Companies Squeeze Legal Fees Even the Most Elite Law Firms That Serve Fortune 500 Companies Are Being Forced to Become More Efficient Series: BUSINESS GOES TO COURT. to Cut Costs and High Fees, Companies Aggressively Manage Their Legal Work. Part 5 of a 5-Part Series. First of 3 Articles Appearing Today

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WHETHER they got mad or just determined, company lawyers decided a few years ago that they weren't going to take it any more.

Caught between rising legal expenses and cost-cutting demands by senior management, many in-house corporate lawyers began challenging the fees charged by outside attorneys. These general counsel not only have sparked a revolution in how legal services to business are billed and paid for, but, more broadly, their assertiveness could effect long-term changes in how those services are performed.

"Efficiency," a production-line word that seemed as out of place in many law firms as blue collars, has joined the legal lexicon.

Even the most elite law firms that serve Fortune 500 America - firms long accustomed to receiving millions in fees from blue-chip clients with few questions asked - have been hit by companies' insistence on economical practices. "There isn't a law firm in the United States that hasn't had discussions with clients about value billing," says a partner at one of the most prestigious law firms in Chicago, who asked that his name and the firm's name not be used.

"Value billing" is an umbrella term for a wide range of new or dusted-off fee arrangements between outside lawyers and, generally, substantial corporate clients. "General counsel at major companies are driving the effort, and the impact is mainly on large and mid-size law firms," says James Marcellino, a partner at McDermott, Will & Emery in Boston and president of the Boston Bar Association. "But within that segment of the legal market, value billing is a hot topic of conversation." Fees gain new visibility

Indeed. At the three-day annual meeting of the American Corporate Counsel Association in Washington last November, an entire afternoon was devoted to a discussion among the member in-house lawyers about fee arrangements with outside attorneys.

Business's concern over steeply climbing legal fees isn't new. At least 15 years ago, many corporations began to bulk up their legal departments in order to perform routine (and, in some cases, even more-specialized) legal work inside. But most of the achievable savings have been realized, and the trend has leveled off. In fact, a nascent counter-trend is perceptible, according to D. Broward Craig, a legal consultant in New York, who says some downsizing companies are starting to shrink legal staffs and "outsource" more work.

What is new is the willingness of company counsel to challenge the bills they receive from outside lawyers. In part this stems from the fact that corporate legal departments today are filled with law-firm alums who know the pressure on outside lawyers to rack up "billable" - but sometimes inefficient or unnecessary - hours of work.

Companies and their in-house lawyers are taking their revolt a step further, however. In questioning the billable hour itself, they are raising fundamental issues about value and productivity in the delivery of legal services.

Legal scholars Robert Litan and Steven Salop, reflecting much current thinking, wrote in an article in the Jan.-Feb. issue of the journal Judicature that "hourly fees provide ... incentives for attorneys to run up bills at their client's expense." The authors propose a combination of closer monitoring of hourly charges and alternative fee arrangements to eliminate those incentives.

Many general counsel are adopting such practices. Some companies, notably insurance giants like Liberty Mutual in Boston (see accompanying story) and Aetna Life & Casualty Company in Hartford, Conn., that have large litigation caseloads handled by hundreds of outside lawyers, have developed extensive legal-cost-management programs.

Virtually across the board, companies are requiring detailed bills from outside lawyers: Gone are the days when law firms could submit five- or six-figure invoices "for services rendered. …