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Online Exclusive: Law Departments Purge for Change

At first, a recession is a crisis, an acute challenge that must be met head on. But after a year or two, it just becomes a way of life. Everyone’s affected. No one is spared the financial pressure and budgetary constraints. The question then becomes how you manage over the long term, adjusting goals and expectations to maximize efficiency and reduce cost without surrendering quality of service.

These days all law departments are running lean, trying to find their own solutions to the universal problem of doing more with less. But no two companies are alike–the recession has hit industries in various ways, to varying degrees. So this month, InsideCounsel reaches out to companies across the spectrum–aerospace, telecom, retail, health care–to see just how they are responding to the limitations and opportunities of the recession.

Their experiences show that while a tight economy is no walk in the park, it’s not tragic either. Difficult as a recession can be, it’s part of a cycle; it can be a balancing force. In some ways it actually makes an in-house counsel’s job easier, more interesting and more rewarding.

Best Buy: Insourcing

The economic crisis has hit all big box retailers hard, and Best Buy is no exception.

“We’ve had the same challenges as everyone else, and have been asked to find ways to shave costs,” says Todd Hartman, vice president, associate general counsel and chief compliance officer at Best Buy Enterprise Services Inc. “We started by looking at what we can do more efficiently in-house.”

Insourcing is one of the broadest trends for legal departments in this recession, and it’s by no means limited to the run-of-the-mill work traditionally handled in-house.

In Best Buy’s case, the law department was able to take on a significant amount of trademark and corporate transactional work it previously sent to outside counsel. Hiring contract attorneys played a big part in making that possible.

“We’ve been able to acquire a lot of capabilities by hiring contractors who normally would be fully employed at major law firms,” Hartman says. “There are a lot of very skilled legal professionals frankly withering because law firms don’t have the work in this market.”

The law department has also maximized its existing potential by re-evaluating the skills and talents of lawyers already on staff and redeploying them where appropriate. As a result, the lawyers can handle more sophisticated legal work within the department, putting a significant dent in the outside counsel budget.

As in most legal departments, Best Buy’s in-house counsel are pulling more weight these days, but Hartman says the greatest efficiency strides have been realized in how the work is managed and redistributed.

“If I have one really good attorney who has great judgment and great insights, and is able to act appropriately, that essentially takes the place of three [outside counsel],” he says. “Their ability to triage, to understand an issue as it’s coming in, can save me immense amounts of outside counsel fees and in-house resources.”

Finding the talent to do that is easier in the current buyers’ market, he says. And that’s not the only upside to what has been a trying couple of years for all.

“I hope we never go through another crisis like this, but one lesson I’ve learned is that we can apply the same discipline we’ve found over the past year and a half to our regular operations,” Hartman says. “These cycles really bring in that discipline and make you look at where you get legal department value.”

Boeing: The Squeeze

The current economy has been hard on both the commercial and defense sides of Boeing’s business. In a recession, air travel drops and airlines are more likely to park jets in the desert than buy new ones. At the same time, the government cuts back orders and long-term development in defense programs.

That kind of volatility is nothing new to aerospace companies, and Boeing has long been renowned for running a lean legal department. Even so, the company has felt the full brunt of the recession, and the law department is doing its part to meet the challenge.

“We don’t have a lot of discretionary money other than outside counsel spend in our budget, so we’ve squeezed law firms hard,” says Steve Horton, a Boeing assistant general counsel who handles the company’s engineering operations and technologies services. “We have a very aggressive volume discount and control rates closely. We’ve done really well, and the rates we get for most of our work are very competitive.”

The company’s outside counsel overhaul predates the current recession, but the results have been particularly valuable since the downturn. Horton says just as Boeing has put pressure on law firms, it has revised the expectations of what is required of in-house counsel who direct the work.

“When our new general counsel [Mike Luttig] came in four years ago, we had about 400 law firms, and people were pretty sloppy in the way they managed the firms and passed work out,” Horton says. “This became one of the top priorities that permeated all the way down to every attorney in the department.”

Since then, Boeing has tinkered with the mix of attorneys in the 143-lawyer department to achieve the right balance of talent and capability. The ability to effectively manage and monitor outside counsel and better coordinate projects, Horton says, is the key to optimizing the budget for outside counsel.

“If you look back over the last five years, some firms get it better than others, and it all starts with the in-house attorney,” he says. “We set the parameters, and we’re the ones that lay out the rules and the way we want things done. If you don’t do that, then shame on you, and you’re going to pay for it.”

RehabCare: Smooth System

With 35 specialty hospitals across the country and a 41-state network of rehabilitation services, St. Louis-based RehabCare Group has the full palette of legal issues for a health care company.

Like many companies these days, RehabCare performs as much of that work as possible in-house–Medicare cases, employment matters, real estate, even finance work such as proxies and 10-Ks. What’s surprising is that such a small law department covers all that ground.

“We have three in-house lawyers and a handful of paralegals,” says Patti Williams, RehabCare’s senior vice president and general counsel. “We place a lot of reliance on our paralegal staff; they do fairly high-level work, which is one way we’re able to keep costs down. We might pay a little more for paralegals, but we get ones who can function more like junior lawyers.”

