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Category: Risk Management

Study: Washington, DC Outpaces Peer Cities on Hourly Rate Growth

February 15, 2024

A recent Law.com story by Abigail Adcox “ ‘D.C. Was Our Best-Performing Region’: Billing Rate Increases and Demand Growth Drive Strong Year in the Beltway”, reports that law firms based in Washington, D.C., finished out 2023 with a strong financial performance, propelled by billing rate increases, expense control and robust demand within regulatory and litigation practices, according to results from a bank survey.

Among D.C.-based firms, gross revenue was up 7.6% in 2023 over the previous year, higher than the industry average of 6%, as the average billing rates in the region rose 8.8% compared with the industry average of 8.3%, according to Wells Fargo’s Legal Specialty Group’s year-end survey results.  Those results included eight firms headquartered in the D.C. region.

“D.C. was our best-performing region,” said Owen Burman, senior consultant and managing director with the Wells Fargo Legal Specialty Group.  “When talking to firms to really find out what drove it, the regulatory side was on fire for so many firms. And litigation overall has been supporting many firms this past year.”  In average revenue growth, D.C. firms exceeded peers in New York City (7%), California (6.6%), Texas (6.3%), Florida (5.9%), Chicago (5.2%), Philadelphia (4.7%) and Atlanta (4.4%), according to Wells Fargo data.

“The practice mix was very much in favor of D.C.-headquartered firms” in 2023, Burman said, citing robust demand within restructuring, antitrust and litigation practices, as other firms saw the impact of slowdowns in the transactional market.  It follows a lackluster 2022 for D.C. firms, which “underperformed,” as anticipated enforcement activities under the Biden administration didn’t come to fruition as expected, according to Burman.

However, in 2023, as demand picked up within regulatory and litigation practices, D.C. firms were able to control expenses and were less aggressive in hiring, contributing to their revenue growth.  Profits per equity partner were up 10.7%, compared with the industry average of 4.9%.  The number of full-time equivalent lawyers at D.C. firms also grew by 2%, slightly below the industry average of 2.8%. However, productivity at D.C. firms was down 1%, still better than the industry average (down 2.1%).

Demand among all lawyers was also slightly better at D.C. firms (0.9%) than the industry average (0.7%), but fell short of peers in New York City, which saw a 2% increase in demand.

Controlling Expenses

Meanwhile, total expenses grew 4.1%, the best out of all eight regions tracked, and above the industry average of 6%.  “They were able to control the expense growth much better than peers,” Burman said.  “Last year they were able to control the lawyer compensation pressures a bit more than other markets.”

Billing rate increases were in large part able to compensate for increases in lawyer compensation at D.C. firms last year.  “All together the rate increases are covering it.  The problem is that they were hoping it would cover other investments and now they have to redirect that money into supporting the lawyer compensation,” said Burman, adding that artificial intelligence and innovation investments are other top priorities for firm expenses.

Because of these expenses and other priorities, in 2024, D.C.-based firms may see more expense pressure, and they may be more in line with the industry averages in expense growth, he said.  Still, entering the year, D.C. firms are “optimistic,” Burman added, expecting strong demand within litigation and regulatory practices to continue.  “Their growth estimates are quite optimistic,” Burman said.  “Litigation, restructuring practices are still quite strong.  So those haven’t tailed off as we’re anticipating this rebound in transactions.”

Article: Seven Key Metrics to Evaluate Spend on Outside Counsel

January 8, 2024

A recent Law.com article by Rosemarie Griffin, “Seven Key Metrics to Evaluate Spend on Outside Counsel”, reports on metrics to monitor outside legal spend.  This article was posted with permission.  The article reads:

Gartner research shows that external spend comprises approximately 45% of overall spend for the median legal department, yet legal leaders often have trouble understanding where much of that spend originates.  Legal leaders continue to invest in spend management solutions to improve their insights into external spend data.  However, many of these same leaders find it difficult to translate that data into insights to inform decision making, even when spend data is accessible in dashboards or reports. 

When it comes to improving how external spend is evaluated, legal leaders should first determine the goals they want to achieve (e.g., reducing costs or improving quality) and then identify and track data to inform strategic decisions.

Gartner experts have prepared seven example metrics that legal leaders can use to inform their external provider management and align it with their organization’s overall strategy.  The following examples provide a framework for assessing needs and working with vendors and/or internal teams to build similar reports.

1. Total Spend Over Time Comparison

Comparing spend over time, especially in a visual dashboard, enables legal leaders to quickly spot trends or instances that could lead to overspending  This type of comparison also provides a holistic picture of historic spend in given periods, allowing for better budgeting.  One of the most valuable means of displaying comparative spend is with total spend per month, compared year over year.

