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 By Larry Bodine, a Web and Marketing Consultant based in Glen Ellyn, IL. He has advised law firms on marketing strategy, individual lawyer marketing plans and Web site plans. He can be reached at www.LarryBodine.com and 630.942.0977.
Contrary to the common perception, law firms are successfully resisting efforts by corporate clients to cut law firm costs and change billing methods. This is true despite all the “convergence” plans, RFPs and moves to impose uniform billing codes, according to a new Association of Corporate Counsel/Serengeti survey of corporate law departments.
The findings are surprising, considering how often in-house lawyers describe how they’ve got law firms on a leash, by sending less legal work outside, cutting the number of law firms they work with, and imposing all manner of cost-cutting programs on law firms.
Consider the following points from the 33-page Executive Summary of the 2003 ACCA/Serengeti Managing Outside Counsel Survey Report:
- The billable hour is solidly entrenched. “The vast majority of work done by outside counsel is still billed at either standard or discounted hourly rates, both of which have increased during the past year,” the report states. 80% of in-house counsel still use standard hourly rates for outside legal work. Few law firms offer alternative rates and resist them when they are proposed.
- The Uniform Task-Based management system (“UTMBS”) codes have flopped. Proposed in the 1990s, corporations wanted law firms to use a code for each task and activity, so that invoices could be easily compared. But “enthusiasm quickly faded” the report says, because law firms resisted. As a result only 4.4% of in-house counsel require use of UTBMS codes today.
- Spending on outside law firms is growing despite all the corporate cost-cutting measures, according to the report.
- Corporations spend way more on outside law firms than they do on their own in-house law departments by a ratio of 1.6 to 1. For example, median spending on outside counsel increased to $1.2 million in 2002 , according to the report. At the same time, spending on in-house law departments was only $750,000.
- In-house law departments are tiny and overworked: 75% of in-house counsel are in law departments with five or fewer attorneys. One of the top concerns of in house counsel was “too much work for too little resources/legal budget issues,” according to the report.
 These tiny law departments are trying to manage numerous law firms with thousands of lawyers. The median number of law firms used in the U.S. by law departments was a median of 10 firms in 2002, according to the report. These firms include well-financed, full-service, multinational giants that dwarf the law departments.
- Law firms are successfully resisting the plethora of cost-cutting measures thrown at them by corporate clients. A good illustration is the fact that RFPs are used by a minority of in-house counsel – only 23.3% of in-house counsel issued an RFP in 2002. “One reason that this practice is not gaining momentum may be the lack of law firm responses to the RFPs,” the report said. “There were on average less than two responses (1.85) for each RFP issued.” RFPs are extremely burdensome to law firms, which often suspect that they are a pretense that allows the company’s favored law firm to get the work, or else are a guise to find out what law firm billing rates are.
Survey methodology
ACCA (now renamed ACC) is the in-house bar association, with 14,000 members in 40 countries representing 6,500 corporations. Serengeti provides Serengeti Tracker, an Internet-based technology for law departments to manage their legal work worldwide. The written survey questionnaire had 67 questions and was mailed in May 2003 to 9,300 ACC members; in addition ACC e-mailed the questionnaire to more than 5,000 in-house counsel. The survey includes responses from in-house counsel at 266 companies in 20 industries. Survey responses were accepted from all in-house counsel, regardless of rank.
 The third annual survey “is a practical way for in-house counsel to share experiences,” said Frederick Krebs, president of ACC. “Rather than relying on ‘conventional wisdom’ or anecdotal evidence, corporate counsel can now review hard data regarding what has worked and what hasn’t worked,” said Rob Thomas, Vice-President of Strategic Development for Serengeti and author of the report. The full 200-page report is available on CD and can be purchased for $750 from ACC Online from Serengeti at www.SerengetiLaw.com ($500 for ACC members, $650 for LMA members).
