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Many companies are instituting new policies for hiring outside counsel — policies that are making some general counsel squirm and some law firm lawyers shudder. Under pressure to control expenditures for legal services, general counsel are increasingly called upon to explain their outside counsel hiring practices and the resulting costs to their clients. More important, while in the past the details of hiring decisions may have been left up to general counsel and their law departments, now many corporate employers are getting involved. Some corporations are implementing policies that mandate that their procurement or purchasing departments become involved in every decision to outsource services — including legal work — says Ron Friedmann, president of Prism Legal Consultants Inc. Some outside counsel say that this increased involvement by purchasing and procurement departments has resulted in a “commoditization” of legal services — corporate clients purchasing legal services much like commodities. “There’s a movement right now, across the board, to pay the lowest price you possibly can,” says Ed Hansen, a partner in the global outsourcing and technology practice at Morgan, Lewis & Bockius. “On the surface, it seems like a good idea, but companies aren’t able to differentiate what’s a commodity and what’s not. You can’t buy outsourcing services like you buy pencils.” Hansen calls outside counsel services “relationship-based contracting,” and says those contracts can fail when the GCs need to work internally with management or departments like procurement or purchasing come between in-house and outside counsel. THE CHALLENGE “Unlike other portions of the company that can be easily measured and quantified, it’s very difficult to quantify legal services,” says Susan Hackett, general counsel of the Association of Corporate Counsel. Legal services have value beyond the billed hourly rate, although that value is tough to measure. “How do you measure the troubles the company didn’t experience?” says Hackett. “How do you prove the value of, �We didn’t have an SEC investigation this year’?” Procurement or purchasing employees who are not part of the legal department may find it difficult to appreciate or even understand those values. They may also find it hard to differentiate between a straightforward legal task that could be performed by most corporate lawyers and one that requires involvement by a trusted legal adviser who may be familiar with the company’s legal needs or who has particular expertise. The procurement department is often brought in because some corporations understand that their attorneys aren’t that great with numbers, budgets, and purchasing, Friedmann says. Management may think that attorneys tend not to negotiate legal costs and decide to step in. “When purchasing departments see how lawyers operate, they see low-hanging fruit,” Friedmann says. For the cost-conscious company, legal services present an easy way to reduce costs. Yet this focus on cost-cutting may threaten the trusted relationship between in-house counsel and outside attorneys. “Securing outside counsel is such a personal decision,” says Hansen, and involving procurement people in the process “is like using the procurement department to hire an employee.” When costs are the deciding factor in hiring outside counsel, the value of hiring someone trusted and familiar to do the job — not to mention someone whom the law department can work with — is often discounted. Hansen recalled a complex telecommunications deal for a large corporate client where he not only negotiated the original contract, but also renegotiated it two years later when the provider threatened the client with litigation. Hansen successfully resolved the issue, even netting the client some money in the process. Yet when the contract was up for renewal, Hansen received a surprise: a request for proposal for legal services. As part of its efforts to cut costs, the company required that outside counsel hiring decisions be made with the involvement of the procurement department. Hansen was outbid and replaced on the deal he had originally crafted by a lawyer whose bid was just 10 percent of Hansen’s price for the job, despite corporate counsel’s insistence that Hansen handle the contract and appeals to the chief information officer and a vice president to try to get him hired. The contract at issue was ultimately renewed without much renegotiation. Merely looking at costs is not always the best way to choose outside counsel, Hansen says. Procurement employees who don’t have a legal background are often unable to differentiate between attorneys and may ultimately outsource to a new attorney without the skills and trust required for the job, simply on the basis of lower costs. “A procurement group is not capable of differentiating between top players,” Hansen says. “They don’t understand that their skill sets need to be separated, and are also incapable of differentiating between top and bottom players.” Legal services are different from other services, Hansen adds, and while “a lot of legal work is in the nature of a commodity, the procurement groups can’t differentiate.” As a result, difficult, detailed, or important cases may be outsourced to unqualified attorneys, even though they may require more seasoned or familiar outside counsel. Hackett agrees that there’s something different in what lawyers do, but said it’s difficult to put a finger on what that difference is — and even more difficult to put it into words and relay it to management. Legal services are different from others because of the professional and ethical traditions that characterize the field, yet, “I don’t see people always living up to that,” said Hackett. “We need to rediscover what made us different in the first place.” THE SOLUTION “One of the challenges is balancing how well the outside firm knows the company’s business with how