By Anthony Paonita, From Corporate Counsel

GCs can see exactly what they’re paying for. That’s not always a good thing.

Betsy McCoy knew something was wrong. The general counsel received 130 “nicely packaged” bills from one of her regular outside law firms. As she pored through them, she says that every single bill had a mysterious charge of anywhere from $50 to $1,900. When she examined them more closely, she read that the charge was for storing her computer files on the firm’s network.

“I went off the deep end,” says the VP of Miami-based real estate developer The Related Group. “What the hell?” To her amazement, the charges amounted to some $37,000.

She did what any cost-conscious GC would do. She called the firm, who told her that they had to bill her for that item because “it costs us so much to maintain the technology to give clients the best service.” McCoy objected: “I am never going to pay those charges. I’m writing it off, across the board. I consider it part of your overhead.” McCoy says it was a real battle—it took two years—to wipe those charges off the bills, even though her company was one of the firm’s best clients.

This episode may represent an extreme example of client-outside firm disagreements. But in these cost-conscious times, when every corporate legal department (indeed, every corporate department) is under pressure to reduce expenses, episodes like this are playing out across the nation, and probably the globe. Legal departments, armed with the data provided by detailed electronic billing, are examining every line item, and red-lining every questionable expense.

And law firms, burned from the economic downturn of 2008 along with such trends as service outsourcing and the disaggregation of the services they once provided to their clients, are trying to get what they can in the way of fees. “You see the strangest things,” says billing consultant Marci Waterman of Woodbury, New York-based Sterling Analytics Group LLC. “They’re stated with such impunity.”

Welcome to the sometimes unsettled world of client-law firm relations, 2015 edition. In what has become a tradition at Corporate Counsel, we take the annual “Who Represents America’s Biggest Companies” survey as an opportunity to look at facets of the complicated in-house/outside counsel relationship. We’ve looked at trends in the U.S. and abroad; Europeans in some ways are leading the way in alternative billing and other newer ways of doing business. Last year, we took a general look at what irks in-house counsel about their law firm counterparts.

This year, we’re looking at billing, which in some ways has become a complicated game of chicken and gotcha. But, as we’ve found out, it doesn’t have to be like that if both sides agree at the outset how to charge and how to pay. “I pay my firms on retainer,” says Telecom Italia S.p.A. general counsel Antonino Cusimano, whose global practice includes American as well as European firms. “That way, no one is surprised.”

First, the survey. Every year we sift through court papers and regulatory filings to document which law firms represent which Fortune 500 company. It’s a complicated task involving thousands of documents. We took this approach after cold-calling legal departments and asking them to self-report became logistically difficult, and the results proved unreliable.

WHO REPRESENTS AMERICA’S BIGGEST COMPANIES: THE CHART

Relying on documents provides a more predictable baseline, even if it doesn’t always capture the totality of relationships. We can’t account for the advice given verbally (for some odd reason, firms aren’t in the habit of turning over their phone records or lunch expense reports to us). And many firms are just as good, if not better, at keeping their clients out of court as they are at representing them in court. We call this the Skadden paradox.

Now that we’ve settled on a basic approach to the data gathering, we can make certain conclusions. Brand names count. So, for example, Apple Inc. uses Am Law 100 firms such as Gibson, Dunn & Crutcher and O’Melveny & Myers for intellectual property litigation and Jackson Lewis for labor and employment matters. CVS Health uses Foley & Lardner for contracts, and so forth.

We do break some firms out to highlight those most-mentioned firms in a few practice areas. In labor and employment, a crucial practice area for Corporate Counsel readers, Ogletree leads in the number of mentions, followed by Littler Mendelson, Jackson Lewis and Seyfarth Shaw.

Another revelation: There isn’t much movement, especially as law firm panels proliferate. So if you keep past issues around (and last year’s survey is online at CorpCounsel,com), please don’t read much into year-to-year comparisons and which firms rise or fall on the most-mentioned lists. We understand that legal representation is episodic; a matter that might dominate the outside counsel time and budget one year for a company could be resolved by the next year. The main usefulness of these charts is to document the current relationships of America’s largest companies and their firms. And, for firms and legal departments alike, it’s a handy guide to potential conflicts should litigation arise from a dispute. ( For a rundown of our methodology, click here.)

Let’s now turn to the main topic of this article, the billing dance.

Betsy McCoy isn’t the only corporate counsel who’s found herself puzzled by various charges. Brian Ellis, VP and chief counsel of the Medtronic division Spinal & Biologics, says that his department goes through electronic bills manually to find items they won’t pay: “We still have to go through [the bill] and make sure that what we’re being billed for is appropriate.” For example, he says, “we’re still challenged by meeting time and meeting prep time. It’s hard to discern the value of that.”

A recent report in Corporate Counsel affiliate The American Lawyer described, in a somewhat humorous way, charges that clients found objectionable. One firm sent its client a series of bills that, together, resulted in a 42- hour day for one lawyer. A party in a VIP box at Lucas Oil Stadium was billed as deposition preparation. Or—and this has to be the best example—one lawyer billed for time he spent showering, because that’s where he came up with his best ideas.

But those examples are outliers. Framroze Virjee, general counsel of California State University, still retains an outside counsel perspective (he worked in private practice for 30 years). In effect, billing for everything is how outside counsel is used to working. “You assume that you can bill for everything—not just hourly rate, but overtime for secretarial work, meals, copying, faxes, online access services.”

