Not every company chooses fixed fees as the way to reduce external legal costs. Shell Oil Co., the Houston-based unit of Royal Dutch Shell Plc., has developed strategic partnerships with 28 law firms that still pay by the hour. The volume of work the firms get, though, provides Shell with leverage to reap volume-based discounts.

"We used to contract with more than 500 law firms in 2002, and we contract with less than 350 today," says Kennetta Joseph, manager of the strategic-partnership program in Shell's law department, "but our goal is to have our 28 strategic partners handle the majority of our legal work." Partners share documents and other knowledge on a Web-based system, "so we are not repeatedly paying for the same work," she says. Shell's program is predicated on reducing billable rates as well as cutting duplication of effort, and Joseph says the program is resulting in cost savings but that it's too early to calculate the actual dollar amount of the savings.

Microsoft adopted a similar legal strategy in July 2004, instituting "a preferred-provider program" for external law firms, according to Kevin Harrang, deputy general counsel, Law & Corporate Affairs, Internal Operations, at the software giant. He says Microsoft managers have cut the number of law firms used to a core group of 30 from more than 500, and that "the company's goal this year is to concentrate its legal spend on a group of about 20 'premier' firms."

Microsoft continues to pay the majority of firms it contracts with by the hour, but the preferred-provider strategy saved the company millions of dollars in fees alone through year one. "As we further strengthen our relationship with providers," says Harrang, "we anticipate more savings." — R.B.

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