Microsoft's legal department has seen its legal budget cut by 15% over the last 18 months, leading to a 5% reduction in headcount, according to the software giant's general counsel, Brad Smith.

Before the cuts, Microsoft's legal department had a $900m (£564m) annual legal budget and 1,050 staff, including 450 lawyers.

Speaking in an interview with Legal Week sister title The National Law Journal, Smith said the company had also sought a 10% reduction in fees charged by outside counsel and had moved farther away from the billable hour model in response to the recession.

To this end, Microsoft, one of the world's largest consumers of legal services, consolidated its list of preferred US advisers earlier this year, reducing it from 16 to 10.

The most high-profile casualty of the panel review was K&L Gates – the firm named after Bill Gates' father and a longstanding Microsoft adviser in its pre-2007 merger guise of Preston Gates & Ellis. Arnold & Porter and Sullivan & Cromwell were among the other firms removed from the roster, which was initially put in place in 2005.

The new list of firms includes Cadwalader Wickersham & Taft, Covington & Burling, Orrick Herrington & Sutcliffe, Sidley Austin and Weil Gotshal & Manges.

Smith said the toughest part of his job during the past 18 months has been laying people off, with one of the most significant changes being the amount of time that he spends talking to the anxious employees in his department about the company's decisions and direction.

"Closing deals and bringing in revenue is more important than ever," said Smith, who has served as general counsel of Microsoft since 2002."[But] the biggest change has been to manage through cutbacks."

News of Microsoft's robust response to the global downturn comes after the general counsel of Citigroup last month disclosed in a panel debate that the bank now handles around 30% of its work under alternative billing arrangements.

The National Law Journal is a US sister title of Legal Week.