Cisco saving big bucks by putting lawyers on fixed fees

Silicon Valley is a large consumer of legal services and those services are wildly expensive, so beancounters across the Valley must have perked up at a Wall Street Journal article about Cisco's efforts to stem the cost of their lawyers.

Cisco has largely deep-sixed the billable hour and is paying its two major outside law firms on a fixed-fee basis.

"Typically, large numbers of associates go off and write memos that get tucked into the lower right-hand side of someone's drawer," says Gordon Davidson, chairman of Fenwick & West LLP of Mountain View, Calif., the firm that represented Cisco Systems in its WebEx purchase. Using a monthly fixed-fee arrangement, he says, Fenwick lawyers have cut down "on stuff that we were doing that was interesting, but not that useful."

Cisco pays for about 75% of its $125 million legal bills on a fixed-fee basis. And no wonder. GC Mark Chandler (that's him on the left testifying before Congress about collaboration with China) estimates he has trimmed his outside legal bill by 25%. One key reason may be found in a recent study by law professor Bill Ross, which found that two-thirds of lawyers said they had "specific knowledge" of bill padding. More than half said they had performed unnecessary tasks in order to bump up their invoices, the WSJ Law Blog reports.

So bypassing the billable hour can remove huge temptation by lawyers to bilk their clients. With $125 million legal budget, how is Cisco going to notice a certain memo really took 10 hours not 14?

On the other hand, with the size of its budget, companies like Cisco can make even powerhouse lawyers like Fenwick and West (which does Cisco's corporate work) pay attention. And Fenwick is willing to play along because new technology makes estimating the amount of work involved much more predictable.

New tools are helping both sides estimate costs up front, giving general counsels more confidence to move ahead with arrangements like fixed fees and "value-based billing," in which the payment a firm gets depends in part on the results it achieves.

The boosts have mostly come from off-the-shelf electronic-billing and "matter-management" software programs. Over time, as data accumulate, general counsels' offices are able to organize cost information on everything from a group of 20 patent filings to a large single task like reviewing three million document pages.

Cisco's experience with Morgan Lewis, which handles the company's litigation, shows that it will be quite a while before the legal industry is happy about this new arrangement - ML figured they made about 15% than they would at billable rates - but that ultimately this is where lawyers need to go:

Ms. McKeon and Mr. Davidson at Fenwick say the Cisco arrangements are now profitable, though not hugely so. "You don't want your law firm making a huge profit," says Ms. McKeon, "but you don't want your law firm taking a hit either. They're not going to give you the same level of service."