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The worst economic crisis in years is forcing everyone to look for ways to save money, and general counsel are no exception. Some are cutting their internal expenses-not filling an open position, for example, or reducing the travel budget. But the main place that many GCs hope to save money is in their outside counsel spending. So they're dropping law firms, and demanding lower bills and fixed fees from the ones they keep.

"Maximizing efficiency and saving money is something many in-house departments have been trying to do for the last 20 years," says Thomas O'Neil III, general counsel at WellCare Health Plans, Inc., a Tampa-based company that provides claims processing and other administrative services. "But now the economic climate has added urgency to the goal." O'Neil says that WellCare is "in the process of reevaluating the firms that have done work for us and coming out with a roster of preferred firms, as well as new terms of retention."

Other companies are also shrinking their outside counsel lineup. Jeffrey Carr, the legal chief at FMC Technologies Inc., says that the Houston-based company will give all of its European legal work to a single firm. And Madeleine Johnson, the general counsel at Dallas-based Southwest Airlines Co., says that she too is considering "whether to consolidate outside counsel work by using fewer firms."

Firms that manage to keep their clients can't rest easy, either, since they'll be expected to submit cheaper invoices. Carr says that in December he sent a letter to FMC's law firms in which he asked them to cut their bills by 10 percent on matters less than half done, and by 5 percent on matters more than half done. Carr additionally told the firms that beginning this year, they should present project budgets that are at least 10 percent lower than last year.

One way that law firms can reduce their bills is by eating their own expenses, Carr says. "There are no pass-through costs," he maintains. "Our firms and vendors must act as general contractors for their scope of work so that they manage their subcontractor and vendor costs to the lowest possible level. If they fail to do so, it comes out of their profits."

Southwest's Johnson agrees. "For example, I generally don't think that outside counsel should be charging for computerized research fees on top of a lawyer's time for doing the research," she says.

Legal consultants aren't surprised by the GCs' demands. According to Jonathan Bellis at Hildebrandt, "Most law departments continued to tighten their spending belts during 2008, taking a hard look at internal staffing levels and methods for controlling law firm fees, and accelerated those efforts in the final quarter of 2008." Bellis leads the worldwide law department consulting practice at Hildebrandt, a legal consulting firm based in Somerset, New Jersey.

And in a November 2008 survey by Altman Weil, Inc., 75 percent of general counsel said that their departments were facing budget cuts this year, with an average decrease of about 11 percent. "The solutions are often different for every organization," says Dan DiLucchio, a principal at Altman Weil, a Newtown Square, Pennsylvania-based legal consulting firm. Some general counsel who responded to Altman Weil's survey said that they would be reducing the size of their own staffs or cutting in-house compensation. But as DiLucchio notes, "Generally, the largest portion of spending is on outside counsel," so law firms will be expected to take the biggest hits.

Even companies that claim they aren't feeling the pinch are taking action. Chris Willis, general counsel at Dallas-based Interstate Battery System of America, Inc., says that his business is doing well. However, Willis adds, "We are utilizing alternative billing arrangements more than in the past, including flat-fee for file handling, and retainer agreements, primarily in the employment area."

While GCs expect their law firms to bear the brunt of the cost-saving burden, they're also willing to make internal cutbacks. For example, several companies are trying to reduce their travel expenses by increasing their use of videoconferencing and Web conferencing. And businesses are also expecting their stafff lawyers to work more. Two-thirds of the general counsel who responded to the Altman Weil survey said that they planned to bring more work in-house.

While there haven't been any publicly announced law department layoffs yet, some legal chiefs say that they're moving more slowly in filling vacancies. At FMC, for example, Carr says that he eliminated two nonlawyer positions, "one by having one of our folks pursue opportunities elsewhere," the other by "not filling an open position and reassigning those duties to existing resources."

O'Neil also plans to exercise caution when filling any potential openings at WellCare, saying that he will "carefully reflect on the needs of the company over the next year, and if the position is important, fill it." He adds, "In any searches that we conduct in the upcoming year, we will be sensitive to the current market realities, and strive to provide competitive compensation accordingly."

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