Budgeting trend sweeps world of contracting with law firms.

Wayne Lovett knows that a routine employment claim shouldn't cost more than $10,000 in legal fees. It's just trying to convince the lawyers of that.

"When you start saying, 'Cut down the hours and the fees to the paralegals,' at the end of the day that type of budgeting is too easy to get around because they can just increase the number of hours or the hourly rate," said Lovett, executive vice president and general counsel of Mercury Air Group Inc. "I have found it more effective to say, 'This case is worth X number of dollars. Figure it out, guys.'"

In-house lawyers are increasingly asking the law firms they hire to submit estimated budgets so they can reduce the costs of legal work, particularly when defending themselves against lawsuits.

For years, companies have asked for budgets from their lawyers for business transactions and more predictable types of legal work. But with increased pressures to report higher earnings, in-house lawyers from publicly held companies must now keep better track of how much they spend in lawsuits, and they want outside law firms to do the same.

"It's one of the top five trends in the country affecting law firms," said Blane Prescott, a partner at Hildebrandt International, a legal consulting firm. "It's been a long-term trend, but it's building now. And it's building in response to how aggressively law firms have raised their rates."

According to a 2004 survey by the Association of Corporate Counsel, 78 percent of in-house lawyers require budgets of some kind from outside law firms, less than 2 percentage points higher than in 2000.

But the amount and variation in the types of legal work requiring budgets has risen substantially, according to the same report. In 2003, companies sought budgets for almost half of all legal matters, compared with 37.5 percent two years earlier.

In the past, Lovett said, "people looked at lawyers the same way they look at doctors: When was the last time you asked your doctor for a budget? You got sued and had a problem, you're looking for someone to solve that problem, and there was this professional allure around what lawyers do."

New types of costs have changed that mindset. Lovett, who has been asking for budgets from lawyers for the past several years, said he now wants them in employee claims and collections matters because they involve lots of discovery motions for computer records and e-mails, a type of cost that did not exist even five years ago.

Those newer costs have created mounting pressure among in-house lawyers to lower the legal department's overall costs.

"Traditionally, while the internal legal budget was controllable on staff and size and resources, when it came to outside counsel that was a huge variable that would go back and forth," said Ron Peppe, vice president of law and technology at the Association of Corporate Counsel. "Companies are attempting to get their hands around it."

Budgets have been used increasingly for litigation, which was previously believed to be too unpredictable to fall within an estimated budget. Many lawsuits, especially those involving insurance claims, product liability and some intellectual property disputes, have become routine.

Prescott, who noticed the trend picking up in the last two years, said budgets are most common in "mid-market litigation."

"It's insurance defense, day-to-day litigation, corporate disputes, where the consequences of losing the case are not fatal to the company," he said.

Not all the budgetary requests from inhouse counsel are the result of cost-cutting. A growing number of public companies are seeking quarterly estimates of their legal costs simply for reporting purposes.

"The objective of it is not to cut costs," said Marty Katz, partner in the entertainment and media practice of Sheppard Mullin Richter & Hampton LLP. "It's so they can have an accurate reporting for SEC purposes."

Budgets have created challenges for some law firms.

Many argue that they are unreliable since lawsuits still involve a large dose of unpredictability. The judge may rule differently than anticipated, the laws may change or the opposing lawyers might file an unexpected motion.

Budgets also limit a lawyer's options in a case because he must decide which motions to file and how much time to spend on a project. In many cases, budgets end up changing as the case moves forward.

"It's difficult to predict in litigation because no one has a crystal ball," said Richard de Bodo, a partner in intellectual property at Irell & Manella LLP. "There are things that create a situation where it's not an absolute predictable number."

Budget Requirements

Wayne Lovett, general counsel of Mercury Air Group.

* 78 percent of in-house counsel required budgets from outside lawyers they hired in 2003

* Of all legal matters, those that required budgets totaled about 47 percent in 2003, up from 37.5 percent in 2001

* In-house counsel require budgets in more than 68 percent of litigation matters

* 71 percent of intellectual property matters require budgets from in-house counsel

Source: The Association of Corporate Counsel