CounselLink 2020 Trends Report

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CounselLink Enterprise Legal Management Trends Report

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Executive Highlights

Insights are based on data derived from nearly $35 billion in legal spending, almost seven million invoices, and more than 1.7 million matters. The key metrics are based on 2019 charges billed by outside counsel.

USE OF ALTERNATIVE FEE ARRANGEMENT (AFAs) CONTINUES TO INCREASE

AFAs continue to gain favor among corporate counsel. In 2019, 12.1% of matters were billed under some form of alternative billing, up from 9.2% in 2017. Additionally, data showed an increase in the percentage of dollars billed under an AFA, from 8.3% in the previous report to 10.2% for the most recent year of data.

“LARGEST 50” FIRMS CONTINUE TO DOMINATE HIGH-RATE WORK

Combining the three matter categories commanding the highest partner rates, the largest firms had a 62% share of invoice amounts billed in 2019, a number that has gradually increased over time. The three matter categories earning the highest partner rates are Mergers and Acquisitions; Corporate, General, Tax; and Finance, Loans and Investments.

THE LARGER THE FIRM, THE HIGHER THE TIMEKEEPER RATE

Timekeeper billing rates are highly correlated with the size of the timekeeper’s firm, most notably when comparing firms in two size groups. Partner billing rates for lawyers in the “Largest 50” firms, which have more than 750 lawyers, are 51% higher than those of partners in firms with 501-750 lawyers. And partner billing rates in firms with 201-500 lawyers are 29% higher than those for partners in firms with 101-200 lawyers.

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Introduction

The first edition of the CounselLink Enterprise Legal Management Trends Report was published in October 2013. That report established a set of key metrics based on data available via the CounselLink Enterprise Legal Management platform and provided insights that corporate law departments and law firms could use to guide their decisions and subsequent actions.

With the volume of data available for analysis growing with each passing year, the 2020 edition of the Trends Report represents the most up-to-date and even more detailed picture of how legal market dynamics are evolving over time.

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

We recognize the that the business and economic climate has changed dramatically in the first half of 2020 and the legal industry has had to react quickly. In light of these recent market changes, we analyzed data through May 2020 to find some leading indicators of how the legal landscape may be changing. Jump to page 16 to learn more.

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Update on the six key metrics

Each annual update of the CounselLink Enterprise Legal Management Trends Report covers a standard set of key metrics related to hourly legal rates and the corporate procurement of legal services.

Blended Hourly Rate for Matters – by Practice Area
BLENDED HOURLY RATES AND RATE VOLATILITY DIFFER BY TYPE OF WORK

All analysis is based on data through Dec 31, 2019 Practice areas ordered by median blended matter rates

Interpreting the Chart:
The chart on the previous page captures median rates for partners, associates, and paralegals; along with the range of blended average hourly rates 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 median hourly partner rates: $560 and $513, respectively. Although the IP-Trademark partner rate is almost 10% higher than the Corporate, General, Tax partner rate, the blended median rate for IP-Trademark is considerably lower ($310) versus the same rate for Corporate, General, Tax ($419). This indicates that relative to Corporate, General, Tax matters, IP-Trademark matters are staffed more significantly with non-partners, whose hourly rates bring down the overall blended average matter rates.

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. 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 rate of the different timekeepers that work on a matter. The chart shows that the median blended hourly rate is highest for Mergers and Acquisitions, where the most expensive firms are more often involved and with a great deal of partner engagement.

Comparing Regulatory and Compliance to Insurance as an example, the spread between the 25th and 75th percentiles of blended hourly rates for Regulatory and Compliance work is broader than that for Insurance. On a 10-point scale, Regulatory and Compliance has a Volatility Index of 10, while Insurance has an index of two, indicating that the mix of timekeepers and rates paid on Regulatory and Compliance matters varies significantly more 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.

Eight matter types have a relatively low Volatility Index (4 or lower), which means rates are consistent and less subject to negotiations between corporations and their firms:

Rates across most practice areas are rising relative to prior reports, though the rate trend is down slightly for IP-Patent work. Three categories have the most notable rate increases:

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. Note, however, that when looking at trends, it is important to evaluate the entire range of rates rather than focusing solely on the median rate.

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Law Firm consolidation—Number of Legal Vendors Used by Corporations

Law Firm Consolidation – Number of Legal Vendors Used by Corporations

 58% OF COMPANIES IN THE COUNSELLINK DATA POOL HAVE 10 FIRMS OR FEWER THAT ACCOUNT FOR AT LEAST 80% OF THEIR OUTSIDE COUNSEL FEES
All analysis is based on data through Dec 31, 2019

Interpreting the Chart:
This chart shows the degree of law firm consolidation among companies whose outside counsel legal billings are processed through CounselLink. The horizontal axis aligns participating companies into nine segments addressing different degrees of consolidation. For example, the bar on the far right indicates that 34% 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 just 2% of companies having 20-30% of their legal billings with 10 or fewer firms.

Industry type 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:

Alternative Fee Arrangement (AFA) Usage by Matter

SOME FORM OF AFAS WERE USED IN 12.1% OF MATTERS
All analysis is based on data through Dec 31, 2019

The use of AFAs to govern legal service payments varies considerably by legal matter type. Commodity-type work traditionally has the highest volume of matters billed under AFAs. Those categories include Insurance;

IP-Patent; IP-Trademark; Employment and Labor; and Finance, Loans and Investments. Two of these categories have well over 20% of matters billed under some form of alternative arrangement: Finance, Loans and Investments; and Employment and Labor.

In 2019, we also saw 19% of Merger and Acquisition matters billed under some form of AFA. In the previous Trends Report, that percentage was just over 10%, a significant jump for high-cost matters.

