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A difficult economic environment is changing the ways that in-house counsel manage legal work, according to a report recently released by the Association of Corporate Counsel and Serengeti Law. In-house counsel are caught between a heavier workload and their companies’ need to hold the line on legal spending. This year’s report describes how legal departments are meeting this challenge, and what these changes mean for their law firms. More than 250 law departments contributed their experiences to the third annual “ACCA/Serengeti Managing Outside Counsel Survey Report.” After two years of no change, legal spending as a percentage of company revenue jumped from a median of 0.51 percent to 0.57 percent this past year. Legal costs have the biggest impact on small companies (with less than $100 million in annual revenues), which on average spent 2.2 percent of their revenue on legal expenses, compared with 0.32 percent at large companies (with more than $1 billion in annual revenues). Since most companies spend significantly more on outside counsel than on their legal departments, it is not surprising that the top concern of most in-house counsel (currently 82 percent) is getting control over outside legal spending. Dissatisfaction with outside legal costs is leading companies to impose more constraints on their law firms, and to send less work to them. As a result, law firms have had to slow the increases in their hourly rates in each of the past three years (from 9.3 percent to 6.3 percent to 5.4 percent). In-house counsel are expecting further slowing of rate increases during the coming year. Respondents also estimated that spending on outside counsel next year will be flat, which � assuming a small increase in hourly rates � means that corporate law firms may get even less work in the coming year. What are the specific controls being placed on outside counsel? Gaining widespread acceptance is requiring outside counsel to live within a budget. The “do whatever is necessary” approach is increasingly being reserved for the most critical matters. Budgets jumped from fifth to second place (after monthly or periodic bills) on the list of the most common retention terms required by law departments. Both the number of in-house counsel requiring budgets (83 percent) and the average percentage of matters in which they require budgets (41 percent) are up significantly from last year, with litigation identified as the area where budgets are most often required. Budgets not only clarify expectations on both sides about appropriate levels of law firm activity, but also set clear benchmarks against which ongoing performance is monitored. An increasing number of in-house counsel are also requiring electronic billing, which gives them direct access to financial data for each matter and permits them to use automated systems to audit bills and compare actual spending with budgets. WHAT CLIENTS WANT Other controls on outside counsel identified in this year’s report include: • Requesting that law firms share their work product not only with in-house counsel but also with other firms representing the client on similar matters, to permit reuse of work product; • Requiring firms to agree to specific retention terms before they start work, including no change of attorneys or rates without approval, end-of-matter assessments, compliance with ADR policies, and use of vendors specified by the client; • Requiring more types of conflicts checks than the minimum required by ethical rules (e.g., past representation of adverse parties in unrelated matters, potential issues conflicts), and less willingness to grant blanket waivers of potential future conflicts; • Requesting discounts for early payment of bills; and • Requiring that associates handling their matters have minimum levels of experience. More law departments report that they are terminating relationships with law firms that are not responsive or too costly. Convergence continues, with more work going to smaller firms, which are perceived to have better rates and service. Companies that are serious about implementing cost controls with outside counsel are finding that these techniques are having an impact. Savings are reported to be at least 10 percent of annual outside legal spending. On the flip side, techniques explored by in-house counsel that do not seem to be gaining traction include: • Competitive bidding or RFPs, which on average receive less than two law firm responses. • UTBMS bill coding, now required by only about 4 percent of companies, one-fourth of which admit that they do not use the coding provided by their firms. ADDING TECHNOLOGY, NOT STAFF After two years of outside legal spending that was double the amount of internal spending, the ratio dropped to 1.6 this year, indicating that more work is being retained by the law department. Yet on average, in-house counsel are projecting no change in the number of staff lawyers and paralegals. As a result, the second-most-pressing concern for in-house counsel this year is “too much work for too little resources/legal budget issues.” With increasing pressure to send less work to outside counsel and to spend more time managing the work of outside counsel, in-house counsel are feeling pressed to accomplish more without adding personnel. And it’s clear that more in-house counsel are turning to technology to increase productivity in order to handle more work with current resources: The concern that increased the most this year was having “technology to improve the efficiency of the law department and work with outside counsel.” In-house counsel are starting to close the technology gap with their colleagues at law firms. Unlike last year, in-house counsel are generally planning to increase spending on various new technologies during the coming year. In general, as Internet-based systems such as extranets and e-billing have matured and gained mainstream acceptance, they have moved up in the list of technology priorities that law departments are considering. E-billing is at the top by a wide margin, with more than 28 percent of law departments currently considering implementing it with their law firms. EXTERNAL, INTERNAL TOOLS The smorgasbord of other technology to help law departments manage their legal work breaks down roughly into two categories: external tools (that include their law firms), and internal tools (used only by the law department). Among external technologies, law department extranets, currently used by about 20 percent of law departments, continue to grow in popularity as a way to share information. For the first time, more law departments are considering extranets than are considering new internal software to help manage outside counsel. And law departments that are creating extranets are increasing at a faster rate than are those whose law firms are providing extranets, perhaps reflecting the corporate client’s frustration at having to go to multiple law firm extranets to access their data. Law departments’ use of application service providers (extranets hosted by third parties) has doubled (to 22 percent in two years), making ASPs a serious alternative for law departments seeking quick setup and convenient access for exchanging bills, documents, and other information in a single site. On the internal side, spreadsheet, database, and calendaring software are still used more often than formal matter-management software packages to track work with outside counsel, although the differences are narrowing. The use of electronic document repositories (for managing large volumes of litigation or transactional documents) also grew significantly during the past year (from 13 percent to 19 percent). On the other hand, law department intranet use seems to be leveling off, showing a slight drop from last year. Law departments are also showing increasing independence in analyzing the performance of their outside counsel. For the first time, reports generated by internal matter-management systems were more commonly used than reports provided by law firms. While in-house review of paper bills is still the most frequent source of information regarding law firm performance, electronic billing data is starting to make significant inroads, growing by more than 40 percent over last year. The vast majority of law departments perform this analysis in-house, rather than using outside consultants. In-house counsel report that law firms are not cooperating when it comes to controlling legal costs. Each of the past three years, outside counsel have been rated lowest in performance on cost consciousness and predictive accuracy. In fact, the top suggestion for outside counsel is to be more concerned with costs. These sentiments are supported by reports of law firm resistance to alternative fees, failure to respond to requests for bids, and reluctance to accept other changes sought by in-house counsel. This strong level of dissatisfaction among corporate clients presents a clear opportunity for those law firms that are willing to work with their clients to improve efficiency and predictability. Rather than waiting for their clients to impose new constraints, outside counsel can gain a competitive advantage by identifying and proposing practical solutions that will meet the needs of both sides of the relationship. Rob Thomas is vice president, strategic development, at Serengeti Law, whose Web-based technology is used by more than 1,800 in-house counsel to manage work with their outside firms. He may be reached at [email protected]. Information about the 170-page “2003 ACCA/Serengeti Managing Outside Counsel Survey Report” (which includes trending analysis from the past three years) is available at www.serengetilaw.com/survey.

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