Looking At Supply And Demand To Pinpoint Why Outside Counsel Rates Continue To Rise

It’s official: Outside counsel rates are high and getting higher, according to a CounselLink 2023 Trends Report Mid-Year Special Edition.

In 2022, year-on-year statistics showed that the average partner billing rate rose by 4.5%, the highest increase in the 10-year history of the CounselLink Trends Report. January to July 2023 data, compared with the same period the previous year, show an even higher increase in average outside counsel billing rates: 5.7%.

The continued climb in partner billing rates could be a surprise, until you look at these obvious culprits:

• Economic fluctuations in the current mini-recession climate
• The laws of supply and demand
• Law school costs of more than $220,000

Law Firm Billing Rates And Supply And Demand

In this Above the Law article citing a Wells Fargo’s Legal Specialty Group survey of 130 firms, including 66 of the Am Law 100, during first-half 2023 “lawyer headcount is up 3.9 percent, but demand is down, leading to a decline in productivity to the tune of 4.1 percent.” It seems that law firms are opting to wait out a drop in demand by clients for law firm services, which only delays the inevitable for associate deferrals and terminations.

Over the summer, we saw the deferral of associate start dates at some big law firms. Those in the technology sector fell victim to the slashing of thousands of corporate jobs which directly influenced incoming associate positions and technology practice areas. These productivity fluctuations, also seen in mergers and acquisitions, most certainly affected supply and demand.

With the unemployment rate hovering at 3.8%, recruiting top law firm talent is a significant investment in a firm’s future success. This also means that the coveted billable hour is sliced and dispensed among senior lawyers and their associates. To justify worth, everyone needs to document billable time, which suggests that some associates are left holding the bag with few billable hours inside to support their own performance — a tick-tick of the time bomb to termination.

Taking Action

The continuing rise in outside counsel rates is not sustainable.

Our symbiotic relationship runs in cycles, fluctuates with the economy, and depends on how we coalesce. As law firms continue to identify ways to maintain profitability, general counsel and chief legal officers focus on mitigating risk to their legal spend (while protecting the organization from the influence of negative market factors).

To manage during disruptive times, here are several suggested ways to control rising outside counsel costs:

1. Set up a preferred provider program. Work with the law firms that want to collaborate with you to develop a more balanced relationship.
2. Use an enterprise legal management solution to approve timekeepers, monitor timekeeper billing, and ensure that an unapproved timekeeper doesn’t bill five hours or less without adding value.
3. Develop a rate-review process audited twice annually.
4. Mix up relationships: consider hiring midsized law firms with equally astute lawyers to manage legal matters. Many smaller firms offer billable rates lower than those of larger law firms.
5. Incentivize the law firm that accomplishes previously set goals, brings home a win, and has the philosophy of being accountable for litigation outcomes.

What thoughts can you add to the conversation about how we can all survive a looming recession? Follow me on LinkedIn, and let’s open a discussion.

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Olga V. Mack is the VP at LexisNexis and CEO of Parley Pro, a next-generation contract management company that has pioneered online negotiation technology. Olga embraces legal innovation and had dedicated her career to improving and shaping the future of law. She is convinced that the legal profession will emerge even stronger, more resilient, and more inclusive than before by embracing technology. Olga is also an award-winning general counsel, operations professional, startup advisor, public speaker, adjunct professor, and entrepreneur. She founded the Women Serve on Boards movement that advocates for women to participate on corporate boards of Fortune 500 companies. She authored Get on Board: Earning Your Ticket to a Corporate Board Seat, Fundamentals of Smart Contract Security, and  Blockchain Value: Transforming Business Models, Society, and Communities. She is working on Visual IQ for Lawyers, her next book (ABA 2023). You can follow Olga on Twitter @olgavmack.