On January 30, 2017, eight members of the In-House Advisory Panel for the 2017 GC Summit gathered at the offices of Squire Patton Boggs in Budapest for a Round Table conversation on the challenges they face and strategies they employ in dealing with external counsel. The event was moderated by Akos Mester, Partner at Squire Patton Boggs.
Akos: Thank you, David. Sziasztok, everyone. The pleasure is ours to have you all here. Please introduce yourselves and share the size of your legal team, and whether compliance and regulatory is included within it or not.
Daniel: My name is Daniel Szabo. I’m representing Hewlett Packard Enterprise, which has a relatively significant footprint in the country. We employ a significant number of people, and we have diverse activities from manufacturing to services to sales. The legal team is partially responsible for compliance, as are a number of other functions in the company. The overall leadership however, is taken by Legal. And of course it is a very important area in my practice. More so that Transparency International has recently published its Corruption Perception Index, and Hungary’s rating unfortunately fell. Its current ranking is 57 – down from 50 – and any country scoring more than 50 is considered high risk. So from low risk it has shifted to high risk. And as we continue to conduct sales activities in the country, this is of course something that we need to deal with.
Szabolcs: Hi, I’m Szabolcs Gall, I’m Head of Legal for Scitec Nutrition, and I’m also responsible for regulatory. Compliance is part of that role. We sell in over 100 countries, and I’m basically responsible for ensuring compliance in all those countries. In most of those countries I use local counsel or local regulatory assistance, but I still take primary responsibility for all that. We have a small internal team, just a few people. And we use mostly external lawyers for our activities.
It’s an interesting business. Sports nutrition used to be a free-for-all industry. Companies would put whatever they wanted in their products, because customers who were taking them wanted to see results quickly. It’s a big challenge to walk the tightrope between being fully compliant everywhere and at the same time having useful products.
What you find is that the laws are all over the place for sports nutrition, so I can sell a product that’s legal in Hungary, but in Sweden they would say it hurts people. So how do you really balance that? And how much do you try and create a product that is compliant everywhere and still have a successful global business?
Judit: I’m Judit Pettko-Szandtner, Head of Legal at UniCredit Bank Hungary. Up until the beginning of last year, legal and compliance was under one umbrella. It is split now, so I’m responsible for legal and regulatory matters but not for compliance. The legal group in Hungary has a head-count of 19, including part-time workers and some standard external lawyers that work with us.
The banking sector is, on the one hand, like a dinosaur, and on the other hand it’s at a turning point now, because lots of people think that we are not competitive enough any longer. For legal the next period will be exceptionally exciting and challenging compared to previous years. In previous years we were mainly occupied with consumer protection, regulatory issues, reputation and damage control, and now the main focus will be on innovation and competition. After some more cautious years risk appetite will grow again. Together with the banking sector in-house banking counsels should redefine themselves as well.
CEELM: When you say banking is like a dinosaur in some ways, what do you mean?
Judit: When I started in the 90s, the banking industry was very sexy, and everyone wanted to work here. It was very different from now. Now working in some new, fresh industries, such as the IT sector seems to be much more attractive. It’s a big issue in the banking sector right now. How to remain competitive in the age of Big Data, digitalization, how to keep up with the competition coming from other industries, such as the fintech sector, how to keep clients, how to attract employees and talent are the current challenges.
Zsolt: I’m Zsolt Wieland, from OTP Bank, the largest Hungarian bank – so one of the largest dinosaurs. We are sitting not only in Hungary, but we have subsidiaries and branches in eight different countries, mainly in CEE, and in Russia and Ukraine as well. The legal team is about 30, but we have a different structure, with legal colleagues in the region as well, so it’s a matrix kind of governance. I’m responsible for retail and general issues.
Akos: So in your role you’re responsible for OTP’s operations in all these other countries, or just in Hungary?
Zsolt: We have more than 50 subsidiaries, with project firms and things like that. Of course if we have a bank in Hungary, we have to ensure they are doing the same things. It’s not corporate governance, but let’s say it’s a very intense discussion between the headquarters and the subsidiaries. But yes, we are responsible. It’s mainly focused on the reporting obligations. We have a reporting line, and we discuss some of the issues.
