Editor's note: This is the fifth installment of a weekly series from The Legal Intelligencer looking at the lasting effects of the recession on the legal industry.
Law departments certainly aren't immune to the systemic changes the economy has forced upon their law firm counterparts, but when outside counsel fees are a department's biggest cost, general counsel are expecting the biggest changes to come from the firms that serve them.
"I think we're on the cusp of change," Texas-based FMC Technologies general counsel Jeffrey Carr said. "And if firms don't change, they're not going to like what results in the end because there are forces in play that are driving change and you can miss the train, you can get on the train or you can get hit by the train, but the train is moving."
Daniel J. DiLucchio Jr. of Altman Weil said every change in law departments is stemming from cost control, and many of the changes are fundamental and long-lasting.
"Law departments are really starting to look at regional and midsize firms for a lot of their work," he said as an example. "When that starts to happen, that's fundamental. They're not going to, as soon as things change, switch back. That's not something you do on a whim." Carr, who has long been on the forefront of pushing for innovation in law department and law firm operations, is in the midst of an online social networking-like process that is using Legal OnRamp to solicit outside counsel that embrace things like innovation and alternative fee arrangements. The first phase is complete and he said about 25 firms will probably move to round two.
While he was impressed with the creative responses he saw in phase one, Carr said he was disappointed to see less than 10 percent of Am Law 200 firms had put their hats in the ring. Maybe it was because they didn't have a Texas office and figured they didn't have a shot, or maybe it was because they hadn't heard about the initiative to start with, he said.
"If I go to a darker side, and I truly hope this is not the case, but one interpretation is that there's a significant part of Big Law that is not ready to change and that's really distressing," Carr said. "I hope that's not true because, if it is true, that means we're going to go through a period of incredible disruption in the near future."
SunGard Data Systems general counsel Victoria Silbey is looking for the right balance of having a small contingent of outside firms she uses while being open to new, regional firms. She is asking her primary firms to talk about different ways of budgeting matters in order to save money and get more predictability. "I personally think lawyers are notoriously bad in coming up with a realistic budget," she said. "I want them to have to put some of their reputation on the line with these budgets."
Silbey said she is still going to track the hours in alternative fee arrangements to gauge what system works best for her and at the end of the first year in trying this out she might find things need to be tweaked.
The overall process for purchasing outside counsel services is going to be done with a much more critical eye, Silbey said. For the first time, she is issuing requests for proposals and is now wondering why she hadn't always done that.
Some companies are also looking at bringing on outside counsel later in a matter rather than signing them up at the first hint of a deal or case, she said. With more work being done in-house and often fewer dollars to hire new lawyers for the department, Silbey said people are working really hard and often on matters unique to the economy and new to them.
"It has shown us, to some extent, that we really can do more internally than maybe we even imagined that we could," Silbey said, adding later, "Even as the economy turns around, it will be a while before those things fade away. I hope we can figure out how to inculcate them." Higher Value Work
Caroline B. Manogue, chief legal officer of Endo Pharmaceuticals Holdings, is in the unique position for this market of looking to expand her eight-attorney legal department to 10 to include another patent and corporate attorney. She said the hope is to save more money in outside counsel costs than what it will cost to expand the department.
The department also increased its paralegal head count in order to shift more work in their direction. The overall goal is to focus its attorneys on higher-value work, she said. Much of that is accomplished through the use of automated systems.
Silbey said her department was on a technology push even before the economy took a nosedive. The document management, billing and forms systems were all upgraded and an intranet was created specific to the legal department.
Technology might be driving change, Carr said, but it's not being exploited in a way that drives efficiency because the tradition within large firms is to customize each high-end matter to drive hours rather than leveraging past work product or streamlining processes.
Drinker Biddle & Reath and several other Am Law 100 firms are trying to focus on Carr's point about leveraging the work product.
In conjunction with its recent decision to focus on training of first-year associates for the first six months rather than billing them out to clients, Drinker Biddle teamed up with the Practical Law Co., which is geared toward corporate work. PLC offers attorneys model documents and clauses, how-to guides on certain areas of law, updates on new law and a searchable database of deals and securities findings.
Doug Raymond, head of Drinker Biddle's corporate and securities practice, said in an e-mail the use of PLC's services is one way to bolster its training program with the added benefit of focusing on efficiency.
THE BUSINESS SIDE OF LAW
Dechert's William Lytton, a former general counsel to companies like Tyco and General Electric Aerospace, said law departments are under such pressure today to ensure their corporations are acting appropriately. The compliance function of these departments is growing at a time when many corporations are looking to cut back legal budgets, he said.
If companies cut legal budgets for the short-term benefit, he said, they risk significant long-term damage.
Lytton equated the current growth in regulation and the Obama administration's interest in focusing on where dollars are spent to the enactment of Sarbanes-Oxley in terms of the amount of adjustment law departments will need to make.
Manogue said Endo has created a government affairs function that reports to her and will have a new public policy director starting this month all in an effort to keep up with the constant developments in the health care industry. The goal is both to ensure the company is in compliance with new laws and to lobby on behalf of its interests as debate over proposed changes continues.
The push for in-house counsel to be part of the business team has been exacerbated by the recession. Carr said the in-house community is much more focused on the business and business results. General counsel are managing risk more appropriately and focused on adding value to the shareholders. In-house lawyers need to offer recommendations and not just give options, he said.
"It's more important for legal to have a seat at the table now more than ever so there would not be a need for course correction," Manogue said.
Whether it's alternative fee arrangements or technology, law firms or law departments, Carr said attorneys' project management skills need a massive retooling. And it's not just changing an industry, it's changing the fundamental way lawyers think, he said. While that may sound like a daunting task and could very well take years to accomplish, general counsel seem to agree that a conversion is in progress.
"The premise is that the current legal delivery system is fundamentally flawed and has to be changed," Carr said. "So the current economic crisis is the catalyst that allows us to address that but I don't believe that we're going to revert to the practices of the past when some of these fundamental structural changes take hold."
The next installment of The Legal Intelligencer series will examine practice diversification and hiring practices within large law firms.