The group representing in-house counsel across the country says it is fed up with exorbitant outside-counsel legal fees.
And it’s ready to demand more value for corporate America’s legal dollars.
The 23,000-member Association of Corporate Counsel is working on a major initiative to overhaul the way outside law firms work for and are paid by corporate clients.
An ACC committee is brainstorming with general counsel around the country to develop a set of best practices it will recommend to members – including alternatives to the much-reviled billable hour.
Details of the plan are expected to be unveiled in September. But Susan Hackett, ACC’s general counsel, said the committee is considering a number of options, including: alternative fee structures; early case assessment; and better use of technologies and bonus incentives to produce results within set deadlines.
For many corporate counsel, the breaking point on attorneys’ fees was a report in the Wall Street Journal last year that rates at some Manhattan law firms had topped $1,000 an hour.
“What’s new in the last year is that the level of frustration has moved to anger,” Hackett said. “In-house counsel aren’t going to put up with it.”
Not only are corporate counsel rebelling, but their bosses are also irate, said Michael Roster, a former ACC chairman who is helping spearhead the project.
“The CEOs put the newspaper down on the desk, and said, ‘Don’t you dare use any firms that are doing this,’” he said.
Billable hour targeted
While the billable hour has long been the bane of clients who pay it, ACC officials say they’re serious about finally getting rid of it.
“The firms should be rewarded for giving you high-quality legal work efficiently,” Roster explained. “That is the core of this project: How do you measure that value and how do you pay for it?”
Hackett added: “In-house counsel want results for the money they’re spending, and to be better assured they’re getting value. Right now, all they get is a bill that multiplies the number of hours by the number of lawyers. In any other industry, this would not be allowed.”
Zenon P. Lankowsky, general counsel for CVS/Caremark in Woonsocket, R.I., said most corporate counsel have been wrestling with outside law firm costs for years.
“Some of those suggestions about how to rein in costs are nothing new,” he said.
Firms that work for CVS/Caremark, for example, use a variety of billing alternatives, including blended rates that average out hourly rates for attorneys in a firm. Other times, a firm will combine fixed fees with risk-sharing, so that the firm is responsible for expenses that exceed the normal billing rate.
For what Lankowsky calls legal “commodity work” which does not require specialized talents, the company sometime solicits bids from law firms in search of the lowest cost.
“You take different approaches with respect to different legal issues, matters and problems, and you also try to stay abreast of the evolution of what’s taking place in the law business,” he said.
Other alternatives include a risk-sharing model, such as the one pioneered by DuPont’s legal department, which promotes “strategic partnering” with law firms to control costs and increase effectiveness.
Stung by rising costs for asbestos litigation, DuPont’s law department in the early 1990s established a program to improve the quality, cost and efficiency of legal services provided by outside firms.
The company whittled down the number of law firms it used from more than 350 to a core group of about 40 firms in North America and the United Kingdom.
Andrew Schaeffer, DuPont’s managing counsel for operations and partnering, said the long-term relationships established over the past 16 years allow DuPont to enter into discounted and alternative fee arrangements with its outside law firms.
“The old model was you pay by the hour, but that’s very inefficient,” he said.
DuPont’s alternative fee arrangements include flat or fixed fees, usually for routine types of legal work, or discounted fees in return for a performance bonus
In court cases, for example, a certain amount – usually 15 percent to 20 percent – may be held back. If the law firm wins the case, it gets the 20 percent, but if it fails, it loses the 20 percent. DuPont also offers bonuses for exceptional work.
“It’s all about results,” Schaeffer said. “We’re very willing to share in success with the firms. Some of our firms are really focused on trying big cases, and they realize if they win 75 percent of the time, they’re going to be well off, even if now and then they lose one.”
Schaeffer said Dupont makes a point of looking for medium- and small-sized law firms to be part of its network of primary firms. The company has expanded its network beyond traditional, large firms to include: Glynn & Finley, a 10-lawyer litigation boutique in Walnut Creek, Calif.; Lightfoot, Franklin & White, a 48-lawyer litigation firm in Birmingham, Ala.; Cotten Schmidt, a 19-lawyer firm in Fort Worth, Texas; and Leader & Berkon, a 16-lawyer, New York firm that touts itself as a “smart, agile, cost-contained operation.”
Hesitant to make a change?
Word of ACC’s initiative has already popped up on several legal blogs, generating a variety of reactions – including skepticism.
“General counsel have always had the power to make a difference, and they never have,” said Edward Poll, a Venice, Calif. legal consultant and law blog author (www.lawbizblog.com).
“All they have to do is hire regional law firms whose overhead is less, or sole practitioners,” he continued. “But they don’t do that, and the reason is that despite the cost, it’s safer.”
Fearful of making the wrong decision, in-house counsel continue to rely on the same, big law firms they’ve used for years, he contended.
“With all due respect to the (ACC) organization and their right-thinking, I don’t think you’re going to get corporate America to move off the dime of corporate mentality,” Poll remarked.
But Schaeffer countered that he’s seen a “huge amount of interest” from other companies interested in breaking out of the big-firm routine.
“More and more companies,” he said, “are willing to look for regional, small and medium-sized firms – maybe not for M&A – but for things where they can get just as good quality at better rates.”
And Roster said the economic downturn just might be the impetus needed to force change. Many U.S. companies, he noted, are scrutinizing every aspect of their spending, including legal costs.
Roster doesn’t expect ACC’s initiative to transform corporate legal practices overnight, but he is hopeful it will trigger dialogue that will eventually lead to improvements.
“There’s a pretty high chance there will be changes,” he predicted.