Finance executives have struggled against a tide of rising costs in the past year, paying more for everything from the commodities embedded in their products to the milk that swirls in their morning coffee. Service costs have also skyrocketed, perhaps nowhere more than in the legal arena.
With fees for some top New York City partners hitting the once-unimaginable $1,000-per-hour mark, and first-year associate salaries at one white-shoe Washington, D.C., firm reaching $180,000 a year, legal costs have risen at a pace that might make an OPEC minister blush. A recent study of 800 in-house lawyers conducted by the Corporate Executive Board found that their companies spent 50 percent more on large outside law firms last year than they did five years ago. In the current economic environment, with CFOs looking to rein in costs wherever they can, legal bills might as well be wearing a bull's-eye.
Cutting back on legal spending is easier said than done, however, given that corporate litigation shows no signs of abating. Forty-five percent of U.S. companies spend $1 million or more on litigation annually, according to a study by law firm Fulbright & Jaworski. Amid the current crisis, many businesses expect to face even more lawsuits — some arising from bankruptcy disputes and labor claims following layoffs. The Fulbright survey found that 34 percent of U.S. in-house counsel anticipate more legal disputes in 2009, while just 8 percent forecast a decline.
Finance chiefs and their colleagues in the general counsel's office are trying various approaches to contain legal costs. For one, company executives have become more selective about what kind of work they send to outside firms. "Our corporate counsel will spend a lot of time on an issue reviewing it themselves, and if they're not certain, they will then bounce it to outside counsel, as opposed to immediately turning outside," says Steve Crane, CFO at ModusLink Global Solutions, a supply-chain process-management company with a staff of three in-house attorneys. "As time moves on, I think we'll be even more judicious about turning to outside counsel."
ModusLink is not alone — many other companies are beefing up their in-house legal staffs in hopes of handling more work on their own. Susan Jacobsen, a spokesperson for the Association of Corporate Counsel (ACC), whose membership comprises 24,000 in-house lawyers worldwide, says the group's most recent annual survey found numerous signs that the steady march of hourly rate increases is prompting companies to keep more work in-house. Median outside legal spending declined in the past year, the ratio of outside legal spending to in-house spending is down, and in-house attorneys don't expect to increase their spending on outside counsel in the coming year, although they do anticipate further fee hikes.
In addition to doing more legal work on their own, company executives are discovering a new appreciation for small and midsize law firms, which generally charge less than their heavyweight competitors do.
Jim Grady, finance chief at A.L.P. Lighting Components, a midsize global manufacturer, says he has kept a lid on legal costs by sticking with a regional firm even as the business has doubled in size. "We don't want to sacrifice our history with our law firm to go to another firm. They understand our objectives and the way we do things, and that allows them to be more efficient," says Grady.
He also urges his outside counsel to use as much of the same documentation as possible for repetitive transactions. For example, amid the financial-market consolidation, A.L.P. has switched banks twice in the past 18 months, says Grady. The company was able to rely on some of the same documents in the process.
Company executives are experimenting with other approaches as well, in many cases borrowing cost-control techniques from other parts of the business. The ACC launched an initiative last September encouraging members to pursue alternative arrangements with outside lawyers, such as negotiating fixed fees for certain projects, consolidating work with fewer law firms in order to secure volume discounts, putting new projects out for competitive bids, and making some portion of the final payment contingent upon performance. Some in-house attorneys are also requesting discounts for early payment, a common practice in such areas as materials procurement but a rarity in professional services.
And then there is offshoring. Chicago-based legal-services firm Mindcrest employs more than 470 lawyers in India, where it can pay junior associates $25 to $50 an hour, more than $100 per hour less than an associate would make at a large law firm in the United States. The firm provides a range of legal services to both law firms and corporate legal departments, including document preparation and review. Competitors include Pangea3 and Quislex, both of which are based in New York but employ hundreds of lawyers in India. Still, despite the growing number of overseas options for routine legal work, just 2 percent of companies report that they use such a service, according to Fulbright & Jaworski, although that number jumps to 8 percent for large companies.
Mounting a Defense
Law firms have not been immune to the economic crisis and have made adjustments accordingly. Some large firms have laid off lawyers as much of the transaction-based work on mergers and acquisitions and initial public offerings has dried up. Many firms are trying to reemphasize their value to clients and to differentiate themselves from competitors.
Steve Blonder, a partner at Much Shelist, a midsize Chicago-based firm that counts A.L.P. Lighting among its clients, urges finance executives to consider the kind of services they need before rushing out to retain a top-tier firm at corresponding top-tier prices. "Many executives have leaned toward always hiring a big firm, because you will never be second-guessed for getting the biggest-name firm. But I don't need to go to the Mayo Clinic for a checkup," he says. "For most medical care, I can go to my family practitioner."
Blonder says he recognizes that Much Shelist, with a staff of 85 lawyers, may not be the right firm for every assignment. "If you have a case that needs 15 bodies thrown at it, a smaller firm is not for you. But the key is differentiating: On what things do you really need that?" As finance chiefs look to trim their budgets, he says, "it should be a wake-up call to executives that the biggest law firms may not be a fit for them on every matter."
Jeffrey Stone, a partner at McDermott Will & Emery, an international firm with more than 1,100 lawyers, agrees that finance executives should evaluate their legal needs before choosing a firm. "For routine work, where the risk is relatively low, you should go to a lower-cost provider," he says. "You're balancing risk and cost."
Who Gets What?
At ModusLink, Crane says the company has successfully done just that, working with one large law firm and one smaller firm. The company's general counsel determines which provider is best suited to each legal matter as it arises. On issues of board-level importance, "I guarantee you it goes to the larger firm," Crane says. "We do take name brand into account, on the grounds that you feel they're more established, they've been through more, and there's a marquee name there that you're willing to pay for in some situations."
Within McDermott Will & Emery, Stone says the firm has tried to increase the pricing flexibility for its clients by developing a new category of lawyers called "staff attorneys." These are in-house lawyers who are not on a partner track; they work fewer hours and are paid less than traditional associates.
The firm introduced the concept a year ago, in part as a response to the increasing amount of work competitors were sending off shore. Stone says neither the firm nor many of its clients were comfortable with that practice, because of concerns about security and quality assurance.
Although Stone is skeptical about offshoring legal work, "We do recognize that there are different components to every case," he says. For example, even high-stakes litigation involves tedious document review in addition to advanced legal strategizing. While he says clients rarely complain to him about his own hourly rate, "What really galls them is a lawyer who is fresh out of law school charging $500 an hour to do really routine work."
The firm can now perform such work in-house at a much lower price. Other large law practices, such as Dechert and Paul, Weiss, Rifkind, Wharton & Garrison, have also adopted the staff-attorney model.
Before exploring these new options, however, a simple first step for CFOs eager to trim legal costs is to subject legal bills to greater scrutiny. Vaguely categorized charges "for services rendered" will no longer pass muster in most finance departments. ModusLink's Crane says he will examine not only the number of hours billed and the hourly rates more closely, but also the experience (read: cost) of each lawyer working on a project. While Crane says he has no plans to switch law firms any time soon, he admits that, "we'll be squeezing them on fees, as we will be doing with everybody else. There will be more detailed review of the bills, and more upfront discussion about what things are going to cost."
In other words, make your case.
Kate O'Sullivan is a senior writer at CFO.