugural Naiman Clarke In-house Legal Practice Survey looks at the effectsof the downturn on In-house legal practices and sheds some light on how In-house counsel can bestmanage their people and practice through difficult financial times, whilst building a strong foundation for thefuture.Research ObjectivesThe Naiman Clarke In-house Survey is based on in-depth and national research. To be released annually,the report will analyse a range of issues affecting In-house legal practices throughout Australia.The research for the 2009/10 report was conducted with the following objectives in mind: To gain an understanding of the challenges faced by In-house legal practitionersduring the GFC. To explore any changes to the practices mix of In-house legal counsel broughtabout as the result of the Global Financial Crisis. To explore whether the GFC has had any effect on the outsourcing practices of inhouse legal departments, and if so in what way. To investigate the human resource management practices of In-house legaldepartments including hiring intentions, retention strategies and remunerationpractices. To explore the views of In-house counsel on the economic outlook for Australia ingeneral and their industry sector in particular.Research MethodologyThe research was carried out by conducting in depth one-on-one interviews with senior In-house lawyersacross a range of industries. An explorative research technique was chosen because it offered a variety ofbenefits including flexibility (with the researcher being able to ask questions and collect data on a variety oftopics), and the ability to collect highly detailed data from the subject giving the researcher access to highquality information.Participants from a range of key industriesacross small (under 100 employees), medium Naiman Clarke In-house Legal(100-200 employees), and large (200 or morePractice Survey...sheds someemployees) enterprises were surveyed. Duelight on how In-house counsel canto time constraints we were precluded fromusing some of the more time consuming and best manage their people andcomplex probability sampling methods and inpractice through difficult financialthese circumstances non-probability sampling times, whilst building a strongmethods such as convenience and snow-ballfoundation for the future.sampling were employed.2 3. NAIMAN CLARKE IN-HOUSE SURVEY 2010For the 2009 survey participants from 17 core industry sectors as detailed below were surveyed. Advertising/Marketing/Media Automotive Construction/Property/Engineering Commodities Education Financial Services/Insurance FMCG Government Information Technology Manufacturing Mining/Resources Professional Services Property Retail Telecommunications Transport/Logistics Wholesale/DistributionThe participants were part of legal departments that ranged in size from 3 to 40 lawyers with anaverage team size of six lawyers and two support staff. Participants from a range of key industries across small (under 100 employees), medium (100- 200 employees), and large (200 or more employees) enterprises were surveyed. 3 4. NAIMAN CLARKE IN-HOUSE SURVEY 20102. ECONOMIC OUTLOOKEconomic ProspectsRespondents were asked their views about the outlook for the Australian economy in general and their industrysector in particular. The survey participants were generally optimistic about the Australian economy in 2010 butwith the exception of a small minority they were not overly bullish.The overwhelming feeling was that while there are some green shoots it is unlikely that we will see a quickrecovery and that it may take until 2012 for the economy to fully recover. Almost universally respondents feltthat the global economy will continue to do it tough over the next twelve to twenty four months but that the localeconomy would fare better.The overall sentiment was cautionsummarised by comments such as whileI have a cautiously optimistic outlook thereis a lot of complexity, we are in unchartedwaters and not taking anything for grantedand I would express my feeling asconservative optimism, I want to believethat the worst is over. There was anoverwhelming feeling that there is still somepain to come in some sectors. A lot of the negativity is starting to ease. I think its going to go up from here and come back as quickly as it went awayShape of RecoveryMost respondents felt that a return to robust growth was unlikely until liquidity returned to global financialmarkets, but while many believed that this was likely in 2010 they were not sure to what extent or how quicklythe recovery would take place.There was a wide divergence of opinion on when the economy would recover as well as the shape of therecovery. Opinions were fairly evenly divided between those that expected a U shaped recovery and themore optimistic respondents who were expecting a V shaped recovery. This divergence of opinion is bestexemplified by the following statements from respondents:I am not a financial expert but it feels like we have hit the bottom but I am not sure about the shape of the recovery We have hit the bottom but the bottom takes a while to play out and in these circumstances we are likely to see a parabolic [U shaped] recovery We are likely to see a moderate recovery, Australia is better placed than other countries but I am not sure whether there will be a double dip I think we