CEELM: How many lawyers do you have reporting to you?
Zsolt: Each subsidiary that is relevant has about 25 or 30, so it’s a regular reporting line. And some extraordinary ones exist as well.
Zoltan: I am Zoltan Fenyi, from Sberbank Hungary, Head of Legal. We are the Hungarian subsidiary of the largest Russian bank, and we have regular discussions with them on a regular basis, of course. In Hungary compliance and legal functions are separated, since August. When I was also responsible for compliance it was an exciting experience for me. I do think these functions are best not held in the same hand, because I have sometimes felt conflict of interest situations, and there is a group policy that these functions have to be separated, which I think is the right approach. Regarding the Hungarian banking market, I fully agree with Judit that we are facing a new era, and we have to focus on business and business support. This is the era of creativity, I think. The last couple of years were about regulatory compliance, but currently legal heads have additional responsibility. Regarding the staff, I am responsible for seven lawyers, and as I have some compliance functions, I have to keep contact with the authorities and some type of reporting tasks, I have three further colleagues dedicated to these issues.
Andras: I am Andras, and if you are talking about dinosaurs, I represent one of the biggest, Tesco. Tesco has 19,000 employees, here in Hungary alone. It is the biggest employer after the Hungarian Post – we’re the biggest private employer. Tesco is also present in the Czech Republic, Slovakia, and Poland. Altogether we have 70,000 employees in these countries. In Hungary alone we have 208 stores and HUF 700 billion annual turnover. So it’s a huge company. My role: it’s a special and interesting combination of a local and a regional role, because I am partly responsible for the Hungarian legal team, and mainly for local matters like authority investigations, disputes with customers and employees, and also all kinds of litigation. But I am also responsible for ethics and compliance on a regional basis. The reason why we have this interesting combination of the local and regional roles is that two years ago these four countries were integrated into one business unit – we usually call it “One Europe.” And the regional leadership team decided to structure the Central European legal team like the rest of the business, so instead of a geographical-based structure now there is functional support in six different functions, from commercial to property to employment to compliance, and each function has its Head of Legal responsible for the whole region, and I am responsible for Ethics and Compliance, and with respect to Ethics and Compliance I have a team of five lawyers in the four countries and on top of this I have three lawyers here in Hungary responsible for litigation, dispute resolution, and all other regulatory matters. Plus informally – on a dotted line – I also take care of the Hungarian legal team, though officially they do not report to me, but as we sit in one room, physically we are together, so I’m like the unofficial Head of Legal in Hungary, and they can come into my office and discuss everything – even though I am officially not responsible for their area. So it’s an interesting combination of roles.
And it has been quite tough, for the last year, because everybody had to get familiar with this new structure. Now it’s better, but it’s still quite difficult to work in this remote way and manage people in the region.
Akos: Thank you all. Moving from these introductions, I would be very interested in your experience working with external lawyers and the way you outsource legal services to law firms. What are your experiences on that?
Daniel: That’s an interesting topic. When I moved in-house the first thing I noticed is that all my friends in private practice began giving me business cards (laughter). I got phone calls and messages, all of them convinced they are on the marketing path here. The truth is mundane. Multinationals like ours, which are vertically integrated and have reached a remarkable level of efficiency, do not allow local counsel or regional counsel to adopt decisions alone as to which firm they can work with, because costs do matter and there are sophisticated procurement procedures in place in the company. You know, we consume legal services at all levels of the market, so we have internationally recognized brands for big transactions, restructurings, litigations, government investigations, and the like. Then we usually have the mid-tier firms – independent local firms that do things like corporate work and competition. And when it comes to corporate housekeeping, day-to-day stuff, small disputes, and the like, it’s sometimes sole practitioners, sometimes it’s small law firms, who know our business well because they’ve been around for some time.
The lower you go on the reporting line, the less influence you have in choosing the big brands, and even the mid-tier. You have more flexibility in selecting the smaller firms, and sometimes with the mid-tier firms. The big brands are selected at the HQ level.
