Reduced legal fees for large corporate clients

this is the legal fees article that was discussed in yesterday's forum:


July 6 (Bloomberg) -- Peter Kreindler, the top lawyer at Honeywell International Inc., likes to buy his briefs in bulk.

Kreindler said he hopes to trim work from hundreds of law firms in Europe this year to gain volume discounts. In the U.S., he has already cut the number of firms he uses for litigation, employment and intellectual property issues to about 20 from 60.

``The fewer firms you use, the more volume you can give them and consequently the bigger discounts you get,'' Kreindler, 62, the general counsel at Morris Township, New Jersey-based Honeywell, said in a telephone interview. ``That's what it's all about.''

As companies spend millions to comply with the Sarbanes- Oxley law and firms raise lawyer salaries by about 10 percent this year, corporate counsel are looking to slash legal budgets. Companies such as General Electric Co., Schering-Plough Corp. and Shell Oil Co. have rolled out similar programs to trim their roster of lawyers.

Corporations spent an average of 0.63 percent of revenue on legal expenses in 2005, compared with 0.52 percent in 2003, according to the General Counsel Roundtable, a Washington research group.

More companies are trying to limit legal work to a handful of firms to gain volume discounts, said Daniel DiLucchio Jr., a consultant at Altman Weil Inc. in Newtown Square, Pennsylvania.

``It's easier to manage fewer firms, you can establish a better relationship, and you leverage your purchasing power,'' DiLucchio said.

`A Killer'

While corporate legal departments reap savings, law firms can expect a cut in their profitability. Volume discounts shave about as much as 15 percent off hourly rates of partners at large law firms that charge up to $1,000 an hour, said Peter Zeughauser, a law firm consultant and former chairman of what's now known as the Association of Corporate Counsel.

``It's a killer'' to a firm's profitability, said Zeughauser, who is based in Newport Beach, California.

Cisco Systems Inc., the world's biggest maker of computer- networking equipment, brokered flat-fee deals with Philadelphia- based Morgan, Lewis & Bockius; Mountain View, California-based Fenwick & West; and Houston-based Baker Botts.

Cisco

The arrangements helped Cisco cut legal expenses from 0.54 percent of revenue in 2003 to 0.39 percent in 2007, General Counsel Mark Chandler said. That means that while Cisco's revenue is expected to rise 85 percent to $34.9 billion over that period, based on a Bloomberg survey of analysts, legal costs would have only increased 33 percent to about $136 million.

``We are not trying to affect the profitability of the firms, we are trying to change the way work gets done,'' Chandler said. Firms are forced to improve technology or use support staff for some assignments, he said.

Anton Valukas, a partner at Chicago's Jenner & Block, which handles commercial litigation for Honeywell, said bonuses the firm reaped when it won cases helped offset the discounts.

``We provide value to Honeywell,'' said Peter Sacripanti, a partner in the New York office of 1,061-lawyer McDermott Will & Emery, which also handles commercial litigation for Honeywell. Sacripanti declined to discuss financial details.

In Europe, Peter Wayte, a partner in the London office of DLA Piper UK LLP, said his firm has entered into such agreements with clients on occasion for a decade.

``It is a relatively complex arrangement in order that both sides feel they are getting a fair deal,'' Wayte said. ``We don't want to work at a loss or an unacceptable profit, and there wouldn't be much point for them because it wouldn't last very long.''

Wilmington, Delaware-based DuPont Co., the third-largest U.S. chemical maker, pioneered the model of cutting firms and extracting discounts in the mid 1990s, when it pared its list of law firms from 450 to 34. DuPont saved $13.2 million in the first three years of the program, spokesman Anthony Farina said.

Saved `Millions'

Schering-Plough General Counsel Thomas Sabatino Jr. said companies are increasingly paring their law firms, first to gain cost savings and then to compel firms to become more familiar with their business.

Sabatino, 48, has twice cut lawyer lists, first as general counsel of Baxter International Inc. and more recently at Kenilworth, New Jersey-based Schering-Plough, which last year selected seven law firms to handle about 70 percent of the company's work.

Schering-Plough won discounts from the firms as well as promises they wouldn't raise hourly rates for two years. Sabatino also set up arrangements to handle some issues, such as due diligence for transactional work, on a fixed-fee basis, he said.

Schering has saved ``millions'' since paring the list, Sabatino said.

Houston-based Shell, the U.S. unit of Royal Dutch Shell Plc, Europe's largest oil company, used more than 400 law firms before paring down in 2003. Now it sends the majority of its work to 28 ``strategic'' partners.

Discounts on hourly rates are ``a key part'' of the arrangements, said William Lowrey, Shell's general counsel.

hmmm...how many have that kind of bargaining power?