Rate Hikes

General counsel all over the world are steeling themselves for what seemingly has become an annual rite at the beginning of every year: the announcement of law firm billing rate increases. We know they are coming and believe they will be substantial. At the outset of the fall recruiting season, law firms announced hefty increases in starting salaries for entering associates. We also saw legal publications boast record utilization rates, margins and profits-per-partner for the major firms. The rate increases cannot be far behind.

As general counsel, we are all under constant pressure to control costs, while maintaining and improving the quality of the legal services we deliver. Doing so during a time of major profit growth by our outside counsel is quite a challenge.

With that in mind, I offer the following strategies that have been successful for Chevron in containing costs during this period of billing rate escalation:

Scrutinize costs as closely as fees. We have adopted a set of universal outside counsel guidelines specifying our policies regarding costs and disbursements. Billing rules based upon those guidelines are built into our e-billing system, such that the system flags variances and alerts our managing counsel. Moreover we call upon our relationship managers to review all significant cost items to ensure our providers are being efficient and aren't billing us for ordinary overhead expenses. One key area receiving increased scrutiny is document discovery, which now involves more contractors and specialty vendors.

Manage outside counsel staffing. We insist upon pre-approval of all staffing decisions with respect to our matters and enforce that through rigorous review of law firm bills. We ask our firms to staff leanly, and we are not shy about speaking up when we see inefficiency. In addition, we believe law firms should internalize training expenses, and we do not want to see young lawyers learning by observation at our expense. We also are constantly mindful of costs in deciding what work should be sent outside and what we can do internally.

Consider in-sourcing. Each year we use our financial information system to evaluate the work individual outside lawyers are performing. Whenever we see that an individual outside lawyer is consistently devoting a substantial portion of his or her yearly time to our work, we consider that work to be a candidate for in-sourcing.

Rely more on local, regional and specialty firms. High billing rates at some major international law firms are a direct result of the huge machines those firms must feed. Expansion into foreign markets, development of marketing materials and hiring work-life balance consultants all cost money that has to be recovered in client billings. There are, however, many talented and fully capable lawyers practicing at regionally focused firms and specialty boutiques that don't have as much overhead.

Consider split-engagements. In some mission-critical matters, it's essential that we have the best outside counsel money can buy. But it's not always necessary to take the full law firm package that comes along with that premier lawyer. In some instances, we might hire a particular firm to handle trial work while pairing that expert trial team with a solid, but lower cost, regional firm to handle the routine matters associated with the case.

At Chevron, we have worked very hard to build effective partnerships with outside counsel, and we want our firms to be prosperous. The current market environment is very favorable to law firms and rates are increasing far faster than we as clients would like to see. It is simple economics that demand curves slope downward and rate increases cause demand to moderate until pricing discipline is regained. That is exactly what we are seeing in the legal market today, as companies try to manage their demand for law firm services in direct response to rapidly escalating billing rates.

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Charles A. James is vice president and general counsel for Chevron Corp. He was formerly assistant AG in charge of the Antitrust Division at the DOJ.

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