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Gone are the days when in-house counsel send out major projects to outside counsel, pay vague bills "for services rendered," and remain uninvolved while outside counsel determine what is necessary, according to the results of the 2007 ACC/Serengeti Managing Outside Counsel Survey, a collaboration between the Association of Corporate Counsel (ACC) and Serengeti Law, released at ACC's Annual Meeting on Monday in Chicago. The survey requested information about the ways in which in-house counsel are managing the work handled by outside counsel, and gathered metrics regarding the management techniques being used. It also collected data on hourly rates corporate clients are paying for specific types of work in the largest metropolitan areas across the country.

In general, in-house counsel have become more systematic in the ways that they manage their work with outside counsel and are applying basic vendor management practices in their evaluations, according to the survey results. In-house counsel believe that outside counsel will be more effective and efficient if the client is kept well-informed and involved in strategic decisions, thus requiring their outside counsel to provide early assessments, budgets and results reports summarizing what was achieved and lessons learned.

"In-house counsel are taking note of the rise in hourly rates and associate salaries, and are holding their outside firms accountable," explains Fred Krebs, ACC President. "The primary driver of legal costs is outside legal spending, which is roughly double the spending on in-house counsel; however, during the past several years the ratio has shifted in favor of law departments, reflecting more legal work being done in-house."

Krebs further explains that while "focusing on client service is the latest buzz within law firms, they still aren't getting it." This year's survey showed that half of the respondents terminated relationships with some of their outside counsel during the prior year: some for failing to perform according to client expectations, others due to high costs, and some for poor work product or results. More importantly, almost 50 percent cited communication and personality issues as a driving force behind termination. Krebs deems this to be a wake-up call for law firms. "The firms should focus on providing value to the client, and not profits per partner or hourly rates."

While in-house counsel have had a stronger voice in the legal department/law firm relationship, another major change during the past three years has been the increase in time and energy demanded by compliance issues, including periodic reporting on legal spending and developments. The increasing complexity of regulatory requirements, driven by Sarbanes-Oxley and related laws, along with a series of high-profile trials involving executives and in-house counsel, have undoubtedly heightened concerns regarding legal compliance issues. This shift in priorities may have had a ripple effect through relationships with outside counsel, making in-house counsel more likely to bring in outside help, and less sensitive to higher hourly rates, as indicated in other parts of this year's survey.

"Each year, in-house counsel tell us that they are dealing with more regulatory requirements, as well as more restrictions on spending," said Serengeti's Rob Thomas, the author of the survey Report. "As a result, they are imposing more controls on outside counsel, and are putting systems in place that help them to better track and assess the work that they are managing."

The following includes a few of the general conclusions from this year's survey, presenting some of the more significant areas of change, as well as some of the constants, over the past seven years.

In-house counsel are setting more rules for their relationships with outside counsel.

Over the past seven years, more in-house counsel have required specific terms of retention that govern what they expect from their outside counsel. This survey collects information on more than twenty specific categories of retention terms, including financial and budget terms, early assessments and regular updates, technology expectations, and required pre-approval of changes to legal teams or rates. Across the board, the use of each retention term has increased over time. It is likely that this trend will continue, as in-house counsel state that they are planning to require even more of their firms in the future.

In-house counsel are using more sophisticated technology to track activities of outside counsel.

Although many in-house counsel still use home-grown spreadsheets or internal matter management software, a growing number are moving to Internet-based systems that help them collaborate directly with outside counsel. Even more in-house counsel say that they plan to use such systems to exchange information on a regular basis with outside counsel, including electronic billing to track spending and budget performance. On the other hand, because in-house counsel prefer to use client-centric systems, the use of extranets provided by law firms (that require clients to go to multiple online sites) is declining.

A small number of activist in-house counsel are becoming bolder each year, requiring more from their outside counsel.

Roughly one-fourth of in-house counsel are more actively managing outside counsel than the majority of their peers. Such activities include convergence, issuing competitive bids for new work, requiring minimum levels of experience of associates working on their projects, getting discounts for early payment of bills, and systematically evaluating the performance of their outside counsel. This group is growing, as evidenced by much higher numbers of in-house counsel requiring minimum levels of experiences for law firm associates and discounts for early payment. This group also is becoming more active each year to better manage work with outside counsel. For example, the average minimum level of experience required of law firm associates has increased from three years to five years, and early payment discounts have also increased in amount. This minority group of in-house counsel are pushing harder to build upon past successes, and are creating new paths for their less activist peers.

Budgets are widely used to clarify expectations, and monitor performance.

Approximately three-fourths of in-house counsel require at least some budgets, and on average budgets are now required for about half of the projects that they manage. Unlike some of the other management techniques covered by the survey, budgets seem to have gained widespread support among a majority of the in-house bar. Budgets not only clarify spending expectations between client and outside counsel, but also give clients milestones against which to determine whether projects are going as expected. Budgets are also driving in-house counsel to technologies that ease budget administration, including electronic billing systems that automatically compare bills with budgets as part of the bill review process.

Convergence continues to be common, but often just meets expectations.

Convergence continues to be a management technique used by about one-fourth of in-house counsel in any given year. These law departments generally hope to achieve efficiencies, better rates and better work by having a smaller number of law firms with which they do most of their business. This practice appears to have been effective in keeping the number of law firms representing specific companies constant or lower over time. However, convergence does not appear to be gaining momentum, with fairly constant numbers year-to-year, and most companies stating that it met, but did not exceed, their expectations. The median number of law firms used in the U.S. by law departments during 2006 (8) was significantly lower than last year (12), and matched the lowest level of prior years (8 in 2004). Only 8.9 percent of companies (compared with 13.9 percent last year) use more than 50 firms. These numbers may reflect the smaller size of companies this year, and the effects of convergence (law departments reducing the number of outside counsel).

SURVEY METHODOLOGY AND RESPONDENT DEMOGRAPHICS

In order to encourage broader participation, this year's survey was conducted online in two parts: one survey to collect hourly rate data, and another for the rest of the survey questions. Multiple e-mail notices were sent by the ACC to U.S. members regarding each survey. The responses to the non-hourly rate survey were provided during May and June, and the responses to the hourly rate survey were provided in August and September. Data received in response to the online survey questionnaires were compiled in databases, from which tables and analyses of the data for all of the survey questions were created.

-- 263 law departments completed the non-hourly rate portion of the survey; hourly rate tables were provided by an additional 148 law departments.

-- 62 percent of respondents were General Counsel; 11 percent were assistant general counsel/staff attorney; the remaining included law department administrators and other in-house counsel titles.

-- 28.4 percent of respondents were from small companies; 38.4 percent from medium companies; and 33.2 percent from large companies (For purposes of this report, company size was based upon 2006 annual worldwide revenues, where "small" companies were those with less than $100 million; "medium" companies were those with $100 million through $1 billion; and "large" companies had greater than $1 billion).

-- 35 percent of the respondent law departments were small (one attorney or no attorneys); 47.9 percent were medium (two to 10 attorneys); and 17.1 percent were large (more than 10 attorneys).

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