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Call it a tale of two cultures. On one side: the law firm, founded on the billable hour and the practice of passing expenses along to the client. On the other: businesses, pressured by the lousy economy and scrutinizing every expense. The culture gap is an old one. What is new, however, is that in-house lawyers aren’t taking it anymore. Increasingly, they’re telling outside counsel: Perform more efficiently or find another client. When Serengeti Law and the American Corporate Counsel Association surveyed corporate law departments in 2002, 78 percent of respondents cited outside legal costs as their top concern. And a recent survey by legal consultant Altman Weil, Inc., of in-house lawyers found that 55 percent had either fired or were considering firing their outside counsel. The chief gripe? For all their talk of business partnering, outside counsel still aren’t taking their clients’ cost issues seriously. “It doesn’t appear that law firms are responding to the high level of concern from their clients,” says Robert Thomas, president of matter management provider Serengeti Law and a former managing partner himself, at Seattle’s Stokes Lawrence. “The firms just are not being proactive.” Faced with this inaction, in-house lawyers are grabbing the upper hand. Over the past few years, they’ve developed � and often insisted upon � measures that challenge the old billable hour: volume discounts, preferred providers, Web-based reverse auctions. And they’ve even sent work to cheaper lawyers in the Third World. Technology has given law departments critical leverage. New software lets in-house lawyers track and compare outside counsel costs in minute detail. “With in-house counsel increasingly able to look under the hood and see what goes on at the law firm, clients can force them to be more efficient,” says Firoz Dattu, head of research at the Washington, D.C. � based General Counsel Roundtable, a for-profit membership organization. “It’s all about letting outside counsel know you can evaluate their efficiency.” Here’s a look at some of the newest models � implemented within the past two years � that try to wring more value out of every legal dollar. Aces Wild: FMC Technologies Jeffrey Carr, the GC of FMC Technologies, Inc., isn’t afraid to alienate a few managing partners. He’s developed a risk/reward system that hits law firms where it hurts: in the accounts receivable department. Carr’s approach requires outside counsel to forgo 20 cents of every dollar they bill. But they have the chance to recoup the money � plus potentially hefty percentages more � if they work quickly, efficiently, and successfully. Carr is using this model with 12 firms now and plans to extend it to all his outside counsel by April. He estimates he’ll spend about 17 percent less on outside counsel in 2003 than he did in 2002. “What law firms sell � what their inventory is � is hours,” he says. “I’m interested in buying results, not hours.” The 46-year-old Carr studied economics, worked in private practice, and then founded and ran an international consulting company, so he knows both law and business. The executive started pushing alternative fee arrangements soon after joining FMC Corporation in 1993. In 2001 the company spun off FMC Technologies, and Carr was named GC of the new entity. Headquartered in Chicago, it’s now a $2 billion public company. Carr supervises nine in-house lawyers. Shortly after he became GC, Carr implemented a comprehensive model for retaining outside counsel, which he’s dubbed the Alliance Counsel Engagement System (patent pending). Under ACES, outside counsel assume some of the risk the client faces. “Law firms talk all the time about strategic partnerships, but what they mean is giving them more work,” Carr says. “I like to remind my lawyers of what they learned in law school: a partnership means a sharing of risks and rewards.” For each piece of litigation, Carr defines success as a settlement at or below the potential risk he’s estimated. He then asks outside counsel to supply target budgets for five phases: pleadings and assessment, discovery, mediation, pretrial, and trial. (Third-party costs, such as local counsel, must be folded into the budget, not simply forwarded to the company.) When the firm’s invoices come in, Carr pays 80 percent and puts the remaining 20 percent into an “at-risk bucket.” Outside counsel can go over budget in any phase, but once they do, the payment ratio flips: 80 percent goes into the bucket, and 20 percent is paid. If outside counsel attains the goal Carr set for the case, they get all the money in the bucket. They can also win rewards for speed and efficiency, each worth up to an additional 100 percent of the 20 percent that’s in the bucket. Carr says this system has worked in both simple and complex cases. For nonlitigation work, he developed a parallel model, called ACES-LT (for long-term). It’s built on the same 80/20 split, but success is defined by the supervising in-house attorney, who grades the firm every time an invoice is paid. Those periodic evaluations are tallied at the end of the year. Although it’s too early to have consolidated savings figures, says Carr, cycle time (from case filing to resolution) is way down. On routine personal injury litigation, cycle time has dropped from multiple years to fewer than 18 months. The