cost-effective they are overall,” Friedmann says. General counsel are in a unique — and uniquely difficult — position: Although they are obviously concerned with getting the best legal services possible, they also answer to management on costs, just like any other department. “It’s clear that corporations are increasingly looking at ways to save money, and law departments are cost-centers and need to be managed as cost-centers,” Friedmann explains. “A forward-thinking general counsel should look to the purchasing department for help.” While procurement or purchasing department involvement with hiring outside counsel can lead to tension, savvy general counsel shouldn’t ignore the purchasing department’s interest and expertise. Rather, in-house counsel should work together to balance the company’s cost-cutting needs with their preferences for outside counsel. Hackett says coming up with unique models for comparing legal services might be the key to that balance. “The �counting pencils standard’ doesn’t apply, but that doesn’t mean legal services don’t need to be measured,” Hackett says. “They just need to be measured differently.” General counsel should look for ways to quantify legal services that will steer the procurement department toward measuring results, not just costs. For instance, some law departments look at comparative savings in the industry in general or at outside counsel savings effected by better practices or better technology, Hackett says. Some large companies even have created a position within the law department whose sole responsibility is to oversee outside counsel costs, retention rates, and savings maximization. Such a position — particularly when filled by a member of the law department — can cut costs while ensuring that the company’s legal needs are adequately met and outsourced to the right people. The key is to work with procurement to establish better metrics, Hackett advises, because it’s ultimately the legal employees who understand how legal services should be measured. And when general counsel come up with a novel way to compare and measure legal services, they ought to put it into a formal plan because doing so will help prove to management that the lawyers understand the business end of legal services and are committed to containing costs. In fact, Friedmann says that in-house lawyers need to be more involved in managing outside counsel costs and services. “Understand the corporate approach to purchasing and understand the perspective of the CEO and CFO on purchasing,” he advises. That may mean setting case budgets, taking an active part in yearly reviews, and gaining a better understanding about budgeting and cost management methods in general. Unique and creative ways of procuring outside counsel services such as online reverse auctions and e-billing, both of which are slowly being introduced, might also help cut costs, yet can yield the same level of service to which law departments are accustomed. Law departments can also help by drawing clear lines between legal projects and cases that need different types of attention and assistance. For instance, law departments can help differentiate “low-end” work from “high-end work,” Friedmann says. “Some may be higher-stake, but there are a lot of lower-level day-to-day claims … that are fairly straightforward.” For those cases, general counsel should first determine whether to in-source or outsource the work, and if the decision is to outsource, “the next question is, whom do we outsource to?” Friedmann says. “If you separate the nature of the cases, you can apply different sets of criteria.” Still, at times, general counsel will have to stand up for their choice in outside counsel, Hansen says, even if that means more costly work, and they will have to make sure they have the final say in procurement of outside counsel. General counsel may be worried about alienating long-term outside counsel colleagues, yet cost-cutting measures don’t necessarily have to adversely impact trusted outside counsel relationships. “There are ways of managing purchasing that are still respectful of relationships,” Friedmann says. Have scientific — not antagonistic — conversations with outside counsel, he recommends, laying out data about their costs and the costs of competitors. All this cost-cutting business “may threaten a relationship with outside counsel who’d been with in-house counsel for a long time, but it also offers a chance for an even stronger relationship .�.�. and will solidify those relationships that can stand the test,” Hackett says. Hackett also says there is a clear trend toward cost-cutting on lower-end work. Some general counsel increasingly turn to smaller law firms who haven’t been on their lists of providers in the past. Fed up by increasing hourly rates at the big firms, many corporate counsel use their top players solely for difficult, complicated, or potentially costly cases and opt to give lower-end work to less expensive outside counsel instead. In some instances, outside counsel face yet more avenues of competition for corporate clients. On certain jobs, for instance, companies looking to cut their legal costs may favor less costly legal research firms and or outsourcing to attorneys overseas. A recent article in the Connecticut Law Tribune reported on one general counsel at Terex Corp. who was so outraged by big firm costs that he floated the idea of taking legal work to India. His outside counsel firm drastically dropped its hourly rate. Whether it will continue to create friction between corporate counsel and their outside counterparts, this is clear: Pressures to cut legal costs will continue to plague law departments, and general counsel will have to come up with innovative ways to reduce costs while maintaining quality.
Ursula Furi-Perry is a lawyer and a writer on legal issues. This article first appeared in GC Mid-Atlantic , an ALM publication.

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