The economic outlook is like a spinning top, creating uncertainty among corporations, investors, shareholders, and legal departments. The trickle-down effect puts Chief Legal Officers and General Counsel squarely in the crosshairs of troublesome rising outside counsel fees, among other negative factors affecting budgets during this rolling recession.
If legal departments feel the pinch, how are law firms faring, and what’s causing them to pass along their costs to in-house counsel?
Factors Affecting Outside Counsel Fees
A plethora of economic and industry criteria contribute to business expenditures, and law firms’ bottom-line fluctuations are dependent on many of the following factors:
- Rising interest and mortgage rates. To get a handle on inflation, the Federal Reserve raised its interest rate at the end of July 2023 by .25% to as much as 5.5%, the highest level in 22 years. The higher interest rates sent mortgage rates sky high: 7.6% average for a 30-year fixed mortgage. Borrowing costs for real estate are now higher than ever, affecting consumers and businesses, alike.
- Cooling demand for legal services. With explosive growth in law firms showing signs of teetering, higher lawyer fees are assessed on clients to offset troubled practice areas that may be experiencing little-to-no growth.
- Associate deferrals to balance the cost of labor. Many large law firms are asking summer associates to defer start dates while dangling a stipend on a stick if they accept the deferral. Law firms are looking to balance labor against projected contracts.
- Aging or non-existent technology. Law firms need to update their tech stack, which contributes to nearly 50% average annual overhead. Software investment includes case management, time and billing, CRM like InterAction+™, or a media intelligence tool like Nexis Newsdesk™. GCs are demanding more industry intelligence from law firms, and this often requires a subscription to databases that deliver company and industry insights.
- Higher partner and associate fees for complex legal matters. The annual CounselLink® 2023 Trends Report showed the highest average law firm partner rate increase in in the last 10 years. Lawyers’ hourly rates soared 4.5% in 2022 versus 2021. Among practice areas, Mergers & Acquisitions topped the scale at $955 per hour.
These factors explain some of the reasoning why law firms continue to elevate their fees. While CLOs and GCs have little recourse against paying for higher legal spend, adding a technology solution like Enterprise Legal Management (ELM) provides ways to mitigate the risk of rising outside counsel hourly rates.
CounselLink ELM helps the legal department improve budget and invoice management with greater efficiency and higher productivity. Legal spend cost containment requires:
- Analysis of the legal department’s current technology
- Audit of department analytics and reporting abilities
- Knowledge of budgets, invoicing and compliance with workflow guidelines
- Ability to review accuracy of invoices, timekeepers’ hourly rates, time billed to a matter, and which invoice line items are acceptable or denied.
Look for the CounselLink 2023 Trends Report Mid-Year Special Edition that explores whether inhouse counsel can expect law firm timekeeper rates to continue to increase through year end 2023.