Better historical spending data allows for more accurate budgeting, enabling legal departments to base projected future spending data on similar spending during that period in previous years   Historical spending trends can also help determine potential upticks in seasonal work and how much spending might be expected to fluctuate.  Comparing this information makes it easier to spot outliers when reviewing spend reports.  When legal leaders notice outliers from previous periods, they can analyze individual matter budgets from that period to see if a unique event explains that spending and, if not, adjust future spending, renegotiate with law firms and/or adjust the quantity and type of work sent to external providers.

2. Spend Compared to Budget

Once legal teams create a budget, they can also leverage data to manage that budget by tracking law firms’ spend.  While budgets with law firms are not always accurate, legal leaders should still track budget overages and use any overages to save money by renegotiating the amount billed and increasing scrutiny in future bills with that firm.

If a law firm is consistently over budget on matters, legal leaders should take a deeper look into the matters being billed by that firm.  It may be possible that one matter is significantly over budget, for known and expected reasons, but all matters coming in consistently over budget indicates a larger issue.  This might mean the in-house team member responsible for managing firm spend is not effectively managing a firm, or it could mean the firm is consistently ignoring budgets when making staffing and billing decisions.  Monitoring this data at the macro level can allow teams to proactively address any budget issues without waiting until large matters are completed.

Once a potential issue is spotted, legal leaders should speak with the matter owner(s) in the department working with a firm to see if there is an adequate explanation for the deviation.  From there, they should work with the firm to create a plan to readjust spend or rework the budget if necessary. It is important to track these overage conversations and any improvements on budget compliance to use in vendor evaluations.  Having conversations with vendors about their budget compliance legitimizes the budget and ensures a firm will monitor the available budget when making staffing and billing decisions in the future.

3. Blended Rate

Another helpful tool for monitoring law firm billing is the blended rate.  A blended rate, the average rate of all roles by hours billed, helps clear any confusion and identifies the true hourly cost the firm is billing, instead of just the rates billed by each role at the firm.  An effective report might visualize the average blended rate for top vendors as ranked by their total fees billed.

Understanding the blended rates first helps identify which firms are charging more, on average, per hour.  Using a blended rate ensures firms cannot hide costs by overusing staff with high billing rates.  Legal leaders can then take a closer look at potential over billers to see whether the matters billed by that provider justify the higher billing rate, or if they may be using high-cost attorneys unnecessarily.  Leaders can then negotiate rates or staffing or take advantage of alternative fee arrangements (AFAs).

4. Matter Staffing

To complement the data from blended rates (or provide a proxy, if the department cannot access that data), legal leaders benefit from a breakdown of the percentage of roles (paralegal, attorney, partner, etc.) billing the department from each firm.  If staffing is too senior, the department is paying higher rates than required for a task.  If the staffing is too junior, the work may not be adequate for the quality expected by the firm.  One way to visualize this data in a report is by displaying staffing allocation, by vendor, for vendors that bill the most fees, or a selected list of vendors.

Understanding what type of role executes the work will allow legal leaders to quickly see if a firm may be over- or underusing expensive law firm partners or attorneys for the work billed.  For some workstreams, such as major litigation, extensive use of experienced attorneys may be required.  For these cases, legal leaders may look to ensure partners and high-value attorneys have devoted considerable time to that work.  Blended rates alone cannot provide this information.

However, if a firm is generally used for low-complexity work, significant partner use could be unjustified, leading to unnecessarily high rates.  Visualizing this information is especially useful when combined with data on blended rates and billing guidelines, as blended rates will support an overbilling hypothesis and guidelines allow the legal department to clearly lay out what roles should be executing each type of work managed by a firm.

5. Turnaround Time

Aside from direct costs, another important outcome to report is the turnaround time for individual matters.  Slow turnaround time can delay matters and increase costs. However, if turnaround time, for similar matters, decreases significantly without explanation, it could be an indicator of lower work quality.  Turnaround time alone cannot adequately explain cost overruns or outcome quality, but it can be used as an indicator to take a closer look at a firm’s work.  Legal teams can visualize turnaround time by sorting matters by priority and plotting median turnaround time for matters at each priority level. 

Legal leaders can monitor firms’ work speed and compare them to the previous year to check in when turnaround times are longer than average, meet with firms to diagnose the issue (if times are unjustified), and create a plan to improve performance and maximize value.  This approach can also reduce cost if additional time is leading to more billed hours.  Any significant slowdowns could be from the complexities of a major individual matter or other factors, but it is an indicator that legal leaders should take a closer look at that individual firms’ work to evaluate whether the slowdown is justified.  Turnaround time metrics can be valuable, but they rely on legal staff to close out matters properly for accurate data.  This metric is only effective alongside established expectations for closing matters.

