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Sluggish economy keeps up pressure on GC-law firm relationship

|Written By Andi Balla

Ask any corporate counsel about what their first priority is when dealing with their external law firms, and they are likely to say keeping costs down tops the lists.

It’s a trend confirmed by the latest results of the Association of Corporate Counsel/Serengeti annual survey. However, the survey also sheds light on how the sluggish economic recovery, particularly south of the border, is keeping up the pressure in the relationship between corporate counsel and law firms.

That pressure has led to a higher than ever focus on the need to drive efficiency in legal costs, moving to more value-based policies to reduce overall legal spend, especially with outside firms.

As a result, in-house counsel are now more intent on asking for hard data — metrics, targets, project management tools, and rigorous cost controls, says James Merklinger, ACC’s deputy general counsel and vice president of legal resources.

“These findings are consistent with what we have been hearing from members throughout the year. The successful firms will be the ones that track and present results-oriented data to clients so as to continuously improve accountability, efficiency, and transparency,” he adds.

While the ACC survey did not deal directly with Canada, Canadian Lawyer’s annual corporate counsel survey, which was released today, shows a similar trend in this country. Recent InHouse roundtable discussions also noted that keeping legal spending low is a universal need for businesses.

“I just don’t think law firms can afford to not be more creative in what they’re doing,” said Barbara Silverberg, head of the legal department at Dell Canada Inc. Participating in the fifth annual InHouse/ACC roundtable earlier this year, she stressed that only law firms willing to be flexible about their billing practices would be able to be successful in the new economic realities.

The link between the economy and the relationship between the in-house counsel and their external lawyers is clear when sources like the latest Hildebrandt Baker Robbins Peer Monitor Economic Index data point to a direct link between economic uncertainty and the volume of business forwarded to law firms.

As third-quarter results come out, the PMI report shows demand for law-firm services dropped, and law-firm profitability fell, as cost reductions were unable to fully offset weak demand and rates. The PMI survey monitors law-firm market performance using real-time data drawn from major law firms in the United States and key international markets.

“Mirroring the recent weakness in the overall economy, the law-firm market took a slight step backwards in the third quarter, which is traditionally the slowest period of the year,” says Mark Medice, program director of Hildebrandt.

But even with the continuing sluggish economy, the ACC and in-house counsel believe there is opportunity to make the relationship evolve for the better during the downturn.

“Everyone’s been forced by the economy to look and see how you do business,” says ACC president Fred Krebs. “We started our Value Challenge initiative before the economy went into its downturn. Initially, our thought was that we were going to have to persuade folks to consider these things. Given the way the economy went, we quickly moved with persuasion to [implementation] — looking at different value-billing mechanisms.”

Other key findings from the ACC/Serengeti report include:

• In-house counsel are now asserting themselves into staffing decisions, demanding transparent budgets, and deciding on technology for e-billing and other aspects of the process — the rules of engagement are now very precise and determined in advance of legal work.

• There has been a noticeable shift of legal work from external firms to internal law departments. Thus, outside counsel must not only compete for business with other firms but also with their own clients for legal work. And, clients see this move to in-house as a trend that will continue.

• In terms of fee structures, while the billable hour is still the standard method used by firms, alternative fee arrangements based on value-driven results are on the rise. And, law firms are moving away from the significant hourly rate increases they imposed in the early 2000s.

• Technology that connects corporate clients directly with their law firms is affecting the careful tracking of budgets and case plans, spending and results, leading to greater transparencies and efficiencies in the work performed.