CEELM: How does HQ know which international brands are good in Hungary? Just because they’re good in New York doesn’t necessarily mean they’re good in Budapest.
Daniel: Actually, my experience tells me that if somebody’s good in New York and has a good network, then it’s as good on the ground as it is there. There are occasions, when it comes to small countries, that you don’t see big US law firms present, so they use sub-contractors. But it’s usually pretty reputable law firms in the group, so I’ve never had an issue with a US firm and a local firm they work with, because they’ve provided the same kind of service.
CEELM: So you’ve never been asked by HQ to recommend a good international firm on the ground?
Daniel: If there’s an issue on the ground that’s significant and attracts your attention, then of course HQ will listen, but I’ve never had a problem with a firm they’ve appointed. Sometimes we’ve seen big international firms leave the region, but nevertheless they’ve left behind well-established practices that somehow managed to retain that know-how, that ability to follow the trends. They’re pretty good.
Akos: Does your HQ instruct you which law firm to use, or do they trust your judgment?
Daniel: You have to think of this in terms of approved pools of suppliers, and from there you can of course pick, but ultimately HQ has to bear in mind the company’s best interest at a global level. It’s never a zoo of hundreds of different suppliers. It would be impossible to coordinate and to efficiently manage. But we are made up of 100% subsidiaries, and I think maybe other companies that are perhaps not as hierarchically integrated and are made up of partial subsidiaries might have a very different approach, because partial subsidiaries have a greater degree of flexibility.
Akos: Do you all have the same experience in terms of your flexibility to hire external counsel?
Zoltan: We have more responsibility for selecting external counsel. We also have a panel defined by HQ, but of course if we decide in favor of a company on reasonable grounds which is not in that panel, they will accept our suggestion. But on the other hand there is an expectation from their side to keep as much work as possible in house. Of course these expectations are expressed in terms of KPIs, strict budgeting, procurement procedures, and so on. As a result the room for external services is limited. Of course there are some tasks that require external counsel, for example, labor disputes and litigations, where there could be a conflict of interest. And bigger transactions, especially where foreign jurisdiction rules will apply. In this case a firm with a good international reputation will be important as well. And sometimes there can be a need for an opinion on a subject we are not entirely sure of the answer to. But generally we try to keep the work internal.
Akos: But with all that, there still needs to be a decision made at some point which lawyer to work with. I’d be very much interested to find out, are you making that decision, or is it a joint decision of the business and the legal function to pick that specific legal counsel for that specific project?
Zoltan: It depends on the topic. For example, if you are talking about cross-border finance from several lenders, it’s certainly not an individual decision, because there are several counter-parties. There are pros and cons. And of course prices are relevant. As a result, it will be the result of consensus. It’s not only an individual decision.
On the other hand, if you are talking about lower-level questions and individual legal opinions, I myself can decide on proposing a law firm, and I can take my experience into account. The name of the firm is of course relevant, but so is my knowledge of the lawyer, and my experience, and I can certainly decide in favor of a person who is not included in an international pool, with no international background, if I have good experience with him. The level of fees is important as well, of course, but there is certain room for considering other factors in case of offers from the same level.
Szabolcs: I had a different experience, both in my previous role at Tesco and in my current role as well. In my current role, obviously, I decide who to use. And whenever I take on a new role, I try to reduce the number of external counsel, and use a few of them, almost exclusively. I find that that works best. My experience at Tesco when I was there was quite interesting. A few years ago they tried to essentially buy legal services like they would buy bananas, using the procurement team. And in my experience that never worked. The panel of law firms was good, maybe in the UK or the US, or in other jurisdictions. But I was never happy with the firms that they were using. So I found that buying legal services for a group is very difficult because the jurisdiction changes – and the regulatory matters within the jurisdiction change – so much, and the quality of firms change so much, depending on the jurisdiction. So I think, you know, buying legal services on a group level is dangerous. If you have a good panel obviously where you’ve got good local firms on the panel, where you have some flexibility, that’s great, but having some decision from headquarters as to who you use locally, on a local matter ... I think lawyers should have some input. I think Andras can confirm that that’s the situation now at Tesco.