6. Strategy Versus Complexity

Another way for legal leaders to monitor their use of outside counsel is through the distribution of external matters by complexity and strategic value.  While this requires legal staff to accurately gauge and input the information, it can be extremely useful to evaluate the mix of work sent to external providers.  Some departments and external spend management solutions provide legal leaders with the tools to rate matters by qualitative metrics (including strategic value and complexity) when opening a matter and presenting these matters in a grid.

One of the most effective ways of reducing outside counsel costs and increasing the value received by in-house resources is to consider the strategic value and complexity of a matter when deciding whether to send something outside.  Legal leaders should aim to keep matters of high strategic value (other than major litigation) in-house as much as possible, where they have the best knowledge of the business.

Any matters of high complexity and low strategic value are good candidates for outsourcing to law firms, while low complexity, low strategic value matters are good candidates for alternative legal service providers (ALSPs.)  If legal departments see a large percentage of high strategic value matters sent outside, they may reduce outcome quality for the business and reduce the strategic benefit of in-house resources.  At the same time, if low complexity matters are being sent to law firms, then legal departments have an opportunity to insource those matters or shift that work to lower-cost ALSPs.

7. Grid Summary Report

To better compare spend across firms and practice areas, legal leaders can use a grid summary report that displays spending in a grid with the top 10 to 20 practices as rows, and the top 10 or 20 firms as columns.  Ideally, this report would classify rows into tiers of firms.

A grid report typically visualizes the gaps and overlaps and can help inform opportunities for consolidating spend.  At minimum, seeing this grid should allow the department to ask, “Are we making the right allocations?” If the report indicates a law firm is not often used, or is used for only one stream of work, then it may be a suitable candidate for consolidation.  Often, legal leaders report they are unaware that a single attorney is engaging with a firm until they get a complete spend report.  Tiering by practice area allows the department to notice this behavior more easily.

Strong relationships with law firms are valuable, as they will have better knowledge of the business and can provide better opportunities, including bulk discount on fees, secondments, and additional services, such as those provided by a captive ALSP.  These benefits can often be increased (particularly for organizations with smaller overall legal spend) by consolidating work to a smaller number of firms.  If a firm is being underused across practice areas but provides good value for work in other practice areas, legal leaders can also instruct their teams to shift work away from other firms to that firm.  This shift increases the value provided in a practice area while minimizing the loss of relationships that may occur by bringing on new firms for a practice area.

Other Metrics to Consider

The list of metrics above is not comprehensive of all metrics available from spend management platform vendors, or all metrics that may be useful when making strategic decisions on outside counsel.  Other recommended metrics (that may or may not be available from vendors) include spend by firm tier, average vendor rating (from after-action reviews at matter close), and top matter owners by spend.

External spend management platforms can provide some options for reporting, and legal teams can build on these systems to create their own reports to ensure they have the data required to make effective external spend decisions.  These reports can also help legal show the value it provides to the business, by showing how it has increased the efficiency of theory spend or reallocated work to better outcomes.

Rosemarie Griffin is a Senior Research Principal at Gartner.

Article: Understanding Attorney Fee-Shifting to Mitigate Risk

December 5, 2023

A recent Business Insurance article by Iran Valentin and Allison Scott, “Perspectives: Understanding Attorney Fee Shifting to Mitigate Exposures”, reports on the importance of understanding attorney fee-shifting in litigation to mitigate risk.  This article was posted with permission.  The article reads:

The availability of attorneys fees is a significant concern to policyholders.  Without the potential to recover the fees, most dubious claims and suits related to employment law and consumer protection, for example, would not be pursued.  The potential of a fee recovery also drives up the cost of resultant litigation, settlements and awards.  Thus, a double-headed monster emerges: an increase in the number of claims and an increase in exposure, which can eventually drive up the costs of insurance.

An existential threat that exists for corporations is a “nuclear verdict,” or a runaway jury award.  These huge verdicts grew in the face of incessant legal advertising by plaintiffs attorneys and the resultant slanted narrative effectively desensitized potential jurors to the value of money and preemptively taints prospective jury pools.

Within this context, it is more important than ever for insurance professionals and defense counsel to understand the significance of attorney-fee shifting.  When crafting a defense strategy, many factors are considered, including the nature of the alleged loss, the profiles of the litigants, the reputation of the claimants’ counsel, recent jury verdicts and the jurisdiction.  Equally as important should be considering the effect of fee-shifting, to develop strategies to mitigate that exposure.

Remedial legislation

Basically, fee-shifting requires a losing party in litigation to pay a prevailing party’s attorneys fees.  It represents a departure from the “American Rule,” which generally provides that each party to a litigation will bear their own fees.  However, fee-shifting statutes have continued to grow, especially in the areas of employment and consumer protection, or so-called remedial legislation.

