20% Cost Increase . . . and Rising? (Part 1)
A new survey conducted by BTI Consulting Group of Fortune 1000 companies finds that corporate legal bills increased nearly 20% in 2006.
Ouch!
More work has been flowing to outside counsel — 65% of total legal spend in 2006 as compared to 42% in 2001 — primarily in the areas of mergers, regulatory work and class action lawsuits. That explains part of the increased costs.
Higher billing rates explains the rest, and and I’m not just talking about cost of living increases. I review legal bills as part of my job and every year I’ve seen rate increase requests ranging from the modest (2-3%) to the immodest (30+%). Ironically, the increases have usually have nothing to do with additional responsibilities the lawyer is taking on on behalf of the client. No, the work assignment (read value to the client) is the same. It just costs more. Why? Because the lawyer has another year of experience, or they’ve been promoted from senior associate to junior partner, etc.
It therefore comes as no surprise that the American Lawyer magazine reported an increase of 20+% of per partner profits between 2002 and 2005.
In all fairness, that increase in profits is not entirely due to rate increases. Let’s not forget that the law firm business model is one of time and material. You can also boost the bottom line by wringing more hours out the billable assets you already have. But putting young lawyers through the wringer has other costs associated with it — attrition.
According to the NY Post Gen-X lawyers in their 3rd to 5th year of practice are walking away from prestigious law firms leaving more senior lawyers, including partners, to do the grunt work. Unless these senior lawyers are willing to adjust their rates to reflect the real value of these lower level services outside counsel bills will continue to escalate to unprecedented levels.
Budget issues rank among the top objectives for general counsel in 2007 according to the General Counsel Roundtable. More specifically, general counsel will seek to partner more effectively with frims to obtain more value for the money and they will continue to revise and streamline their network of preferred vendors.
The confluence of events should be a wake-up call for fat cat law firms. Particularly since another survey conducted last year by BTI revealed that almost 54% of the corporate counsel surveyed had fired their primary law firm and only 30.7% would recommend their primary law firm. Clearly the gloves are off.
The fight to rein in legal costs, however, does not begin and end with lawyers. It really begins with the actions that trigger the need for all that legal work. If ever there was a time for an ounce of prevention and a dose of Legal Literacy to save a pound of cure — THIS IS IT.
Come back tomorrow for Part 2 when we’ll take a look at what management can do to stem the rising tide of legal costs.