Rate increases by law firms – a contentious topic

Charge-out rates of law firms inexorably, inevitably and (to some inside lawyers) inequitably rise (See my post of July 30, 2005: nearly 5% increase in rates for partners; Sept. 25, 2006: outside counsel rates average $185 per hour; and Feb. 23, 2008: annual average increases of about 5.5% in outside-counsel hourly rates.).

Worse, the larger the firm you use, the higher the rates move every year (See my post of Oct. 25, 2007: average partner billing rates trend steadily higher as firm size increases; and Jan. 3, 2007: each additional 100 lawyers raised the average partner rate $13.).

The most fundamental improvement a general counsel can make, in decisions on whether to permit requested rate increases by law firms, is to set criteria for inside counsel to grant approval (See my post of Nov. 21, 2005: rate increases linked to productivity increases; Dec. 16, 2005: rate changes not by 12 months but by project experience; March 12, 2006: different rates for the same lawyer, according to value of a task or matter; Dec. 5, 2007: no rate increases for Wal-Mart without strong performance and value added; and Nov. 24, 2005: assess requests against changes in the CPI or a company’s profitability.).

No magic potions or secret methods exist to circumvent the disciplined work of firm-by-firm reviews of rate increases (See my post of Jan. 25, 2006: American Express’ patent for a solution to law firm rate increases.). You need comparative rate data (See my post of April 8, 2005: compare the rate increases of your key firms to those of peer firms.). You need experience data (See my post of Sept. 5, 2005: DuPont’s nine-part application when a firm requests rate hikes.). You need to understand the economic drivers of law firms (See my post of Nov. 13, 2006: three-way vector that determines billing rate increases at law firms; and May 8, 2007: alpha and beta figures for outside counsel rate increases.).

After all this, or before some of it, some managers of outside counsel simply slam on the brakes (See my post of April 8, 2008: rate freezes on specific matters are better than discounts; April 26, 2006: warm up to the idea of not freezing billing rates; and March 11, 2007: rate freezes work like discounts.).

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