Legal Advice: Procurement Strategies for Legal Services in Financial Institutions

WHITE PAPER2 LEGAL ADVICE PROCUREMENT STRATEGIES FOR LEGAL SERVICES IN FINANCIAL INSTITUTIONSTHE CHANGING LANDSCAPEThe global banking and financial industry operates in a highly complex environment that has undergone significant transformation in the past decade. The years following the financial crisis have forced the industry to adjust to increased regulation and higher capital requirements (for banks and insurers), and intensified the need for robust business processes across the board. On top of this, customer expectations regarding service quality have skyrocketed.As financial companies explore new technologies, uncertainty over regulations — further complicated by their forays into inorganic growth and/or geographic expansion — has elevated the role of their legal departments. Never seen as anything less than strategic, they are now viewed as even more crucial.The purpose of legal departments is to mitigate legal risks that can cripple the business and bring serious consequences to the firm’s employees. Adapting to a rapidly changing high-risk environment goes beyond just ticking the box for compliance. While this can be expensive, the failure to comply can be even more so.For example, in 2016, the U.K.’s Prudential Regulation Authority (PRA) issued new requirements to ensure that financial firms are able to operate during periods of stress or recovery.1 As failure to implement these requirements could lead to a mandatory independent external review or, in the worst-case scenario, revocation of the firm’s banking license, this was not something that could be taken lightly. Initially, several companies underestimated the effort for legal compliance, leading to a last-minute scramble for external legal support, and consequently legal costs skyrocketed.A well-planned legal procurement strategy, with an optimal mix of in-house legal teams and outsourced legal experts, can set firms apart from competitors and generate real business value. Here, the objective is to put in place the best fee arrangements and utilize innovations in technology to mitigate risks efficiently and effectively.FACTORS TO CONSIDER WHILE STRUCTURING YOUR LEGAL TEAMService DeliveryWe are already seeing the blurring of global borders in legal departments. Companies are handing over internal support workto, or obtaining ancillary services (dispatching letters and enclosures,transcription, research, etc.) from, legal process outsourcing (LPO) firms to achieve labor arbitrage savings. Rigid silos are being replaced by fluid structures. 1 These guidelines, called Operational Continuity in Resolution (OCIR), necessitated that financial firms remediate their contracts and put in place strict Service Level Agreements (SLAs) with a number of third parties (so as to ensure continuity of supply), as well as restructure their “critical” shared services. WHITE PAPER3 LEGAL ADVICE PROCUREMENT STRATEGIES FOR LEGAL SERVICES IN FINANCIAL INSTITUTIONSLike other corporate functions, legal departments are experiencing technological disruption. Legal tech firms are at the forefront of this disruption, most commonly leveraging machine learning and artificial intelligence to perform traditional due diligence tasks such as research, reviewing documents and reading contracts. Organizational Risks and ExposureDecisions about budget management depend largely upon legal risks and the degree of risk exposure. An assessment of legal risk exposure must be undertakenfor each area of legal risk. These risks may vary based on the company’s business (for example, retail bankingand insurance firms would face quite different risks withregard to their customer profiles) and regions where it operates.2 It is imperative to understand the company’srisk appetite. Some risks may be tolerated and dealtwith reactively, whereas others may need to be prevented,that is, dealt with proactively. The responsibility of a generalcounsel (or chief legal officer) is to minimize these risks across the company through efficient investment.In-House vs. OutsourcedThe choice between in-house lawyers and external experts depends upon a number of factors, such as company policy, type of legal matters handled, etc. BFSI companies must keep these factors in mind while considering their legal outsourcing strategy: Skills required and availability of resources. Location of resources. White-collar labor rate trends are a major cost component for legal services, so think through your options: tier 1 vs. tier 2 cities or, in extreme cases, on-shore vs. near-shore vs. off-shore. Resource mix optimization. Work must be performed at the lowest level (paralegal, junior/senior associate, partner) possible without impacting quality. Demand reduction via spend controls and outside counsel policies; preference given to working with independent legal advisors over fixed-duration contracts with law firms.2 Firms can choose to handle this diffe