Key data on law department billing and law firm consolidation.
CCBJ: In the LexisNexis annual CounselLink report, you track a number of key metrics, one of which is alternative fee arrangements (AFAs). What trends are you seeing in that area?
Kris Satkunas: In all the years we’ve been tracking the use of AFAs, the metric has always hovered around 10 percent of matters being billed under some sort of alternative arrangement. This year we saw that number pop up to 12.2 percent – up from 9.2 percent in the previous report. That may not sound like a huge increase, but it’s significant. We’ll continue to watch to see if the increase turns into a trend. There’s always been talk about the value of AFAs. I am hopeful that more departments are finally recognizing the benefit of the predictability AFAs provide around what they’re going to spend on a matter, as well as a cost-management tool.
You also track metrics about the type of work firms handle. Tell us more about that.
There are a handful of types of legal work that command much higher rates from partners. One of those types of work is mergers and acquisitions, which isn’t surprising – M&A is very strategic work, and companies want to hire the best attorneys to do it. Another high-rate area is finance loans and investments. The third area is corporate work and the fourth is regulatory and compliance. Those types of legal work command the highest billing rates, and what we find is that the largest firms have the lion’s share of that work. If you combine the four highest-paying types of legal work, 57 percent of the dollars on those invoices come from the largest firms. When looked at that same data in the last report, it was 50 percent. Now they’re at 57 percent, so a driver of the increase we’re observing in median rates for these types of legal work is that larger firms are handling an increasing share of strategic matters.
There has also been a trend in terms of partner rates based on law firm size. What are you seeing there?
We categorize firms based on the number of lawyers they have. For instance, we have a category that is 750 or more lawyers, which roughly translates into the 50 largest firms. The second largest firms have 500 to 750 lawyers. What has always been the case, and continues to be the case, is that the average rate for those largest 50 firms is significantly higher than the tier below it, those firms with between 500 and 750 lawyers. The differential between the billable rates of the partners in those largest firms is 53 percent relative to the rates of the partners in the second tier of firms. Not only is that gap huge, but it’s growing.
In the previous report, there was a 45 percent differential between the biggest firms and the second biggest firms, and now it’s up to 53 percent. Naturally law firms annually increase their rates as part of their budgeting process, but the largest firms are raising their rates more than the next tier firms – and they’re realizing those increases. Continuing to see that gap widen is pretty significant.
Can you talk about law firm consolidation?
That trend started around 10 to 15 years ago, as we saw that our customers in corporate law departments were increasingly trying to work with a handful of preferred providers. The way we measure it in the Trends Report is the number of companies using 10 firms or fewer to handle at least 80 percent of their spend, and that number has been pretty stable. It’s been sitting at around 60 percent for the last two or three years, including this most recent year.
So the industry appears to be about as consolidated as it will be. What is interesting is to think about all of these trends together. If a corporate law department is consolidating to fewer law firms, they’re giving a greater share of their legal work to their preferred providers, which means they’re likely taking it away from smaller vendors, which should give them the leverage to negotiate better rates, right? Firms are accustomed to being asked for volume discounts – so companies providing higher volumes of work should be asking for a reduction in rates from their preferred providers. I don’t think we’re seeing evidence of that. What we’re seeing instead is a widening of the rate gap – the largest firms are getting more work and they’re increasing their rates at a disproportionate rate to the smaller law firms.
Anything else that corporate counsel should consider when looking at these trends?
Law departments need to do their own internal benchmarking, where they are analyzing hourly rates, for instance, so that they really have an understanding of the range of rates they’re paying for a certain type of work. Having a good handle on that is really important so that you can use it to negotiate carefully, using your past history as the benchmark. Then take additional external benchmarking like what’s available in the CounselLink Trends Report and see how you line up against those numbers as well. Many legal departments don’t have the time or resources to do this sort of thorough analysis of their own data today.
Published September 24, 2019.