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The world of law firm billing rates can be a murky place, shrouded in obscurity and less-than-transparent pricing. While many leading law firms publish list rates for their services, the truth behind the veil — actual billing rates — has remained a mystery to clients and law firms alike. That is, until now. The BTI Consulting Group’s most recent study explores the billing rates that Fortune 1,000 clients pay to their law firms by attorney level, locality, and practice area. BTI interviewed more than 200 Fortune 1,000 corporate counsel, and discovered that a whopping 73 percent of clients negotiate rates with their primary law firms. In aggregate, the rates that clients pay are about 14 percent to 24 percent lower than the rates published by law firms. The primary reason for this disparity lies in a number of changes that Fortune 1,000 corporate counsel have made in the way that they hire, use, and manage their outside counsel. To streamline operations and improve performance and service, general counsel are consolidating their law firms and exploring options that better serve their needs. TRACKING THE TRENDS One of the trends affecting the composite, actual billing rate at Fortune 1,000 companies is clients’ increased usage of midsize law firms, where they enjoy lower rates than at the larger, more traditional firms. A second reason for this rate gap is in the level of volume discounting and negotiating that clients engage in with their primary law firms. As they funnel work to fewer firms, clients are using their negotiating leverage to obtain discounted rates. As noted above, almost three-quarters of Fortune 1,000 corporate counsel negotiate rates with their primary law firm. Finally, clients report that their top priority for 2003 — risk reduction — has intensified their need for fee predictability. Our study found that law firms responding to this need with alternative billing arrangements, budget proposals, and risk-reduction strategies are delivering lower rates per hour, along with better service. Larger clients are rewarding these responsive firms with more business. To establish benchmarks that general counsel can use to assess their cost of legal services, BTI asked clients what they pay senior partners, partners, and associates in eight key practice areas: antitrust, civil litigation, corporate, employment, environmental, intellectual property, IP litigation, and privacy. At $437 per hour, senior partners in antitrust practice garner the highest average hourly rates, followed closely by corporate senior partners at $434 per hour. This same pattern holds true at the partner level, where clients pay top rates in antitrust and corporate: $324 per hour and $314 per hour, respectively. At the associate level, antitrust once again leads at $203 per hour, but IP litigation displaces corporate to take the second-place spot at $194 per hour. Of the practice areas surveyed, clients pay the lowest rates for employment and environmental work. THE D.C. MARKET Across all practice areas, clients around the country pay rates that vary by as much as $156 at both the senior partner and partner levels. For both partner groups, clients in Washington pay average rates that are in the top quartile nationwide: $460 for senior partners and $315 for partners. Rates paid to associates vary by up to $100 across the country. Clients in Washington pay associate rates that fall just below the 75th percentile at $199. Looking at practice areas, Washington clients pay the highest premiums to corporate attorneys. Rates for corporate partners — at an average of $365 — are 12 percent higher than in all other practice areas in the District. Similarly, corporate associate rates are 18 percent more than rates for associates in other practices. Washington clients also pay higher rates for IP litigation and antitrust work than clients in other cities. New York clients pay higher rates for privacy, civil litigation, and intellectual property work. IMPROVING PERFORMANCE The ability to assess legal costs is paramount to improving the performance of the legal department. Transforming your department from a cost center to a revenue-generator mandates that your law firms deliver business value by reducing risk and translating legal issues into business issues. The key first step, assessing your company’s cost of legal services, will help the legal department to: • build efficiency into the department’s work processes; • implement cost controls; • mitigate risk through predictability of legal costs; and • extract the most value from law firm relationships. Savvy corporate counsel use proven benchmarks to track and measure the cost of their legal services. They maintain centralized databases and records that enable them to evaluate actual billing rates by law firm, legal matter, practice area, and office locality. A handful of the most advanced systems incorporate systematic assessments of case results, perceived value, ease of management, and level of satisfaction. COST-CUTTING STEPS The following steps are proven to help lower legal costs as well as to improve performance: • Define your costs across law firms and activities. Compile a centralized repository of actual law firm billing rates. Turn to your outside counsel for help in gathering and tracking this information. • Identify benchmarks. What are the market rates paid by corporate counsel? Look to competitive intelligence, your own law firms, internal tracking sources, and respected, published research. (Note that published law firm rates are $24 to $88 higher per hour than rates paid.) • Pinpoint strengths and weaknesses. Compare the rates you’re paying to those prevalent in the marketplace. See where your company is paying more than the market rate and focus on these areas to negotiate reductions. Draw on facts to guide and inform the negotiation process with law firms. As important as billing rates are, this is only the starting point. Law firms with higher rates may deliver much more value than less-expensive firms. The first rule is to understand the value of the service, both in terms of the market and the benefit, then look at the cost. The objective is to make sure you are getting good value, not just paying the lowest possible rates. Michael B. Rynowecer is president of the BTI Consulting Group, a Boston-based firm providing research, consulting, and training to the buyers of professional services and their service providers. He can be reached at (617) 439-0333 or [email protected].

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