2015 CounselLink Enterprise Legal Management Mid-Year Trends Report

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Executive Highlights

Based on data derived from outside counsel invoices processed through the CounselLink platform. Information is based on the trailing 12 months ending June 30, 2015, unless otherwise noted.

  • Overall usage of AFAs remains relatively stable
    Overall, 8.6% of all corporate matters and 7% of billings are under some sort of alternative fee arrangement. For the past three Trends Reports, the percentage of matters and billings handled under AFAs has been fairly consistent, ranging between 9-12% for matters and 7% for billings. Commodity type work, such as Insurance and Employment, has the highest volume of matters utilizing AFAs, at 15.6% and 14.1%, respectively. Corporate, General, Tax has shown an increase in the portion of work under alternative fee arrangements, growing from 9% of billings in the last report to 12.5%.
  • The gap between partner hourly rates for “Largest 50” firms and the “Second Largest” firms continues to grow
    The “Largest 50”Firms with more than 750 lawyers have billable rates that are 44% higher than the next tier of firms (501-750 lawyers) – a 6% increase since the last Trends report.
  • Some significant rate increases are evident in select practice areas
    Two of the 12 practice areas examined show median partner rate growth above 2.9% during both the past year and over the previous three-year period. These practice areas are: Regulatory and Compliance and IP-Patent.
  • Some significant rate increases are noticeable in the industry, although growth is inconsistent across geographies.
    Four cities show rate growth of 3.5% or more both in the short term (1 year) and longer term (3 year CAGR). These cities are: Chicago, San Francisco, Boston, and Philadelphia. On the opposite end of the spectrum, five cities had hourly rate growth of less than 2.5% in both metrics. These cities are: Houston, Los Angeles, Miami, Minneapolis, and Phoenix.

 


 

Introduction

The first edition of the LexisNexis Enterprise Legal Management Trends Report was published in October 2013. The inaugural report established a set of key legal services industry metrics and provided insights corporate counsel and law firms can use to guide their decisions and subsequent actions. This fifth and latest edition of the Trends Report presents a mid-year review of those guiding metrics, helping to create a more detailed historical view of how legal market dynamics are evolving over time.

Mid-year reports such as this focus solely on refreshing the data associated with the six key metrics. End-of-year reports refresh the six key metrics and also compile a deeper assessment of market conditions to highlight noteworthy trends.

As always, the report presents a snapshot of data available via the CounselLink Enterprise Legal Management platform. The collective stream of data and processed invoices aggregated since 2009 comprise more than $18 billion in legal spending, more than four million invoices, and well over one million matters, with the volume of data available for analysis growing at a rapid pace.

Details about the methodologies used, definitions and expert contributors conducting the analysis are presented at the end of the report.

 


 

The Key Metrics

Each semi-annual update of the Enterprise Legal Management Trends Report covers a standard set of key metrics for hourly legal rates and the corporate procurement of legal services from law firms.

Key Metric #1: Blended Hourly Rate for Matters – by Practice Area
Blended hourly rates and rate volatility differ by type of work
Based on trailing 12-months ending June 30, 2015.
Practice areas ordered by median blended matter rates

Update on the Six Key Metrics Key metrics1 -

Interpreting the Chart:

The chart captures median rates for three different groups of timekeepers (partners, associates and paralegals) and the range of the blended average hourly rate across multiple matter types. As a guide to interpreting the output, consider IP -Trademark compared to Corporate, General, Tax. These two categories have somewhat similar average hourly partner rates – $413 and $425, respectively – but IP -Trademark work requires significantly less partner time. The result is a noticeably lower blended median rate for IP – Trademark work ($300) versus the same rate for Corporate, General, Tax ($335).

An additional metric provided in this section is the Volatility Index – a calculated marker indicating the variability encountered in blended matter rates. Using a 10-point scale, the Index reflects how broad the spread is between the 25th and 75th percentiles of hourly rates. High volatility scores indicate greater variance in prices paid based on the mix of timekeepers and individual hourly rates.

Comparing IP – Trademark to Insurance as an example, the spread between the 25th and 75th percentiles of blended hourly rates for IP – Trademark work is broader than that for Insurance. On a 10-point scale, IP – Trademark has a Volatility Index of 6, while Insurance has an Index of 2, indicating that the mix of timekeepers and rates paid on these matters varies more significantly than the mix for Insurance. A high volatility index could also be an indicator of a wide variety of matter types being represented in this category.

