As law firms’ hourly rates continue to rise, in-house counsel must decide when to approve these rate increases and for how much – all while preventing unnecessary rises in their company’s total legal spend. Rate increases can be difficult to track over the years, especially when you handle a large volume of cases, budgets, and firms on a daily basis. Without measures in place to manage these increases, you can soon find that the company’s legal spend has crept higher and higher without justification.
What are some available strategies to control legal outsourcing costs when you are faced with rate increases?
While alternative fee arrangements can circumvent the issue of hourly rates for some matters, hourly rates are still the prevailing form of billing. Clear guidelines and legal spend data are two effective tools to manage hourly rate increases.
It is important to establish clear terms in the company’s billing guidelines that require firms to submit requests for rate increases as opposed to rate increase notices. Several other provisions should also be included:
- Assign a specific individual within the legal department to be responsible for approving rate increases. Depending on the size of the company and complexity of the legal matters at hand, assign these responsibilities to one or two people on a division-by-division basis, so that rate increase requests can be considered based on geography and area of law.
- Create a rate increase form to be completed by the firms. It can require information that clearly lays out the timekeepers, the current and increased rates, and the reason why these rate increases are justified.
- Set an annual deadline by which the firm must submit rate increase requests. Imposing a specific deadline will provide time to make an informed decision and better balance the budget for the coming year.
- Establish a staffing structure by limiting the number of timekeepers who are allowed to bill on a case. For example, a firm cannot have more than one partner, one associate, and one paralegal working on the same case. This prevents firms from using only attorneys with the highest rates to work on a matter.
- Specify the number of hours a timekeeper can bill overall or on a specific task. For example, no more than eight hours a day can be billed on a matter and the firm should not bill more than five hours of legal research without client approval.
Before approving rate increases, you should also closely evaluate your legal spend data.
Legal Spend Data
Legal spend data is an important way to stay informed of how hourly rates impact the company’s legal spend. As referenced above, you should allow enough time to evaluate this data before approving rate increases. By evaluating retrospective data, prospective data and comparative data, you will be able to understand how hourly rates have impacted the bottom line in the past, how rate increases will impact future spend, and how the rates compare to the rates paid by other companies in similar regions and areas of law.
1. Retrospective Data
Past rates and hours billed can be summarized over the course of several years. These reports show the overall trend of the rates and hours billed over the course of several years.
2. Prospective Data
The new proposed rate can be plugged in with the hours billed over the past year to project what the company’s legal spend would be for the next year. Of course, this projection will not be exact, but it offers a good starting point to see the impact of these rate increases based on current spend.
3. Comparative Data
Current rates are compared to the rates paid by other companies in that region and area of law. Data can also track what the company is currently paying other firms for this type of work and in this region. This information shows where the current and proposed rates stand in the market place.
While rate increase approvals are inevitable, well-structured billing guidelines can streamline the approval process and clean data can keep legal departments informed of what impact rate increases will have on their bottom line.