are seeing a return to some pretty strong fundamentals but it will probably take a good while to get back up to the levels we were operating at previously I am not sure when it will take off but when it does take off it will take off like crazy4 5. NAIMAN CLARKE IN-HOUSE SURVEY 2010Shape of Recovery (Continued)The most common economic concerns were the employment outlook, the likely impact of rising interest rateson the shape of the economic recovery and continuing unrealistic asset valuations exemplified by the followingcomments: While the decline seems to have slowed or stopped I am not convinced that we are going to see a significant upturn in the global economy in the short term. I feel we are likely to see a U shaped recovery with some pain yet to come. My greatest concern is the hidden jobless in the economy, the people who are not showing up in the statistics at this stage but who may struggle to find work in the future We are expecting challenging conditions over the next twelve months ... [due to the] ... uncertainty in the manufacturing and commodities sectors, vagaries in exchange rates and the global economy, in the macro economy the pain to consumers is still to come as interest rates return no long term levels when the economy improves. I think that the veracity of asset valuations is still questionable and to me this says that fundamentally nothing has changed, we have still not learned the lessons of the GFC While corporate profits which are the primary drivers of share markets have recovered a bit, balance sheets still contain a lot of overvalued assets and until this is remedied we can continue to expect volatility in the financial markets.When it came to discussing prospects for their own industry a majority of respondents felt next year would seea modest improvement, even participants whose industry had not been adversely affected during the GFCexpressed some caution. The sentiment ranged from a decreasing decline to modest growth as summarised bycomments from respondents such as: Our organisation is budgeting for a decreasing decline in trade volumes in 2010, we are cautiously optimistic that we can begin to rebuild our business in 2011 Manufacturing will bounce along the bottom for a while, domestic housing will improve a little but interest rates will have an impact While liquidity is returning to credit markets the improvement is slow and it is still difficult for entrepreneurs to get finance. I think its going to take a while to return to normal operating levels The GFC has had a big impact on ... [our] ... industry due to the issues in the finance industry, we expect the next 12 months to be steady with modest growth The prospects for our industry are very much dependent on the preparedness of banks to start lending again, at the moment the banks are imposing very strict conditions I do not believe we are going to see a decline in the domestic market but 30% of our revenue comes from international customers and we may see some pressure in that areaPerhaps unsurprisingly, most confidence was shown by legal counsel in the finical services sector but even herethere was a fair degree of caution.5 6. NAIMAN CLARKE IN-HOUSE SURVEY 20103. CHANGE TO PRACTICAL MIXOne might generally expect that during times of serious economic hardship the practice mix of In-house legaldepartments is likely to change. The survey reveals that both the nature and extent of the changes resultingfrom the impact of the Global Financial Crisis have not been in line with expectations. Most notably the surveyindicates that there has not been a large increase in disputes but finance related transactions appeared to be onthe up. While we have seen more dispute resolution and insolvency based work it has not been a huge change in those areas, but we have seen a substantial increase in finance related work. Disputes have actually dropped but this is not the result of economic circumstances but the manner in which we have handled disputesMany respondents reported only a small decrease in deal related transactions. Our practice mix has changedbut not as much or necessarily in the ways I imagined, while we have seen an increase in restructuring workthere has also been lots of new business as well.As might be expected, bearing in mind the speed at which most businesses moved to reduce headcount, theincreased focus on productivity as well as recent changes to industrial relations legislations, there has been anincrease in employment and industrial relations type work. We have seen more work in the HR space as theresult of the business ratcheting up performance expectations.Other changes are summarised by the following responses: In past cycles I had noticed a change in the practice mix towards insolvency type transactions (debt recovery, liens etc) and disputes generally increasing, but despite the current hard times we are still doing a lot of contracts There hasnt really been a change in practice mix, we were expecting it but it didnt really happen We have seen less large transactions such as M&A and large supply agreements ... [but on the flip side] ... there has been an increase in restructuring agreements and an increase in technology in some parts of the businessIn the Financial Services and Insurance sectors the GFC has led to an increased focus on compliance