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2014 CounselLink Enterprise Legal Management Year-End Trends Report


Executive Highlights

  • AFA usage has been increasing steadily over the past 4 years
    The number of legal departments engaging in alternative fee arrangements with their law firms is increasing. The percentage of CounselLink customers engaging in these fee arrangements has increased from 59% in 2011 to 76% in 2014.
  • IP Litigation work is increasing in the “Largest 50” firms
    The “Largest 50” firms (those with 750+ lawyers) are steadily increasing their share of IP Litigation work (from 36% in 2011 to 61% in 2014), while the share of IP Litigation for “Large Enough” firms (those with 201-500 lawyers) has dropped from 35% to 13%.
  • ”Large Enough” firms are staffing IP Litigation cases with considerably more partner effort than the “Largest 50” firms.
    CounselLink data indicates that the majority of matters at the “Largest 50” firms have less than 1% of partner time billed to them, whereas at “Large Enough” firms (those with 201-500 lawyers) 53% of matters have between 20 to 60% of partner hours billed to them.
  • Within IP Litigation, median partner rates at the “Largest 50” firms have dropped for four consecutive years
    The median rate paid for partners in the “Largest 50” firms billing on IP Litigation matters in 2011 was $656. The median paid to partners billing in 2014 dropped to $622. Examining the same data point for “Large Enough” firms reveals a median rate of $560 in 2011 versus $651 in 2014. The median rate in “Large Enough” firms has surpassed the median rate in the “Largest 50” firms in 2014.

 


 

Introduction

In this, the fourth edition of the Enterprise Legal Management Trends Report, powered by LexisNexis CounselLink, we continue to refine our perspective on legal market dynamics. The first edition of the report, published in October 2013, established key metrics and provided insights corporate counsel and law firms can use to guide their decisions and subsequent actions. This latest edition of the report presents a year-end review of those guiding metrics, providing an even more comprehensive view of how market trends are evolving over  time.

Mid-year reports focus solely on refreshing the data associated with the six key metrics. End-of-year reports – like this one –refresh the six key metrics and also compile a deeper assessment of market conditions to highlight noteworthy trends.

As always, the report presents a snapshot of data available via the CounselLink Enterprise Legal Management platform. Currently, the collective stream of data and processed invoices gathered since 2009 represents nearly $18 billion in legal spending, more than four million invoices, and well over one million matters, with the volume of data available for analysis growing at a rapid pace.

Details about the methodologies used, definitions and expert contributors conducting the analysis are presented at the end of the report.

 


 

Market Insights: Largest Law Firms Winning Sizable Majority of IP Litigation Work

The market share for IP Litigation is shifting to the “Largest 50” firms (those with 750+ lawyers). In 2011, the “Largest 50” firms were responsible for billing 36% of IP Litigation charges within the CounselLink data set. That share has increased in each successive year, growing to 61% in 2014, while “Second Largest” firms (501-750 lawyers) and “Large Enough” Firms (201-500 lawyers) are losing share.

The data also reveals significant differences in partner billing rate trends for the “Largest 50” firms versus the “Large Enough” firms. Individual partner rates at the “Largest 50” firms have been fairly flat over the past 3 years and the median hourly rate for partners in the “Largest 50” firms has been dropping, driven by a shift in work to less senior partners. On the other hand, “Large Enough” firms have been increasing individual partner billing rates materially. CounselLink data also indicates that “Large Enough” firms staff IP Litigation cases with considerably more partner effort than do the “Largest 50” firms.

Figure 1: Enterprise Legal Management Trends Report
Macro Trend: In aggregate, median partner rates for IP Litigation matters remain flat
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart shows the range of IP Litigation partner rates for the years 2011 through 2014.

Median rates paid to partners for IP Litigation work appears to be fairly flat since 2012, ranging between $548 and $554.

Figure 2: Enterprise Legal Management Trends Report
Macro Trend: IP Litigation partner rates for the “Largest 50” firms are trending downward
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart highlights median hourly partner rates for IP Litigation matters at the “Largest 50” firms (those with 750+ lawyers) between 2011 and 2014.

Examining median hourly partner rates for IP Litigation at the “Largest 50” firms (firms with 750+ lawyers) shows rates have dropped from  656 in 2011 to $622 in 2014. Looking more closely at billing rates for this firm size shows that this result is the effect of two factors: partners doing IP Litigation work have held their rates flat and that work has shifted to more junior partners from more senior partners (see Figure 6).

