Recently, LexisNexis CounselLink published its first Enterprise Legal Management Trends Report. One of the key metrics included in the report is blended average matter rates, which I think warrants more discussion.
When I talk to most managers of legal departments or their procurement partners, their efforts to manage rates usually focus on individual timekeepers. It’s time to look at the big picture and stop spending so much time in the industry talking about how much a given partner charges.
Take for example a situation where a cost conscious corporation has decided to work with a new vendor. They successfully negotiate a 30% discount off of the firm’s standard rates, resulting in individual lawyers working on commercial matters at these rates that are competitive with industry benchmarks for lawyers of comparable experience:
• Senior Partner: $700/hr
• Midlevel Partner: $550/hr
• Junior Partner: $400/hr
• Senior Associate: $350/hr
• Junior Associate: $250/hr
This is a much superior arrangement to the one used for commercial matters in recent years. One of the partners at that previous firm billed at a rate of $1000 per hour! The win is celebrated.
Meanwhile, six months go by as invoices are submitted at agreed upon rates for multiple matters. As part of a CFO financial review, the analyst in the legal department runs a report of total fees paid for each commercial matter and divides by the hours billed on the matters. The resulting blended average matter rates range from $430 to $590.
But wait – last year’s average matter rates for similar matters ranged between $380 and $500! How can the matters be costing more when timekeeper rates this year are lower? The answer of course, lies in the mix of timekeepers that work on the matters. In this case the new firm is utilizing more senior and midlevel partners to handle the work than the original firm was. When analyzing staffing mix, remember that simple leverage ratios such as “partner hours to associate hours” don’t tell the whole story. In my example above, there is a big difference between the three levels of partners and their effect on the bottom line.
To understanding the drivers of outside counsel expense, I often suggest that legal departments look first at matters, not at timekeepers. If I were managing the department described above, I’d break my commercial matters into groups of reasonably similar matter types, and begin my analysis with a look at blended average matter rates. For similar types of works, I would hope there is low variability of those rates; i.e., I’d expect a pretty tight band around the median. If average rates are all over the board, how can a legal department expect to come reasonably close in budgeting and forecasting exercises?
In the Trends Report, one of the metrics introduced is a “volatility index” which does exactly what I describe above for 12 different types of matters. The index is on a scale of 0-10, with the upper range indicating matters with highly-variable blended average rates. Certain matter types have low volatility (Insurance and Mergers & Acquisitions), while others are much more volatile (Regulatory & Compliance). When grouping matters appropriately within one corporation, I contend that rate volatility should be quite low. I encourage corporations to calculate their own volatility index, and take steps to eliminate the outliers that drive up the index result.
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