Running the legal department of a large American financial institution in the post-financial crisis world is, in a word, expensive.
In 2012, Wells Fargo general counsel James Strother launched a three-pronged program to reform his department and cut costs: His team reevaluated the way they hired lawyers, how work was managed internally, and what work was going to which law firms.
The results followed a familiar trend: more resources and more work in-house, and more pressure on law firms to bring prices down.
“We worked on ensuring that we reduced the overall number of firms that we had,” Strother had. “That last part is still a work in progress, because we still use an awful lot of firms. But we’ve brought the overall spend down pretty nicely.”
Strother said that before his reform effort started, outside legal spend constituted 80 percent of his budget. Two years later when it finished, legal spend was down to close to two-thirds of his budget. He declined to name specific dollar amounts.
One of the nation’s largest financial institutions, Wells Fargo is ranked 27th in the latest Fortune 500 list. The company has 8,000 locations, 13,000 ATMS, and offices in 36 countries. The bank posted over $22 billion in revenue in the first quarter of 2016.
Last month, Strother spoke to Big Law Business by phone about changes in his legal department, how his lawyers are still grappling with the effects of the financial crisis, and do’s and don’ts for law firms that want his business.
Below is an edited transcript of the first installment of the interview.
Big Law Business: You announced plans to start cutting outside legal spend. Any success?
Strother: What we did is we launched an initiative that ran for three years, from 2012 to the end of 2014, which we call “legal effectiveness and efficiency.”
In it, we had three broad work streams. One was “mission and talent”: What kind of people do we recruit? What kind of value proposition do we have to attract people? And how do we develop them?
The second stream was “internal roles and processes.” How do we do our work? How should we staff ourselves? How do we fit what we do internally to where the company is and where it’s going? To where the industry is and where it’s going? To where the external environment is and where it’s going?
Then the third category, which is probably what I emphasized a few years ago, was what we called “external spend optimization.” We kind of finished it up in 2014, and now it’s integrated into what we do on an ongoing basis.
Big Law Business: How much money have you saved?
Strother: We don’t really break out specifics, but let me give you a couple of things that turned out to be interesting to us. One of the things we looked at, going in, was that due to the financial crisis and all the legal issues that generated, and changes in our company and industry, our balance of internal versus external legal spend was really skewed to the outside.
As we went into that work, about 20 percent of our spend was internal and 80 percent was external. Admittedly, we had a lot of litigation that we were working through. That was not appropriate, really, for a company like ours. In doing the work, we ended up growing our internal staff, and shrinking the external spend to the point where it’s more like one-third inside, two-thirds outside today.
That’s a better balance probably for a company like ours, with the kinds of issues that we have. We had to attack it on two fronts. One is to increase the amount of work we were doing internally. Bring some stuff in that we were sending out. Then at the same time, be more disciplined and more business-like about our external spend.
That involved being more thoughtful about firm selection, by segmenting matters that we referred out, to be sure that we were using exactly the right kind of firm for the right kind of matter. We’re managing matters better, and using data that we previously really didn’t have, through e-billing.
Then, we worked on ensuring that we reduced the overall number of firms that we had. That last part is still a work in progress, because we still use an awful lot of firms. But we’ve brought the overall spend down pretty nicely.
Big Law Business: How much is the financial crisis still echoing in your legal department today?
Strother: The financial crisis was really unlike anything I’ve experienced in my career. I’ve been through quite a bit over a long period of time. If you think that it started in 2007, which is when I would think about it, the impacts are still being felt on the legal side. That’s unprecedented, historically.
Of course, some of the issues we had, as all financial institutions did, because of issues in the mortgage industry. In our case, we had a big merger with a company [Wachovia Bank] that had some financial issues. Lots and lots of litigation flowed through. We’re probably through the lion’s share of it, but there are still some things left to finish up. It certainly has been the biggest focus of what we’ve had to work on over the last eight or nine years.
I was going to say, on top of that, though, the regulatory changes that we’ve experienced with Dodd-Frank, and all of the reactions of Congress and the regulators to what caused the financial crisis, have produced huge amounts of work on the legal side since 2009 and 2010.
Just this morning I was talking about two big issues that have come up now, many years after the crisis, such as the Department of Labor fiduciary rule and other things that we’re just now implementing that are coming into place way, way after the crisis. Our whole group’s been busy — litigation and the business support teams as well.
Big Law Business: Wells Fargo was one of several banks whose resolution plans, or “living wills,” were rejected by regulators a couple of months ago. How much of a headache has that been for banks?
Strother: A living will is an example of a fundamental change in the way that our country looks at how to regulate financial institutions. I don’t think most companies really spent a lot of time and energy trying to design how their bankruptcy would look.
Of course, there are a lot of legal aspects to that, because a company like ours has a large number of legal entities. Each one of those — you have to think through how it would be resolved. You have to know a lot about bankruptcy law, about finance, about security interests, about the rights of creditors and so forth.
That’s an ongoing process. We need to do that every year. Of course, every year things change, expectations change. We foresee that things like that, and stress testing and other things, will just continue to be something where we put a lot of energy into them each year.
Big Law Business: Law firms are involved in those processes, obviously. What’s important to you in a firm? What’s a pet peeve?
Strother: One thing that I value — and I think across our team we value it — is that we work best with firms that want to really partner with us, that really value the relationship, so there’s kind of a mutual value that’s felt on both sides.
What happens then is the firm that we really like to work with will get more opportunity to get to know us. We then spend a lot less time trying to explain the complexities of whatever business is involved, how our systems work, how our processes work. They understand how our culture is, and what we expect when folks are out representing us and presenting us to the world, in effect.
It’s just very valuable when they understand it, and we don’t need to train them and re-train them about what our expectations are, what kinds of risk tolerances we have and so forth. Over time, the value of those deeper relationships just increases for us.
I don’t have anything I’d call a pet peeve, but I do find that firms have a tendency to want to expand some of the things they’re doing, and they bring in teams to introduce to us, when in fact our needs are so broad, and often so specialized, that we’re already covered in another area.
Or it’s an area where the firm doesn’t really sit at the top of the list, and we really wouldn’t need to consider using them for those additional services. You do see that from time to time because everybody’s always trying to expand their relationship. It’s just a little bit of a waste of time to look at something we’re not likely to be interested in.