Figure 3: Enterprise Legal Management Trends Report
Macro Trend: IP Litigation partner rates for ”Large Enough” firms have risen each year since 2011
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart illustrates the range of outside counsel partner rates billed to CounselLink customers for IP Litigation partners at “Large Enough” firms during the period 2011 to 2014.

Whereas the data in the previous section indicates that median hourly partner rates at the “Largest 50” firms (those with more than 750+ lawyers) have decreased, it’s a very different rate story at “Large Enough” firms (those with 201-500 lawyers), where individual partner rates have been increasing over the past four years. Median rates have increased from $560 in 2011 to $651 dollars in 2014 (a compound annual growth rate of 0.5%).

Figure 4: Enterprise Legal Management Trends Report
Macro Trend: Median partner rates at ”Large Enough” firms exceeded median partner rates at the “Largest 50” firms in 2014
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart shows the median partner rates at the “Largest 50” firms (those with 750+ lawyers) and at “Large Enough” firms (those with 201-500 lawyers) for the period 2011 to 2014.

The median partner rate of “Large Enough” firms (201-500 lawyers) has passed the median rate of the “Largest 50” firms’ partners in 2014. The median partner rate billed from a “Largest 50” firm was $622 in 2014, while the median partner rate from a “Large Enough” firm  as $651. The median rate is a significant data point; however, an analysis of the entire range of rates shows that at the 75th percentile, the “Largest 50” firms continue to have higher rates than “Large Enough” firms ($747 vs. $735 in 2014). The fact that the median rate is lower for the “Largest 50” firms than the median rate for “Large Enough” firms indicates a shift of work to more junior partners in the larger firms. The “Largest 50” firms have greater flexibility in staffing decisions than smaller firms.

Figure 5: Enterprise Legal Management Trends Report
Macro Trend: Individual partner rate increases at ”Large Enough” firms are materially on the rise.
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart shows the year-over-year change and 3-year CAGR for individual partner rates at the “Largest 50” firms (those with 750+ lawyers) and at “Large Enough” firms (those with 201-500 lawyers) for the period 2011 to 2014.

When considering individual partner rate changes at the “Largest 50 firms,” the median 1-year change was 0.7% and the 3-year CAGR was -0.4%, reflecting significant pressure on the “Largest 50” firms from corporate counsel negotiating hourly rates. On the other hand, partners in “Large Enough” firms (201-500 lawyers) have been raising their rates materially. The median rate increase on a 3-year CAGR basis for a partner performing IP Litigation work from “Large Enough” firms was 5.8% and the 1-year change was 2.7%.

Figure 6: Enterprise Legal Management Trends Report
Macro Trend: 50% of the IP Litigation matters handled by the “Largest 50” firms included virtually no partner time. In contrast to the “Largest 50” firms, IP Litigation matters in ”Large Enough” firms reflect a higher percentage of work performed by partners.
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart shows the percentage of work handled by partners at the “Largest 50” and “Large Enough” firms.

The percentage of IP Litigation work performed by partners varies significantly with firm size. Large law firms leverage the large pool of associates and other lower rate timekeepers to limit partner billing on IP Litigation matters. 50% of the IP Litigation matters handled by the “Largest 50” firms (those with 750+ lawyers) had virtually no time billed by partners. 53% of the matters handled by “Large Enough” firms have between 20% and 60% of their hours billed by partners.

Figure 7: Enterprise Legal Management Trends Report
Macro Trend: Within IP Litigation matters, the “Largest 50” law firms are dominating the market.
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart illustrates the IP Litigation market share held by firms of various sizes between 2011 and 2014.

The market share for IP Litigation is shifting to the largest firms. In 2011, the “Largest 50” firms (those with 750+ lawyers) were responsible for billing 36% of IP charges. That share has increased in each successive year, growing to 61% in 2014. The firms that are losing the most share are the “Second Largest” firms (those with 501-750 lawyers) and “Large Enough” firms (those with 201-500 lawyers).

 


 

Market Insights: Alternative Fee Arrangement Adoption is Rising

Overall, the percentage of matters that have billings under some sort of alternative fee arrangement (AFA) has remained fairly stable at approximately 9% of matters and 7% of billings (See Key Metric # 3). Some might believe this stability is an indication that AFAs are not gaining in popularity, and the billable hour will continue to be the primary basis of legal billing in the future. However, CounselLink data reveals that the number of legal departments engaging in alternative fee arrangements with their law firms is increasing. Three quarters (3/4) of companies used alternative fee arrangements in 2014. The percentage of CounselLink customers engaging in alternative fee arrangements has increased from 59% in 2011 to 76% in 2014 (See Figure 8).

