Data Analytics

Big Law Commands Big Rates

Kris Satkunas, director of strategic consulting at LexisNexis CounselLink, discusses the major takeaways from the most recent CounselLink Enterprise Legal Management Trends Report, including what we can learn from 2019’s data – and what we can’t.

CCBJ: Let’s start with a broad overview of the CounselLink Enterprise Legal Management Trends Report. What can you tell us about it – how it’s structured, the companies involved, etc.?

Kris Satkunas: The analysis in the report is based on data that flows through CounselLink. CounselLink is both a matter management and an e-billing solution, meaning law firms collaborate with corporate customers about specific matters through CounselLink and also submit invoices for work related to those matters in CounselLink. A massive amount of data results from those processes, and that aggregate data provides valuable information for the industry when mined for trends. I do want to point out up front that we scrub the data of any identifying information and normalize and aggregate the data and put it into a separate database that contains no information that can identify the law firms, the clients they serve, the specific matters or the individual timekeepers. The database currently has records that represent about $35 billion in outside counsel spending.

As far as the scope of the organizations, there are thousands of law firms that bill through CounselLink – all shapes and sizes from different geographic locations. The only law firm data that we use for the trends report, however, is U.S data. As for the corporations or other entities that are being billed, CounselLink’s market is broad. There are several hundred entities using our solution that range from small corporations to very large ones with billions in revenue. They span many industries, and there isn’t a significant concentration in specific industries.

What are the top three trends that the report identified this year?

Every year as I do the analysis for the report, I look for the few things that really stand out the most to me. I try to find the things that I think are going to be of the most value to our industry. This year, one relates to alternative fee arrangements (AFAs). And the key finding this year is actually something that we initially reported on last year. But let me back up for a moment and give a bit of context first. Historically, we’ve been producing the trends report since 2013. For the first five years, what we saw was that alternative fee arrangement usage hovered around 10 percent. In other words, 10 percent of matters had some sort of non-hourly billing arrangement. But last year when we did the analysis, we found that the number of AFAs had gone up to just over 12 percent. On the surface, that might not seem like a very big increase, but actually, to go from 10 percent to 12 percent after not really moving at all for years, we felt like that was significant – but I also thought that perhaps last year was just a one-time blip.

This year, looking at the data from 2019, we saw that, once again, just over 12 percent of matters were being billed under some sort of AFA. So it feels like a trend has really begun, that finally, after years of talk about increasing the use of alternative fee arrangements, it really is happening. I think it’s exciting to see that the dial finally has moved. From our point of view, it’s a move in the right direction. There are so many benefits to AFAs, and corporate legal departments are starting to realize it as they start using more and more of them. They get much better predictability as far as what their expenses are going to be. And there is accountability because they’ve often already agreed on the pricing with their law firms. It helps them manage their spend. These advantages have always been there,
and now we’re starting to see them pay off more.

Our recommendation is to think about law firm segmentation as part of your vendor management strategy.

The other two key findings that we highlighted in this year’s report are intertwined, and they relate to the size of law firms. I think that most people know that larger law firms charge higher rates. One of the key findings this year is that Big Law has a very large share of the highest-value legal work – and that share has been growing. For example, the practice area that commands the greatest partner rate, on average, is mergers and acquisitions (M&A) at $765 an hour. The largest firms, those with more than 750 lawyers, had 77 percent of all billing for M&A work in 2019. If I look back to 2016, their share was 60 percent. So I think it really speaks to the strategy of Big Law that they have an increasingly large share of this higher-value work.

Part of the point I want to make – which moves into the third key finding – is that if you know that the larger firms are going to charge higher rates, well, there’s value in considering whether the lower-tier firms might be able to handle some of the legal work that you’re giving to the largest law firms today. Because the third key finding is that indeed, it’s true, the larger the firm, the higher the timekeeper rate is – and we provide details in the report itself. If you look at the largest tier of firms, which are roughly the largest 50 firms, and compare their rates to the next tier of firms, which have between 500 and 750 attorneys at them, the larger firms charge, on average, 51 percent higher hourly rates. That’s a huge difference. And even if you look at some of the other tiers of firms, as you start to break them down, you see increases that are significant between, say, the group of firms that has between 100 and 200 attorneys compared to the next tier, 200 to 500 attorneys. There’s a 29 percent increase in rates there.

So the takeaway from this analysis – of looking at rates by size of firms – is that our recommendation is to think about law firm segmentation as part of your vendor management strategy. Think about all the types of work that you have and whether you need to have premium pricing in order to get quality results, and consider whether moving to a smaller tier of firms might deliver more value, in terms of similar results at a lower cost.

Specifically, what did you find out about law firm blended rates and the volatility rate? What did you find about law firm rates overall?

What we saw is that from 2018 to 2019 there was an increase of between 3 percent and 4 percent in rates overall. If you look at practice areas, which I think is really important to consider when analyzing hourly rates, we saw larger increases in 2019 in practice areas like M&A, which I mentioned earlier, and corporate and tax work, regulatory and compliance.

Because we’re looking at data that spans many different corporations and many different types of law firms, you would expect to see a good bit of volatility in the rates that are out there. Especially in areas like regulatory and compliance, there are so many different types of law firms that are billing for this kind of work, but there are also very different sorts of matters that fall into this bucket. It’s the practice area that we see the greatest volatility in.

If you look at practice areas like insurance, on the other hand, we see a very narrow band of rates, because that work has such a high volume that the rates have moved toward the median regardless of the specific type of insurance claim it is. So we see much lower volatility there.