The key to the department’s efficiency, Williams says, is systemizing as much recurring work as possible so lawyers are not needed at all in the early stages of matters.

“We’ve templated a lot of documents,” she says. “The paralegals are key; they’re the frontline. When we get requests for contracts or we get Medicare denials, we have paralegals and appeal writers who do that kind of work. They know when to ask a lawyer for help and when to make an executive decision on their own. They’re worth their weight in gold.”

But they don’t cost their weight in gold. A top-notch paralegal is still far cheaper than a lawyer and often more effective on routine matters. Law firms are still needed, of course, but Williams tries to bring them in only when their expertise is truly required. And when it comes to rates, she takes a hard line.

“I don’t know any other business that would send you an invoice and just give themselves a 35 percent raise,” she says. “We use an automated system to catch those things, so if someone’s rate changes, it gets flagged and comes to my attention.”

Williams does not accept midproject rate increases and limits increases on new matters to 5 percent. She also negotiates fixed-fee arrangements where possible, finding greater leverage to do so in this economy.

“It gives you an easy opening to talk about these issues with your firms and make sure they’re all on board,” she says. “As confrontational as lawyers are, sometimes they do try to avoid difficult conversations. Because you’re interdependent with law firms, you don’t always want to rock the boat or feel like their least favorite client, so sometimes you let things slide. But when the economy is like this, it’s just easier to talk to them about it.”

eBay: Procurement Pro

When Betsi Brouse joined eBay four years ago, the company lacked a formalized program to manage outside counsel. There was no negotiation on price or any system that determined what law firms were chosen or why. Brouse was hired specifically to revamp the law department’s relationship with law firms, but she’s not a lawyer. An MBA by training, Brouse is a procurement specialist.

As eBay’s strategic sourcing manager, Brouse evaluated the company’s more than 400 law firms, and split them into two categories. Tier one firms, the dozen or so that account for about 70 percent of the company’s legal spend–patent and general litigation, mostly–got the primary focus.

“We created a program where we do annual evaluations,” she says. “We developed specific retention agreements for [tier one] law firms and negotiate alternative fee arrangements with them every year based on what work we’re anticipating. I’d say in the last two years the recession has helped us be a little more aggressive in those negotiations.”

For tier two–everyone else–Brouse focused on consolidation. She has already cut eBay’s outside firms to 250 from more than 400, and she aims to cull another 100 off the list. Reducing the number of law firms is one of the most consistent ways to control costs, she says.

“You still need a few firms within each practice area–a little bit of competition is good,” Brouse says. “But with fewer firms you’re able to create strategic relationships. Let’s face it, this industry has always been driven by volume, so the more volume you give a law firm, the more leverage you have when you’re negotiating cost.”

The program has been effective. In 2009 the company saved $2 million, and it expects to save $4 million this year.

The bottom line for effective negotiation with law firms, Brouse says, is to be upfront and honest about your goals and expectations.

“You put your cards on the table, you share your company goals, you share all of your specific department goals, what you’re trying to achieve that year, and you work with that law firm to create goals together,” she says. “Then they understand what you’re trying to achieve. They’re not left in the dark.”

Qwest: Three Prongs

A phone is one of the last things people give up in hard times, so telecom has been more insulated from the recession than some industries. But no large company escaped cost constraints that followed the credit crunch. Qwest General Counsel Rich Baer says his law department has approached the challenge from three angles.

“These three strategies are particularly important when the economy is difficult and our business is challenged,” he says. “The first one is to look at everything we do, both internally and externally, and decide what’s truly necessary.”

That question is most salient when it comes to big-ticket litigation, and it’s more refined than a simple matter of whether to fight or settle.

“Let’s say we have a lawsuit, and the lawsuit in part turns on what was discussed at a particular meeting that eight people attended,” Baer says. “The usual approach would be to depose all eight people, review all of their files, and see what’s out there. I challenge my folks to depose three people first, look at the documents on the next three, and ask how much more value you’re likely to find. Instead of just blindly turning over every rock, we try to be strategic and targeted about what is likely to advance the defense or prosecution of the case.”

The second prong is to sweat the small stuff. At large companies with massive budgets for outside counsel, it’s easy to gloss over smaller bills. But all those nickels and dimes add up.

“You tend to be less sensitive to the variety of projects your outside lawyers are doing,” Baer says. “You say, ‘It’s only $10,000, it’s only $25,000,’ when millions of dollars are going out the door. So we try to ingrain in our lawyers that they are the stewards of our shareholders’ money. We ask them to treat every dollar that goes out as if it’s coming out of their own wallet.”

The third strategy is to milk as much value and efficiency as possible out of new technology. As a company that makes its name moving and storing vast amounts of data, Qwest should be aggressive about legal technology, from corporate transactions to litigation, Baer says.

“We’re always looking at and using different technology, especially in electronic discovery. We’re pretty advanced–or we’d like to think we are,” he says, jokingly, “when it comes to reducing costs significantly by leveraging technology.”