Large firms gaining share of high-end work, new opportunities for AFAs, revealed in 2019 CounselLink Enterprise Legal Management Trends Report

By Kris Satkunas, Director of Strategic Consulting, LexisNexis CounselLink

The 2019 CounselLink Enterprise Legal Management Trends Report is the seventh installment of our annual analysis of charges billed by outside counsel. This year, the data is the result of analyzing over $33 billion in legal spending – nearly 7 million invoices and approximately 1.7 million matters processed through our cloud-based legal management platform. The findings were telling for law firms big and small, and we derived several major metrics that will influence the decisions of law departments in the coming year.

Consolidation Has Resulted in a Bigger Share of Wallet for the Largest Firms

Hourly billing rates are increasing across the board for firms of all sizes. However, the roughly “largest 50” firms (those with 750-plus lawyers) have widened the gap relative to rates paid to firms with 501 to 750 lawyers. The largest law firms have realized rates 53% higher than the next tier of firms. (In 2017, our data showed a 45% gap, and in 2016, a 40% gap in rates between these 2 tiers of firms.)

The root cause of the widening gap is not what one might expect, i.e. it’s not the result of the largest firms increasing rates more than those of the next tier of firms. Rather, the gap is being caused by an increasing dominance of the largest firms handling high-end work. The areas where the largest firms dominate the work – Mergers and Acquisitions (74% of this work handled by the “largest 50” firms, Finance, Loans and Investments (58% of work handled by “largest 50” firms), Corporate, General, Tax (55% of work handled by “largest 50” firms) and Regulatory and Compliance (52% of work handled by “largest 50” firms) – coincidentally have the highest average partner rates of all practice areas measured.

The legal industry has witnessed the consolidation of work among firms as in-house legal teams seek to gain broader, deeper relationships with trusted advisors and to leverage greater volumes of work for better prices. Based on CounselLink data, that consolidation has benefited the largest law firms. In prior reports, data suggested some shift of high-end work to the second largest tier of firms, but most recently, it is the largest firms reaping the benefits of consolidation trends.

Savvy legal department leaders who have successfully consolidated work should carefully monitor prices being paid to their preferred providers to ensure that increased volume has in fact been paired with preferential pricing arrangements.

Use of Alternative Fee Arrangements (AFAs) Has Increased

AFAs were used in 12.2% of matters in the 12 months of data ending April 30, 2019 — a solid uptick compared to the 10% level the metric has hovered around for the last few years. Based on this year’s results, 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 cost management.

The practice areas of Finance, Loans, and Investments and Employment and Labor saw the highest percentage of matters using AFAs. Employment and Labor practices were early adopters of AFAs, but the Finance, Loans, and Investments category saw a notable increase in recent years, with 28% of matters now billed under some form of alternative billing.

For in-house attorneys interested in engaging in more alternative fee arrangements, it is best to explore such opportunities with firms with whom you have trusted relationships. Law departments that manage legal invoices with e-Billing solutions such as CounselLink should take advantage of the wealth of data captured by those solutions to analyze historic matter spending in order to establish thresholds and fixed fee amounts. And always keep in mind your over-arching objectives (efficiency, predictability, and cost savings) to prevent overly complicated billing arrangements.

Blended Hourly Rates Show Some Increases and Shifts in Volatility

Media attention is most often paid to individual lawyer rates. While individual rates are certainly important to manage, blended hourly rates of timekeepers across matters are more meaningful. Blended matter rates paint a more accurate picture of the effect of hourly rate changes and staffing decisions on legal work.

Rates across most practice areas are rising relative to years past, but the practice areas of Mergers and Acquisitions, IP/trademark, and Finance, Loans, and Investments saw the highest increases in blended hourly rates across timekeepers. It’s no surprise that Mergers and Acquisitions has the highest blended hourly rate given that this work traditionally results in a higher percentage of partner time, and legal departments often engage with white-shoe law firms that bill at higher rates. Accordingly, hourly rates for this practice area have a relatively low “volatility” score, meaning there is not material deviation in the blended rates paid for M&A matters in the industry.

Four practice areas have relatively high rate volatility scores:

  • Corporate, General, Tax
  • Regulatory and Compliance
  • Commercial and Contracts
  • Finance, Loans, and Investments

Legal departments should keep in mind that practice areas with higher volatility may have more opportunity for rate negotiation. E.g. while Corporate, General, Tax draws the second-highest median matter rate (second to Mergers and Acquisitions), it could be a practice area in which legal departments have more opportunity to request that law firms find ways to manage down costs.

Kris Satkunas is Director of Strategic Consulting of LexisNexis CounselLink.