When Law Firms Hike Rates, Sharp General Counsel ‘Learn to Bake’

This is the time of year when law firms send out letters to clients, thanking them for their business and, regrettably, informing them that rising costs will force rates to go up come January.

General counsel often respond by voicing strong concerns about price hikes, and go to various legal publications vowing to fight back. But many wind up grinning and bearing it.

Big Law firms plan to raise rates by an average 8% next year, according to research by Wells Fargo. That not only outpaces inflation, but also is the biggest expected rate hike in the 15 years that Wells Fargo has been surveying firms.

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On occasion—if you’re an important client—you might be successful in negotiating a slightly better discount to offset some of the hike, or perhaps even force the firm to grandfather your company in at the old rate for a year.

But there’s a certain helplessness that sets in—especially if you love the firm, they do good work, and they know your company. You don’t want to start over with someone else.

Here’s what you can do:

Fish in Other Ponds

Not all price increases are unreasonable.

I remember complaining to one outside counsel about a rate hike. She nicely reminded me that my own company had just raised prices on its customers, and that both of our price increases were below inflation. That sparked a conversation about why our company often waited 90 days or longer to pay law firms…a fair point that I knew added financial pressure to the law firm.

But not all price increases are reasonable. They should be compared with market rates and the value provided by the firm.

You’ve got two options if you aren’t able to negotiate a rate with your current firm that makes sense.

The first is to start looking at lawyers in lower cost cities.

Many lawyers, even at national firms, charge much lower rates in smaller cities. Those lawyers often have a national practice and are frequently well versed in your state law. Their rates are lower because so are costs in their local area.

When I was running legal departments in the Bay Area, I was struck by the difference in billing rates between lawyers in nearby San Francisco offices and those in many other places across the country.

While some practice areas were best serviced locally, I realized that I rarely saw local attorneys in person. Most of the work was done by phone or email.

I found a terrific national employment lawyer in Minneapolis, a top business immigration firm in Virginia, and a first-class trademark and regulatory firm in Chicago. In each case, I got outstanding service and advice at rates that were 20-40% less than comparable attorneys closer to home, saving millions of dollars over the years.

Do It Yourself

The second option is to ask a bigger question: Is your outside counsel spend out of line with your overall legal budget?

Every company is different, and certain business models may require more or less outside counsel work. As a rule of thumb, though, I found that 50% of my overall budget was devoted to outside counsel spend, and 50% to the in-house team. If either side moved outside the 60-40 range, it would trigger a review to understand the causes and to evaluate whether hiring another lawyer made sense.

Crunching the numbers isn’t always simple, but the calculation might go something like this:

• Total cost of hiring an in-house lawyer: $350,000.
• Total hours from new in-house lawyer: 2,500, reduced to an estimated 1,800 “billable” equivalent hours. (I never actually asked lawyers in-house to report their time.)
• Cost per billable hour in house: $194.

Of course, an incremental in-house lawyer wouldn’t typically alleviate all of a company’s outside legal needs. It may however, eliminate the need for a single outside lawyer charging $650 hourly and billing the company for 1,000 hours over the year. That’s a substantial cut to the overall spend. As a bonus, you add a lawyer who would still have 800 hours to devote to other work that wasn’t being done at all.

A request for another head may be met with resistance, particularly when the calculations are more complicated. Still, I’ve seen finance managers light up when I propose cutting $700,000 from my outside counsel budget in exchange for hiring an in-house lawyer that costs half that much, all in.

You can accept paying more for a loaf of bread. Or complain about it. Try to negotiate with the baker. Or learn to bake.

Rob Chesnut is the former general counsel and chief ethics officer at Airbnb. He spent more than a decade as a Justice Department prosecutor and later oversaw US legal operations at eBay. The author of “Intentional Integrity: How Smart Companies Can Lead an Ethical Revolution,” Rob consults on legal and ethical issues.