MIKE YUILLE TALKS TO IN-HOUSE LAWYERS AND FINDS THEY WANT TO USE FIRMS WHICH RELIABLY PROVIDE COMMERCIAL SOLUTIONSBack in April, the Prudential insurance giant became the latest big FTSE company to launch a full-scale review of its legal function, including its law firm panel.

The idea was to consider using a single panel of firms for all its work, rather than its existing system of various panels for different areas of the business.

The sweeping nature of the review was described by legal head Peter Maynard as starting with a 'blank piece of paper'.Such reviews are becoming more frequent.

This is hardly surprising when one considers that, since the early 1990s, more than half of all FTSE 100 companies have set up formal panels of law firms.

What is interesting is the variety of circumstances which drive such reviews: the rise in corporate activity such as mergers, acquisitions and restructurings, and the balance struck between work handled in-house and sent outside.

For example, oil giant BP this year rationalised both its legal department and informal panel of firms after merging with Amoco, while Barclays Bank's similar move was to match its lawyers more closely to the current global group structure.There is also the basic need to find continually greater efficiency and savings to maximise profits.

After all, the interests of shareholders is the one true imperative in business.

This has led to many companies doing as much work as possible in-house, using panels just for big-ticket corporate deals, rare specialist advice, and blocks of low-value repetitive work.One example of this approach is HSBC, the international banking group which owns Midland Bank.

HSBC employs around 170 lawyers worldwide.

Among its 30-strong UK legal team, many have City law firm backgrounds and pride themselves on being able to handle much work in-house.

In the early 1990s the group also formalised both a seven-firm London panel for big-ticket work -- including Clifford Chance, Allen & Overy and Linklaters -- and a regional panel of 13 firms.

The panel system delivers the level of service required, which includes a practical and business-orientated approach to advice, and there are no plans for any immediate changes.But as Richard Bennett, group legal adviser, says: 'We do keep our relationships with our panel firms and payment of all legal bills under very close scrutiny.

There is a constant review'.Changes within the group, such as when acquisitions are made, can obviously lead to minor changes in the legal function.

'Everytime there's a deal, you have to look at it carefully,' says Mr Bennett.The acquisition of Republic National Bank is a prime example.

'I know who their principal London lawyers are, who are not on our panel.

We might keep them on because they have an expertise in bullion and precious metals,' says Mr Bennett.The constant drive for greater efficiency also results in tweaking the structure of the legal function.

'How one does it is the million-dollar question,' he adds.

'We meet with the firms several time a year and look at the records.

We then have full and frank discussions.

We speak to managers in parts of the bank and ask them what they think of XYZ.' One current example of tweaking is outsourcing away from the panel for debt collection.

'There are proposals that we put out work to a couple of small firms.'Mr Bennett's legal team, like many others in big companies, effectively acts as a middleman between the bank and its external lawyers.

'We are the intermediary with the whip, potentially to say that this or that isn't right,' he says.

'Last year I had reason to pick up the 'phone with at least one firm and say we were unhappy.

It's all water under the bridge now.'HSBC believes in handling much work in-house, as part of a group-wide strategic plan called Managing for Value.

Mr Bennett says: 'We are constantly looking to see how we can add more value to the business.

We see ourselves as a mini law firm, which has to market itself to the client'.One recent rationalisation involved moving the work for Midland Bank's retail branches from London to the Birmingham offices.

'It frees up more people's time in London to hopefully do more head office-related work,' says Mr Bennett.

Not all big corporations use formal panels, however.

Many prefer a more flexible, informal approach.One example is petroleum giant Shell UK.

Richard Wiseman, Shell UK's legal director, heads a 28-lawyer UK team as part of a 300-strong international department.

Firms used for UK work include Herbert Smith, DJ Freeman, and Allen & Overy.

'We are very flexible, and it's very much horses for courses,' says Mr Wiseman.

'Like many people, we have people we prefer to work with.' Mr Wiseman envisages no change in his approach to using firms.

'It's a question of skills available, and price,' he says.

There is no panel arrangement, no retainer, and no attempt to barter on fixed fees.

And he adds: 'For an organisation of our size, we put little work out'.

As Mr Wiseman says: 'If you make a firm stick unreasonably to an agreed fee rate, it's to no-one's interest unless it's part of a series of transactions'.There are distinct advantages to using a wide circle of firms, he believes.

'You need to be able to compare different firms for similar types of work.'The balance of work between in-house and external lawyers is sometimes dictated by the sudden need for corporate prudence.

For example in April, retailer Marks & Spencer launched a full-scale review of its legal function as part of a company-wide e conomy drive, after announcing its worst-ever profits fall.

But instead of staff cutbacks, the review resulted in the legal department handling more of its growing workload in-house.

