Feature Article Measuring Metrics and Rates –Do you see what I see? By Dr. Silvia Hodges
In-house lawyers have increasingly been charged with “doing more with less” over time. Top management now demands that the legal department save money and reduce risk.
Legal departments have hence closely monitored and analyzed their spending, reengineered processes, built or rebuilt work teams, hired legal process outsourcers (LPOs) for specific projects or tasks, and created tools that drive standardization, reduce risks, speed up cycle times, and increase efficiency.Process-driven legal procurement is increasingly involved in addition to the use of legal operations professionals who understand process improvement. Typically equipped with a strong financial background, legal operations people scrutinize legal spending, and analyses go from the 10,000 feet-view down to the granular level of a Uniform Task Based Management System (UTBMS) task code, while invoices are looked atundefinedsometimes literallyundefinedline by line.
Law firms formulating their marketing and business development strategy need to understand what clients pay attention to and how their firms compare in the marketplace from the client’s point of view. The recently released 2012 Real Rate Report analyzed over $7.6 billion in law firm billings between 2007 and 2011 from over 4,000 law firms and 120,000 billers, including 80,000 partners and associates, and its findings are instructive.
TyMetrix Legal Analytics and the Corporate Executive Board examined actual rates clients paid, matter phase costs charged, and analyzed invoice data to quantify and explain what drives rates. Here are some of the findings that your clients are aware ofundefinedand you can now, too:
No reward for loyalty
Many industries reward the loyalty of customers with more favorable rates, but the length of a relationship between a client and his law firms has the opposite effect in the legal sector. The data from the 2012 Real Rate Report reveals a fairly strong positive relationship between length of relationship and higher ratesundefinedthe longer the relationship; the higher rates tend to be.
One might assume that the acquired company-specific expertise helps firms to work faster and/or more efficiently, but instead, early on in the working relationship, law firms are willing to charge lower rates. After two years, rates begin to creep higher, and higher, and higher. One can expect a client complaint or defection sooner or later, so a better strategy would be to monitor the market and stay competitive.
Concentrating spending on a few law firms does not appear to be effective for clients to decrease rates as it appears to limit the competition. While consolidation may be a means to control quality, to lower internal transactional costs, and to establish closer, strategic relationships with law firms, it does not lower costs according to the data.
The remedy: Some companies have had success combining consolidation with a panel mechanism in which a manageable number of firms compete for the company’s legal work. This way, competition is maintained while spending is consolidated. Other companies outsource appropriate pieces of the process to lower cost providers without compromising quality. Again, law firms need to make sure they stay competitive and do not take their existing clients for granted. The situation might change faster than one would otherwise expect.
Despite recession, rates have been growing
Unlike many clients’ organizations, law firm rates have increased regardless of the larger economic situation. Although rate increases were relatively restrained during the recession, rates still increased nevertheless. And in the past two years, lawyer rates have resumed growing well past inflation.
What’s more, rates for the highest billing lawyers, those who bill $1,000+ per hour, have been growing nearly three times faster than those of the lowest billing lawyers: a 75% increase since 2009. Rates for lower priced lawyers, however, have only seen a slow increase as they have been facing greater competition from LPOs and contract attorneys.
Fees for Finance and Securities, Regulatory, and M&A practices have increased the most; litigation and real estate increased the least. Clients have been paying a premium for lawyers who work for larger firms, as law firm size is one of the five main cost drivers. Unless necessary due to geographic need, specialty, or “brand,” sophisticated clients carefully consider which firms are most cost-effective. As a result, firms need to understand the situation of the client and the value attached to a matter to price accordingly.
Not everyone pays the same
According to the data, the vast majority of lawyers (90%) billed different rates to different companies for similar types of work. Data from the 2012 Real Rate Report showed that some practice areasundefinedsuch as M&Aundefinedhad the highest proportion of lawyers billing companies different rates, while other areasundefinede.g., Corporate and General Businessundefinedshowed less variation. Although many companies thought they were receiving the lowest available rates with law firms, many were not. More transparency in the market is likely to mean that rates will be less variable in the future, as firms will likely face tougher negotiators.
What really drives rates: Where you work is more of a factor than how much experience you have
Conventional wisdom suggests that rates are driven by expertise, such as your practice area, and (years of) experience. However, the data from the 2012 Real Rate Reportshows that these factors are less important than expected. A lawyer’s rate is more determined by law firm size and locationthan by a lawyer’s partner status, experience, or practice area.
The statistical model identified the relative importance of different factors on an individual lawyer’s rate through linear regression. The model has an adjusted R2of 54%, meaning that 54% of the variation in legal fees can be accounted for by the above-referenced five variables alone. Other factors might influence the rates as well, but managing these five factors in terms of picking firms in regards to geography and size, or matter staffing, will influence legal spend. Law firms need to prepare their offering keeping this in mind.
Additionally, law firm size has the most important statistical impact on rates, adding roughly $15 per 100 lawyers in a firm to the statistical base of $151 per hour. Being located in a tier 1 market (see definition below) is the second most important influence on rates, adding $161 to an hourly rate. Partner status ranks third among statistical impacts, adding $95. Experience ranks fourth, accounting for $34 per 10 years’ experience. Among practice areas, only finance and litigation showed statistical impact, finance adding $99 per hour, litigation subtracting $15.
A client really pays most by location
Location is one of the primary factors driving lawyer rates. Data from the 2012 Real Rate Report reveals wide variations between rates in the most and least expensive U.S. legal markets. Though most cities showed significant rate increases since 2009, the majority of the substantial increases occurred in areas that were already relatively expensive-“Tier 1” markets. Boston, NYC, San Jose, Houston, San Francisco, and Chicago were the most expensive (legal) metro areas and saw the largest rate increases in terms of average hourly rates between 2009-2011: (9.9% for Chicago, 12.3% for Boston). San Jose is perhaps not surprising, given its importance as a technology center. Houston has experienced recent rapid growth in technology and financial service sectors and, therefore, the associated complexity of required legal services. In addition, its importance as an oil and gas center also drives significant demand for specialized legal work. Not in the top 10 for most expensive metro areas, but in the top 10 of areas with the largest increases were Dallas, Portland, OR; Omaha, NE; Salt Lake City, UT. All had increases of over 10%.
Las Vegas, Tampa, Cleveland, Milwaukee, Raleigh, Phoenix, Bridgeport, Minneapolis, Miami, New Orleans saw the least increases (up to 4.7%), although one might argue that compared with their clients, all (except for Las Vegas), actually saw increases despite the recession. Several of these cities, notably Las Vegas, Tampa, Cleveland, Phoenix, and Miami were among the hardest hit in the recent recession and housing downturn. The 2012 Real Rate Report also noticed a negative correlation between metropolitan unemployment rates and rate increases across the 2009-2011 period. The higher the unemployment rate is, the lower rate increases tend to beundefinedsuggesting that rate increases are driven to some extent by recent economic activity in the locality of the service provider.
Dr. Silvia Hodges lectured at Harvard Law School on “Power of the Purse: How Corporate Procurement is Influencing Law Firm Selection.”She is the keynote speaker at the upcoming conference on the influence of procurement on the purchasing of legal services, scheduled for June 15, 2012 in New York. Silvia is an adjunct professor at Fordham Law School in New York where she teaches courses in law firm marketing and law firm management. She is also director of research services at TyMetrix Legal Analytics. As a speaker and researcher she focuses on how clients buy legal services, in particular procurement, and data-driven management in the legal industry. Silviacan be reached at firstname.lastname@example.org.