workand perhaps unsurprisingly, these are the sectors that saw the biggest trend towards an increase in litigation.We have seen more work inthe HR space as the resultof the business ratcheting upperformance expectations.6 7. NAIMAN CLARKE IN-HOUSE SURVEY 20104. CHALLENGESAs might be expected In-house lawyers deal with a range of business and professional challenges. The resultsof the 2009 survey indicate that in addition to the common challenges normally facing In-house legal practices(e.g. the requirement to deal with new regulation) there were a number of new challenges arising specificallyfrom the economic conditions created as the result of the global economic downturn including the increasedfocus on corporate governance as well as the challenge of dealing with GFC related resource constraints. For us the greatest challenge has been the diversity of work. We are expected to be experts on just about everything.Doing more with lessWhen asked about their biggest challenges over the last twelve months the most common response was therequirement to do more with less as the result of cost constraints exemplified by comments from the followingrespondents: We are not splashing the cash anymore, our budgets are under increasing pressure, corporate is asking us to do more with less Our biggest challenge is doing more with the same resources, getting the ship in order during an economic downturn requires more legal work but with no extra resources Providing legal services with insufficient resources is always a challenge We are dealing with cost pressures but are still responsible for delivering a quality outcome There has been a huge amount of work created by the market conditions and regulatory changes but because of headcount freezes in our company we have been expected to do more work with less resourcesEven legal counsel supporting businesses that were not affected by the economic downturn were forced todeal with a reduction in spending. Since the financial crisis we have seen some pulling back of discretionaryexpenditure, its more a case of being cautious rather than the affect of financial circumstances.A bi-product of the reduction in resources available to legal departments was that lawyers were sometimesrequired to advise in areas where they may not have sufficient expertise. For us the greatest challenge hasbeen the diversity of work. We are expected to be experts on just about everything.Raising FinanceAs might be expected many businesses were dealing with financing pressures arising from the reduction inliquidity in the credit markets. While liquidity is starting to return to credit markets the process is slow and it isstill difficult for entrepreneurs to raise finance. Consequently refinancing existing debt and raising new capitalhas been difficult in a challenging business environment. These pressures were also having an impact onorganisations that did not rely on financial markets to raise finance. The greatest challenge for us is continuedfunding, it is becoming harder to get funding from government.7 8. NAIMAN CLARKE IN-HOUSE SURVEY 2010Regulatory ChangesThe challenge of dealing with new legislation continues to be one of the most common challenges In-houselawyers are dealing with: We are preparing for new legislation that is likely to have a significant impact on our industry sector. The challenge will be planning for something where we are unsure of the details, so its a bit like gazing into a crystal ball Working effectively with regulators is one of the greatest challenges facing our business at the moment. It seems that each regulator is very different in style and approach. Being the interface between the regulator and the business is an ongoing challenge We operate in a highly regulated environment dealing with FOI issues, State privacy legislation and regulatory oversight from the ombudsman and ICAC and this is a continuing challenge for our practice We are bracing for the legal challenge of dealing with new legislation coming at the end of the year One of the greatest challenges we face is changing regulation, the ability of a change in regulation to have a substantial impact on shareholder value The new government is trying to prove itself by introducing a raft of new legislation to position itself as a friend of the consumer. This increases the compliance burden on businesses.Other GFC Related Business ChallengesWhen asked to comment on the challenges facing their business the concerns cited included continued marginpressure in spite of the general economic recovery, asset values (a number of respondents felt there were still alot of overvalued assets in the market), a slow recovery and the state of the international economy. The followingcomments summarise the most common issues: Our clients are more sophisticated about how they use our services. They have started to differentiate among our product offerings in order to save costs. Specifically they are choosing less premium products to save money One of our greatest challenges is declining margins due to a change in product mix caused by the GFC The GFC is unprecedented in terms of the pressure it put on management, advisors and boards Our greatest challenge has been caused by cost cutting & downsizing over the last 12 months. The result is a loss of knowledge, momentum & organisational memory of the people who leave Supporting a business which is under great pressure in the market is always a challenge as is dealing with performance and HR issues which are associated with an economic downturn8 9. NAIMAN CLARKE IN-HOUSE SURVEY 2010Non-GFC related challengesWhile GFC related challenges featured highly in this years survey there were also a number of issues whichrepresent continuing challenges for In-house lawyers raised by respondents. These included understanding thecompany and the people and what makes them tick, managing the expectations of internal clients. Managingclient expectations is always a challenge. Many internal clients come to the legal department expecting a yes/noanswer and this is often not possible, and the pressure not to stand in the way of the businesses transactions isan ever present challenge for In-house lawyers.In the financial services sector the increased focus on compliance was a commonly cited challenge. Everyonehas raised expectations of the level of risk analysis we are expected to conduct.Everyone has raised expectations of the level of risk analysis we are expected to conduct. 9 10. NAIMAN CLARKE IN-HOUSE SURVEY 2010 5. OUTSOURCING Few would argue that it would be impossible to effectively run an In-house legal practice without some assistance from external legal providers. For this reason, the effective management of outsourcing practices is a key area of competency for In-house legal counsel. For the 2009/10 survey respondents were asked their views on a range of topics dealing with the issue of outsourcing including the types of matters typically outsourced, the impact of the GFC on outsourcing practices as well as their approach to a number of costing models for legal services emerging in the marketplace. Type of work outsourced When asked to comment on the types of matters typically outsourced to external legal providers the majority of respondents stated that they were most likely to outsource matters based on their size and strategic importance to the business, matters that involved a high risk to the business or had the capacity to have a negative reputational impact on the business, and matters in specialized areas of the law. The following responses were typical:We outsource non-routine work such as litigation, major M&A and capital raisingWe tend to outsource the legally complex matters that we do not have the time or resourcesto handle effectively In-houseIt depends on the size of the transaction and how business critical it isWe outsource complicated and high risk matters as well as resource intensive project workWe only outsource work that is significant from a risk or reputational perspective Budgets Many legal departments were under pressure to reduce spend on external legal counsel. This was more likely to be the case for local affiliates of multi-national corporations:Were under pressure to reduce external legal costs which we have adapted to in a number ofways including keeping more work In-house & negotiating better fees with the firms that we useThe message in our company globally was to reduce costs, to go to the firms and try to reducerates by 10%Even though there is pressure to reduce costs, I have taken the attitude that it is better to workcollaboratively with external firms on the issue of fee reductionThere has been some fairly aggressive discounting in the United States and that has resultedin some pressure for us to reduce costs in Australia and as a result we have had to make someadjustmentsThe legal department has been under pressure to reduce outsourcing costs as part of a globalpolicy of cost cutting. We have looked at both how much work we outsource and who we useand have started to use lower tier firms to reduce costs10 11. NAIMAN CLARKE IN-HOUSE SURVEY 2010Budgets (Continued)Even lawyers working at organisations which did not have a specific policy of reducing external legal spend weremore likely to look more closely at their outsourcing strategies as part of organisation wide cost cutting initiatives.The following comments were indicative of the general mood: We have become more vigilant with pricing and more diligent on querying fee estimates I have become increasingly reluctant to send work externally We are always looking at reducing costs by driving efficiencies We have had pressure applied internally to reduce fees to outsourced providers, this has come at a time when the amount of work we outsource has dropped significantly because there have been less projects on and we are trying to do more In-house We are reducing our outsourcing spend by increasing the size of our team.One of the most common strategies used to reduce external legal spend has been the rationalisation of externallegal panels: Our number one goal globally has been to reduce the number of firms we use around the world as part of an initiative to decrease outsourcing of legal work. One of the KPIs introduced into our organisation over the last couple of years has been the reduction of legal expenditure. We have been able to reduce expenditure by almost twenty five per cent by bringing as much legal work as possible In-house and consolidating our panel we took a large informal panel and formalised it as well as introducing restrictions on who could brief out to the panel.Other