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Editor’s Note: This month, Legal Times introduces a new column that will explore thechallenges, problems, and issues faced by in-house counsel. Marc Martin — a D.C.-arealawyer with senior-level experience on the inside who recently returned to private practice — will write the column, but it is intended to be interactive. Our hope is that Martin willprovoke our readers to both react to what he posits and offer up new topics for discussion.That’s the point — to spark a conversation. Martin will synthesize your views in this column.Write to him at [email protected] kelleydrye.com. You can also contact us directly at [email protected]. The media have exhaustively covered the difficulties corporations are facing since the collapse of the tech boom and in the aftermath of the recent corporate scandals. The legal trade press has closely chronicled the “perfect storm” that has hit many law firms: higher overhead, caused by escalating salaries, expensive leases and IT expenses, combined with the significant downturn in corporate transactional work. Yet little has been said about how these changes have affected the relationship between in-house counsel and outside counsel. Historically, the in-house lawyer and outside counsel have been strategic partners. After all, they’re all members of the bar and subject to the same professional standards; they generally understand the other’s role since most in-house lawyers practiced in a law firm; and they both serve the same client. The problem is that both are facing extreme pressures that are in conflict: in-house counsel must better control if not reduce outside legal costs, and outside counsel must generate more revenue. The pressure on in-house counsel is increased by the stringent new requirements relating to corporate governance, best practices, and transparent financial reporting. Meanwhile, the pressure on outside counsel is exacerbated by increased competition for scarcer billable hours. Many law firms have gone so far as to lay off associates, “de-equitize” or “manage out” partners, and close under-performing branch offices. With both parties to the relationship under the gun internally, it begs the question: What is happening to the inside-outside counsel relationship? It’s evidently taboo to openly discuss the inherent tensions in the relationship. When I called senior in-house lawyers at four large, publicly traded companies for their views, all four lawyers insisted on anonymity. Their comments reflect signs of widening fissures in the traditional relationship with outside counsel arising from these divergent internal pressures. THE TENSION: REAL OR IMAGINED? Each of the in-house lawyers I spoke with says that there is a noticeable difference in the relationship during this downturn. A senior in-house lawyer at a large Washington-area financial services company (we’ll call her Financial Counsel) points out that the conflicting objectives of cost containment and revenue generation have always been there during her 20 years of practicing law, particularly during downturns, but now the “cost-containment tools have changed, and the commoditization of top-level law firm service has increased.” She adds, “We . . . were less concerned about [legal costs] during flush economic times when the company as a whole saw itself as a revenue-growth company rather than a cost-discipline company.” Another senior in-house attorney at a Washington-based media company (we’ll call him Media Counsel), agrees: “I think the tension, at some level, has always been there, it’s just more pronounced now. When there were more dollars to go around a few years ago, there was less scrutiny of outside counsel. Now in-house counsels are working with zero-growth or reduced legal budgets. Companies are more cautious and fiscally conservative in this environment, and law firms are working harder to get and retain business.” The general counsel of a New York-based tech company (we’ll call him NY-GC) agrees that the economy has strained the relationship, and puts the blame mainly on the scarcity of mergers and acquisitions work: “When I’m giving nonroutine matters to outside counsel, like M&A, the legal costs are thrown in the deal [and capitalized] so I’m flexible on pricing, but now, when everything I outsource hits the bottom line, I have to micro-manage legal expenses. And law firms are hurting because they can’t make up the difference with high-margin big deals.” DO OUTSIDE COUNSEL “GET IT”? The general counsel of a Washington area tech company (we’ll call him DC-GC) doesn’t mince words. He believes that outside counsel are “oblivious” to the increased pressures and demands on in-house counsel: “Outside counsel do not know the pressure or issues faced by general counsels, and how they affect legal purchase decisions.” He adds, “They rarely ask the basic questions like ‘What’s keeping you up?’ and ‘How can I help?’ “ Financial Counsel says, “Imposing discipline continues to be an area in which the interests of lawyers and clients are not aligned.” This disconnect seems to be greatest with associates. NY-GC notes, “Law firms pay no attention to making associates savvy to the business reality of their clients. Only the partners seem to understand the business issues that drive the legal issues. . . . One reason I demand a 15 percent discount from law firms is because I think that’s roughly the amount some associate is going to try to pad my bill.” Media Counsel agrees: “Associates having to meet an hourly billing quota don’t get it, but the partners seem to understand the economics [driving the cost-saving measures].” WHAT ARE THEY DOING ABOUT IT? Clearly, companies that have economic leverage in these times are exerting it to extract cost savings where they can from vendors, suppliers and business partners. Outside counsel are not immune from this trend, and in-house counsel must be the enforcers, to the detriment of the relationship if necessary. Outside counsel cannot afford to take even longtime clients for granted. DC-GC, for example, believes that in this environment, in-house counsel have no choice but to keep looking until they find outside counsel who understand their current needs. For those who do, “the reward is repeat business and strategic dependence.” NY-GC shares his experience. “We recently dropped a firm that we had been giving millions of dollars in business annually for years because it refused to discount. We gave that work to another firm that was willing to [discount],” he says. Some companies are making compliance with their cost-saving policies a precondition to engagement by the company. Financial Counsel notes that her company has just introduced e-billing. “Law firms that won’t say yes to it can’t play. So far, I don’t think any law firm has said no,” she says. She adds that her company has an “increased willingness to impose caps on projects (not just an open-ended per-hour engagement) and to isolate discrete aspects of projects and assign some pieces here and some pieces there.” Media Counsel notes that while his company is putting more pressure than ever before on outside counsel, most law firms he works with are willing to be flexible in constructing alternative billing arrangements and submitting case budgets. “Of course,” he adds, acknowledging his leverage, “it helps that we’re part of a big company.” ARE EFFECTS SHORT- OR LONG-TERM? These criticisms and concerns should be put in perspective. It’s evident that many of these issues are the temporary side-effects of the downturn, and that the relationship remains alive and well in most respects. All of these in-house counsel spoke with respect about the substantive work and general performance of their existing outside counsel. NY-GC, for example, has been pleased by how he has been able to “click” with the younger set of partners he encounters, with their proactive approach and business sense. But they also spoke with trepidation about the long-term effects of Sarbanes-Oxley on the respective roles of in-house and outside counsel. In fact, they spoke with enough intensity on the topic that I think it deserves a separate column. As an in-house counsel, what is your position on these issues? You can e-mail me with your comments on this column, or to raise other topics, at [email protected]. Your remarks may be quoted, without attribution, unless you request otherwise. Marc Martin served as general counsel and senior in-house counsel at several public and private companies in the Washington area. He recently returned to private practice and is currently special counsel in the Vienna, Va., office of Kelley Drye & Warren.

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