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I’ve spent a lot of time in the last few months ruminating about two complicated and seemingly unrelated problems. On a personal level, I’ve been wondering whether applying to Manhattan’s top nursery schools for my 2-year-old is worth all the trouble. (More than 300 applicants for some 20 openings is the norm.) At work, I’ve been trying to divine what Fortune 500 general counsel really want from their outside counsel regarding discounted rates and alternative fee arrangements. Neither question has a clear, simple answer. Both raise the issue of whether blindly paying for something that’s considered the “best” is always worth the money. Both issues drive people away from me when I raise them at cocktail parties. In 2003, the Am Law 200 firms reported $54 billion in revenue — most of that came from your coffers. These firms are likely to report even better results this year, say two new studies. Forty-four percent of Am Law 200 managing partners plan to hike their billing rates by more than 5 percent in 2005, according to Corporate Counsel’s sibling publication The American Lawyer. Yet 84 percent of companies still use standard hourly billing rates for 75 percent of their work, according to a 2004 ACC/Serengeti Managing Outside Counsel Survey. In other words, most big law departments aren’t looking for novel, potentially cost-cutting ways of lowering their outside legal bills. Why aren’t general counsel more aggressive about these issues? Here are some hypotheses I keep hearing from outside and inside attorneys and legal department consultants: THE LILY-LIVERED THEORY In-house lawyers are uncomfortable having awkward billing conversations with their outside counsel, especially lawyers they’ve relied on for years. As a result, they don’t ask for discounts or fixed-fee arrangements as often as they could. Plus, company lawyers often come from firms, so they know that raising rates is a bedrock principle of firm economics. THE OPEC THEORY The Am Law 200 firms, the highest-grossing legal outfits in the country, are essentially a cartel. While they don’t set prices in concert, their rates tend to match, and in-house lawyers don’t have a lot of other choices for top legal expertise. If they want to get the best M&A work in New York, they’re going to have to pay roughly the same wherever they go in the city. THE RETURN-TO-SENDER THEORY Corporate counsel want to keep their career options open, including going to one of their outside firms if the whole inside counsel thing doesn’t work out, so they’re not going to shake up their relationship with a firm over something like billing rates. THE YOU-CAN’T-PUT-A-PRICE-ON-IT THEORY What price can you put on bet-the-company work? Quality legal advice is worth whatever it costs. Maybe so, but when your outside counsel bills go up more than 5 percent this year, for the same work as last year, is that explanation really going to fly with your CEO? Let me know.

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