Seven benchmarking best practices for legal departments
Corporate legal departments are awash in benchmarking information from many different sources, particularly around billing rates for law firms. Yet, there is so much data that it is often difficult for them to determine what it all means and how they can leverage it to save time and money.
Fortunately, there are approaches to benchmarking that you can use to help cut through the clutter and identify what is important.
Here are some benchmarking best practices to assist legal teams with generating meaningful insights and closely evaluating law firm rate requests.
#1 Benchmark your own data first
Before looking at external information, it’s important to benchmark internal data and understand whether law firm rates are consistent across your own organization.
For example, in-house counsel in different areas or offices may be using the same law firm and not even realize it. This is particularly common in larger, decentralized legal departments.
GCs can also look at their own billing information to see if they have volume work with a particular firm, or can consolidate work spread across other firms and use it as leverage to negotiate better rates.
#2 Look at the range of rates
Median numbers can provide a useful snapshot, and it is human nature to focus on one data point.
Kris Satkunas
Courtesy of LexisNexis CounselLink
However, looking at the range of rates, such as firms in the 25-75 percentiles, will provide more valuable information. Rates that are either higher or lower than that tend to have more of an outlier effect that can skew overall rates.
Consider the case of Hearst, which like many Fortune 500-sized companies requires its law firms to submit next year’s proposed rates and if approved, hold them for two years, according to Jessica Williams, senior manager of operations in Hearst’s Office of the General Counsel.
As part of its annual review process, Hearst asks law firms to provide current and proposed rates by individual timekeeper. Hearst also requires its law firms to submit information that includes timekeeper staff role, location, practice area and years of experience.
Additionally, firms are required to submit a rationale for their proposed rates, allowing them to make a case for the value they provide that goes beyond the billable hour.
#3—Take the big-picture view
While it’s easy to focus on timekeeper rates, it’s also important to look at matter-level rates.
Matter-level rates tend to offer less variability than timekeeper rates, particularly when looking at partner vs. associate rates and hours worked by different timekeepers on different matters.
#4—Consider staffing and expenses
Staffing levels can have a significant effect on overall blended matter rates. You may have seen headlines about significant pay increases for first-year associates that corporations presumably will be asked to absorb — this should be part of your rate conversation.
GCs should also ask outside counsel about overhead expenses, since many law firms now have hybrid work environments and have seen their real estate costs decrease. Lower expenses may be one area of potential leverage around hourly rates.
#5 — Examine firm size
According to the 2022 CounselLink Enterprise Legal Management Trends Report, the biggest law firms tend to charge the most, depending on practice area.
Overall, the rate differential for partners in 750-plus attorney firms is 54%, versus firms with 501-750 attorneys.
This means that corporations that are open to using slightly smaller firms for some of their work have opportunities for significant cost savings.
#6—Start with a question or two
It’s easy to get trapped in the weeds of benchmarking and focus on producing reports rather than improving processes.
To avoid this, start by asking a business question, such as whether the legal department should pay the rate that a particular timekeeper has submitted. Then, identify the key metrics that are needed and define parameters for the data.
This will help you gather and interpret the relevant data and give you the insights you need to make smarter decisions – rather than just producing another report.
For example, Hearst’s rate review process steers its legal department to answer two questions: “What is Hearst paying today versus what is it being asked to pay tomorrow for the same service?”; and “Does the value of the service justify the cost?”
According to Williams, benchmarking enables her team to answer these questions for executive leadership and to make sure the department takes a fair and consistent approach to rates across the board.
Concluding thoughts
Managing costs while ensuring quality service is an ongoing balancing act for legal departments. One way to find the right balance is through benchmarking and data that pinpoints how legal departments are paying their outside counsel.
There is plenty of data that legal departments can find, much of it is confusing or not particularly relevant. That’s why it’s so important to identify the right information for benchmarking your particular organization and its goals.
With this approach, you can develop benchmarking best practices and make data work for you.
