For the first time in three years, controlling spending on outside counsel has returned as the top priority for in-house counsel, topping compliance concerns, according to the results of the 2009 ACC/Serengeti Managing Outside Counsel Survey, a collaboration between the Association of Corporate Counsel (ACC) and Serengeti Law, released at ACC's Annual Meeting, October 19 in Boston, MA. While compliance issues had reigned for three years, economic factors from the past year have altered the key focus for in-house counsel. The need to drive efficiency is leading to more value-based policies to reduce overall legal spend. Such policies include requiring minimum levels of associate experience, discounts for early payment of bills, engaging in RFPs, and reducing the number of law firms representing the company. For those firms they retain, clients are looking to negotiate more flexible value-based fee and service models.
The majority of in-house counsel (69.9%) provided specific suggestions to their outside counsel to increase the value of their services. While hourly rates are still the norm, use of alternative fee structures rose to 61% of in-house counsel. In particular, fixed fees (38.0% of in-house counsel), project retainers (15.4%) and contingency fees (10.5%) are increasingly popular alternatives. Furthermore, for next year, in-house counsel predict no increase in hourly rates - a first ever in the nine years of the survey.
"The tough economic times have added urgency to the continuing client push for better value from their firms," says ACC President Frederick J. Krebs. He adds, "In-house counsel and law firms must communicate about how to improve service and explore new ways to efficiently manage legal costs."
A final trend worth highlighting this year is the continued movement to Internet-based systems to help clients manage and predict costs more accurately. More than half (51.3%) of in-house counsel this year report they are planning to adopt Internet-based systems to work directly with their outside counsel. These systems, which are hosted by vendors and run by law departments, are quickly replacing the previous movement towards law firm extranets (down to 8.7% of in-house counsel having used any extranets this year, compared to 10.4% last year).
When asked the top five most pressing issues facing their law departments, "reducing outside legal spending" was the top concern, cited by 80.5% of this year's respondents. Sarbanes-Oxley and other legal compliance requirements fell to a close second (78.2%), while concerns about reduced legal budgets/having too much work for fewer resources came in third (60.3%). Rounding out the top five were "keeping management apprised of legal developments" (60.0%) and "staying apprised of changes in the law" (54.1%).
With the focus on reducing outside counsel spending, the median change in aggregate outside legal spending this past year was no change, the smallest in the history of the survey. Similarly, the actual increase in hourly rates this past year was for the first time lower than had been predicted the prior year (an increase of 4.76% after a prediction of 5.02%).
A larger percentage of the legal budget is going to law departments, less to outside counsel. Specifically, the ratio of spending on outside counsel to spending on company law departments has declined from 2.0% in 2004 to 1.29% in 2007, up a bit to 1.6% in 2008.
Record numbers of in-house counsel reported that they engaged in more activities to get better control over outside legal spending. Examples of high and unprecedented levels of cost containment methods include:
• Requiring Minimum Levels of Associate Experience - 62.0% (a record high)
• Implementing Convergence (reducing the number of outside firms engaged) - 32.8% (a record high)
• Receiving Discounts for Early Payment of Legal Bills - 18.7% (a record high)
• Competitive Bidding and RFPs - 20.0%
• Value-Based Suggestions for Law Firms - 69.9%
• Termination of Outside Counsel- 50.3%
• Use of Alternative Fee Structures - 61.0%
• No resistance within Companies to Alternative fees - 62.3%
One aspect the survey addressed was the ACC Value Challenge, an initiative that seeks to reconnect the cost of legal service with value and better align the interests of clients and the firms that represent them.
Value-based suggestions to outside counsel included the use of case plans, tracking budgets, periodic status updates, more efficient staffing levels, better training of associates, more use of technology, and improved management of other vendors.
As part of this movement to deliver value, in-house counsel are using more sophisticated technology to track the activities of outside counsel, and have plans to do more.
Types of Internet-based systems in-house counsel reported using this year include:
• Combined Matter Management/E-billing - 13.6%
• Separate E-billing - 5.9%
• Separate Matter Management - 2.3%
Over the past nine years, more in-house counsel have required specific terms of retention that dictate what they expect from their outside counsel. The most common terms required of outside counsel are:
•Required Monthly/Periodic Bills - 95.6%
• Billing Formats/Details - 66.2%
• Discounts from Standard Hourly Rates - 66.2%
• Preparation of Budgets - 61.3%
• No Change of Hourly Rates Without Approval - 58.0%
• Preparation of Early Case Assessment (Risks and Resolution Strategies)- 54.6%
• Periodic Written Matter Updates - 53.3%
• Limits on Internal Charges (e.g. copies, faxes, phone, online research) - 52.3%
• No Change of Assigned Attorneys Without Approval - 51.5%