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Warning: The true story recounted in the next few paragraphs may induce nightmares in some readers. A general counsel concerned about outside legal expenses may experience a moistening of the palms, dryness of the mouth and sharp pains in the chest. Last May, U.S. District Judge Stephen Orlofsky ruled that United Computer Resources of New Jersey Inc. had violated two permanent injunctions by selling counterfeit Microsoft software and ordered that, in addition to sanctions, it had to pay Microsoft’s outside counsel. Microsoft then sought $252,476.25 in fees and $63,064.34 in expenses — nearly all of it billed by the Cherry Hill, N.J., office of Philadelphia’s Montgomery, McCracken, Walker & Rhoads. In his decision last August, Orlofsky could barely contain his disgust: “Microsoft, through Montgomery McCracken, expended an incredible 1066.6 hours of attorney time and 73.6 hours of paralegal time investigating and prosecuting a civil contempt matter against an adversary with whom it was already familiar … involving legal issues that Microsoft had previously argued and prevailed on in numerous similar proceedings in other courts.” Faulting Montgomery McCracken for excessive and duplicative work that amounted to “a legal feeding frenzy,” the judge slashed its fees by more than 40 percent. The firm isn’t commenting and Microsoft isn’t complaining, but most general counsel can’t count on adversaries to pay the bills — or judges to slash them. And they don’t have Microsoft’s resources. As the economic slump persists, and companies look to cut costs, law departments are under increasing pressure to reduce expenses often driven by outside fees. According to the 2002 law department spending survey conducted by PricewaterhouseCoopers, median in-house spending is up 4.3 percent this year compared to last, while outside expenses jumped more than twice as much: 9.2 percent. For the 181 companies responding, outside counsel fees represented 59 percent of their total legal expenses. General counsel are adopting a host of measures to increase productivity and contain costs. They vary according to the company’s size, needs and preferences, but interviews with corporate lawyers at 10 large companies suggest that many seek alternatives to paying by the hour. These range from auctioning cases to low bidders, to hiring temporary lawyers, to paying annual retainers. All this is precisely what Robert Hirshon had in mind when, as the American Bar Association president last year, he railed against standard billing and launched the ABA Commission on Billable Hours. Hirshon appointed a mixture of in-house and outside lawyers and asked them to propose solutions. In a report delivered at the ABA’s annual conference in August, the commission identified ways the system fails both general counsel, who seek predictable, reasonable costs, and outside lawyers, whose firms may demand that they bill 2,000 hours a year. “Hourly billing penalizes the efficient and productive lawyer,” the report argues. “The inefficient and less productive lawyer ends up billing more hours.” The practice also “promotes duplication of effort by not providing any incentive to limit the number of lawyers.” Anastasia Kelly, GC of Sears, Roebuck and Co. and the commission’s co-chair, says the report’s timing “couldn’t be better.” Law departments “are under enormous pressure to cut costs and improve productivity in a way that’s never happened before.” She cites two reasons. The dot-com bubble drove up first-year associate salaries, which in turn fueled “this explosion in the cost of legal services from outside firms.” And the recession has forced companies to cut costs. Many general counsel, herself included, are paid in part according to how well they meet their budgets, she says. And now that the Sarbanes-Oxley Act requires chief executives to certify their financial statements, it’s likely all department heads will be required to understand and attest to their own numbers, she adds. The 10 in-house lawyers interviewed all seem keenly aware of their budgets. Some are rising, usually as a result of an uptick in litigation; a few are falling, often due to cost cutting last year. Several GCs have hired more in-house lawyers to reduce outside costs. Stacy Fox, GC of Visteon Corp., a supplier of parts and technology for cars, added a lawyer in the past year. She now has nine in-house and plans to add another to help with SEC filings. Her budget for outside counsel will shrink by about 12 percent this year, she says. Hoil Kim, GC of Cabot Corp., a specialty chemicals manufacturer, may add a lawyer or two to his 14. In his two years as Cabot’s GC, he’s already hired two litigators and expanded the hours of a third who worked part time. His outside fees are $6 million to $7 million — down about $1 million from last year, he says. In addition to departmental budgets, most GCs also require outside firms to supply