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The age-old headache of cost containment in corporate legal offices is now headed to the Internet. With rising legal and litigation expenses and constant debates over hiring counsel in-house or farming the work to outside firms — and with the pressure of rising costs expected to continue — corporate general counsel are often searching for new tools. And a debate is growing over what steps are needed and how far legal departments need to move away from usual business practices. At Houston-based Conoco Inc., the Internet will be used as a training ground for company employees. Just up and running, the company is requiring employees to take legal courses via computer. The company hopes employees — eventually every employee working for Conoco — will learn ways to avoid suits in the first place. “We take the lessons learned from cases and share them,” says Rick Harrington, Conoco’s senior vice president and general counsel. He says the legal training courses were developed with Chicago-based Sears and other major corporations. It is a large undertaking for Conoco, a global company that will need to develop the courses in numerous languages and in a variety of styles that will be understandable to a wide array of employees. Preventing suits and legal costs in the first place is also a goal at Dallas-based Southwest Airlines. Associate general counsel Debby Ackerman says the company has seen “creeping” litigation expenses, but adds that the airline has relatively low costs for a company its size. “The way to manage your legal costs is to manage your business properly,” Ackerman says. “I don’t mean to sound flip, but I think that is the case.” She says if the company has a problem, every effort is made to solve it so that less litigation occurs. If the airline has, for example, a dispute with one of its vendors, Ackerman says the usual route is to get the decision makers on both sides together to try for a solution, rather than simply firing off a threatening letter from lawyers. And Ackerman says the path to avoiding suits is a two-way street. “If we make a mistake, we’ll own up to it and fix it,” Ackerman says. But some observers say stronger actions are needed. A recent report from the New York-based accounting, tax and consulting firm KPMG says corporate legal departments need to adopt a whole new attitude. “Corporate law departments can better manage litigation by using new management techniques such as risk analysis models and cost-control measures, just like other divisions in their own companies,” says KPMG’s Jay D’Antoni. “No corporate law office can predict when lawsuits will be filed, so there will always be a reactive quality to the way they work. But once the lawsuits are filed, the process will be better managed.” KPMG came to those conclusions after surveying 351 senior in-house corporate lawyers across the country. KPMG reports that nearly two-thirds of the in-house counsel surveyed said their litigation costs had increased an average of 29 percent over the past few years. KPMG could not say how many of those surveyed are in Texas. “A new business model will be mandated for corporate legal departments, which must operate more efficiently to counter rising litigation costs and bottom-line pressures,” says D’Antoni, national director of the litigation testimonial unit of the firm’s Forensics and Litigation Services practice. He cites increasing numbers of suits, increasing damage awards, increasing litigation expenses and low recovery rates through insurance as factors creating the pressure. THE CAPTIVE FIRM Dallas-based ClubCorp, a major player in the business of managing and developing golf course resorts, is taking a whack at legal costs by setting up its own law firm to handle the company’s legal needs. This “captive law firm” is an independent company, with ClubCorp as its only client. A set monthly fee is paid to the firm for legal work. This creates room for growth by the lawyers, since partnership opportunities exist. But unlike the usual hiring of outside counsel, billable hours and questions over whether the bills are getting padded are no longer an issue. The captive firm can bring in outside counsel if needed, but profit motives apply pressure to limit this practice. Developed by Terry Taylor, ClubCorp executive vice president and general counsel, the goal is to overcome problems and limitations associated with both traditional in-house legal departments and the hiring of outside firms to handle legal work. Taylor set up the captive firm of Henslee & Cassidy in 1996 and reports immediate savings of 50 percent. Since then, costs have increased but Taylor says much of that is due to additional legal work that the firm wasn’t hired to do at first. For example, with 250 individual companies as part of ClubCorp, the sizable task of handling corporate records and minutes of meetings was previously done outside the firm. Now, Henslee & Cassidy is taking care of those legal chores as well. At Houston-based Apache Corp., an oil and gas exploration company, internal programs are aimed at making all parts of the firm comply with the law. Those efforts include OSHA and EPA regulations along with issues of international law. But the company is active in acquiring properties for exploration and each of those transactions contains its own legal traps and issues. “It’s very event-driven,” says Apache Corp. general counsel Zurab Kobiashvili. There are often surprises, such as legal problems inherited from prior owners. And the legal work, particularly in the United States – Kobiashvili points to Canada and Australia as two places that are less litigious – can be complicated. He says the trick for the legal department is to learn from experience and to know the risks. “We have a good sense as to what the exposure is,” Kobiashvili says. The company uses a wide array of outside lawyers. That roster was developed over many years, with specific talents and costs in mind. Kobiashvili says that gives his company flexibility and the skills it needs, as opposed to simply hiring a large firm to do all the outside work. Even small legal departments have to contain costs and Hugh Simpson, executive vice president and general counsel at Fort Worth’s Cash America International Inc., is trying to save money by hiring another lawyer. Simpson added a third lawyer in the past year. An experienced litigator, Simpson hopes the new lawyer can ride herd on lawsuits and closely monitor them for possible cost containment and savings. “As an experienced litigator, I think he has a better ability to perform that function than I do,” Simpson says. Neal Sutton, general counsel with Houston-based Smith International Inc., says his company is constantly negotiating with outside counsel and looking for deals. The oil service industry seeks discounts by giving a large amount of work to one firm. They sometimes seek flat-fee arrangements. But he says cost control has always been a priority and that little has truly changed. “I don’t necessarily see a crisis,” Sutton says. He is worried that large pay increases for first-year associates at major law firms will eventually trickle down to corporate clients, but is waiting to see how that issue plays out. Conoco’s Harrington also sees no reason to panic. He says risk analysis and other business school models, such as those suggested by KPMG, have been in use at major corporate legal departments for many years. Notes Harrington, “Cost containment has been a huge focus for a long time.”

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