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In-house counsel are challenged by the competing demands of three distinct roles: legal practitioner, trusted adviser to business clients and manager of outside counsel. Preparation for the first two roles usually comes in law school and private practice. Effective techniques for managing outside counsel, on the other hand, are generally learned only through on-the-job training and from sharing experiences with other in-house counsel. To facilitate the exchange of valuable management experiences, Serengeti Law (whose Internet-based service helps in-house counsel manage work with their law firms) created an annual survey for the American Corporate Counsel Association. Each year, hundreds of corporate law departments complete a lengthy questionnaire regarding their work with outside counsel. The findings are instructive not only for in-house counsel, but also for their law firms. TOP PRIORITY: OUTSIDE SPENDING The economic downturn has increased the focus of in-house law departments on cutting costs. For the second consecutive year, controlling outside spending was selected as the most pressing issue facing in-house counsel. And in both years, in-house counsel expressed their belief that outside counsel do not share their concerns regarding the cost of their services. Specific complaints included resistance to alternative fee arrangements and not responding to RFPs. In fact, the improvement that in-house counsel would most like to see in their law firms is more cooperation to keep their fees reasonable. One consequence of this priority is that less work is allocated to law firms. Compared with last year, spending on outside counsel dropped, while in-house spending increased. This trend is likely to continue: Median projections for the coming year are for an increase of 5 percent in law department spending, but only 2 percent more for outside counsel. In step with these trends, there have been smaller annual increases in hourly rates. The median increase reported for 2001 was 6.3 percent, a significant drop from the increase of 9.3 percent during 2000. In-house counsel expect this trend to continue, with a median projected increase in law firm hourly rates of 5.2 percent during 2002. The bottom line is that the need to control outside legal costs creates significant opportunities for law firms willing to devise more cost-effective solutions for their clients. TACTICS FOR CONTROLLING COSTS The most common primary methods to control outside legal spending used by in-house counsel (in descending order) are: case/matter budgets, discounted/alternative fees, billing guidelines/spending rules, an in-house fee/bill manager, and evaluations of outside counsel. Yet some of these methods are more effective than others in actually generating savings: An in-house fee/bill manager produced a mean average savings of 23.9 percent, discounted/alternative fees saved 21.5 percent, evaluations of outside counsel saved 20.4 percent, case/matter budgets saved 17.6 percent, and matter management systems saved 15.5 percent. There are many other tactics being tried by in-house counsel. For example, to avoid paying for training or inefficiencies of young lawyers, more in-house counsel are requiring that law firm associates have a minimum level of experience to handle their work. The mean required level of experience also increased, to almost 4 years. And more in-house counsel (almost 10 percent) report receiving a discount on their firms’ bills for early payment. The mean average discount is 5.7 percent for payments within 22 days. TECHNOLOGY Economic pressures have also reduced law department budgets for new technology. One notable exception is electronic billing software, which for the second year is the most common new technology being considered by in-house counsel. It’s also noteworthy that the use of application service providers (ASPs), whose Internet-based services facilitate collaboration with outside counsel, doubled during the past year to 20.1 percent of in-house counsel. CONVERGENCE TAKES HOLD The general perception that companies are reducing the number of law firms that they work with (often referred to as “convergence”) is borne out by the numbers. The median number of U.S. law firms used by law departments during 2001 declined by 15 percent from a year earlier, from a median of 10 law firms to 8.5 firms. Only 8.9 percent of the surveyed law departments used more than 50 law firms domestically during 2001, a marked decrease from the previous year’s 12.4 percent. Large companies (revenue over $1 billion) are twice as likely to have implemented the strategy of convergence than small companies (revenue less than $100 million). This process is also leading to a greater concentration of corporate work among large firms. The mean average percentage of legal spending with large law firms (more than 100 lawyers) rose significantly, from 33.6 percent to 51.2 percent, while spending with small law firms (up to 10 lawyers) fell from 12.3 percent to 11.8 percent. HOURLY BILLING PERSISTS The American Bar Association’s Presidential Commission on Billable Hours recently released its report analyzing alternatives to standard hourly billing. Both ACCA and the ABA have been studying alternatives to hourly billing, due in part to the reverse incentives created when outside counsel are paid by the hour. Many law departments are exploring alternative fees to align the compensation of their law firms with their own goals of fast and favorable resolution of legal issues. Nevertheless, the vast majority of work done by outside counsel is still billed at either standard or discounted hourly rates. Overall, most in-house counsel report paying standard hourly rates for most of their outside legal work during 2001, about the same as in 2000. Approximately half negotiated discounted hourly rates for some of their work, also about the same as last year. While fixed fees are used by 25.1 percent of in-house counsel, other alternatives to hourly rates are much rarer. These include blended hourly rates, retainers and contingent fees. PERSONAL RELATIONSHIPS Even more than last year, in-house counsel rely on personal referrals to find new outside counsel, the most common sources being outside counsel, in-house counsel at other companies, other in-house counsel at their company, a company-approved outside counsel list and other employees at their company. Declines are seen in the use of published directories, online directories and searches of law firm Web sites. When selecting outside counsel, in-house counsel consider the skills of the individual lawyer before the qualities of the law firm. Consistent with this approach, in-house counsel are less likely to tolerate a change of team members unless they are consulted in advance. Changing lawyers on a matter without client consent is often a violation of the client’s terms of retention, and is cited as a primary reason for termination of law firms. Despite more formal management of the work performed by outside counsel, personal relationships remain paramount. Rob Thomas is vice president, strategic development at Serengeti Law. He may be reached at (425) 748-5115 or [email protected]. Information about the 260-page “2002 ACCA/Serengeti Managing Outside Counsel Survey Report” is available at www.serengetilaw.com/survey.

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