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Most general counsel 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 A.G., 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,” Briscoe said. “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 said 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 said 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 said. “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., said 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.” Initial skepticism It’s hard to pinpoint which company first ordered procurement staffers to review outside legal costs. But a half-dozen of the businesses who have adopted the practice cite Hartford, Conn.-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 General Counsel 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 10-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’ 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 said 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% of the $90 million we used to spend on outside counsel,” Hughes said. 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 products liability work from 167 to just one-Shook, Hardy & Bacon. The Kansas City, Mo.-based firm won a rigorous request for proposal (RFP) process by promising to handle all of Tyco’s products liability defense work for a competitively priced 18-month fixed fee. Not waiting for orders 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 said. 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 said. 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 are relieved to hear of Cooperman’s concerns. Rees Morrison at Somerset, N.J.-based legal consulting firm Hildebrandt International Inc. said 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 said. “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 said 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.”

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