Corporate Counsel Facing Budget Cuts and Need to Address Outside Law Firm Costs - In House
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Corporate Counsel Facing Budget Cuts and Need to Address Outside Law Firm Costs

General Counsel Pressuring Firms Amid Recession

The following article was written by Brett Tarr, general counsel for eMag Solutions, based in Atlanta, GA:

Times are tough for everyone. The economy continues to falter, and both corporate legal departments and outside counsel are facing unprecedented pressures. Law firms are downsizing and corporate legal department budgets are being slashed. In the midst of this economic crunch,   general counsel have increased pressure on their outside law firms, demanding lower fees, predictable bills and improved service. At the same time, general counsel are wondering what law firm cost-cutting measures will mean to corporate clients in terms of quality of service and how much in the way of cost savings will be passed on to them.

Of the numerous budget issues facing general counsel, the spiraling cost of outside counsel fees and their lack of predictability are the two biggest worries. According to a survey that Altman Weil conducted in November 2008 amongst 115 general counsel, almost three-quarters of those polled reported that they are implementing 2009 budget cuts ranging anywhere from 6 percent up to 35 percent.  How, then, do law departments manage growing legal and e-discovery issues with a shrinking budget and uncertain outside legal costs? 

Corporate law departments can make superficial in-house staff cuts, but in truth, these departments will not come close to 35 percent budget cuts without digging deeper, and this will necessarily mean digging into outside counsel.  In fact, the Altman Weil study reported that the number one target for general counsel spending cuts is outside counsel. More than half intend to decrease the use of outside lawyers in 2009.

The cutting is already here. One general counsel of a large company recently achieved huge savings nearly overnight by firing its large national law firms and switching to smaller regional firms. The change provided the company with top-rate lawyers at a lower cost structure. The company replaced $700-an-hour lawyers with $325- to $450-per-hour counsel.

Some law firms are responding by trying to keep pace with smaller firms. One large law firm pledged to a corporate client that it would match any discounted hourly fees a competing firm might propose.  Companies are demanding ever more discounted hourly rates.

Firms that want to continue representing large companies are expected to make concessions. These corporations expect more value, better representation, and better performance in terms of success.

 Recession Offers Law Firms a Chance to Refocus on Client Needs

There has been plenty of cost cutting at law firms of late, and not surprisingly, in-house lawyers are asking where the savings will go. General Counsel are hoping firms are scaling back in intelligent ways that will allow these firms to be more competitive.  In-house lawyers are certainly expecting that some of the cost savings will filter down to corporate clients and not just into the pockets of firm partners.

Many corporate players believe the legal services market is overdue for a shake up, and the current recession hopefully should provide the impetus for law firms to rededicate themselves to addressing the needs of clients. 

It only makes sense that law firm priorities will need to refocus on client satisfaction, as the legal market has become increasingly competitive in the past decade.  It is no longer an accepted fact that legal fees are in direct proportion to value for the money. 

Law firms are finding themselves stuck in a strange new competitive world.  Law firms face hard times not only because of slashed fee demands but also because new competition is depressing prices.  Overseas firms are trying to pick off corporate clients, offering hourly rates 30 percent to 40 percent cheaper than what large U.S. firms charge. Additionally, corporations are sophisticated about procurement, but not in the area of legal services. That is changing, and the law firms that can go with that change will succeed. 

Law firms that think they are accommodating the market's changes merely by discounting hourly rates may be missing the point, though.  Ultimately, the issue is not one of price, but rather one of offering value.

Similarly, some general counsel think that asking for a discount is all they need to do to manage their legal expenses. But, in truth, a lawyer's hourly rate is an artificial number that serves as a jumping off point to negotiate service levels and timelines. In reality, offering an hourly discount does not control hours or expenditures. Ultimately, there is no control to prevent the final bill from coming out the same or even larger, even after rate reductions.

Law firm downsizing represents a critical decision point, and may lead to increasing automation or even outsourcing of processes to control costs and maximize efficiencies.  Law firms have traditionally been run by lawyers, and in the current economy, it has become increasingly clear that the competitive business of law needs to be run with a business-centric focus. 

Traditionally, as demand for U.S. law firms' services increased, so did their average profitability. Those days are gone. Economic crisis is forcing law firms, few of which are built on a true business model, to become market driven.

Corporate clients are expecting increased communication from outside law firms, and many organizations are starting to develop sophisticated matrices that measure service along a range of values, including communication, after-hours availability, frequency of reporting, and other less traditional measures of legal value.  In a world where law firm life often starts at 10:00 a.m., it is becoming increasingly common for corporate clients to expect daily 9:00 a.m. conference calls with members of the team providing detailed updates.

 In many cases, firms are used to the same old way of doing business, and most do not even realize how expensive they are in relation to their competitors. By giving these firms an insight into that, it will become easier to have difficult conversations down the line.

About the Author

Brett Tarr serves as general counsel for eMag Solutions, based in Atlanta, GA.  Before joining eMag, Brett worked as a practicing attorney at King & Spalding LLP, and has held chief operating officer, legal counsel, and senior marketing executive positions for several corporations over the past 10 years.  Brett has published articles on multiple topics involving electronic discovery, legal preparedness, and data security, among others.  Brett graduated Phi Beta Kappa from University of California at Los Angeles, additionally he earned his law degree from Duke University School of Law and also holds an MBA in Marketing and Management from Georgia State University.  Mr. Tarr can be reached at btarr@emagsolutions.com.