In retrospect, then, McCoy’s surprise upon seeing the charge for the file storage seems almost quaint. But for these and other odd items, you can blame technology. Electronic billing, which uses standard forms to break out charges, has given the legal industry a transparency it never had before. In prehistoric times (say, before the turn of this century), a client typically got a bill stating “Services rendered: $150,000.” Now, not so much. Bills are broken down into discrete services, are coded and flow into corporate databases.

All that means complexity, complain some in-house counsel. They like the transparent detail (we called e-billing the legal department’s “killer app” some years ago), but it comes at a price. Bills have become unwieldy and almost ridiculously granular. Analyzing them can be a full-time job by itself, particularly for smaller departments that don’t have dedicated software and personnel to process the bills. They get detailed breakdowns of every billed item: the lawyers employed; expenses such as travel to court and copying; associates and paralegals; the aforementioned file storage charges—you name it.

Smartphones have made matters worse. Waterman, the billing consultant, blames the overall culture of connectedness, which has blurred the lines between work and not-work, and made it easy for an attorney to document everything. “You really can’t blame attorneys for doing what they’re supposed to do,” she says. “They bill.”

McCoy has a suggestion: “I’d appreciate it if a lawyer really looked at a bill before sending it to me and determine what is real. I’m seeing less editing, just a random collection of entries.”

Virjee, too, is ambivalent about e-billing. He says that while it’s provided a lot more detail, whether that’s helpful depends on the matter. “If it’s a simple case,” he says, “then it’s helpful for me to see exactly what the attorney is doing and what the paralegal is doing so I can see if they’re appropriately staffing the matter. But if it’s a bigger matter, such as a class action, it can also be overkill, because you can miss things.”

It doesn’t have to be so complicated. Bigger departments with a big staff and IT resources have automated ways to sift through bills—and procedures that front-load the discussion over line items.

At American International Group Inc. (AIG), for example, Aaron Katzel presides over legal operations. A lawyer himself, Katzel hasn’t practiced law in his current capacity. But as a trained lawyer, he acts as the big department’s COO, and has helped to develop systems to screen bills by outside counsel.

Katzel concedes that it’s been tough for companies to move away from billable hours and toward matter-based bills. He doesn’t blame firms, though: “It’s up to the lawyers managing the matter to have good oversight.”

AIG oversees matters from the start. The legal department has a panel of firms and establishes base rates. Then, when bills come in, the company’s computer systems do an automated review. Some charges, which are specified on the rules of engagement, get kicked out automatically. Or some will exceed the allowable limit for a certain service. Those bills get analyzed in the department, and either get a pass or are kicked back to the firm.

What items get red-lined? “The cost of being in the business of providing legal services: maintaining the firm’s computer files, administrative services, paralegal services. We don’t pay for these. The first year out of law school? We don’t pay for that.”

This all sounds good, but what if the firm pushes back? “There’s always a certain amount that gets kicked out,” says Katzel. “Firms understand that. And firms have a lot of clients,” he says, generously. “They sometimes forget what a certain company’s standards are.”

In the end, though, as in many facets of the client/outside firm relationship, communication is crucial, especially at the outset of the engagement. And that means being up-front and having rules that govern what’s permissible and what generates an irate phone call or email.

Ivan Fong, general counsel of 3M, in St. Paul, MN, on April 22, 2014.

3M, for example, has guidelines for its panel of law firms. When the company retains a firm, it sends the firm a copy, so that the lawyers know precisely what GC Ivan Fong’s legal department will and won’t pay for. Fong (left) cautions that the guidelines are subject to revision as fewer and fewer of its matters are billed on an hourly basis. A sampler of what 3M legal won’t pay for: intra-office conferences, or conferences that “include an excessive number of firm timekeepers.” Also: legal research; clerical tasks such as printing, copying, filing or mailing; time billed in excess of 10 hours in a single day on a 3M matter, unless during a trial.

Bristol-Myers Squibb Co. also has guidelines in place. The legal department has a panel of firms, says Laura Caponi, director of legal operations, “so no one really wants to do a bad job.” The key for Bristol-Myers, she adds, is communication, followed by close data-gathering. “When firms start working with us,” she says, they have to acknowledge that they read and understand our policies.”

To ensure adherence to the guidelines, the department “heat maps” law firms’ billing patterns. It looks at consistent and inconsistent behavior, and does analytics about how firms staff matters—for example, how many associates they use.

But even with the high level of automation and data collection, Caponi says, “an inside attorney always needs to keep a watchful eye to see if something makes sense.”

In the end, though, the whole issue of retaining and paying for counsel comes down to building trust. No one has an interest in wild billing and stiffing outside firms. Telecom Italia’s Cusimano says that he works closely with a relatively small number of firms, and does not pay by the hour. They’re on retainer; if a matter is complicated and requires more resources, they’ll call him, and they’ll work it out.

As Caponi says: “Working with trusted partners helps. We would hope that they’d be looking out for our legal interests. They’re not always the enemy.”

IMAGE: Betsy McCoy thinks that electronic bills are way too complicated. She’d like to see some editing before sending.

For more on this story go to: http://www.corpcounsel.com/id=1202737471386/Who-Reps-Americas-Biggest-Companies-You-Want-Me-To-Pay-For-What#ixzz3mNwiB41z