There are multiple pockets where the industry shows strong signs of moving toward more creative pricing:

CounselLink data shows that:

  • AFAs have become more popular in 5 practice areas (See Figure 9).
  • Smaller firms are twice as likely to engage in alternative billing (See Figure 10).
  • Pharmaceutical and Professional, Scientific, and Technical Services industries are increasingly turning to alternative fee arrangements (See Figure 11).

For Pharmaceutical companies, the types of matters driving this trend are largely IP. A broad mix of matter types is being billed more frequently under non-hourly methods for the Professional, Scientific, and Technical Services.

 


 

Figure 8: Enterprise Legal Management Trends Report
Macro Trend: Data Shows Usage of AFAs is Increasing
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart shows the percentage of CounselLink customers engaging in some sort of alternative fee arrangement between 2011 and 2014.

Although alternative fee adoption rates vary by matter type, firm size and industry, the data shows that the percentage of CounselLink customers using alternative fee arrangement is increasing steadily, from 59% in 2011 to 76% in 2014. In 2014, nearly half of companies are using AFAs for 1-5% of their matters. On the high end of adoption, 10% are using some form of alternative fee arrangement in over a quarter of their matters. Only a quarter of companies use entirely hourly billing.

Figure 9: Enterprise Legal Management Trends Report
Macro Trend: AFA Usage is Increasing Across Multiple Matter Types
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart shows the relative usage and the change in alternative fee arrangement usage by matter type between 2013 and 2014.

Although AFA engagement varies by matter type, usage has been increasing steadily across these matter types between 2011 and 2014. For example, in 2014, 45% of CounselLink customers were billed under an alternative fee arrangement for Corporate, General, Tax matters compared
to 39% in 2013.

Figure 10: Enterprise Legal Management Trends Report
Macro Trend: Smaller Firms Are Using AFAs Twice as Frequently as the Largest Firms
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart illustrates the percentage of matters with some sort of alternative fee arrangement in place.

The “Largest 50” firms (those with more than 750 lawyers) and “Second Largest” firms (those with 501-750 lawyers) bill under alternative structures for about 5% of their matters, while the smaller firms bill under them for 10%

Figure 11: Enterprise Legal Management Trends Report
Macro Trend: Companies in two industries have been increasing AFA usage substantially between 2011 and 2014
Based on rolling 12-month totals ending December 31 for years 2011 to 2014

This chart shows the percentage of matters using some sort of alternative fee arrangement in the Pharmaceutical and Professional, Scientific and Technical Services industries between 2011 and 2014.

Two industries stand out as increasingly turning to AFAs: Pharmaceutical (from 3.3% in 2011 to 19.5% in 2014) and Professional, Scientific, and Technical Services (from 0.9% in 2011 to 10.6% in 2014). For Pharmaceutical companies, the types of matters driving this trend are largely IP. A broad mix of matter types is being billed more frequently under non-hourly methods for the Professional, Scientific, and Technical Services industry.

 


 

The Key Metrics

Each semi-annual update of the Enterprise Legal Management Trends Report covers a standard set of key metrics for hourly legal rates and the corporate procurement of legal services from law firms.

Key Metric #1: Blended Hourly Rate for Matters – by Practice Area
Blended hourly rates and rate volatility differ by type of work Based on trailing 12 months ending December 31, 2014.
Practice areas ordered by median blended matter rates.

Interpreting the Chart:

The chart captures median rates for three different groups of timekeepers (partners, associates and paralegals) and the range of the blended average rate across multiple matter types. As a guide to interpreting the output, consider IP -Trademark compared to Corporate, General, Tax. These two categories have high and nearly identical average partner rates – $450 and $447, respectively – but IP -Trademark work requires significantly less partner time. The result is a noticeably lower blended median rate for IP – Trademark work ($293) versus the same rate for Corporate, General, Tax ($365).

An additional metric provided in this section is the Volatility Index – a calculated marker indicating the variability encountered in blended matter rates. Using a 10-point scale, the Index reflects how broad the spread is between the 25th and 75th percentiles of hourly rates. High volatility scores indicate greater variance in prices paid based on the mix of timekeepers and individual hourly rates.

Using IP – Trademark compared to Insurance as an example, the spread between the 25th and 75th percentiles of blended hourly rates for IP – Trademark work is broader than that for Insurance. On a 10-point scale, IP – Trademark has a Volatility Index of 9, while Insurance has an Index of 3, indicating that the mix of timekeepers and rates paid on these matters varies more significantly than the mix for Insurance. A high volatility index could also be an indicator of a wide variety of matter types being represented in this category.