The move was a recognition of the greater economy and efficiency, says company secretary Graham Oakley.

'An ever-growing workload means M & S will probably expand rather than contract the department,' he says.

'We think that a better service can be provided in-house.

We have an increasing workload and when it reaches critical mass, it justifies taking on specialists.

For example, we may take on a specialist contracts lawyer.

If we find we have a particular large piece of work, perhaps we will be looking to beauty parade it.

The in-house team does the majority of day-to-day work -- about three quarters of the total.

Our ability to provide instant expert service is the best way forward.

Retail is a fast-moving environment, so you have to react quickly.'Marks & Spencer's regular firms, which include Freshfields, Linklaters, SJ Berwin and Cartwrights, are unlikely to see a fall-off in work.

But neither are they likely to see a surge of instructions.

Marks & Spencer has aligned its lawyers closer to the business to create greater efficiency.Mr Oakley says: 'Internally, we have followed the business structure more closely, and the company has made its business units more formal -- UK retail, overseas, and financial services'.The Woolf reforms to the civil justice system could be the next big factor to lead to reshaping legal functions.

Shell's Mr Wiseman welcomes Woolf.

He says: 'It's quite obvious that some of the techniques introduced by Woolf are having benefits.

The plaintiff's part 36 offer [where the plaintiff tells the defendant what he or she will settle for] helps concentrate minds'.But all legal chiefs believe it is still too early to know just how the changes will impact on their departments.

'The judges are still working out how exactly to play Woolf,' says Mr Bennett.

Mr Oakley adds: 'I think we're learning,' says Mr Oakley.

'At M & S, litigation mainly involves customer and staff accidents, and is handled through our insurer and its lawyers.'Some Woolf elements will require in-house lawyers taking a closer interest in details of cases and work closer with lawyers for the insurers, Mr Oakley says.Orla Collins, manager of external legal resources at insurer CGU, says: 'Our immediate experience is that the amount of general litigation has fallen dramatically -- by more than half.

But this may be short-term.

Claims which fall under pre-action protocols involve a three-month time lag before resorting to litigation.

It may be that solicitors are being more reasonable in their settlements, it may be that there is a tidal wave waiting to engulf us.

In the event we can't cope, we will need more resources'.Paul Gilbert, past chairman of the Law Society's commerce and industry committee, says that as the range of legal risk for companies has broadened during the last few years, from the proliferation of corporate governance issues and regulation to the closer attention of the press, so the job of in-house lawyers has changed.

'In many cases, they've become managers of legal risk,' says Mr Gilbert, who is group company secretary and head of legal at United Friendly Assurance.

'But the in-house lawyer has only limited scope to deliver across this broad range.

Instead, they now look for strategic alliances with their external law firms.'By being able to rely on external lawyers that understand the company's business and can be trusted to provi de commercial solutions to commercial problems, the firms can work more closely with the in-house team.

Firms benefit by having more stability of work, and longer-term client relationships.'It can be a genuine win-win situation, by working together in order to contribute to the relative success of the client business,' Mr Gilbert says.

But he warns: 'You have to get the environment right first, in order for the relationship to flourish'.To achieve this, the onus is very much on the company legal chief.

When appointing external lawyers, that person must think through what is needed from them in terms of advice and relationship and, equally importantly, what the companies can offer the firms in return.

Pre-pitch meetings are helpful to clarify these points and to allow the external lawyers a chance to explain what they can offer -- and what they themselves want, says Mr Gilbert.'The law firm must be equally thoughtful,' he adds.

'They must be prepared to give ground if necessary, and to invest in the relationship with the potential client.'Firms should think about how they will present themselves after the pitch.

Mr Gilbert advises: 'Think about how you can support the business? What services might the company need in the future? Can you help them with internal training programmes, for example? Finally, don't be reticent about asking for what you want.

Firms need to make a decent living, too.

After all, they're not charities'.CASE STUDY: CGUA classic example of how companies use their legal functions, and why they sometimes restructure them, is now being played out at insurer CGU.

The group was formed a year ago by the merger of Commercial Union and Scotland-based General Accident.

The fundamental rebuild of the UK and global functions will take two or three years.

This involves creating a smaller, more focused external panel of law firms.The merger has led to the creation of two legal departments: one, split between London and York, services the group and overseas.The other department, based in Perth, acts for the UK business CGU Insurance (CGUI) and specialises in general motor and household insurance work.

Last year, it handled 22,000 litigated claims -- mostly road traffic accidents and third-party litigation.

Group general counsel Ian MacDonald, formerly head of legal for General Accident, is based in London.'Initially, the main driver for change has been the merger, but second consideration was to produce savings for shareholders,' says Orla Collins manager of external legal resources at CGUI.

'It's been quite a big restructuring job.

