Corporate law departments are seeing the highest rate increases from law firms since before the 2008 recession. A report from the Thomson Reuters Institute showed that increases averaged 5.5 percent in the first quarter of 2023.
Firms may be catching up after many quarters of keeping rates flat, but for clients still struggling with expense challenges post-pandemic, the rate increases are hard to stomach. This is especially true if they feel like they aren’t getting additional value for their money.
Legal departments are feeling even greater urgency to manage increasing timekeeper expenses from law firms. And this isn’t just rate increases. As they start to dig deeper, many law departments are finding additional sources of bloat in law firm invoices. They are also finding ways to reduce this bloat so that they are paying for the value they receive.
Increases in law firm invoices
While the recent average quarterly rate increase was 5.5%, there is a wide range. Some practice areas or firms may have kept rates flat. But note that one legal department we talked to saw an average rate increase request rate of 15% last year – nearly three times the national average.
That law department and many like it pushed back on rate increases and started looking more closely at their invoices.
What factors are causing higher timekeeper rates?
There are three main sources of bloating on law firm invoices. These factors result in law departments paying more than they expect to, without seeing additional value for their money. These sources are:
Law firms are certainly within their rights to request rate increases, and they should be compensated for the value they deliver. Sometimes, though, these increases don’t reflect the market rate. They can also affect clients unevenly – if you are a long-time loyal client, you may be paying increases on top of already inflated rates.
Sometimes when law departments agree to a certain rate, that rate doesn’t make it into the firm’s timekeeping system correctly. This can result in clients paying a higher rate than they agreed to for certain timekeepers. This is usually the result of human error and not of bad intentions on the part of the law firm. Still, these incorrect rates can add up significantly. Rate increase and other billing guideline errors can add up to $375,000 in annual bloat for a $1 billion company, according to a report from Forrester.
Other billing guideline errors:
Legal departments agree to pay for certain costs and expenses related to their matters, but they also refuse to pay for certain others. Common examples of excluded expenses are copies, scans, overnight messaging, word processing, and document submissions. Through human error, firms may charge for these anyway. And because manual review of invoices is tedious and time consuming, many law departments pay these charges despite their violating the guidelines.
Right-sizing law firm invoices
Many legal departments have experienced all these sources of bloat. The next question is, What do we do about it? That is, how can we systematically manage these invoices so we are paying for what we agreed to and ensuring our rates match the value we’re receiving?
There are two sets of data that are important to improve your overall spend management. The first is understanding what you’re paying now and what you’ll pay in the future, by matter and by law firm. This will help you understand the scale of your overall rate increases. The second critical data set is industry benchmarks. What are other companies of your size paying for similar work in similar geographies? Being able to compare against your past payment and against the market helps you assess whether rates are appropriate.
Once you’ve agreed to rates and billing guidelines that both you and your firms believe adequately reflect the value they provide, it’s time to manage against that agreement. Establish a process to check each invoice against your billing guidelines. Establish another process to continually review rate increase requests against market benchmarks. These processes will help your legal department pay an appropriate price for each invoice and stay in line with market rates in the future.
Finding data and establishing processes
A busy law department reviews and pays hundreds of invoices each year from dozens of outside law firms. While you may know that it’s important to compare your invoices against benchmarks and billing guidelines, you also may recognize the challenges in the execution. Finding the data and finding the time to enforce billing guidelines are both significant challenges if you’re handling them on your own. It certainly isn’t reliable to poll your network on every matter type to see what they’re spending. And manual review of every invoice against billing guidelines isn’t sustainable or effective for most lean legal departments.
To perform effective spend management at scale, most modern law departments are implementing tools to help them find benchmarks and review invoices thoroughly. Tools like Legal Tracker from Thomson Reuters relieve the administrative burden on the team, remove much of the risk of human error, and provide reliable data that helps you ensure you’re paying for the value you receive under the terms you agreed to.
Are you looking to improve your legal department’s control over law firm invoices? Learn more about how Legal Tracker from Thomson Reuters can help you strengthen spend management and operations.