Andras: Yes, I think the situation is better now, because we explained to the procurement team that this is not like buying a cleaning service. They don’t know the leading firms, and the lawyers who work at a given law firm, and therefore we agreed that they will be excluded from these kinds of procurement processes, and it’s our full competence who to go with.
And a very interesting experience, and I don’t know how it is with your companies, but my experience is that money doesn’t really matter. The offers of the big international law firms with the good brands are quite similar. Certainly there are law firms which are a bit more expensive and others that are a bit cheaper, but at the end of the day the offers are quite similar, so my experience is that for an English lawyer, these kinds of offers are relatively low. So the tiny differences don’t really matter, and the quality and the lawyer sitting in the law firm are the factors which really matter.
Daniel: While I agree that lawyers should have a say in procurement, I don’t agree that procurement doesn’t have a role to play here. I think that if you leave the procurement of legal services exclusively to the legal department, that’s a potential for a conflict of interest. Especially in small countries like ours, where everybody knows everybody, and you frequently switch roles between in-house and private practice. It’s not necessarily healthy if you are on too good terms with a supplier and if others in the company don’t really see what’s behind your decision. And as to the fees, in fact it is an issue for us, just as with any other consultant services or any other supplier to the company. I think the key here is to be able to assemble a professional pool of bidders, and then if they’re comparable because they have similar skill sets and experience, then you can leave the rest for the fees to decide.
Zoltan: In my opinion the fee has an additional meaning. If fee requests are capped, for example, we can estimate the work they would expect to perform to answer that specific question. If I have a deep understanding of that question and I think that it requires hours and hours to provide a qualified legal opinion and in-depth analysis of that question, and the fee offers do not reflect the necessary hours, I would think it would have a negative impact on our decision, so it would be a bad move of the external counsel to offer us an unreasonably low price. Of course, it may be possible that they are making the offer knowingly, preparing to answer the question almost free of charge so they can refer to the case and to us in their marketing materials, so there could be added value. In those cases it’s not necessarily that bad a message for us.
Judit: I think the system is much more simple at UniCredit. We do have procurement rules and a special procurement system, depending on the values of the external contract, but the main rule is that we work as efficiently as possible, so we have a certain budget, which doesn’t give us too much room. In-house people have a budget, and we definitely decide on a cost benefit basis, keeping in mind the procurement rules as well. Price is extremely important. On the other hand, the Group gives us a complete free hand, apart from the budget. We do have a panel, but on this Group panel, there are hardly any law firms that are active in Hungary. So on the one hand we have absolute freedom and we use this freedom to get the most added value for the best possible price.
Anna: I’ve been the legal director of Auchan Hungary for almost 13 years, and basically, if we go into details, we are also a tiny unit. There are about four of us on the legal team. And my ambition is always to do as much work internally as possible to reduce costs. I’m not very much liked by external law offices because usually when I arrive the first thing I try to do is cut costs. I can say that unless there’s a very big issue – for example in 2012 when Auchan bought the seven Cora hypermarkets in Hungary, that’s a kind of question that, even though I think we’re extremely competent, I think we need external help with. And sometimes we need help with company matters, but otherwise we try to do as much work ourselves as possible.
I have a lot of flexibility in selecting external counsel. French companies normally, they’re not as internally regulated as others. There is a laissez-faire attitude: you have more autonomy in certain decisions. But of course I do have a boss. I do have a budget. I think I’ve reached the optimum of the costs possible, so I’m not as flexible as I might want to be. It always depends on the issue.
Akos: One more thing on fees. What’s your view on fixed fees or capped fees relative to hourly rates?
Szabolcs: When I started at Scitec Nutrition, the structure that I inherited was a fixed fee. A lot of firms were getting paid a fixed monthly fee. So one firm would be getting paid 4 or 5 or 600,000 forints, and they were on retainer to do whatever. And that “whatever” was too loose. And so I went in and I said “OK, can you show me what you’ve done for the last six months,” and there were months were they hadn’t done anything. Which is disconcerting because you get there, and your chosen firm that you trust is billing you for doing nothing. So I like fixed fee arrangements, and the arrangements I put in place were a mix of fixed fees and hourly, with pretty fixed targets. So say if I’m paying a firm a few thousand euros a month to do something, there’s an annex of what you’re doing for that month. So I disagree with Daniel’s procurement comment, because I prefer to work with lawyers that I trust and that are my friends, because I think the relationship that you have with your lawyers is a close relationship, so having ...
