Explaining hefty legal bills has never been far from the thoughts of general counsel – money-related friction between clients and lawyers is as old as the profession, having become a staple of countless lawyer jokes.

But as companies put more pressure on legal departments to cut costs – and law firms' earnings and billing rates streak skyward – there are signs that this simmering resentment could boil over into something more substantial.

The clearest flash-point for that resentment was seen last month with the publication of 'Stop the Clock?', the long-awaited report by the Commerce and Industry (C&I) Group into fees. The report, produced in conjunction with accounting group BDO Stoy Hayward, polled 171 senior in-house lawyers to collate information on billing practices and attitudes among general counsel.

At the heart of the report is the concern that legal bills bear little relation to the value of the services that clients are receiving. An overwhelming majority (82%) think hourly billing is inefficient (see box). A further hardcore of 10% said hourly billing has 'no strengths at all'. Hourly billing is perceived to provide no certainty over the final cost of work. However, despite its unpopularity, hourly billing remains common; it is responsible for about two-thirds of legal fees distributed in the UK, according to the report.

Given the timing of the report, which comes during a year in which partner profits at leading firms have soared by 20% while partner charge-out rates now routinely go over £600 an hour, such sentiments are understandable.

Deepak Malhotra, InBev Western Europe general counsel and C&I Group London chair, argues that fees are the single biggest issue the commercial profession currently has to face.

"It is not about the final figure on the bill," he says, "what matters is that firms should have a culture where they can clearly articulate what value the work they have done holds."

Summing up this more robust stance against soaring legal fees was UBS general counsel Peter Kurer, who branded the legal services market as "dysfunctional" when speaking at a Legal Week event earlier this month.

With the C&I Group arguing that in-house counsel have finally found a voice in the battle over fees, the question is whether clients can force through real changes.

Yet a key issue for general counsel is considering the extent to which they are complicit in this dysfunctional market, either through failing to use their purchasing power or actively contributing to the bottlenecks that send fees surging.

Freshfields Bruckhaus Deringer corporate partner Mark Rawlinson makes the point that external counsel do expect to negotiate on fees and stresses that it is important for clients to push for the billing methods that work for them.

"There are a number of sophisticated purchasers of legal services out there who know how to get the right work for the right price," says Rawlinson. "During the past few years we have been in an incredibly active M&A market, which has seen legal costs creep up. It is a supply and demand dynamic."

Part of that dynamic has been the robust levels of transactional activity over the past two years. The reluctance on the part of general counsel to instruct mid-tier law firms has seen top deals bottleneck around a highly select group comprising the magic circle and a handful of rival UK and US firms.

As the more reflective company lawyers concede, this tendency is largely down to general counsel and, arguably, represents a fundamental failure of clients to assert their purchasing power.

Michael Herlihy, a former ICI general counsel and consultant at Jomati, says that the inability of clients to look beyond a handful of advisers is having a considerable impact on the wider market.

"There is a small group of firms in London which general counsel of most big companies feel they have to go to for big-ticket work," he says. "These firms set a benchmark on fees and when they go up, the firms in the tiers below them put their fees up as well."

One magic circle partner points out that it is down to general counsel to be brave enough to go to the right firm for the level of work, and cost, that they really need.

"Firms will only charge what clients will pay, no one is holding a gun to their heads saying they have to use a particular firm," he says. "People should not feel as if there is a compulsion to use any one firm. You cannot go to the Savoy Grill and expect Pret prices, it is just not realistic."

Herlihy agrees, saying: "The onus on change is on the general counsel, not the law firm. They should ask themselves if they really need to go to these expensive firms for less complex work."

Another reason for this focus on instructing a narrow band of advisers is that general counsel, as much as they like to position themselves as sophisticated buyers, are in some cases buying the proverbial IBM, which, of course, no-one ever got fired for using.

Ian Fitzsimons, general counsel at Pernod Ricard, says this pressure is considerable on in-house lawyers. He comments: "In big-ticket work, you look to those firms that have tried and tested experience. The emphasis is on finding the people who have both the experience and the contacts to get the job done, rather than on looking for cost savings that are immaterial in the overall scale of the deal."

Fitzsimons stresses that top-quality counsel can be a major boon to clients when the big deal comes, saying: "Lawyers also bring strategic advice to deals that can be of enormous value. They are obviously well paid but I don't think that they are necessarily overpaid compared to other advisers in transactional work."

It is this insurance element of instructing brand law firms that has a major impact on the way the legal services market operates. Indeed a cynic might wonder that if clients profit from both the strategic benefits of using a leading M&A adviser and from the insurance factor if they fail to perform, why do so many complain of the premium their services carry?

It is also interesting to consider the panel system, which has taken hold of the UK's legal market over the last decade. There is no doubt that some individual companies have used the model with skill to control costs, and, in sectors such as insurance, it has proved brutally effective. Yet, the success of panels in achieving value during a period in which profits, salaries and rates have soared could hardly be called conclusive.

So much for the finger-pointing. What will probably be needed are positive suggestions to move the debate forward. Despite calls for more billing options, it is conceded that the in-house community has not so far been greatly successful at articulating alternatives.

Often the talk has vaguely turned to the concept of adding value, though general counsel might want to consider that in a transactional environment the experience of investment banking suggests that this would usher in far higher premiums for high-end work while depressing fees on general commercial work. Perhaps a breakthrough could come from the C&I, which is promising to follow up its report with a 'tool kit' to help general counsel devise billing alternatives.

Also important will be a more mature and open debate between client and adviser than has so far been the case.

Freshfields Bruckhaus Deringer's Rawlinson says clients should be prepared to be as flexible as their advisers if they want to overhaul the hourly billing system. "Law is a service industry and as such it is client-driven," he says. "Clients change the specification of work all the time."

Richard Price, senior partner at CMS Cameron McKenna – a firm that has trail-blazed in terms of seeking out detailed client feedback – points out that lawyers in private practice hate being chained to hourly rates as much as general counsel.

He comments: "The hourly rate often leads to arguments and distrust and does not result in efficient working. We give fixed fees based on certain assumptions but they are often broken. We could have a much better relationship, it should be a two-way system of trust."

InBev Western Europe's Malhotra agrees that the solution lies in more frank communication. "I do not think it is about clients and advisers any more – that is not the future of the relationship. Partnership between the two parties is critical."