At 12.1%, the overall use of AFAs is stable relative to the prior Trends Report, though it is a significant uptick from the years 2016-2018, when usage ranged between 7% and 10%.

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Alternative Fee Arrangement (AFA) Usage by Billings

ALTERNATIVE FEE ARRANGEMENTS WERE USED IN 10.2% OF BILLINGS IN THE PAST YEAR
All analysis is based on data through Dec 31, 2019
Partner Hourly Rate Differences by Law Firm Size

FIRM SIZE MATTERS IN PARTNER BILLING RATES
All analysis based on average partner rates across practice areas, excluding insurance, through Dec 31, 2019

Partner Hourly Rate Growth by City

5 MAJOR CITIES SHOW RATE GROWTH OF 4% OR MORE OVER THE LAST YEAR, AND OVER THE LAST 3 YEARS
All analysis is based on data through Dec 31, 2019

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.

The biggest growth spurts in attorney rates for the last year were in Boston, Chicago, New York City, San Francisco, and Washington, DC. Each of the five cities saw attorney rates grow at or above 4% in both annual rate growth and compound annual growth rate (CAGR) over the last three years.

On the opposite side of the spectrum, three cities saw hourly growth rate below 3% in both metrics: Miami, Minneapolis, and Phoenix.

Partner Hourly Rate Growth by State

GROWTH IN MEDIAN PARTNER RATES VARIES BY STATE, AVERAGING 3.3% YEAR-OVER-YEAR
All analysis is based on data through Dec 31, 2019

Partner Hourly Rate by Practice Area – Last 12 Months

PARTNER RATES IN 3 PRACTICE AREAS HURDLE THE $600 BARRIER
All analysis is based on data through Dec 31, 2019

At $765, Mergers and Acquisitions legal work continues to lead the way in average partner rates for the last 12 months. M&A is followed on the list by Finance, Loans and Investments; and Corporate, General, Tax. In all three categories, the commonality is a tendency among companies to trust larger firms for their experience and expertise in such high stakes matters. In fact, the “Largest 50” firms commanded 77% of M&A work; 63% of Finance, Loans and Investment work; and 58% of Corporate, General, Tax legal work. Those percentages have been gradually growing over the last 4 years.

At the lower end of the average hourly rate spectrum is insurance work. Insurance companies demand and negotiate aggressively for low rates on their high-volume defense matters, the majority of which are handled by the smallest firms: 61% in 2019.

Partner Hourly Rate Growth by Practice Area

4 PRACTICE AREAS SHOWING 4% PARTNER RATE GROWTH OVER THE LAST YEAR AND OVER THE LAST THREE YEARS
All analysis is based on data through Dec 31, 2019

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The Changing Landscape

Since 2013, we have released our annual CounselLink Trends Report featuring insights in the legal industry, particularly as related to hourly billing rates. While this annual information is valuable, we recognize that the business and economic climate has changed dramatically since the end of 2019, and the legal industry has had to both react to changes and prepare for the future. In light of market changes, we have analyzed additional data sourced from CounselLink through May 2020 to provide the industry with insight into some recent trends evidenced by data.

TRENDS IN NEW LEGAL WORK

We compared trends of new matters by matter category for the months of January through May for 2018, 2019, and 2020. This data reveals several noteworthy trends in 2020.

TRENDS IN DISCOUNTS ON LEGAL BILLS

Legal departments have found themselves under even more pressure in 2020 than in recent years to manage outside counsel expenses. We looked at the number of invoices reflecting an invoice-level discount (discounts that may be applied either by the law firm at time of submission or by corporate counsel at time of invoice approval, e.g. not charge-specific adjustments).

Relative to prior years, 2020 invoices reflect a notable trend in increased discounting in the last 3 months. Historically, calendar year-end is the only time that 16% or more of invoices are discounted, whereas in 2020, May has crossed that threshold.

These metrics and trends are helpful; however, clearly such metrics are lagging in nature. Their value comes as we consider what future trends, they are leading indicators for, and to plan appropriately for that future. We are not working in a period of “business as usual,” and as such, legal department leaders need to be prepared to respond and change how they do business more rapidly than in more normal times.

As corporations seek to rein in 2020 expenses, the pressure on general counsels to do their part means a continued focus on outside counsel spending. Traditionally, most legal departments put considerable time and effort into annual hourly rate negotiations with law firms, and for 2020 that effort occurred prior to the COVID-19 crisis. Rather than relying on the traditional time-consuming process managing the resubmission of individual timekeeper rates by a multitude of law firms, we recommend legal departments use more efficient, scalable approaches to reducing outside counsel bills.

The most straightforward approach to reduce a bill is to take a discount off the entire bill (either a percentage or dollar amount). CounselLink and presumably other Enterprise Legal Management solutions offer this functionality to invoice approvers. Given that we suggest this approach in lieu of a lengthy rate negotiation, it is critical that general counsels communicate clearly with their outside counsel about plans to discount bills for an interim period of time.

Given trends that reflect reduced demand for legal services, coupled with greater discounting of legal bills, general counsels need to be mindful of the cash flow challenges potentially being faced by their law firms. 2020 is an opportune time to consider creative financing arrangements with vendors such as CounselLink’s FastTrack program, delivering rapid payment to law firms without affecting corporate payment terms.

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ABOUT THE ENTERPRISE LEGAL MANAGEMENT TRENDS REPORT

Since the inception of the CounselLink Enterprise Legal Management Trends Report, Kris Satkunas has been the principal author. She has made notable contributions to this latest Enterprise Legal Management Trends Report in the analysis of CounselLink data and in preparing the surrounding narrative.

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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 honing 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.