Jane Topping in Perth [CGUI's head of legal, formerly business services manager of the General Accident legal department] has had to fundamentally change the function of what the former General Accident department is there to do.

She's recruiting to enlarge the department.'There is an emphasis on doing work in-house wherever possible, including general insurance, company/commercial, employment, IT law, and some acquisitions work.

The choice for using external firms for these areas was limited and 'phenomenally' expensive.

'We have shown we can handle work more cheaply and effectively by doing it in-house,' says Ms Collins.The Perth in-house department has been divided into two functions: the legal department proper, and a legal insurance helpline for policyholders.

'We are setting up a smart sourcing programme to outsource general commercial and employment work,' says Ms Collins.

'The intention is to use it as a short-term measure over the next few months.

We have tried this a s far as possible, with some niche areas such as property and litigation being dealt with externally.'The UK legal panel for CGUI has already been totally revamped.

Ms Collins says: 'We used to have a very large panel of between 70 to 100 firms in England and Wales.

That was cut in April to a small panel of 18 firms'.The process is now moving on to reorganise two specialist panels.

These, which focus on environmental claims (large scale disease and environmental) and financial liabilities (professional indemnity) currently use some 20, mainly big, regional firms.

That overall number is likely to be halved, and the aim is to have just four firms for environmental work.But the new specialist panels are only an interim measure for the next 12-18 months.

'That's because we will need to fundamentally review our needs again in the light of the merger itself, and also in the light of the Woolf reforms,' says Ms Collins.The restructuring is more than just a reaction to merger.

It is also a sign generally that the company is becoming a more sophisticated consumer of legal services.

'Obviously, we have to deliver saving as a result of the merger, and legal is one area where we can do this,' says Ms Collins.

'We also have to try to continuously improve the service we receive, and manage the panels in a more pro-active fashion.'The London offices of CGU are beginning a similar review of the international legal functions.

As part of that, Clifford Chance was appointed in April as the main adviser for corporate transactions.

There is the possibility of firms overlapping between the international and CGUI UK panels, Ms Collins believes.

'We will be attempting to co-ordinate our actions in order to maximise our purchasing power,' she says.LINDA TSANG TALKS TO PRIVATE PRACTICE LAWYERS ABOUT THE KEY INGREDIENTS OF A SUCCESSFUL PANEL BIDBeing on one of the panels of law firms used by a company means set fees and regular work from a corporate client.

In recent months, the legal press has been full of companies slimming down their legal panels.

In this increasingly competitive environment, it has become even more important for commercial law firms looking for work from the corporates to make sure they get their pitch for a panel right.Earlier this year, Zurich Commercial slashed its legal panel from 100 firms to just 16, and Barclays Bank's corporate recovery department streamlined its legal advisers down from 13 firms to five, with insurance giant CGU (see case study below) cutting the number of law firms on its property management panel from ten to three, having already cut its litigation panel from 100 to 18 in April this year.But rationalisation is not necessarily bad news; it means that there are opportunities for more firms to pitch more often, either to get on to, or stay on, a panel.

And it is not only in the private sector that law firms are pitching.

The Leeds office of Pinsent Curtis and Manchester firm Cobbetts jointly won a tender this month for legal work connected with Lancashire County Council's pension fund, which has a £100 million property portfolio.David Philpot, head of Pinsent's property group in Birmingham, considers it inevitable that clients will increasingly want to retain panels of legal advisers because in-house lawyers want to have a controllable resource.

He adds: 'Equally, for major corporate clients, by cherry-picking and selecting a panel of two or three law firms that complement each other -- such as a "magic circle" firm to deal with a hostile bid, and a national firm to provide advice at a lower rat e -- they are recognising the benefits of having a well-selected panel'.From the perspective of both sides of the relationship, it is essentially a sensible business decision for corporate clients to be more focused in their choice of law firm.

Clients may want particular firms for niche areas or even particular partners for their expertise, but they also want to have a range of firms, from the very top City firms to the national firms, which can be used for volume work.

In some ways, the process of pitching for panels can be seen as fairer than working through informal contacts.

Niche, regional, national, City and international firms will all pitch to the same client, and firms right across that spectrum have succeeded.

For example, Barclays' slimmed-down corporate recovery panel includes national firms Dibb Lupton Alsop, and Liverpool-based firm Hill Dickinson Inc Wayman-Hales, and international firm Salans Hertzfeld & Heilbronn HRK; and its property management panel is made up of Denton Hall and Eversheds.For an international firm like Linklaters & Alliance, pitching is a matter of emphasising the firm's strengths.

The head of litigation in the firm's London office, Brinsley Nicholson, says: 'As an international firm, Linklaters has a global resource.

