National versus regional in the American fees battle

If cost-cutting is the order of the day in the legal world, many US general counsel have not heard it. Instead they say they are consolidating business to fewer law firms, requiring firms to budget on projects, focusing on stronger relationships with those firms and spending their legal dollars more wisely than in past years.

And while total outside legal expenditures dropped just 3.12 per cent overall, US companies paid nearly 8 per cent more for outside litigation services.

These trends suggest that pervasive cost cutting is not at the top of the general counsel's agenda, but a result of spending legal dollars more wisely, according to Kelly Fox, editor of the Illinois Times, a sponsor of the sixth annual survey of general counsel. Sent to some 5,000 general counsel at companies of all sizes in the US, the survey was conducted in conjunction with Arthur Andersen LLP. It was released in late 1995 and reveals legal expenditures for 1994.

Fox said: “The common perception among private law firms is that US companies are bringing more of their legal work in-house. However, the reality is that general counsel are choosing lawyers with greater purpose as well as shifting legal work from larger law firms to smaller, regional firms.” She added that the small decline in outside expenditures indicated a mature legal marketplace which fostered increased competitiveness.

General counsel report that although they send their work to an average of 12 firms of different sizes, they prefer to give legal work to local law firms. Of the firms used, approximately 45 per cent are local.

Large, national firms received 23 per cent of the work of US corporations. When asked about their prospects for further reducing the number of law firms they used, 69 per cent of general counsel surveyed said they planned to maintain the same number of relationships.

General counsel reported that total average fees spent for outside lawyers in 1994 was US$2,740,764, or about 1.5 per cent of gross revenues. This is slightly down from the US$2,817,128 spent in 1993.

But in the area of litigation costs, general counsel reported that average litigation costs for the year were US$1,639,514, up nearly 8 per cent on the year before. Of those costs, almost 40 per cent of every litigation dollar, or US$773,197, was spent on discovery, but was 18 per cent less than fees paid for discovery during the prior year.

“This is an indication of in-house managers exerting more control over discovery, eliminating the American 'leave no stone unturned' philosophy and perhaps the wise decision to have in-house lawyers handle such matters,” said Fox.

One reality of law practice remains that general counsel continue to hire individual lawyers for their expertise rather than selecting relationships based on a law firm. Nearly 33 per cent of general counsel said they chose an individual lawyer based on a belief that the lawyer would deliver quality service (29 per cent) over other reasons such as specialisation (19 per cent), history with a law firm (8.8 per cent), geographic location (7 per cent), fee structure (1.5 per cent), internal politics (1.2 per cent) or referral (0.4 per cent).

But if relationships bring business in the door, most law firms are lax to maintain good communication with clients. Only 27 per cent of general counsel report that their outside legal counsel regularly seek feedback about how well needs are being met.

Fox said: “If US lawyers are looking for better ways to serve their clients, the first step would be to communicate with them. Year after year, this lack of communication continues to baffle me.”

But one way firms are fostering better client relationships is by working with general counsel to help control legal costs. The most popular method of cost control (64 per cent) occurs when outside lawyers help negotiate the number of legal professionals involved in a matter.