The statistical model identified the relative importance of different factors on an individual lawyer’s rate through linear regression. The model has an adjusted R2 of 54%, meaning that 54% of the variation in legal fees can be accounted for by the above-referenced five variables alone.

Law firm size has the most important statistical impact on rates, adding roughly $15 per 100 lawyers in a firm to the statistical base of $151 per hour. Being located in a tier 1 market — New York, Chicago, DC, Boston, Houston, San Jose, and San Francisco – is the second most important influence on rates, adding $161 to an hourly rate. Partner status ranks third among statistical impacts, adding $95. Experience ranks fourth, accounting for $34 per 10 years’ experience. Among practice areas, only finance and litigation showed statistical impact, finance adding $99 per hour, litigation subtracting $15.

Rates for the highest billing lawyers, those who bill $1,000+ per hour, have been growing nearly three times faster than those of the lowest billing lawyers: a 75% increase since 2009. Rates for lower priced lawyers, however, have only seen a slow increase as they have been facing greater competition from LPOs and contract attorneys.

Fees for Finance and Securities, Regulatory, and M&A practices have increased the most; litigation and real estate increased the least. Clients have been paying a premium for lawyers who work for larger firms, as law firm size is one of the five main cost drivers. Unless necessary due to geographic need, specialty, or “brand,” sophisticated clients carefully consider which firms are most cost-effective. As a result, firms need to understand the situation of the client and the value attached to a matter to price accordingly.

One might assume that the acquired company-specific expertise helps firms to work faster and/or more efficiently, but instead, early on in the working relationship, law firms are willing to charge lower rates. After two years, rates begin to creep higher and higher. One can expect a client complaint or defection sooner or later, so a better strategy would be to monitor the market and stay competitive.

Concentrating spending on a few law firms does not appear to be effective for clients to decrease rates as it appears to limit the competition. While consolidation may be a means to control quality, to lower internal transactional costs, and to establish closer, strategic relationships with law firms, it does not lower costs according to the data.

The remedy: Some companies have had success combining consolidation with a panel mechanism in which a manageable number of firms compete for the company’s legal work. This way, competition is maintained while spending is consolidated. Other companies outsource appropriate pieces of the process to lower cost providers without compromising quality. Again, law firms need to make sure they stay competitive and do not take their existing clients for granted. The situation might change faster than one would otherwise expect.

TyMetrix Legal Analytics and the Corporate Executive Board analyzed over $7.6 billion in law firm billings between 2007 and 2011 from over 4,000 law firms and 120,000 billers, including 80,000 partners and associates. The Report examined actual rates clients paid, matter phase costs charged, and analyzed invoice data to quantify and explain what drives rates.

Legal departments have hence closely monitored and analyzed their spending, reengineered processes, built or rebuilt work teams, hired legal process outsourcers (LPOs) for specific projects or tasks, and created tools that drive standardization, reduce risks, speed up cycle times, and increase efficiency.

Process-driven legal procurement is increasingly involved in addition to the use of legal operations professionals who understand process improvement. Typically equipped with a strong financial background, legal operations people scrutinize legal spending, and analyses go from the 10,000 feet-view down to the granular level of a Uniform Task Based Management System (UTBMS) task code, while invoices are looked at – sometimes literally – line by line.

Read more on the Legal Sales and Service Organization Inc. (LSSO) website.

In Fordham Law Offers a Marketing Class—Will Other Schools Follow? she discusses the course Law Firm Marketing I teach at Fordham Law School. Vivia writes that my class “makes no bones that lawyering is now all about business these days.” Yes, having a book of business is a prophylactic that will protect partners from being deequitized, or worse, squeezed out during the recession. That’s how it is in this ever more competitive market.

I also love Vicki’s comment: “Funny how mere mention of lawyer marketing makes the ‘law is a profession’ types uncomfortable – like adults when children ask where babies come from – ‘Mommy, where does BUSINESS come from?’ At least Fordham is willing to tackle this issue head-on.” Yes … where do(es) the business/the clients come from? Having to bill hour-after-hour, year-after-year — that’s a tough one.

However, we have more—and better—information in this market than ever before. Whether it’s Citi’s data, PMI, or the just released 2012 Real Rate Report; they give clear indications of what’s happening in the market. For example, for the longest time, we have assumed that clients pay for quality and reputation. While there are likely to be underlying correlations, data shows that what actually drives rates are location and firm size.

Commodity work like wills or patent filings already have price tags, but companies do expect firms to have price tags for more complex work as well. More and more firms, including the most elite ones, have to deal with AFAs today. It’s unlikely that this will change. Phasing the work, disaggregating it in manageable pieces, is useful. That’s what businesses do and that’s what they expect from their firms. The CEO of a company told me not too long ago that “It is very frustrating when you ask [a law firm] for an estimate and then they go 200% over estimate. … I could never do this with my customers. We give estimates. It’s not always simple, but that’s part of business conduct.”

The more sophisticated corporate clients have hired legal operations and legal procurement people in the last few years. They look at the data they have—their own as well as industry data. As much as data can still be improved, it is probably a good idea to start with the data that’s already out there to help make better-informed decisions and keep up with the clients’ level of insight.

Changing Landscape

In today’s highly competitive legal market, it is imperative to bring more to the table than just excellent lawyering skills: an understanding of the business world and law firms as businesses. Clients are demanding it: The Association of Corporate Counsel’s (ACC) Value Challenge has been urging law firms to reconnect the value and the cost of legal services since its start in 2007. The initiative is based on the concept that “law departments can use management practices that enhance the value of legal service spending; and that law firms can reduce their costs to corporate clients and still maintain strong profitability. The ACC Value Challenge promotes the adoption of management practices that allow all participants to achieve their key objectives.” Read my article in the New York Law Journal.

Harris argued that if a general counsel has less money to spend, it naturally follows that she will be hiring less pedigreed lawyers and, hence, in the traditional mindset, less qualified ones. “And since quality is synonymous with reducing risk, the in-house lawyer who seeks to save money does so, presumably, at his or her own peril. Of course, no GC is against cost savings in the abstract, but you’re not going to find one who feels good about increasing the company’s risk profile in the interests of austerity.”

Instead, the ‘how’ is important, having a well-engineered work process populated with a mix of lawyers that can be tested and measured on its ability to deliver on all of those dimensions and more. The concept of a process-led approach to delivering work has been embedded in many other industries, including finance, IT, and HR. To do so, process innovation, technology, and the creation of tools are needed that drive standardization, consistency of risk positions, faster cycle times, and increased efficiency. New playbooks have to be created, better forms, and re-engineered workflows. Teams need to be (re)built and a set of service, quality, and productivity metrics identified and implemented. Metrics play an important role since “what gets measured gets done.” (And what get measured and rewarded, gets done even more, some say.) In this paradigm, the same behaviors that improve risk compliance also reduce cost.

The challenge is to identify the metrics that are critical to the success, whether it is defined in terms of making progress toward strategic goals, or the repeated achievement of some level of operational goal and then focus on these metrics: Key performance indicators or “KPI.” A combination of well-chosen KPI must be viewed collectively to ensure the organization’s decisions are made on an informed basis.

Concentrating spending on a few law firms does not appear to be effective for decreasing rates as it limits the competition. While consolidation may be a means to control quality, to lower internal transactional costs, and to establish closer, strategic relationships with law firms, it does not lower costs. The remedy: Some companies have had success combining consolidation with a panel mechanism in which a manageable number of firms compete for a given company’s legal work. In this manner, competition is maintained while spending is consolidated.