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September 7, 2010 6:00 AM

Reality Check: In Setting Billing Rates, Location and Size Matter; Experience...Not So Much

Posted by Ross Todd

The September issue of The American Lawyer offers a preview of the Real Rate Report, a study produced by CT TyMetrix, Inc., a company that audits law firm bills, and The Corporate Executive Board Company, a company that provides best practices research and analysis. They studied the bills sent to 36 large corporate clients between 2007 and 2009--more than $4 billion worth of timesheets submitted by 90,000 people at 3,500 firms. They scrubbed the data to protect the identity of the billers and the billed. Then they got to work crunching the numbers.

A lot of interesting statistics jump out. For starters, legal bills increased at rates that exceeded inflation, in-house lawyers who spent more at a particular law firm were not getting any discounts, and partner status added nearly $100 on average to a lawyer's rate regardless of experience.

But what most struck us about the report was its portrayal of an industry fraught with inconsistency. The vast majority of lawyers--85 percent--charge clients different rates for the same work. The location of the biller and the size of the biller's firm--not the biller's experience--are the variables that most influence how much a client will pay. And though in-house counsel talk a good game about keeping rates in check, they approve almost three-fourths of all timekeepers' rate hikes.

Take note. Your clients likely already have. Among the noteworthy items (click on the graphic for an expanded view):

BT-RRR_WebVersion02

 

Related:

Survey Shows Law Firms Charging Different Rates for the Same Work
Corporate Counsel, May 26, 201



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I hate to say this, but this data just proves what many are now starting to suspect: that many GC are - and despite all the hot air about pushback - actually stunningly weak and almost incapable of reducing legal spend - even when they have the upper hand - My God, in any other sector people that bad at procurement would be out of a job in 30 seconds.
The next big question - and one American Lawyer should be looking at with all its resources is: why are GC so bad at reducing legal spend?
The more you look the more you understand that the few good news stories about innovators are few and far between. Exactly as your article says: 'Pushback - What Pushback?'

What inference does AmLaw and CT expect readers to draw from the statement "Think twice about trimming your pool of approved legal providers. Companies that spent up to $500,000 at a particular firm paid an average of $255/hour. But those that spent $5–10 million and had leverage and bargaining power . . . paid almost twice as much--$477/hour. "?

The "NO Volume Discount" title and line "think twice" suggest we should conclude there are no volume discounts. An alternative hypothesis is that firms that spend less than $500k are retaining firms for low stakes matters on which junior lawyers do most of the work. Those spending >$5M may be facing higher stakes cases where one would expect the blended rate to be higher.

This is not in defense of BigLaw. Rather, this is to point out another instance of lack of rigor in legal market research. The conclusion _may_ be true but the data presented don't support it.

I don't know that you can really 'blame' the GC for not being able to reduce legal spend when work often _has_ to be farmed out because the company is under a hiring freeze internally, and the nature of responding to litigation and such doesn't really allow to keep pushing expenses to the next quarter.

Oh, boy.

These reported oh-so-obvious implications of CT TyMetrix’s statistical findings are entertaining, at least in a schadenfreude sort of way. But the twist they’ve gotten here relies on three assumptions I find to be not only false, but bizarre: (1) clients are stupid, (2) their law firms are out to screw them and (3) the most plausible relationship between two facts is causal.

If we were to discard these assumptions, we could then engage in some interesting discussion and analysis. What actual events and conditions could be behind these ‘findings’? What are some other possible interpretations of these metrics? What else might be going on?

From this perspective, let’s look at just three of this study’s gotcha! findings:

1. “NO Volume Discount – Think twice about trimming your pool of approved legal providers. Companies that spent up to $500,000 at a particular firm paid an average of $255/hour. But those that spent $5-10 million and had leverage and bargaining power … paid almost twice as much--$477/hour.”

Alternate questions / discussion – All companies don’t have the same legal needs, and all of a single company’s legal needs are not the same in scope, complexity or value. Some legal needs require lawyers with greater expertise and/or more lawyers to resolve. Many (most?) clients seem to give their lower-value matters to specialty firms set up to perform those legal services at a low cost; those matters include routine labor and employment, insurance defense, real estate, financings, etc. Many (most?) clients give their most trusted law firms – their preferred providers, some of which bill $5 – 10 million annually – their larger, more challenging, higher-value matters. In fact, $477/hour sounds about right to me as a blended rate for a senior partner, a partner, a senior associate and a junior associate, with the proportion of work tilted downhill toward associates. But what’s the problem with this alternate analysis? It’s not very gotcha!

2. “Age Before Beauty – Hidden costs, not very well hidden. Associate costs rose 17% between 2007 and 2009. Partner rates rose only 9% in the same time period.”

Alternate questions / discussion – Here, the study reports on and compares two quite different metrics: Associate ‘costs’ and partner ‘rates.’ That could just be sloppy editing, but even if it’s not I can still work with it. Since 2007, a common client theme, reported in the media and heard during client service interviews, has been that many (most?) clients no longer want first-year associates working on their matters. When first-year associates are removed from legal teams, the per-associate costs on that team necessarily will rise – probably around 17%. Mystery solved. Oh, wait – it wasn’t a real mystery after all – just maths.