I think the biggest takeaway in this area is that corporate customers, as they analyze their own data, should not expect to see a lot of volatility. The benchmarks are useful for knowing that there is volatility across the industry, but corporations should be striving for and working with their law firms to have much more consistency as possible in the rates that they are being charged for their legal work.

Please describe the findings surrounding law firm consolidation and the number of legal service providers used by corporations.

This is another key metric that we’ve reported on for several years. Our definition of law firm consolidation is whether a corporation uses 10 firms or fewer for at least 80 percent of their outside counsel fees. We consider those corporations to be highly consolidated. Several years ago, we began seeing that more corporations were moving toward this degree of consolidation. There are a few reasons: There’s the cost benefit of volume discounts, for instance, as well as the benefit of using law firms that have developed a deeper knowledge of your business, which should lead to both efficiency and positive outcomes.

We found that this number moved up to around 60 percent a few years ago, and it’s pretty much held there. We’ve seen for the past two or three years that law firm consolidation seems to have leveled off – it’s plateaued there at around 60%. In 2019, we found that 58 percent of the companies that use CounselLink are highly consolidated. Part of the reason for this plateau is that many companies are in
industries that have to rely on a large number of law firms. Take insurance, for instance. An insurance carrier has to use many different law firms in many different jurisdictions in order to meet their needs. So they’re never going to be highly consolidated under our metric definition, but that doesn’t mean they aren’t or shouldn’t be looking at consolidation opportunities with their vendors.

Your goal is to pay as low a rate as possible without compromising results.

What did you find as relates to the use of AFAs? And what industries are the leading users of AFAs?

I spoke earlier about how AFA usage has increased, which was one of our key findings overall. But more specifically, the key way that we evaluate the use of AFAs is by practice area or matter type. Traditionally, there has been a pretty high level of AFA usage in insurance – both in insurance matter types and in the insurance industry as well. That’s because insurance claims are a very high-volume business, and where there’s higher volume, there’s always been more comfort with using AFAs. All of the data that exists around that volume is useful to arrive at arrangements like fixedfee pricing. Or to break matters down into phases or stages and be able to price certain stages that are more predictable.

The other area that has traditionally embraced AFAs has been employment and labor work. Again, it’s high volume, and there’s an ability to know what to expect something to cost. In employment and labor in 2019, we saw that 25 percent of matters being billed through CounselLink were being billed under some sort of AFA.

But the area that had the highest AFA usage in 2019, where we saw about 30 percent of matters being billed non-hourly, is a category that we call finance, loans and investments. This category spans a lot of different types of work, but one of the reasons that the percentage is so high is that it includes collections work. And this too is high volume work. That said, the finance, loans and investments
category also includes other kinds of legal work, including securities and mortgage-related matters. And we see that there are AFAs in many of these other categories as well. So it’s pretty exciting to see that really there is no category of work that cannot potentially lend itself to an AFA.

What trends did you see in new legal work?

The dynamic within the legal industry – and within every industry – is significantly different now than it was in 2019, due to the unprecedented nature of events in 2020. At the time we released the Trends Report, we’d just started looking at 2020 data to provide our insights, which is what we do, as opposed to just talking about what we’re hearing anecdotally.

One of the areas that we can talk about with certainty is volume. How many new matters did we see in the first five months of this year compared to previous years? We compared three years of data, for the volume of new matters created from January through May in 2020, 2019 and 2018. We wanted to point to the matters that stood out as being different than in prior years, and what we saw was that there were three categories of legal work that really showed declining volume trends.

Merger and acquisition work has fallen off at the steepest rate. If I compare the number of new matters for M&A work, looking at May versus February of 2020, May’s volume of new work was 57 percent of what we saw in February. So quite a rapid decline there. Litigation has also had a steady downward trend, but it hasn’t been as steep. We also saw a pretty big drop-off in the category that we call corporate and tax.

Those are the areas where we’ve seen a decrease in volume of legal work in 2020, during the pandemic. But on the flip side, we saw that employment legal work increased significantly in March, as we moved toward a more homebased working environment across the board. The volume of employment and labor matters in March was 25 percent higher than it was in February. And then it grew another 15 percent in April. So that’s a big uptick, though it actually did drop back down to more normal levels in May.

What are your recommendations for legal departments going forward?

The first thing is the need to communicate clearly what corporate counsel’s needs are to outside counsel. If there is extra pressure on managing outside counsel spend, having conversations with law firms is critical in order to be able to find creative approaches that benefit the corporation but also don’t hurt the law firm. Recognize that there’s a relationship there and that law firms are also struggling with cash-flow needs. Having a decrease in legal work is hurting their bottom line as well. I think that managing that relationship is important, and having an open channel of communication to find ways to help both parties is critical – even more so now than it ever has been.

The other recommendation that I would make, which is no different this year than it would be any other year, is that it’s really important that corporations benchmark their rates. As I said when I was talking about the volatility of rates, it’s useful to have external benchmark data, so that you can get a sense of whether your rates are in line. It’s even more important to understand the rates that you’re paying for your own legal work, and to break down analysis by matter type. Take a specific type of legal work
that you have, and understand the range of rates that you are paying law firms for that work. It shouldn’t vary that much. And if it does, you need to go back and figure out if it’s because you’re using
different sizes of law firms, or if you have inconsistency in the rates that you’re paying within a given size band of firms – and then properly negotiate so that you can have consistency in the rates that you’re paying. Because your goal really should be to pay as low a rate as possible in order to get cost-effective pricing without compromising results. It’s a balance that can be achieved using a thoughtful and analytic approach.

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