commonly employed strategies to reduce external legal spend were going down a tier i.e. moving some orall work from top to medium tier suppliers and looking at non traditional fee arrangements for commoditised work: While we have now tasked our external providers to reduce their hourly rates, we are much more sensitive to the resourcing of matters. We are open to and encourage lawyers to come up with different approaches to pricing such as fixed fee arrangements and risk sharing approaches involving success feesIt often comes down to the relationship with and confidence in the legal service provider when it comes to dealing with the bigger matters. In respect of the more commoditised work where we believe there is room for improved efficiencies we have made some adjustments by encouraging innovation in legal service delivery and cost models To address the challenge of doing more with less resources we have moved from using the top tier firms to mid size firms, we have also moved to retainer based, fixed fee and capped fee models We have stopped using the top tier firms because at medium firms we are allocated a partner at the same price as solicitors in top tier firms11 12. NAIMAN CLARKE IN-HOUSE SURVEY 2010 Budgets (Continued)We are going through a RFI at the moment and looking at blending fixed rate feearrangements on some matters and the value add that firms can provide We have tiered our legal suppliers, as part of this initiative we have defined thecommoditised work and taken this away from our top tier suppliersWe havereshuffledour paneland usedthis as anopportunityto drivedown rates. While a high proportion of respondents were focusing on reducing external legal spend a statistically significant number were not planning on a reduction, or in some cases, due to expected activity in the following year actually planned to increase spending:Our company has been more focused on headcount than external legal spending so therehas been no change in outsourcing planned and our budgets for external legal expenditurehave remained the same as last yearOur budget for legal services next year is doubling due to deregulation and an increase intradeWe are actually planning to increase our legal spend next year due to the number of ... [newproducts] ... expected to come on line next year. Another interesting finding was that more than a third of respondents (37%) did not have a formal budget for external legal expenditure. We do not budget for external legal counsel. While our spending is relatively constant on a year to year basis we do not feel it is necessary to set an arbitrary figure for external legal spend.12 13. NAIMAN CLARKE IN-HOUSE SURVEY 2010Fee ArrangementsThere does not appear to have been across the board The lawyers we usepressure on hourly rates of law firms as the result of the GFCand while there was evidence of fee reduction from somehave come to usexternal providers there does not appear to have been a and been proactivewidespread or systematic focus on fee reduction among law in sharpening thefirms providing services to respondents in an effort to win new pencil and arebusiness, it appears that any fee reductions that have takenplace were design to retain existing business.working harder toThere is also evidence that external providers are trying toretain our businessuse economies of scale and improved internal efficiencies toprovide improved savings to their clients. This appears to bea response to an increasing trend to avoid the outsourcing ofthe more routine work by In-house legal departments. A few firms approached us directly to offer reduced or fixed fee arrangements We are open to and encourage lawyers to come up with different approaches to pricing such as fixed fee arrangements and success fees with risk sharing We have moved to a fixed fee model for debt recovery.While In-house lawyers generally feel that time costing is not the most efficient way to resource matters there isa general consensus that there are few effective alternatives available in the market at present and that value asopposed to price is the primary driver in determining choice of provider. The hourly charging model is flawed but in many cases there is no better alternative We still engage lawyers on an hourly rates basis, if you want fixed pricing there is going to be a contingency built unless they are desperate and that is not the type of firm we are likely to engage because of the specialist nature of the advice we are seeking Some law firms have offered us discounted fees but at the end of the day we are looking at value for money arising from efficient processes and this does not always come from the firms with the lowest hourly rates The more complex the work, the greater the risk and impact on shareholder value the less likely you are to look at price as a determinant and select the service provider based on quality. 