Microsoft, the software giant, has told law firms across the globe that they must trim fees and scrap hourly-rate billing if they want to continue working for the company.

In a letter from Microsoft HQ in Washington, seen by the Gazette this week, Brad Smith, senior vice president and general counsel, outlined the launch of a plan designed to slash Microsoft’s legal spend over the next 12 months.

Addressed to every one of its legal services providers, Smith revealed that Microsoft had ‘initiated a re-engineering program focused on increasing and rewarding cost efficacy’. He said: ‘Attorneys’ fees are fundamental to this effort.’

According to Smith, the programme requires firms to propose ‘creative alternative billing solutions’, with a nudge towards ‘value-based in place of hourly-rate billing’. A 4% cap on rate increases will also now apply.

Although Microsoft’s annual legal spend is not known, it pays more than $150m (£75m) a year to the 17 firms on its premier preferred provider panel.

Jeremy Black, associate partner in the professional practices group at business advisory firm Deloitte, said: ‘It’s not just a question of cost, it’s also a question of quality. For all businesses now, purchasing functions are becoming more sophisticated.’

‘They [Microsoft] are a large spender and they have a duty to their shareholders to get the best value for their money.’

Headed by Smith, Microsoft’s Legal and Corporate Affairs department, which is responsible for all legal work, will stringently evaluate any request for a rate increase. The use of offshore lawyers, the competitiveness of rates and the ability to monitor cost efficiency will all factor.

Microsoft declined to comment on the letter.