Cost controls failing
Despite the resistance, law departments are relentlessly taking steps to control outside legal fees and say they are sending less work to law firms. Financial controls include budgets for all types of matters, with 83% of in-house counsel requiring budgets for at least some of their matters, especially litigation. Other common methods to control outside legal spending were discounted or alternative fees (36.3%), billing guidelines and spending rules (32.2%), evaluations of outside counsel (22.6%) and in-house fee/bill managers (21.1%).
In-house counsel are also trying to micromanage the relationship in other ways, such as requiring law firms to share work product and to set a minimum number of years of experience for associates working on company matters.
But the cost controls are failing to cut overall legal spending. As mentioned, UTBMS codes were a flop, RFPs are used by a minority of law departments, and convergence (reducing the number of law firms) is slowing. As mentioned earlier, median spending on outside counsel was $1.2 million per company in 2002, with a range of:
· $250,000 by small companies (annual worldwide revenues of $100 million or less)
· $988,000 by medium companies (annual revenues of $100 million to $1 billion)
· $5.35 million by large companies (more than $1 billion annual revenues
According to the report, “litigation is by far the largest area of outside counsel expense, comprising a median of 35% of outside legal spending.” Employment/labor, intellectual property/patent, commercial transactions, securities/finance and mergers/acquisitions each involve on average approximately 10% of outside legal spending.
Gold mine of marketing intelligence
The report is a gold mine of marketing intelligence. For example, it turns out that 60.5% of law departments do not have a written list of approved outside counsel. This is contrary to the common perception, and means that the chance to land corporate legal work is more possible than many marketers believe. “Such a list is far more common at larger companies than at smaller companies,” the report says. Those companies that do have such a list have a median number of 20 law firms on it.
Law firms seeking to displace entrenched law firms can use the report to find ways to stop resisting the corporate clients and give the customers what they want, which includes:
- E-billing
- Extranets where all pleadings and filings are stored, and can be exchanged and worked on
- Proposals to cut legal costs with alternative fee structures besides simply reducing hourly rates
- Proposals that conform exactly to RFPs
- Willingness to share work product with other law firms of the client
- Keeping in-house counsel apprised of their cases and changes in the law
- Making the law department look good to company executives and the board of directors
- Solving problems more creatively
- Responding to in-house counsel more quickly
- Understanding the client's business better
Finding law firms
“When finding new outside counsel, respondents rely most heavily upon referrals from trusted individuals, both inside and outside of their companies,” including personal networks, the report said. The five most common ways of locating new outside counsel are from:
- The company’s current outside counsel (81.5%)
- In-house counsel at other companies (52.2%)
- Other in-house counsel at their own company (47.4%)
- A company approved outside counsel list (40.4%)
- Other employees at their own company (26.3%)
There is a continuing decline in the use of printed directories, according to the report, and for the first time, online directories surpassed the printed directories as a method to find law firms. Searches of law firm web sites “remains roughly double the use of unsolicited law firm marketing materials.”
The five more important criteria used to select outside counsel are:
- Past relationship (75.2%)
- Reputation of individual lawyers (72.2%)
- Lawyer expertise in a specific area (69.7%)
- Firm expertise in a specific area (60%)
- Reputation of the law firm (53.3%)
Technology to improve the efficiency of the law department and work with outside counsel was identified as one of the top issues facing law departments. On the technology front, “electronic bill review is experiencing the greatest growth, and is at the top of the greatest number of law department lists to acquire,” the report says.
Firing law firms
There is a lot of turnover of law firms working for corporations, according to the report. During 2002, “just under half of in-house counsel (45.6%) terminated relationships with at least some of their law firms,” it says. This turnover creates marketing opportunities for law firms.
The three predominant reasons cited by in-house counsel for firing their law firms were the same as the prior year:
- Lack of responsiveness
- Poor quality work product/results
- High fees/costs
The top suggestion, listed by 85.6% of in-house counsel, is that law firms be more concerned with costs. The other leading suggested improvements were: be more practical, solve problems more creatively, respond more quickly and understand the client’s business better.
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