Microsoft Corp. is taking another look at how it works with outside law firms, placing a stronger focus on alternative fee arrangements, retainer payments, diversity and developing relationships with outside counsel that go beyond the billable hour.

The company's legal department began using the new approach, dubbed the Strategic Partner Program, July 1 and has named 13 partner law firms so far, including Arent Fox, Covington & Burling, Davis Wright Tremaine, Fish & Richardson and Greenberg Traurig.

David Howard, corporate vice president and deputy general counsel of litigation and competition law and compliance at Microsoft, outlined the new program in a recent LinkedIn post. He told Corporate Counsel in an interview that the Strategic Partner Program is focused on setting up "deeper relationships" with the company's outside counsel.

"When I talk about deeper relationships, it really has to do with firms and the lawyers at those firms becoming more strategically involved with the legal issues of the company, and not just on a transactional basis," Howard said. "We thought of different ways to accomplish that, and our program reflects a number of those elements." 

One obvious step in ridding an in-house and outside counsel relationship of its "transactional" nature, Howard said, is to change the transaction process. That means relying more on retainer-type payments to outside counsel and attempting to increase the share of matters handled using alternative fee arrangements. Right now, Howard said, between 55 and 60 percent of Microsoft's outside counsel matters are dealt with by outside counsel using non-hourly, alternative fee structures. The Seattle-based company hopes to bump that number up to a very robust 90 percent in two years.

Howard said that to get to that higher number, Microsoft will rely on spreading retainer arrangements—already used in several categories of Microsoft's outside legal work—to other types of work, such as regulatory matters.

"I think about the area of regulatory advice that we regularly need. We probably spend a fair amount of money on that advice and in some cases we hire more than one law firm, and we probably do it on an hourly basis for small- and medium-sized projects here and there," Howard said. "But there may be an opportunity in a given area to take all the regulatory advice that involves predictable work, with small- and medium-sized projects, and we pick one firm to do it and pay them on a monthly basis, and do it in a way that encourages that firm not only to provide us that advice when needed but also [provide] 'value-added services' such as making sure we're on top of developments in the area."

Howard said the company already has similar setups with outside firms for patent prosecution, immigration and litigation work.

Despite the focus on moving away from the billable hour, Howard said the model still has a place in the legal market. According to the 2017 Report on the State of the Legal Market by Thomson Reuters, while billable hours worked have decreased in the past 10 years, they have far from disappeared. The average number of billable hours worked per month in 2007 was 134. In 2016, it was 122.

"It's fair to say we've seen more of a trend away from the billable hour in the course of the last few years, and it wouldn't surprise me if that trend continues," Howard said. "But it's hard to say that the billable hour is dead or is going to be dead any time soon."

According to Howard, Microsoft's new program isn't just about cost. Instead, controlling cost allows other variables to be highlighted. For example, Howard said, it's difficult to compare two competing firms when they can price themselves using hourly rates—because hourly rate isn't synonymous with overall cost. There are matters of efficiency (which firm gets the work done more quickly?), staffing (which firm has a leaner team?) and strategy (sometimes the goal is an early dismissal or settlement, not a trial victory that takes years to achieve). So, by controlling cost—and pairing it with competition—Howard said Microsoft can get a better "apples-to-apples comparison" of firms' work.

Another variable that gets the spotlight in Microsoft's new partner program is outside counsel diversity—a topic that the company's legal department has taken a close look at before—retooling its diversity program a year and a half ago. As part of the new Strategic Partner Program, Microsoft is setting up "affinity networks" for its outside counsel. Those networks will put women and ethnically and racially diverse lawyers who represent Microsoft in touch with one another. It's an idea that came from DuPont, Howard said.

He said Microsoft has also had success in letting firms jockey against one another to drive up diverse representation amongst leadership ranks. Microsoft simply demands that a first or second practice chair be diverse, and the firms respond. According to Howard's LinkedIn post, "Over the last two fiscal years, we've had a diverse first or second chair in 35 of the 38 matters large enough to be subject to bidding."