This article was originally published in Corporate Counsel.
Financial services companies often rely on outside counsel for help in a wide range of areas, from litigation to banking operations. According to data from Wolters Kluwer ELM Solutions, financial institutions have historically paid the highest hourly rates of all industries, shelling out 10% more than the next closest (industrials). Since the majority of law firms have been charging more for their work recently, now is the perfect time for financial services companies to take a hard look at what they are paying their legal partners and why.
There are many logical reasons for these higher rates in finance, including the high level of regulation in the industry. Banks and financials are also often headquartered in New York City, which can lead to them using costly firms also based there. But not all the data is so bleak. Digging deeper, financials have been able to contain rate increases better than many other industries while also reducing overall legal spend. In this article, I’ll outline some data points financial services companies should know as they review and hire legal counsel going forward, including some suggestions for negotiating lower rates.
Containing rate increases
While financial services pay a higher baseline rate for outside law firms, the industry did a better job last year in preventing dramatic rate increases. From 2020 to 2021, rates grew less than 3% for financials—notable in contrast to the double-digit rate increases seen in other industries. In fact, only two industries—insurance and consumer services—saw smaller year-over-year growth.
This is largely because financial services companies are more mature than other industries with regard to legal operations and managing outside counsel. Still, because of the higher baseline mentioned earlier, a seemingly small increase percentage-wise still translates to a decent chunk of money. A 2.8% increase off the existing mean rate for financials of $620 equates to an increase of $17.36 per hour. The same rate increase in the insurance industry, where rates are much lower, would amount to only $6.40.
Reducing total spend
Financial institutions, because of their size and regulations, tend to have very high legal spend in absolute dollar terms. And yet, our data shows that financial companies have been able to consistently lower legal costs since 2016. There are many possible explanations for this trend, including the fact that work from the Great Recession of 2008 has gradually tapered off, saving money. But financial institutions have also been working hard to embrace a legal ops mindset by “processifying” tranches of routine legal work, insourcing some legal matters, or a combination of both.
In the five years leading up to 2020, financial institutions have reduced outside legal costs by more than 15%. In fact, the largest reduced mean total outside counsel costs by 26% and median outside counsel costs by 40% during the same period. Why are financial institutions successful at reducing costs? For one, the high level of business activity creates volume and bargaining power than can, if leveraged properly, lead to deep discounts on hourly rates.
Shortcuts to lower rates
Thus far, we’ve covered the fact that financial institutions have been able to contain rate increases and reduce total spend. But once again, the baseline rate for financial services companies is still higher. For many financial services companies, there remains room for savings. Instead of hiring only the largest, most elite law firms headquartered in New York City, financial institutions should consider mid-market firms for garden-variety work. They should also investigate whether there are ways to save money with existing providers, as some of the largest firms in the world have different tiers of pricing for attorneys seated in lower-cost jurisdictions. There are instances when hiring the largest firms is necessary, despite the extra cost. In a litigation context, for instance, these firms can provide intimidation value and specialty talent. Still, Am 10 or 20 firms are not always necessary, especially for less intensive work that could be done by any law firm.
At the end of the day, the weighted average billable rate paid by financial services companies varies dramatically depending on the work. If those companies at the high end of the spectrum were able to lower the rates they paid to the level paid by their peers, they would save millions every year. To make this happen, financial institutions should make use of their extensive bargaining power. Law firms continue to negotiate higher rates across industries, but financial institutions have all the tools they need to control legal spend by containing rate increases, investing in legal operations, and more.