While there is considerable industry focus on individual lawyer rates, it is equally, or arguably more, important, to pay attention to the big picture – the blended average rates that result when a mix of different timekeepers works on matters. The chart will show the median blended rate is highest in Mergers and Acquisitions, where the most expensive firms are more often involved with a high amount of partner engagement.

Five matter types have a relatively low Volatility Index, which means these rates are consistent and less subject to negotiations between corporations and firms:

  • Insurance
  • Environmental
  • Real Estate
  • Finance, Loans and Investments
  • Litigation

Legal departments can compare their own data against these rates and ranges for help in managing costs. If they are currently paying at the top end of the range for more volatile areas, there may be an opportunity to negotiate lower rates or arrange a different mix of timekeepers to reduce costs.

From a trending standpoint, median matter rates for Corporate, General Tax; IP – Patent and IP – Trademark have increased the most since the last year-end Trends Report, while the median matter rates for Finance, Loans and Investments, Litigation and Commercial and Contracts have dropped slightly during this period.

Key Metric #2:
Law Firm Consolidation – Number of Legal Vendors Used by Corporations
51% of companies in the data pool have 10 firms or fewer accounting for at least 80% of outside counsel fees
Based on trailing 12 months ending December 31, 2014

Interpreting the Chart:

This chart shows the degree of law firm consolidation among companies. The horizontal axis aligns participating companies into 9 segments addressing different degrees of consolidation. For example, the bar on the far right indicates 26% of participating companies have 90%-100% of their legal billings with 10 or fewer vendors, representing the most consolidated legal departments. On the other hand, the far left bar shows the least consolidation, with only 1% of companies having less than 20% of their legal billings with 10 or fewer firms.

Industry plays a significant role in consolidation. The segments noted below, reflecting high and low degrees of consolidation, were also identified as such in earlier Trends Reports:

  • Manufacturing (non-pharma) companies, at 64%, retail trade companies, at 67%, and information companies, at 60%, are highly consolidated.
  • An industry with a low level of consolidation is insurance.

Key Metric #3:
Alternative Fee Arrangement (AFA) Usage
AFAs used in 9% of matters and 7% of billing
Based on trailing 12 months ending December 31, 2014

The use of AFAs to govern legal service payments varies significantly by legal matter type. Over the 12-month period ending December 31, 2014, 9.4% of matters submitted and processed via the CounselLink solution were invoiced, at least in part, under a fee arrangement other than traditional hourly billing. Three categories of legal work came in above the average, with Employment and Labor, Insurance, and Mergers and Acquisitions in the top spots where AFAs are most often in place. Notably, Mergers and Acquisitions matters are showing an uptick in the use of AFAs. With counsel pursuing more and more non-traditional fee arrangements, the percentage of Mergers and Acquisitions matters having billings under some sort of alternative fee arrangement has risen from 8.2% in the last report to 11.3% in this latest report.

Key Metric #3:
Alternative Fee Arrangement (AFA) Usage
AFAs used in 9% of matters and 7% of billing
Based on trailing 12 months ending December 31, 2014

The total percentage of invoiced legal fees attributed to AFAs is smaller than the 9.4% of matters cited above, reaching 7.3% of all legal fees invoiced during the same 12-month period. Two factors affect this result:

  • AFAs are more frequently used for matters expected to generate lower, rather than higher, aggregate fees.
  • Clients often put AFAs into place on portions or subsets of matter work, rather than for entire projects, particularly with respect to dispute resolution or litigation matters.

Key Metric #4:
Partner Hourly Rate – Overall
Average rates across practice areas (excluding Insurance) and geographies
Based on trailing 12 months ending December 31, 2014

Hourly rates by law firm size
Median partner hourly rates by law firm size for 12 months ending December 31, 2014

The partner rate gap between the largest firms and the next largest firms continues to grow. Firms with more than 750 lawyers have billable rates that are 38% higher than the next tier of firms (501 – 750 lawyers).

Key Metric #5: Partner Hourly Rate Growth – by Location (City)
Four major cities show rate growth of 3.5% or more over both the last year and the last three years
Based on trailing 12 months ending December 31, 2014

Interpreting the Chart:

In looking at unique partner hourly rates across 15 major metro areas, two indicators were plotted for each location to show both the compound annual growth rate (CAGR) over a three-year span, and the year-over-year change.

Data for individual attorney rate growth by major U.S. city show that New York, San Francisco, Washington, D.C. and Philadelphia are at or above the 3.5% level in both compound annual growth rate (CAGR) and annual growth rate. On the opposite end of the spectrum, four cities have an hourly rate growth below 3.5% in both metrics. These cities are Atlanta, Detroit, Houston and Seattle.