One of the purposes of remedial legislation is to introduce policies intended to benefit the public good, including anti-discrimination, anti-retaliation and consumer protection.  The policies enable fee-shifting provisions so alleged victims have access to competent legal representation.  It is not always the alleged victims who seek vindication, but rather lawyers who make a market in an area where attorneys fees are available.

Fee-shifting is sometimes a misnomer, as the availability of fees under enabling law is often limited to a prevailing plaintiff, as opposed to a prevailing defendant.  Under those laws, legislators seek to avoid the creation of a “chilling effect,” in dissuading potential plaintiffs and their lawyers from pursuing a claim.

Some laws allow for more traditional fee-shifting, by allowing prevailing defendants to recover defense fees for claims that lack merit or are brought in bad faith.  While a prevailing party may be awarded fees under a fee-shifting law, there is often attendant litigation over who constitutes a “prevailing party.”  Generally, a prevailing party is one who achieves a substantial proportion of the relief sought, whether or not that party actually obtains a verdict.  Courts have held that parties may not only prevail by judgment but also by compromise or settlement. 

In at least one jurisdiction, fee-shifting has also been made available in the professional liability context.  In New Jersey, the precedential 1996 case of Saffer v. Willoughby allowed a successful plaintiff to recover attorneys fees in prosecuting a legal malpractice action.  The New Jersey Supreme Court held that a negligent attorney is responsible for resulting legal fees and costs.  Interestingly, those fees were not considered fee-shifting, but “consequential damages” flowing from the attorney’s negligence.  New Jersey courts also allow recovery of fees by a third-party if the attorney intentionally breaches a recognized duty owed to a non-client, such as when serving as a fiduciary. 

The “common fund” and “substantial benefit” doctrines are also court-created fee-shifting mechanisms.  The common fund doctrine applies where litigation has created or preserved a common fund for the benefit of a group of people — such as a class action — and, accordingly, an attorney may be awarded attorneys fees out of that fund.  The substantial benefit doctrine applies if a judgment confers a substantial benefit on a defendant, such as in a corporate derivative action, which could lead to the payment by the defendant of the attorneys fees incurred by the plaintiff. 

Outside of the statutory and court-created fee-shifting framework, parties to a contract may agree to fee-shifting provisions.  Commercial contracts quite commonly contain default provisions that call for the payment of attorneys fees to a prevailing party in a dispute to enforce the terms of the agreement.

In most jurisdictions, attorneys fees that are awarded pursuant to a fee-shifting statute are calculated by setting a “lodestar,” which is the number of hours reasonably expended by an attorney multiplied by a reasonable hourly rate in the jurisdiction. Courts have the flexibility to adjust the lodestar considering certain factors, such as the results obtained by the attorney; the time and labor required to obtain that result; the attorney’s skill; the attorney’s customary fee; the amount of money involved in the claim; and awards in similar cases.

If the prevailing party has only achieved partial or limited success, the requested lodestar may be considered excessive and reduced.  Moreover, the attorney’s presentation of time billed must be set forth with sufficient detail, based on appropriate rates and in compliance with the jurisdiction’s ethical requirements.

Determining exposure

When a claim arises, insurance professionals and defense counsel should determine whether the policyholder is exposed to any court rule, statute, regulation or case law that allows fee-shifting or an award of attorneys fees.  They should also conduct an early assessment of liability and damages and consider early avenues to resolution to mitigate the exposure to fee-shifting.  Depending on the jurisdiction, defense counsel may be able to craft strategies designed to cabin the availability of attorneys fees, helping to drive resolution.  These are good faith strategies and methods employed during a case to drive resolution and also mitigate the exposure to attorneys fees. 

Often, a reasonable settlement curbing increased fees and costs is the second-best result outside of obtaining an early dismissal.  However, it is important to take care during settlement negotiations and the drafting of settlement agreements, releases and stipulations resolving litigation to account for attorneys fees and costs.  Lack of attention or poor drafting could result in unintended consequences, including the imposition of a fee award. 

When an adverse judgment calls for the imposition of an award of attorneys fees, strategies can still be employed to curb a disproportionately excessive fee claim, by relying on mitigation strategies employed at the outset designed to limit the recovery of fees; exposing the limited success of a claimant; exposing an adversary’s wastefulness during the dispute; questioning the proofs submitted in support of the fee claim; and otherwise contesting the reasonableness of the fee claim.

Iram Valentin is co-chair of the professional liability practice group in the Hackensack, New Jersey, office of Kaufman Dolowich LLP.   Allison Scott is an associate at the firm.