hourly rates paid to firms that have been successful are up � by about 15 � 20 percent. But because the company is buying fewer hours, it’s still saving money. Law department consultant James Wilber, a principal with Altman Weil, praises the system. “It seems to promote sharing of the risk without adding subtle disincentives for getting the results you need,” he says. Carr says he hasn’t had much trouble finding good firms (such as Fulbright & Jaworski, Gray Cary Ware & Freidenrich, and Holland & Knight) willing to work on his terms. He did have problems finding IP litigation counsel for one case; all the bids were in the $2 million range. Instead, he turned to an auction, with eLaw Forum. Using ACES, the case was resolved early, and the company spent only $40,000 on outside counsel. But not every firm agrees to play: Some have turned down work from FMC Technologies rather than agree to the ACES model. Joseph Tate, a partner in the Philadelphia office of Dechert and outside counsel to FMC Corporation for 20 years, decided not to bid on a request-for-proposal for employment commodity work. “It made no economic sense to us,” he recalls. “It required us to leave a significant portion of the fee on the table and left it to the client to decide whether our representation was successful enough.” Another lawyer who has done work for FMC Technologies questions the wisdom of requiring bids when outcomes, such as jury verdicts, are highly uncertain � and raises concerns about the quality of firms that would put financial gain ahead of fiduciary duty. Speaking on the condition of anonymity, he likens use of the ACES model to taking bids from doctors without letting them thoroughly examine you first. “I’m not sure you’ll get the best care with that approach,” he says. “Maybe you will.” Ten Years Out: DuPont Getting a handle on outside counsel costs is nothing new at Wilmington’s E.I. du Pont de Nemours and Company. It recently celebrated the tenth birthday of its famously disciplined DuPont Legal Model. But even after a decade, DuPont still finds that it needs to rein in billing practices at its outside counsel. The most recent effort, implemented for the first time in late 2002, tames rambunctious rate increases among the company’s 39 “preferred providers.” Although still under way as we went to press, the new procedure is expected to save the chemical giant $500,000 in 2003. For anyone who missed the hype: The DuPont Legal Model brought discipline to legal spending by imposing early case assessment, dumping over 300 firms from its outside counsel rolls, and implementing a battery of cost-control measures. General counsel Stacy Mobley estimates that those efforts have saved the company a total of $50 million since 1993. Until this year, however, many of DuPont’s firms treated fee increases as a routine entitlement. There is “a general tendency among firms to think of annual increases as a God-given right,” says DuPont’s manager of law firm partnering, Julie Mazza. So she and Mobley injected some business discipline into the process. They formalized the rate-setting process and confined it to the calendar months of December and January. “Beyond February 1, I will not entertain any request for an increase,” Mazza says. If an associate makes partner on February 1, his firm will now have to wait 11 months to apply for an increase in his billing rate. All of the firms’ requests have to be explained and financially justified, via a nine-part application process. Mazza examines each request in light of the firm’s billings over the past five years and its performance ratings. Thanks to Tymetrix, an electronic billing service the company retained two years ago, those metrics are readily available. “It’s a tedious, very analytical process,” she says. “But it gives us a comfort level about where costs will be in the coming year.” After all the numbers have been crunched, Mazza and Mobley sit down to negotiate with the firms. As we went to press, eight firms had applied for rate increases. New Orleans firm Abbott, Simses & Kuchler asked for an increase and, according to partner Deborah Kuchler, the process was “pretty smooth.” She and Mazza negotiated rates for each of the 35 staffers authorized to work on the DuPont account. They also agreed on a multiyear term so they could avoid renegotiating next year. Kuchler deems the outcome a “win-win solution.” But, she admits, “It takes a lot of administrative time.” Digital Dashboard: Raytheon Woods Abbott is not a lawyer. But as senior manager of legal operations, he has a better moment-by-moment grasp of the complex stream of legal spending at Raytheon Company than perhaps anyone else at the Lexington, Massachusetts � headquartered defense contractor. Abbott put in the department’s matter management system nine years ago and has refined it ever since. And, early in 2002, he came up with the company’s newest tool for managing outside counsel costs: a “digital dashboard.” Although he claims it’s impossible to know precisely how much the law department’s automated systems have saved the company, Abbott estimates that it’s in the millions. Six years ago Raytheon spent $150 million on outside counsel fees. Last year they spent $45 million. As a defense contractor, Raytheon has accounting processes that are far more complex than those at most companies. Federal law requires that each weapons system