Findings of recent report by CounselLink

Highlights

Law firm partner rates increased an average of 3.5% each year during the 3 years ended June 30, 2014, according to a report recently issued by Lexis-Nexis CounselLink, an e-billing service used by corporate law departments. Other findings in the report include:

• The median increase for partners was 2.6% in the trailing 12 months ended June 30, 2014.
• The practice areas with the highest 3-year compound annual growth rates - in the 4-6% range - were: IP-Patent; IP-Trademark; Commercial & Contracts; Finance, Loans & Investments; Corporate, General, Tax; and Mergers & Acquisitions.
• On a year-over-year basis, IP-Trademark and Employment & Labor rates increased in the 9-10% range, whereas M&A partner rates increased only about 1%.
• The practice areas with the lowest 3-year CAGRs - in the 2-3% range - were Insurance and Real Estate.
• Among 15 metro areas analyzed, Boston, Chicago, Miami, New York and Philadelphia were at or above the 3.5% level in both year-over-year partner rate growth and 3-year CAGR. The following five cities were below 3.5% in both metrics: Atlanta, Dallas, Detroit, Houston, Phoenix and Seattle. The other five metro areas were not identified.
• Law firm offices in the following states had the highest year-over-year growth in partner rates - in the 3-4.9% range:  California, Oregon, Kansas, Illinois, Pennsylvania, Massachusetts, Delaware, North Carolina, Alabama, Georgia and Florida.

Limitations

In considering these findings, the following limitations should be noted:

• The report does not indicate the number of law firms represented in the data or their size. Instead it states that the results are a snapshot of the data in the CounselLink platform, noting that since 2009 the platform has processed $17 billion in legal spending, nearly 4 million invoices, and well over 500,000 matters. The report itself addresses only the mid-year 2011 to mid-year 2014 period so it is not possible to tell even the total legal spend represented by the data for the report period.
• The data in the report is six months old. The report was issued in late January 2015, analyzing data for periods ended June 30, 2014.
• The assignment of matters into practice areas is based on categorization by the individual law department customers of CounselLink, which introduces potential inconsistency. Also, not all work in a given practice area is created equal. Some firms may practice in a more commoditized end of the spectrum and charge lower rates; others may command higher partner rates for more sophisticated assignments. It unclear whether the sample sizes in the data at the practice area level are statistically large enough to smooth the effects of possibly significant variation in partner rates across firms.
• On the other hand, geographic locations were assigned to individual timekeepers based on the zip code of their resident office, which is a fairly precise way to derive location.

Is this the right way to look at the situation?

The report's focus is mainly on rates, sliced and diced in a variety of ways - by partner vs. associate, by practice area, by state and city, and by time period. It is somewhat curious that there is no discussion of the total cost of matters. While it may be challenging to identify data upon which to base a total cost analysis, total cost needs to be part of the discussion.

How firms can raise rates and deliver lower total cost

For example, a firm that has increased its lawyer rates during the year could still deliver results for a given matter at a lower cost than it did the year before by being smarter about how it conducts the matter. This could be accomplished in two ways:

• Change the mix. The law firm may become better at pushing work down to the most junior (and lowest-cost) lawyers who are competent to handle it. By changing the mix - avoiding top-heavy staffing - the firm lowers the blended hourly rate for the matter and, if the total hours remain the same, the total cost of the matter. The report does note that two practice areas with similarly high partner rates can have very different blended rates if one utilizes a greater percentage of associates than the other. The only analysis in the report of actual blended rate trends, however, is a brief observation that they "increased slightly" over the past six months.
• Improve efficiency. The law firm may become better at managing all aspects of the matter, such as through keeping an eye on scope to avoid unnecessary extra work and using checklists and other tools to improve lawyer efficiency. These improvements reduce the total hours devoted to the matter, and therefore its cost.

Perhaps the perspective of the report is driven by the experience of the primary audience for the report -  corporate general counsel. Perhaps general counsel feel that rate negotiations are the only practical tool at their disposal to manage their legal spend, in the absence of obvious progress by most law firms at improving the way they manage matters.

Matter management improvements can shift the dialogue to value

Conversely, it seems reasonable that a law firm that undertakes serious efficiency improvement and matter management initiatives may be able to change its dialogue with clients from rates to value (total cost). To overcome client skepticism, the firm will likely need to be transparent with clients about the specific improvements it has made. Examples include:

• Utilize visible matter management tools. If the firm has a matter management initiative (also known as legal project management), make a point of using techniques that are visible to the client. These could include:
  • documenting scope in detail with the client at the outset of the matter;
  • presenting a budget to the client and periodically sharing with the client budget vs. actual progress reports to avoid surprises; and
  • involving the client in an after-matter review.
• Employ process tools. Create an assignment and responsibility list for key tasks in the matter to be performed by all parties, update it periodically with status and circulate it to the client and other parties. Or create checklists for internal use in accomplishing various tasks in the matter, particularly those performed by more junior lawyers, and share them confidentially with a trusted client.
• Use substantive checklists. For transactional matters, develop drafting checklists outlining the provisions of key documents, with explanations of the relevant considerations for drafting each provision and links to precedent provisions. This kind of checklist is quicker and easier to prepare than a standard form and can produce almost the same benefits. Share a sample confidentially with a trusted client (with precedents appropriately redacted).
• Initiate AFAs. A firm that has made progress in efficiency and matter management will be in a position to take the lead in suggesting alternative fee arrangements. When successful, an AFA can both deliver value and satisfaction to the client and produce higher profits for the firm.

Conclusion

Clients may focus on hourly rates because they believe that's the only lever they have to push their law firms to deliver better value. A law firm that demonstrates credible efficiency and matter management initiatives may be able to turn to the discussion to value, focusing on total cost rather than rates. The firm will also be better positioned to adopt AFAs.

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