case budgets. Michael Roster, a billable hour commission member and GC at Golden West Financial Corp., says he tells firms what a case is worth before they begin work. Firms are welcome to disagree. “But now you’re having a focused discussion in which they can explain their disagreement,” he says. The number creates a framework for settlement negotiations and for expenses, like the number of depositions that can be taken. “Even when you’re building a skyscraper,” he continues, “vendors can give you a pretty good estimate of the price of the components.” Law firms can do the same. Firms must communicate regularly, and sometimes adjust the budget, he adds, but Golden West does post-mortems on all its cases, and the costs are remarkably consistent. At Sears, Kelly has taken this one step further. Where Roster performs post-mortems, last year Kelly asked in-house lawyers who manage cases to perform, for the first time, a kind of budgetary sonogram. After reviewing past expenses, they submitted budgets for the year to come. “It was very painful,” Kelly acknowledges. “People had never had to think about that.” Previous budgets were retrospective and weren’t used for planning. Yet she found the numbers held up well. Where they didn’t, she adds, it was easy to identify what changed. Asked how they reduce outside expenses, the lawyers interviewed describe a variety of approaches. John Godre, who oversees litigation for Ford Motor Credit Co., the car manufacturer’s captive finance company, has annual retainer agreements with his primary law firms. The amount is based on his company’s average annual workload in the firm’s state during the past three years. He pays a prorated monthly fee and, at year’s end, they make adjustments if the firm’s fees and expenses varied significantly from the retainer. “It’s got to be win-win,” he says. Thomas Sager, a lawyer at E.I. du Pont de Nemours & Co. who handles legal budgets, insists that outside firms cut costs by following guidelines in the “playbook” he provides them. He tweaks the book each year, he says. His most recent directive is: “Thou shalt embrace the use of temporaries.” Firms need to delegate work “to the lowest appropriate level, and in many instances that means the legal assistant.” In the last five years, DuPont has insisted that firms use temporary and contract lawyers. They’re now used in virtually all litigation. In response to discovery requests, for example, they collect and review documents for relevance and privilege. This initiative alone generated savings last year of $5 million, he says. The Recording Industry Association of America, a trade group that represents record companies, controls costs by taking flat-fee bids on smaller jobs, according to Matthew Oppenheim, who runs its law department. On amicus briefs, for instance, he often pays a best-bid fee of between $20,000 and $40,000. Fireman’s Fund Insurance Co. takes bids on large transactions and litigation, says GC Janet Kloenhamer, who is also on the ABA commission. Bids are usually solicited from a small group of firms recognized for their expertise or known through previous work. Visteon’s Fox, on the other hand, doesn’t solicit bids and avoids temporary lawyers. “It’s very important to me to know who I’m using and what their capabilities are,” she says, adding that she prefers to build long-term relationships. DEVELOPING RELATIONSHIPS Many of the lawyers interviewed emphasize the value of developing partnerships with a small group of firms. Gary Cohen, GC of the athletic shoes and apparel company Finish Line Inc., is one. Rather than use contract lawyers or temps, he’s found he can often convince his regular firms to take on the work at a reduced cost — to ensure his continued business. For his big cases, Cohen uses two approaches. Through motions for summary judgment, he negotiates a single “blended” hourly rate for associates and partners. If the case goes to trial, he then negotiates a flat fee. When Thomas Sabatino took over as GC of Baxter International Inc., which sells medical products and services, the company used 180 outside firms. Five years later, 95 percent of the work is handled by less than 20 firms, he says. He’s developed risk-sharing arrangements with his “preferred providers.” When a firm handles a successful transaction, it receives a bonus. When the deal falls through, Baxter gets a discount. There’s a similar arrangement for litigation. “Fees initially drove it,” Sabatino says of these relationships, “but the power now is that everybody gains from it. Saving money is important, but the real value is in partnering.” Sears’ Kelly is optimistic that companies are demanding changes — and law firms are getting the message. Asked how she’ll know when alternative billing has truly arrived, Kelly pauses a moment. When law firms market the alternatives — and include them in brochures. That’s when she’ll know, she says.

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