Although individual lawyer rates are the focus of considerable industry attention, it is equally, or arguably more, important, to look at the bigger picture – the blended average rates that result when a mix of different timekeepers works on matters. The chart shows that the median blended hourly rate is highest for Mergers and Acquisitions, where the most expensive firms are more often involved with a great amount of partner engagement.

Five matter types have a relatively low Volatility Index, which means these rates are consistent and less subject to negotiations between corporations and their firms:

  • Insurance
  • Environmental
  • Real Estate
  • Finance, Loans and Investments
  • Litigation – General

Legal departments can compare their own data against these rates and ranges for help in managing costs. If they are currently paying at the top end of the range for more volatile matter types, there may be an opportunity to negotiate lower rates or to request a different mix of timekeepers to reduce costs.

From a trending standpoint, median matter rates for Mergers and Acquisitions have increased the most since the last report.

Key Metric #2:
Law Firm Consolidation – Number of Legal Vendors Used by Corporations
55% of companies in the data pool have 10 firms or fewer accounting for at least 80% of outside counsel fees
Based on trailing 12-months ending June 30, 2015

Update on the Six Key Metrics Key metrics2 -

Interpreting the Chart:

This chart shows the degree of law firm consolidation among companies. The horizontal axis aligns participating companies into nine segments addressing different degrees of consolidation. For example, the bar on the far right indicates 31% of participating companies have 90%-100% of their legal billings with 10 or fewer vendors, representing the most consolidated legal departments. On the other hand, the far left bar shows the least consolidation, with only 1% of companies having less than 20% of their legal billings with 10 or fewer firms.

The number of law firms who have consolidated at least 80% of their work with 10 firms or fewer has increased by 5% in comparison to 2014 data.

Industry plays a significant role in consolidation. The segments noted below, reflecting high and low degrees of consolidation, were also identified as such in earlier Trends Reports:

• Manufacturing (non-pharmaceutical) companies, at 66%, retail trade, professional, scientific, and technical services companies, at 67% and information companies, at 60%, are highly consolidated.
• The insurance industry has a low level of consolidation.

Key Metric #3:
Alternative Fee Arrangement (AFA) Usage
AFAs used in 8.6% of matters and 7.3% of billings in the past year
Based on trailing 12-months ending June 30, 2015

Update on the Six Key Metrics Key metrics3 -

The use of AFAs to govern legal service payments varies significantly by legal matter type, but overall, remains fairly stable relative to previous reports. Over the 12-month period ending June 30, 2015, 8.6% of matters submitted and processed via the CounselLink solution  were invoiced, at least in part, under a fee arrangement other than traditional hourly billing. This represents a 0.8% decrease in usage since the last Trends Report. Four categories of legal work came in above the average, with Employment and Labor, Insurance, IP – Patent and Regulatory and Compliance in the top spots where AFAs are most often in place. Commodity-type work such as Insurance and Employment and Labor have tended to have the highest volume of matters billed under AFAs.

Key Metric #3:
Alternative Fee Arrangement (AFA) Usage
AFAs used in 8.6% of matters and 7.3% of billings in the past year
Based on trailing 12-months ending June 30, 2015

Update on the Six Key Metrics Key metrics3b -

More notably, Corporate, General, Tax matters are showing an uptick in the use of AFAs. With counsel pursuing more and more non-traditional fee arrangements, the percentage of Corporate, General Tax matters having billings under some sort of alternative fee arrangement has risen from 9% in the last report to 12.5% in this latest report.

Key Metric #4:
Partner Hourly Rate – Overall
Average rates across practice areas (excluding Insurance) and geographies
Based on trailing 12-months ending June 30, 2015

Hourly rates by law firm size
Median partner hourly rates by law firm size for 12-months ending June 30, 2015

Update on the Six Key Metrics Key metrics4 -

The gap between the average partner rates at the “Largest 50” firms (those with 750+ lawyers) and those at the “Second Largest” firms (501-750 lawyers) continues to grow. Firms with more than 750 lawyers have billable rates that are 44% higher than the next tier of firms (501-750 lawyers).

