At a time when corporate purse strings are still cinched relatively tightly, legal departments probably aren’t popping champagne bottles over the news that rates for their outside counsel are continuing to rise.
Legal software company TyMetrix, a business of Wolters Kluwer Corporate Legal Services, and the Corporate Executive Board research firm yesterday released their 2012 Real Rate Report. The report analyzes invoice data to quantify and explain what drives the billable hour, examines actual rates charged, law firm staffing behavior and matter phase costs. In doing so, the report analyzed more than $7.6 billion in law firm billings generated from 2007 to 2011 by more than 4,000 law firms and about 120,000 billers, including about 80,000 partners and associates.
The study revealed that law firm billing rates, which continued to rise throughout the recession, are expected to continue on their upward trajectory for the foreseeable future despite the post-recession pressure on corporate legal departments to control outside counsel spend. After outside counsel rates rose 8.2 percent from 2007 to 2008, rates plateaued somewhat from 2008 to 2009 (2.3 percent increase), but have grown steadily at more than 4 percent per year since 2009.
The report found that the most expensive lawyers are continuing to become more expensive. Rates for the highest billing partners ($800 or more per hour) grew about three times faster than rates for the lowest billing partners (less than $300 per hour). Concurrently, the rates for the highest billing associates ($500 or more per hour) rose nearly five times as quickly as the lowest billing associates (less than $200 per hour).
It’s worth noting that despite this increase in price, companies tend to be willing to pay a premium for the high rates at large law firms. The report found that the percentage increase for firms with more than 1,000 lawyers was double what the smallest firms experienced. The average hourly rates from 2009 to 2011 for law firms with 501 to 1,000 lawyers increased 13 percent, while the hourly rate increase at law firms with one to 50 lawyers rose a meager 4 percent.
- Outside counsel charge different clients variant rates for similar work: Ninety percent of lawyers charged different rates for similar types of work in 2011. Intellectual property (23.1 percent) and commercial contracts practices (18.7 percent) had the highest percentage difference in rates.
- Use of entry-level lawyers can add significant costs: The use of entry-level lawyers (associates with fewer than two years of experience since passing the bar exam) continues to decline. Additionally, matters staffed with entry-level associates tend to cost up to 20 percent more.
- Consolidation not necessarily associated with lower rates. While some in-house legal departments have successfully consolidated work into a single law firm, the report reveals that rates actually tend to increase as a law firm takes on more work from a client.
But despite these billing trends, Julie Peck, TyMetrix’s vice president of strategy and market development, suggests that in-house legal departments shouldn’t base their staffing, strategy and outside counsel selection solely on the basis of rates.
Peck tells InsideCounsel that the data suggests that corporate legal departments are typically paying for law firm size, location and senior talent. Larger firms, she says, often can more quickly execute on matters—and that staffing certain matters on the front-end with more seasoned lawyers also tends to reduce the overall number of hours/days it takes to resolve a matter.
“When we see these types of positive correlations between firm size, lawyer seniority or expertise, and a more efficient execution on the matter—solely focusing on an ‘hourly rate’ might be missing the forest through the trees,” Peck says. “The more advanced legal departments are beginning to incorporate this type of benchmarking and analytical data into how they manage their firms, the way they design AFAs with firms, and the degree to which they can effectively reduce their legal spend while maintaining their desired outcomes and risk profile."
For the full report, visit TyMetrix.com.