By: Kris Satkunas, LexisNexis CounselLink
A vast majority of corporate legal departments withheld hiring new law firms to handle their significant legal matters in 2015, according to the LexisNexis CounselLink 2015 Year-End Enterprise Legal Management Trends (ELM) Trends Report. The study concludes that while most legal departments stayed with their incumbent law firms in 2015 to handle their significant legal matters, there were exceptions to the rule – most notably in the areas of litigation and corporate matters.
According to the Trends Report, just 44 percent of corporate legal departments hired at least one new firm in 2015, and that percentage only decreased with the addition of two or more new firms. However, when considering firms with significant litigation work, 57 percent of companies were willing to hire a new firm for those matters. Similarly, nearly 50 percent of legal departments brought on a new firm to handle significant corporate work. As context, corporate legal departments engaged a median number of 36 law firms in 2015.
Additional analysis related to the number of firms billing corporate legal departments in 2015 reveals that for 57 percent of corporations, 10 firms or fewer represent more than 80 percent of their legal fees. This reflects an increase from 55 percent of corporate legal departments in 2014. Three industries came in among the most highly consolidated in terms of their use of law firms: manufacturing (non-pharmaceutical) at 68 percent, transportation and warehousing at 75 percent, and retail trade at 78 percent. Conversely, insurance companies experienced the lowest levels of law firm consolidation.
The Trends Report, based on more than $21 billion in invoices and well over 1 million matters processed via the CounselLink ELM platform, is designed to provide corporate legal departments with a historical view of how legal market dynamics are evolving over time. Below are five key trends extracted from the study, which sheds light on how and where corporate legal departments invested or cut back in 2015.
New Outside Counsel Hiring Is Highest for Litigation and Corporate Matters
More than half of corporate legal departments, 56 percent, chose to stay with their incumbent firms to handle their significant legal work in 2015. However, there were exceptions made for litigation and corporate matters. For example, 57 percent of companies with significant litigation in 2015 (at least one matter with a minimum of $100,000 in outside counsel fees) hired a new law firm. Similarly, 46 percent of companies with significant corporate work in 2015 brought in a new law firm. By contrast, less than a quarter of companies hired a new firm to handle employment work in the same year. In addition, even fewer companies brought on multiple firms to handle their legal matters, with just 23 percent engaging with two new firms in 2015 and only 16 percent hiring at least three new firms. Companies worked with more law firms (between five and 27) to handle their litigation matters than any other type of legal work. On the opposite end, corporate counsel engaged the fewest number of firms (between one and five) to handle their mergers and acquisitions (M&A) transactions. In spite of this, 31 percent of companies hired a new law firm for M&A work in 2015, which indicates either a material addition to their panel or a replacement of a law firm from the existing M&A panel.
Law Firm Consolidation Continues
In keeping with the law firm consolidation trend, a majority of companies continued to consolidate their outside law firm panels in 2015, with 57 percent of companies in the CounselLink data pool engaging with 10 of fewer firms and accounting for at least 80 percent of fees. While industry type played a significant role in consolidation, manufacturing (non-pharmaceutical), transportation and warehousing, and retail trade were among the most highly consolidated industries.
AFA Use Remains Consistent with Increases in Four Areas
While alternative fee arrangement (AFA) use varied greatly by matter type, overall use of AFAs remained stable in 2015, with 9.4 percent of matters invoiced and processed via the CounselLink software, structured under an AFA. Alternative fees arrangements also accounted for 7 percent of billings for the full year. For purposes of the Trends Report analysis, AFAs exclude any form of hourly billing including discounted and blended hourly rate arrangements. Four practice areas in particular came in higher than average: employment and labor, insurance, IP-patent, and regulatory and compliance. Of note, employment and labor matters structured under an AFA increased by three percentage points from 14.1 percent in 2014 to 17.3 percent. Additionally, commodity-type work such as insurance and employment and labor tended to have the highest volume of matters billed under AFA.
Annual Partner Rates Climb Overall with Three Major Cities at the Helm
Across-the-board partner rates increased an average of 2 percent year over year and varied largely based on geography. Chicago, Boston and Washington, D.C., experienced the largest partner-rate increases. Each city experienced rate growth of 4 percent or more, both over a three-year span and year over year. Boston, in particular, experienced the highest compound annual growth rate (CAGR) and year-over-year increase with an 8 percent increase in 2015 and a CAGR of 5 percent. In addition, Chicago had a 5.5 percent year-over-year rate increase and a 5 percent CAGR. Similarly, Washington, D.C., experienced 4.3 percent year-over-year increase and 4 percent CAGR. By contrast, Dallas, Philadelphia and Phoenix experienced the lowest hourly growth rates, coming in below 2.5 percent in the same metrics.
M&A and Corporate Practices Command 2015’s Highest Partner Rates
M&A, as a practice area, commanded the highest average partner rate at $629 per hour in 2015, according the study data. Corporate, general and tax, as a practice area, came in next at $562 per hour. Regulatory and compliance followed closely with average partner rates of $560 per hour. On the opposite end of the spectrum, environmental and insurance practice areas charged among the lowest rates, at $185 per hour for insurance and $325 per hour for environmental.
As 2016 comes to a close, it will be interesting to see how these market dynamics have shifted over the course of this year. The goal in distributing the CounselLink ELM Trends Report is largely driven by a desire to provide insights corporate counsel and law firms can use to guide their decisions and actions in the future. Stay tuned for the next iteration of the CounselLink ELM Trends Report to find out what story 2016 will tell.
Kris Satkunas is Director of Strategic Consulting at LexisNexis CounselLink.