Pro-activity in a practice area -- such as, in litigation, covering the Woolf reforms -is a relevant factor, but not necessarily the deciding one; the technical skills, experience and expertise of a lawyer or team, or a firm as a whole are more important'.But being on a panel also has its disadvantages, because of the potential for a conflict of interest.

Sally Jones, the new business development director at Pinsent Curtis, and previously an in-house lawyer, says this is why many clients do not put all their eggs in one basket.

'Conflicts can arise if an existing client, whose panel you are on, objects to you acting for a competitor, and obviously if it is a contentious case, there is more likely to be a conflict of interest,' says Ms Jones.In her previous role as in-house counsel at Birmingham and Midshires Building Society and also at Fison & Company, Ms Jones says she was on the receiving end of tenders ranging from a two-page letter to a 70-page document, and those extremes also extended to the prices tendered, and the number of noughts involved.In her current role at Pinsents, Ms Jones deals with all invitations to tender or present to clients, which can range from written tenders to presentations.

She says: 'The process is much more sophisticated and focused now, although there can be problems where clients sometimes do not always make their requirements specific enough.

But in the recent example where this firm pitched for Wembley, the invitations were separated into nine different headings, and the presentations had to be tailored to each, and there also has to be a balance between the technical skills and the "soft" skills of service delivery'.It is obviously a coup to be on a panel, and there is also the bonus of the ability to use a successful pitch as part of a firm's marketing tool, such as including a client in a firm brochure.

Ms Jones adds that this has to be done with the client's agreement.National firm Eversheds has gone one step further than just having a client listed in its literature; it set up a 'partnering' relationship with US multi-national DuPont, which received wide coverage in the legal and business press.

In 1996, DuPont scaled down its legal advisers from six to one in the UK -- Eversheds -- and from 340 to 30 in the US.

The partner in cha rge of this initiative at Eversheds, Paul Smith, says: 'The scaling down of suppliers is a general trend, not only in banking and insurance but also in manufacture and retail, as pioneered by Marks & Spencer.

Generally, panels are more practical, but the difference between panels and "partnering" is that fundamentally, instead of a number of firms being in an arms' length relationship, partnering is a much closer relationship, where both parties have common long-term interests, based on trust'.Whether firms are pitching for panels or for a 'client partner', Pinsent's Mr Philpot says that tendering to get on any panel is a complicated and time-consuming process.

The initial tender will be written, and that itself may be an outline document designed to weed out the initial unsuitable tenderers.

The next, more detailed, written stage will be used by clients to decide who will be invited to give a presentation, which will usually last about 90 minutes.

He says: 'Our documentation today is light years from what we produced five or ten years ago -- it has to be.

We have also recruited lawyers specifically to assist in producing those written tenders.

They are in-house lawyers who have experience of being on the receiving end, and know what motivates the client in making that decision.

Partners inevitably have to have a major involvement in the process, and that is an education that we all have to go through.Mr Philpot says that whether or not you get on to the panel, it is important to follow up how and why the firm did get on to the panel, and just as importantly, why it did not.

'Clients tend to be very co-operative in this because they recognise that you have invested a lot of time and energy in the process.'But there is no room for complacency.

Even if you are on the panel, membership will be for a finite time, and on a particular fee basis.

The client will reserve his or her right to have panel members submit another tender at the end of the agreed period, and that may be subject to different terms and conditions.Any advice as to pitching tends to be of the common sense variety.

Every client likes to think his or her business is unique, so do your homework on the specific sector or industry, either as an individual, team or firm.

Practitioners have to be seen to be 'adding value' by identifying potential problems and also offering solutions.

They have to show that they understand the commercial priorities underlying the transaction and demonstrate a commercial approach to dealing with any legal obstacles.

Being commercial does not mean being unprofessional -- it means standing out from the crowd of other lawyers competing for that client's business.At Liverpool firm Weightmans, the deputy senior partner Ian Evans says that with the number of insurers contracting, 'the firm can't stand still, the market is changing so rapidly with the mergers in this sector.

You have to keep your eyes and ears open, and in specialised areas, such as this firm's which is 80% insurance industry-orientated, mostly defendant, the clients are looking for synergy and a commercial attitude'.Mr Evans is responsible for marketing and business development.

Although it is difficult to quantify the exact resources, he estimates that a major pitch will take up 21 fee-earner days, which will include commissioning research into a potential client and the selection of the appropriate personnel.

This involves with not only a partner, but also a management team to deal with and present the pitch.

Mr Evans adds: 'Those resources and training also apply to the issue of retaining clients, which is just as important.

Whether you are a regional firm like Weightmans, or any firm.

More and more City firms are only going to be used for rarefied work -- the insurance company wants the work done cheaper and by people with that expertise, so the work is coming out of the City.

We are confident about keeping our place in the market -- but you have to be aware of the time and money involved in staying there'.