be tracked with a separate budget. Thus the 65-lawyer department runs 175 separate accounts, which are controlled by 12 senior lawyers. “People can hide invoices in a maze of different areas,” says Abbott. Raytheon retains over 100 outside law firms and receives about 1,200 legal invoices a month. It’s a recipe for chaos. The first step toward order came in 1994, when the company installed an electronic matter management system, CaseTrack. Any matter that results in a bill from a law firm goes into it. But, until last year, that system wasn’t connected to the accounting system. It was virtually impossible for anyone to know how much of any legal budget had been spent at any given point. Relying on the finance department yielded data that was 45 days old. “At that point, it’s way too late to manipulate future spending,” says Abbott. So Abbott, a systems wizard and a champion of the popular Six Sigma “total quality management” methodology, invented something better. He connected the matter management system in Lexington, Massachusetts, to the company’s accounts payable system in Greenville, Texas, and set up a user-friendly graphical interface: a digital dashboard that shows in real time how much of the legal budget, for each business unit and practice area, has been spent. “I want to hold my attorneys’ feet to the fire,” says Abbott. Rebecca Ransom, assistant general counsel for litigation, says the interface helps her stay on top of the approximately 600 cases she oversees. “I use it all the time,” she says. “It helps us know, much earlier, when to rethink our strategy on a case, when to revise a budget, the right questions to ask outside counsel.” “Improving budget transparency helped the in-house lawyers focus on outside legal costs and ultimately helped the department allocate scarce budget dollars more effectively,” says researcher Dattu, who highlighted Raytheon’s technology in his study A More Perfect Union. Passage To India: GE Ever since Benjamin Heineman joined Fairfield, Connecticut � based General Electric Corporation in 1987, the company’s law department has been credited with managerial excellence and innovation. It’s no surprise, then, that GE uses a number of sophisticated strategies for managing outside counsel. These include everything from e-auctions among preferred providers to electronic invoicing. Even in this sophisticated milieu, however, GE’s newest method for cutting outside counsel costs and improving efficiency is extreme. Since 2001 the company has been exporting U.S. legal work halfway around the world: to in-house lawyers based in India. The salaries of Indian attorneys are lower � a total of $1.7 million that would previously have been spent on outside counsel in the U.S. has been saved so far � and a nine-hour time difference means work gets done while Americans sleep. Why would GE take such a radical approach? Part of it has to do with the company’s sheer size, which allows it to explore new and unusual methods. GE currently boasts 930 lawyers in-house, spread out everywhere the conglomerate’s 13 divisions do business � from Schenectady to Singapore. Heineman notes, with some pride, that the company spends only 40 percent of its legal budget (he wouldn’t disclose the exact amount) on outside counsel; the remainder goes to in-house staff. When he arrived at GE 16 years ago, that percentage was reversed. Now only commodity work and “superspecialized stuff” get farmed out. Although GE retained about 500 law firms in 2002, 60 percent of its spending on outside counsel went to just 30 firms. GE Plastics first hit upon the idea of sending U.S. legal work � in this case, contracts with company vendors � to India. In 2001 the unit hired an in-house lawyer to work in Gurgaon, India; two others were hired soon thereafter. GE Consumer Finance followed suit, late in 2001, hiring two Indian lawyers and three Indian paralegals. Other GE businesses are now considering the India option. According to Suzanne Hawkins, GE’s senior counsel for legal operations, the India team saved GE Plastics approximately $500,000 in 2001 and $700,000 in 2002. GE Consumer Finance saved about $250,000 each year. As Hawkins carefully puts it, Indian lawyers are “cost-competitive.” The Indian attorneys are interviewed, hired, and supervised by senior counsel in the United States. They spend a week in the U.S. for training. Because they work under an American in-house lawyer, aren’t representing themselves as American lawyers, have only one client, and don’t deal with third parties, rules on the unauthorized practice of law aren’t a concern. And their credentials are impeccable. Four of the five attorneys have law degrees from American or English universities. All have law degrees from Indian universities and have practiced for several years. “It’s gone extremely well,” says Lawrence Harnett, senior counsel � Americas, for GE Plastics. “And the clients are very happy with the work.” Law firm consultants praise GE’s efforts too. Rees Morrison, a principal with Hildebrandt International, calls the venture “really monumental” and notes that it has the potential to rattle the legal establishment. “The relentless pursuit of low-cost legal talent leads offshore,” he says. “It should scare in-house lawyers as much as it does law firms. It will eat its way up the food chain.”

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