Managing Legal
The Point
“In 2020, 16.8% of [corporate legal] matters had some portion of their billing under an arrangement other than hourly billing”, according to the most recent LexisNexis / CounselLink trends report on U.S. law firms’ charges to U.S. corporations (2021 report based on 12 months of data between January 1, 2020 and December 31, 2020).
Which invites a working hypothesis, or at least a question:
Where a business finds the gumption to negotiate robustly with outside counsel on price, might corporate purchasing power prevail over lawyerly inertia?
This Matters to Your Business
This 16.8% figure for alternative fee arrangements takes place in the context of rising rates overall:
“Despite pandemic-related and other pressures for legal departments to reduce outside counsel spending, hourly rates paid to U.S. law firms increased in 2020. On average, partner hourly rates in 2020 were 3.5% higher than 2019 rates. This is slightly higher than the 3.3% increase in partner hourly rates from 2018 to 2019.”
Because …
Two data points within the report show that law firms’ willingness to work on a basis other than the billable hour — though at a tiny proportion of overall billings — was not confined to isolated, or “backwater”, areas of law practice.
First, the report found that alternative fee arrangements represented between 9% and 17% of billings in every major law practice area (11 of 11).
Second, alternative fee arrangements (AFAs) represented between 12% and 17% of billings in the four major practice areas where year-to-year increases in partner rates from 2019 to 2020 were highest among the 11:
- Regulatory and compliance (rates up 4.1% / 17% of matters priced by AFAs),
- Corporate (rates up 4.0% / 15% of matters priced by AFAs),
- Finance, Loans and Investments (rates up 3.9% / 14% of matters priced by AFAs), and
- Mergers and Aquisitions (rates up 3.9% / 12% of matters priced by AFAs).
These data invite questions: What accounts for outside counsel’s willingness to forego the billable hour in pricing to their corporate client in these practice areas? Do some corporate general counsels exhibit more resolve than others in negotiations with their law firm counterparts? Or does the explanation lie elsewhere?
These numbers don’t alter the reality that law firms in the U.S. and Canada base their pricing on the billable hour for over 80% of corporate legal matters (see this post). But the fact that an admittedly modest 12% to 17% of billings in the highest partner rate practice areas are based at least in part* on something other than the billable hour invites the question: What if more client companies overcame their timidity with law firms and made serious use of their purchasing power in price negotiations?
* For accuracy: The LexisNexis / CounselLink report categorized pricing of a legal matter as “Alternative Fee Arrangement” rather than “Hourly Billing” if all or only an unspecified portion of the fee was priced on some basis other than the billable hour. The rationale for this was not explained.
Part II of II —
Give Price Negotiations a Chance: U.S. Firms Use Alternatives to Billable Hour in 16.8% of Matters — Just Hourly-Billing-in-Disguise?