13 14. NAIMAN CLARKE IN-HOUSE SURVEY 20106. HUMAN RESOURCE MANAGEMENT PRACTICESHiring IntentionsMost respondents said they planned to keep team size the same with no plans to grow. No respondentexpressed an intention to reduce their team size. Approximately 15% of respondents were looking atgrowing their team with the majority of these being from the financial services sector or from businessesthat had not been severely impacted by the GFC. We have head count freezes even though we are expecting work to increase with the arrival of new [products] We are looking at adding to our team but this is dependent on business sign off Theres scope for growth in the legal team in the next 12-18 months as the business has plans for growth We expect an increase in the size and capabilities of the legal, risk and compliance team.Remuneration PracticesUnsurprisingly most respondents revealed that theirorganisation was not offering any significant salaryincreases to the legal team. The exceptions wereat the lower PQE levels where junior lawyers werereceiving market increases as the result of theirincreasing seniority, these increases were designedto avoid a growing gap between private practice andIn-house remuneration models.Bonuses were still being used to reward outstandingWe havent had across the board salaryperformance even with increased pressures oncosts resulting from the GFC with about one third of freezes but both salary reviews andrespondents stating that bonuses had been paid tobonuses were paid out at a lower levelthe top performers. Companywide there were performance reviews but our organisation instituted an executive pay freeze which included the legal team, but fortunately we were able to reward outstanding performance with bonuses Salary reviews for legal were in line with the rest of the company and while the volume and complexity of work have not decreased in our department market pressures do get taken into account when reviewing salaries Theres been a companywide freeze on pay and no bonuses paid, the legal team has been treated the same There has been a salary freeze across most areas of the company but this did not apply to shared services which includes the legal team Legal salaries are tightening up globally in line with the rest of the business but we are still using bonuses to reward top performers 15. NAIMAN CLARKE IN-HOUSE SURVEY 2010Remuneration Practices (Continued)While officially our organisation has instituted salary freezes the top performers have still beenlooked after with salary reviewsJuniors have been treated differently salary increases are based on market at the lower PQElevelsCareer Progression/RetentionManaging the career progression expectations of junior lawyers was one of the greatest human capitalmanagement issues faced by In-house legal departments (especially in the smaller teams). While a rangeof tools were employed by far and away the most common strategies were providing opportunities forlawyers to develop their career by moving into the business and using remuneration policies to retain staff.We have a flat structure in the department and manage career progression by giving ourlawyers an opportunity to move into the businessOne way to keep people is to pay competitively, we try to pay the same as law firmsBecause of the size of our team, moving into non-legal roles is the most common waylawyers in our department progressThere will be no raises but bonuses will still be paid out to the top performers.15 16. ABOUT NAIMAN CLARKE ABOUT THE AUTHORNaiman Clarke was established in 1999, and sinceJohnothan Naiman is a qualified lawyer havingthis time has been driven by the desire to be the practiced as a solicitor, barrister and In-house counsel.best specialised legal recruiter in Australia. We haveIn addition to his legal qualifications, Johnothan hasalways believed that the only way to achieve this goalcompleted a Masters of Business Administration and isis to consistently deliver results by providing creativecurrently studying towards his Masters of Commerce.solutions that exceed the expectation of clients andAs the CEO of Naiman Clarke Johnothan regularlycandidates. provides advice and assistance to some of AustraliasNaiman Clarke is now one of the largest, most leading law firms and In-house practices on a wideknowledgeable and most experienced nicherange of employment and HR issues. Johnothan hasconsultancies in the country. We strive to provide ourheld a number of senior positions prior to his currentclients with an additional resource in all aspects of their role including the Head of Legal Services, Southhuman capital management needs. Our integratedPacific Region at Avaya Inc, and was a member ofservice offering covers all aspects of recruitment, the Executive Management team of Candle Australiatraining and development, performance managementLimited (Australias second largest listed recruiter) asand remuneration planning.General Counsel and Commercial Manager.Our comprehensive range of services includes: Permanent and Temporary Recruitment Services Search and Selection HR Consulting and other professional services Training Psychometric testingOur clients include blue chip multinational corporations,multi disciplinary practices, government, top and midtier capital city firms as well as numerous boutiquefirms both in Australia and overseas.Naiman Clarke has offices in Sydney and Melbournewhere dedicated consultants provide recruitmentservices for clients in Sydney, Melbourne, Brisbane,Canberra, Perth, Adelaide and Darwin. Ourinternational consultants provide Australian candidatesaccess to some of the leading international and localfirms in the United Kingdom, United States, Europe,Asia and the Middle East. The best legal opportunities