3. “Partner Material – Two lawyers with 10 years of experience. One is called ‘partner,’ one is not. The difference? About $100/hour.”

Alternate questions / discussion – OK, this time let’s actually consider the possibility of a cause-and-effect relationship. Two people are associates at a firm. One associate makes partner after seven years, the other one doesn’t. The firm’s decision to make one partner (and not make the other one partner) is not a random decision, but based on some observed variances in these two associates’ lawyering abilities and performances, commitment levels, potential to develop further as a partner, client satisfaction reports, etc. After one makes partner, the next three years offer these two people much different opportunities – the new partner receives much more responsibility to strategize and execute on a broader scale, to manage and supervise other lawyers, to manage the client relationship, etc. The non-partner receives three more years of work experience, but certainly not at the level of responsibility the partner is given. Three years later, do all those ten years of differences sum up to a $100 bill rate difference? Apparently so – because ‘10 years of experience’ don’t equal ‘10 years of experience.’

My conclusion? Statistics don’t lie. In fact, statistics don’t say much at all. It’s every thinking person’s responsibility to analyze and give the most plausible interpretation to what those statistics actually mean – not just how they could support a gotcha! storyline.

Oh, boy.

These reported oh-so-obvious implications of CT TyMetrix’s statistical findings are entertaining, at least in a schadenfreude sort of way. But the twist they’ve gotten here relies on three assumptions I find to be not only false, but bizarre: (1) clients are stupid, (2) their law firms are out to screw them and (3) the most plausible relationship between two facts is causal.

If we were to discard these assumptions, we could then engage in some interesting discussion and analysis. What actual events and conditions could be behind these ‘findings’? What are some other possible interpretations of these metrics? What else might be going on?

From this perspective, let’s look at just three of this study’s gotcha! findings:

1. “NO Volume Discount – Think twice about trimming your pool of approved legal providers. Companies that spent up to $500,000 at a particular firm paid an average of $255/hour. But those that spent $5-10 million and had leverage and bargaining power … paid almost twice as much--$477/hour.”

Alternate questions / discussion – All companies don’t have the same legal needs, and all of a single company’s legal needs are not the same in scope, complexity or value. Some legal needs require lawyers with greater expertise and/or more lawyers to resolve. Many (most?) clients seem to give their lower-value matters to specialty firms set up to perform those legal services at a low cost; those matters include routine labor and employment, insurance defense, real estate, financings, etc. Many (most?) clients give their most trusted law firms – their preferred providers, some of which bill $5 – 10 million annually – their larger, more challenging, higher-value matters. In fact, $477/hour sounds about right to me as a blended rate for a senior partner, a partner, a senior associate and a junior associate, with the proportion of work tilted downhill toward associates. But what’s the problem with this alternate analysis? It’s not very gotcha!

2. “Age Before Beauty – Hidden costs, not very well hidden. Associate costs rose 17% between 2007 and 2009. Partner rates rose only 9% in the same time period.”

Alternate questions / discussion – Here, the study reports on and compares two quite different metrics: Associate ‘costs’ and partner ‘rates.’ That could just be sloppy editing, but even if it’s not I can still work with it. Since 2007, a common client theme, reported in the media and heard during client service interviews, has been that many (most?) clients no longer want first-year associates working on their matters. When first-year associates are removed from legal teams, the per-associate costs on that team necessarily will rise – probably around 17%. Mystery solved. Oh, wait – it wasn’t a real mystery after all – just maths.

3. “Partner Material – Two lawyers with 10 years of experience. One is called ‘partner,’ one is not. The difference? About $100/hour.”

Alternate questions / discussion – OK, this time let’s actually consider the possibility of a cause-and-effect relationship. Two people are associates at a firm. One associate makes partner after seven years, the other one doesn’t. The firm’s decision to make one partner (and not make the other one partner) is not a random decision, but based on some observed variances in these two associates’ lawyering abilities and performances, commitment levels, potential to develop further as a partner, client satisfaction reports, etc. After one makes partner, the next three years offer these two people much different opportunities – the new partner receives much more responsibility to strategize and execute on a broader scale, to manage and supervise other lawyers, to manage the client relationship, etc. The non-partner receives three more years of work experience, but certainly not at the level of responsibility the partner is given. Three years later, do all those ten years of differences sum up to a $100 bill rate difference? Apparently so – because ‘10 years of experience’ don’t equal ‘10 years of experience.’

My conclusion? Statistics don’t lie. In fact, statistics don’t say much at all. It’s every thinking person’s responsibility to analyze and give the most plausible interpretation to what those statistics actually mean – not just how they could support a gotcha! storyline.

Ann Lee Gibson


Thanks to you all for the lively commentary and discussion. I encourage everyone to read the report directly, as you will find a rich platform of data-driven analysis. The report provides the statistical data, and the interpretation is in the hands of those directly engaged in the buying and selling of legal services.
The questions/discussions in this forum are exactly the type of dialogue that naturally evolve from the new level of insight provided by real data. As with any new level of transparency, there are many ways to interpret the information – as AmLaw has done in the above article.

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