Key Metric #5: Partner Hourly Rate Growth – by Location (City)
Four major cities show rate growth of 3.5% or more both over the last year and over the last three years
Based on trailing 12-months ending June 30, 2015

Update on the Six Key Metrics Key metrics5a -

Interpreting the Chart:

In looking at unique partner hourly rates across 15 major metro areas, two indicators were plotted for each location to show both the year-over-year change and the compound annual growth rate (CAGR) over a three-year span.

Data for attorney rate growth by major U.S. city show that Chicago, San Francisco, Boston, and Philadelphia are at or above 3.5% in both compound annual growth rate (CAGR) and annual growth rate. At the opposite end of the spectrum, five cities – Houston, Los Angeles, Miami, Minneapolis, and Phoenix – experienced hourly rate growth below 2.5% in both metrics.

Key Metric #5: Partner Hourly Rate Growth – by Location (State)
Growth in partner rates varies by state, averaging 2.0% year-over-year
Based on trailing 12-months ending June 30, 2015

Update on the Six Key Metrics Key metrics5b -

The median year-over-year growth for partner hourly rates across all states is 2.0%.

Key Metric #6:
Partner Hourly Rate – by Practice Area
Based on trailing 12-months ending June 30, 2015

Update on the Six Key Metrics Key metrics6a -

Aggregate statistics based on CounselLink solution invoice data submitted in the last 12 months identify Mergers and Acquisition as the practice area with the highest partner rate of $600. Next is Regulatory and Compliance, followed by Corporate, General, Tax, which includes advice and counsel, antitrust work, and tax-related matters. In part, all three of these practice areas at the top of the rate range occupy those spaces because companies often use larger firms for these kinds of matters. In the last 12 months, the “Largest 50” firms handled 37% of Merger and Acquisition work, and 34% of Regulatory and Compliance legal work, versus 24% for all other types of legal work. At the lower end of the average hourly rate spectrum is insurance work. Insurance companies demand and negotiate aggressively for low rates on their commodity defense matters.

Key Metric #6: Partner Hourly Rate Growth – by Practice Area
Two practice areas showing 2.9% partner rate growth over both the last year and the last three years
Based on trailing 12-months ending June 30, 2015

Update on the Six Key Metrics Key metrics6b -

Turning to partner rate growth by practice area, two of the 12 practice area categories have shown growth at or exceeding a 2.9% rate during the past year and over the previous three-year period: Regulatory and Compliance and IP-Patent.

Partner rates for Insurance and Environmental are growing more slowly than rates in other practice areas.

 


 

About the Trends Report

Terminology:

  • Matter Categorization – CounselLink solution users define the types of work associated with various matters that were analyzed and categorized into legal practice areas. For this analysis, all types of litigation matters are classified as “litigation,” regardless of the nature of the dispute.
    • Other, as an open category for all other matters and bills not already addressed
  • Company Size – Based on 2012 revenue cited in public sources, companies were grouped into these
    three size categories:

    • $10 Billion
    • $1-10 Billion
    • < $1 Billion
  • Company Industry – Companies were mapped into the NAICS hierarchy based on publicly-available information:
    • Finance
    • Information
    • Insurance
    • Manufacturing
    • Pharmaceutical
    • Professional, Scientific and Technical Services
    • Retail Trade
    • Transportation & Warehousing
    • Other

 


 

Expert Contributors

Several LexisNexis individuals played a major role in analyzing the latest CounselLink data and compiling this first Enterprise Legal Management Trends Report, specifically:

Principal Author

Kris Satkunas
Director of Strategic Consulting

As Director of Strategic Consulting at LexisNexis CounselLink, Kris leads the CounselLink team in advising corporate legal department managers on improving operations with data-driven decisions. Kris is an expert in managing the business of law and in data mining, with specific expertise in matter pricing and staffing, practice area metrics and scorecards.

Prior to joining CounselLink, Kris served as Director of the LexisNexis Redwood Think Tank, which she also established. For five years, Kris worked closely with thought leaders in large law firms conducting unbiased data-based research studies focused on finding solutions to legal industry management issues. Before that, she led the business of law consulting practice for large law firms. During that time she worked with key management at over a hundred law firms to improve the financial models and analyses developed for large law firms.

Kris has authored numerous articles and spoken at many legal industry conferences and events. She came to LexisNexis in 2000 after having honed her finance skills as a Senior Vice President in Strategic Finance at SunTrust Bank. She holds a B.B.A. in Finance from The College of William and Mary.

Kris may be reached at kristina.satkunas@lexisnexis.com or 804.955.4034.

 

 







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