Daniel: Well, it’s not “my” relationship, it’s my company’s.
Szabolcs: Well, yes, but it is your relationship, because at the end of the day you’re responsible for the product. So, for me, using someone that I trust and that is a friend of mine, and that I know is competent, is much better than using somebody that I’m told by the head office that I need to use.
Andras: We have three preferred models at Tesco, and all three are used by us currently. The first one is a fixed monthly fee. We pay a small law firm who is responsible for litigations, and the agreement is that we give a number of litigations to this law firm, and then our expectation is that they should take care of all of them. The second one is the hourly rate. In the biggest investigations it is impossible to agree on a cap, because if it takes three or four years to manage a tax investigation or competition investigation, a law firm can not be expected to give us a cap, and in those cases we need to agree on an hourly rate. And the third one is the cap, which is the best, I think, for us. My practice is that I try to explain to the law firm in great detail what our expectation is, and what the case is about, in order to avoid any unexpected surprises in the future, and then it will be the law firm’s problem if we go beyond this cap (which is quite common, actually). From that perspective it’s quite beneficial to have relationships with fewer law firms, but that relationship should be very close and very good, because in this situation you can agree on a quite good cap. And the opposite scenario is you go to a law firm without any background and history, and then you cannot agree on the same kind of good fee, because you are there for the first time, and maybe from that perspective they will give you a good price, but I think it’s even better to have a close and good relationship with law firms.
CEELM: How often is the cap what you actually end up paying?
Judit: Always. I have never seen the cap not used. Never in my life. Also, we didn’t mention success fees yet. I really like them a lot. I like a model where a cap is combined with a success fee because in this case the law firm does not lose motivation even in the unfortunate case that the cap is exhausted. Again, my main approach is a cost-benefit balance, and the best possible result comes with a success fee, where you have this kind of comfort.
Zoltan: It is also a good indicator in cases where, for example involving litigation, you can see the confidence in the general counsel pitching for the case, because if they accept a big success fee, we think we can rely on their confidence that we will win. We can check it against the fee quotes and the hourly rates that they give, and we can estimate it, and it has an actual value and an actual message for us.
Attila: My name is Attila Bocsak, and I am the Head of Legal of Turk TeleKom International. Our legal department is five people. Three of them are here in Hungary. One lady in Austria, and another guy in Turkey. It’s pretty unique, I would say, and it’s also quite unique I’d say to cover both Turkey and Ukraine, from the Hungarian market. It’s very hard to find one law firm that can really help with that.
My thinking here is that, first of all, generally, to simply speak about engaging a lawyer, without breaking down the kind of work involved, is very hard. It’s very different if it’s regulatory work, if it’s a legal dispute, or if it’s an M&A transaction. I think you cannot just put everything under the same umbrella. And from that perspective it’s very difficult to come up with a general rule. But I understand that you’re mainly talking about transactional work, which is much of what is externalized.
Akos: Thank you, Attila, and thank you all for coming. Again, it’s been a pleasure having you all here, and Squire Patton Boggs has enjoyed hosting and participating in this fascinating conversation.
We would like to thank the host and the In-House Advisory Panel for their valuable insight:
- Akos Mester, Partner, Squire Patton Boggs (host)
- Andras Levai, Head of Legal, Tesco Global Zrt.
- Anna Kis, Legal Director, Auchan Hungary
- Daniel Szabo, Legal Counsel South-East Europe, HPE
- Judit Pettko-Szandtner, Head of Legal, UniCredit Bank Hungary Zrt.
- Attila Bocsak, Head of Legal, Turk Telekom International
- Szabolcs Gall, Chief Legal & Corporate Affairs Officer, Scitec Nutrition
- Zoltan Fenyi, Head of Legal, Sberbank
- Zsolt Wieland, Director, Advisor to the Deputy Chairman, OTP Bank
This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.