Key Metric #5: Partner Hourly Rate Growth – by Location (State)
Growth in average partner rates varies by state, averaging 3.1% in year-over-year growth
Based on trailing 12 months ending December 31, 2014

Across all states, the median year-over-year growth for partner hourly rates is 3.1%.

Key Metric #6:
Partner Hourly Rate – by Practice Area
Based on trailing 12 months ending December 31, 2014

Aggregate statistics based on CounselLink solution invoice date submitted in the last 12 months identify Mergers and Acquisitions as the practice area with the highest hourly partner rate — $600. Next is Corporate, General, Tax, which includes advice and counsel, antitrust work and tax-related matters. In part, both practice areas at the top occupy those spaces because companies often use larger firms for these kinds of matters. In the last 12 months, the “Largest 50” firms handled 38% of Mergers and Acquisitions work, and 34% of Corporate legal work, versus 20% for all other types of legal work. At the lower end of the average hourly rate spectrum is insurance work. Insurance companies demand and negotiate aggressively for low rates on their commodity defense matters.

Key Metric #6: Partner Hourly Rate – by Practice Area
Three practice areas showing 3.5% partner rate growth over both the last year and the last three years
Based on trailing 12 months ending December 31, 2014

Turning to partner rate growth by practice area, three of the 12 practice area categories have shown growth at or exceeding 3.5% rate during the past year and over the previous three-year period: Corporate, General and Tax, IP – Patent, and IP – Trademark. In the previous Trends Report, Corporate, General and Tax; IP – Patent; IP – Trademark; and Regulatory and Compliance had growth rates in excess of 3.5% in both areas.

Partner rates for Insurance and Mergers and Acquisitions are growing more slowly than rates in other practice areas.

 


 

About the Trends Report

Terminology:

  • Matter Categorization – CounselLink solution users define the types of work associated with various matters that were analyzed and categorized into legal practice areas. For this analysis, all types of litigation matters are classified as “litigation,” regardless of the nature of the dispute.
    • Other, as an open category for all other matters and bills not already addressed
  • Company Size – Based on 2012 revenue cited in public sources, companies were grouped into these
    three size categories:

    • $10 Billion
    • $1-10 Billion
    • < $1 Billion
  • Company Industry – Companies were mapped into the NAICS hierarchy based on publicly-available information:
    • Finance
    • Information
    • Insurance
    • Manufacturing
    • Pharmaceutical
    • Professional, Scientific and Technical Services
    • Retail Trade
    • Transportation & Warehousing
    • Other

Expert Contributors:
The CounselLink solution has earned an industry reputation for enabling corporate counsel to use data
effectively as a basis for improving legal department performance and outcomes. Two factors validate these
customer opinions and perceptions:

  • Specific legal spend and matter management features in the CounselLink solution give corporate clients
    robust capabilities to evaluate legal department performance and metrics on an ongoing basis, entirely
    on their own.
  • LexisNexis invests significant resources in professional consulting and service offerings that add a
    valuable layer of expertise in analytics, benchmarking and best practices. The overall goal with these
    optimization programs is to help clients translate data-driven analysis into actions that improve
    efficiency and bottom-line results.
    CounselLink is an Enterprise Legal Management solution suite for matter management, legal spend
    management, legal hold, analytics and strategic consulting services.

 


 

Several LexisNexis individuals played a major role in analyzing the latest CounselLink data and compiling this first Enterprise Legal Management Trends Report, specifically:

Principal Author

Kris Satkunas
Director of Strategic Consulting

As Director of Strategic Consulting at LexisNexis CounselLink, Kris leads the CounselLink team in advising corporate legal department managers on improving operations with data-driven decisions. Kris is an expert in managing the business of law and in data mining, with specific expertise in matter pricing and staffing, practice area metrics and scorecards.

Prior to joining CounselLink, Kris served as Director of the LexisNexis Redwood Think Tank, which she also established. For five years, Kris worked closely with thought leaders in large law firms conducting unbiased data-based research studies focused on finding solutions to legal industry management issues. Before that, she led the business of law consulting practice for large law firms. During that time she worked with key management at over a hundred law firms to improve the financial models and analyses developed for large law firms.

Kris has authored numerous articles and spoken at many legal industry conferences and events. She came to LexisNexis in 2000 after having honed her finance skills as a Senior Vice President in Strategic Finance at SunTrust Bank. She holds a B.B.A. in Finance from The College of William and Mary.

Kris may be reached at kristina.satkunas@lexisnexis.com or 804.955.4034.