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Most GCs have long had the sole authority to hire and fire outside counsel, but that prerogative may be waning. As legal costs continue to rise, procurement executives have started to review external legal spending at several high-profile companies. Having already achieved cost savings in commodities like copy paper and computer equipment, these purchasing specialists have had some initial success in reducing outside counsel bills. But their involvement in the legal hiring process has plenty of critics, from GCs who resent the intrusion, to law firm partners who feel that they’re being asked to give unrealistic fee estimates. Officials at a dozen companies confirm that they’ve directed their procurement departments (which also go under the name of supply chain management or strategic sourcing) to review legal spending decisions. The programs at these businesses — Alliance Capital Management Holding L.P.; Bayer AG; Fireman’s Fund Insurance Co.; JP Morgan Chase & Co.; Merck & Co. Inc.; Merrill Lynch & Co. Inc.; Motorola Inc.; Oracle Corp.; Pfizer Inc.; Tyco International Ltd.; United Technologies Corp.; and Wyeth — are in the early stages of development and generally less than two years old. David Briscoe, a legal consultant at Altman Weil in Newtown Square, Pa., has been closely watching the phenomenon. He predicts that the trend will only continue to grow, and that law firm rates will fall and fee structures will change as a result. “General counsel tried to ignore them, but procurement [departments] gained a reputation elsewhere in the corporation,” says Briscoe. “Now GCs are being forced to accept them.” Some chief legal officers have already come to terms with this development. Fireman’s Fund GC Janet Kloenhamer says that procurement professionals are well suited to attack the inefficiencies of hourly billing. Officials at Novato, Calif.-based Fireman’s Fund told Kloenhamer in February 2004 that its supply chain management group would review the company’s outside counsel roster. Since then, Fireman’s Fund has trimmed its legal roster of more than 400 firms to just nine primary firms. Kloenhamer says that it’s too soon to tell whether the company has saved money with the reduction. “Lawyers don’t have the market cornered when it comes to negotiation,” Kloenhamer says. “People in strategic sourcing have specific skills that add value.” She explains that procurement specialists are trained in contract development, inventory control and management, strategic planning, supplier evaluation, and economic forecasting. Not every GC is willing to cede authority to the procurement department. Noah Hanft, the general counsel at Purchase, N.Y.-based MasterCard Inc., says that legal services should be treated differently than copy paper. (MasterCard’s procurement staff doesn’t review the company’s legal spending.) Hanft maintains, “The kind of legal work that we have performed doesn’t lend itself to commoditization.” It’s hard to pinpoint which company first ordered procurement staffers to review outside legal costs. But a half dozen of the businesses who’ve adopted the practice cite Hartford-based United Technologies as a role model. In 2001 the company’s supply chain management department started a program called UT500. The goal was to eliminate $500 million in annual spending inefficiencies in 17 departments — including legal — that were targeted as “wasteful.” The company’s in-house lawyers were skeptical at first. United Technologies associate GC Paul Beach admits, “We were sure we knew our business better than anyone outside our department.” But under pressure from management, Beach and his fellow in-house attorneys agreed to work with the supply chain team. For the next two years, the outside counsel roster at United Technologies was examined by a ten-member team composed of procurement, finance, and legal professionals. They analyzed how much, at what times, and at what cost outside law firms were used. The review led to major changes in United Technologies’s legal hiring. According to UT500 program manager Judith Hughes, the company trimmed its outside counsel roster of 850 firms to approximately 300 in 2003, and negotiated lower rates from the survivors. She says United Technologies achieved additional savings through other steps, such as tightening the circumstances in which outside law firms can be used. “By making these changes, we cut 20 percent of the $90 million we used to spend on outside counsel,” Hughes says. Other companies have set up similar projects. Princeton, N.J.-based Tyco is halfway through a three-year program that aims to achieve $1 billion worth of spending cuts by 2006. Twenty-two commodity areas will be affected, including legal. A team jointly drawn from Tyco’s law and supply chain departments is currently examining the $138 million that the company spends on outside counsel. The review group has already had an effect, according to Anne Kennedy, the law department’s chief administrative officer. Last October, Tyco cut the number of firms doing product liability work from 167 to just one — Shook, Hardy & Bacon. The Kansas City, Mo.-based firm won a rigorous RFP process by promising to handle all of Tyco’s product liability defense work for a competitively priced 18-month fixed fee. Not all general counsel are using their company’s spending gurus because they’ve been ordered to. Some GCs are taking the initiative on their own. In January, Redwood City, Calif.-based Oracle Corp. finalized its hostile acquisition of rival software maker PeopleSoft Inc. After the deal closed, Oracle GC Daniel Cooperman wanted to review PeopleSoft’s outside counsel lineup. So he called his procurement department to gather information on the law firms that PeopleSoft uses and how much they charge. Cooperman says it’s too early to gauge the success of the project. But he has scheduled more meetings with Oracle’s procurement chief to talk about how they might renegotiate law firm rates. One possibility is using alternative fee structures, Cooperman says. Still, he’s not completely sold on the idea of subjecting outside counsel to the procurement process. “I don’t want to extol the virtues of something I might shit-can in two months,” Cooperman says. In particular, he wonders “whether it’s fair to ask a law firm to come up with the total number of hours they will work in the future.” Other legal experts say they’re relieved to hear Cooperman’s concerns. Rees Morrison at Somerset, N.J.-based legal consulting firm Hildebrandt International Inc., says he’s “appalled” to find that procurement officers have roles in outside counsel retention. “The last thing the process needs is another bureaucratic hoop,” he says. “No one wants that.” Certainly not any firm that stands to lose business. One partner in charge of business development at a major New York firm says he detests responding to hundred-page RFPs. He says that in some cases when a client’s procurement department demands definite fee estimates, his firm has declined to participate. But what if the client is too valuable to lose? “We pull a number out of a hat and pray that it works. It’s all junk.” This partner’s words wouldn’t surprise most procurement officials, who say the most common complaint of law firms is that they’re being asked to predict future costs with certainty. But Paul Ashley, director of global sourcing for Pfizer, doesn’t apologize for demanding fixed numbers. As he says, “We have budgets and are held accountable too.”

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