LegalMarch 06, 2023

LegalVIEW Insights: The fight to limit law firm rate hikes

In recent months, the media sector covering the legal industry has published articles about corporate legal departments being hit with very significant rate increases by their outside counsel and about the negative reaction the increases have prompted. After a long period of modest annual increases, large hikes can indeed come as a shock to legal departments, especially when the gradual uptick has led some in-house legal teams to deprioritize rate management. Lulled into assuming small increases would always be the norm, these law departments are less likely to have maintained strong, up-to-date rate management processes that help them mitigate sharp rises.

However, there are steps that legal departments can take to mitigate the increases being requested by their outside counsel firms. Our report LegalVIEW Insights volume 2023-1: Law firm rate increases provides useful context and benchmarks that can help in-house teams with their efforts to keep rates in check. Here are a few of the takeaways.

Average rates are up but not all rates

Reports about changes in the average rates that firms charge their corporate clients don’t tell the whole story. As a legal ops professional, you should dig deeper into the data before resigning yourself to an inevitable need to spend more on outside counsel. For example, while the mean law firm rate increase from 2021 to 2022 was about 5.6% (and the median was 1.9%), about 40% of timekeepers received no increase at all.

In fact, about 13% of timekeepers had a decrease in the average rate they charged over this time period. These decreases are most likely the result of timekeepers losing higher-paying clients and/or taking on lower-paying ones, rather than actually reducing the rates they charge any one client. Even so, this indicates that there are timekeepers who are being paid by some clients at rates that exceed their minimum acceptable hourly charge. Corporate legal departments that negotiate more aggressively are more likely to engage outside counsel at a level closer to these minimum acceptable rates.

Factors such as industry and practice area affect increases

As described in previous volumes of this report series, outside counsel costs vary by industry. In the data for our most recent report, we see that rate increases are also subject to this variation. Consumer services had the largest increase from 2021 to 2022, with an 8.6% mean rate increase and 3.9% median increase. This may be a result of the economic impact of the COVID pandemic. In 2020-2021, this industry’s average rates remained almost flat, probably because businesses needed time to recover. By 2022, with lockdowns in the past and business largely back to normal, firms may have felt it was time for rates to catch up. Conversely, the insurance industry kept mean rate increases at a mere 3.6% and the median at zero.

Naturally, the type of work done differs among industries, and we see that practice area also had a strong effect on increases last year. The rise in the most commodified work – insurance defense – was only about 14% of the increase in government relations, which is relatively bespoke and high-stakes.

By gathering information on the specific industries and practice areas they are engaging outside counsel for, in-house teams can gain valuable context to better understand how reasonable a given rate increase request is.

The choice of firm can help mitigate increases

Firms at the top of the Am Law 100 implemented the greatest increases, while rates from unranked firms outside the Am Law 200 went up only modestly. However, even among the Am Law 100, 32% of timekeepers received no increase at all. To reiterate, this data shows that there is no reason for legal teams to assume that their costs must rise significantly.

There are valid reasons why companies sometimes choose to engage the costliest firms. Some matters are so critical that high spend on the most experienced lawyers working at the biggest firms is worthwhile. However, it is also true that some companies default to using these firms without spending much time considering whether it is necessary to do so. It is always advisable to at least have internal conversations to ensure that these expensive firms and timekeepers really are needed for a given matter.

For more data and analysis on these topics, as well as additional insights that can help in the effort to limit outside counsel rate increases, download the full report: LegalVIEW Insights volume 2023-1: Law firm rate increases.

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