Hi there,
Should in-house teams stop caring so much about law firm rate hikes?
I know, it’s a bit of a spicy suggestion. 🌶️
But hear me out.
Yes, there are reports of top law firm partners receiving $20+ million in annual compensation, prompting some to liken top-tier partners to NBA star players. 🏀
At the same time, firms continue to report record-breaking revenues 💰 — Linklaters is the latest.
It’s easy to fall into reactive thinking here.
“We must do something to take control of these ridiculous rate hikes!” 🤬
But the current narrative around rate hikes and outsized partner profits at top firms should be read in the context of what else is happening in the marketplace.
Along the spectrum of legal work that a typical in-house team sends to their outside counsel, only a small portion really requires the equivalent of NBA-grade legal prowess.
For all the rest, the decision comes down to a weighted evaluation of which firm or legal service provider — as measured against the relative risk to the business — has:
✅ The right level of expertise
✅ The right team
✅ The right strategy
✅ The right price
For the majority of matters that don’t need an all-star firm (at all-star hourly rates 🫰🏼), there is a suitable alternative fee arrangement, or AFA, to govern that arrangement.
To put it another way, for most in-house matters that require the help of outside counsel, only a very small fraction need involve a billable hours arrangement at a top firm partner’s hourly premium.
Still, year after year, in-house teams — who face increasing pressure to do more with less — devote countless hours and resources to the rate review process.
😖 Setting up spreadsheets, building rate card comparison frameworks for all firms, and manually setting up calculations like “weighted average change %” and “spend impact.”
😥 Validating that data with appropriate internal and external benchmarks.
😣 Capturing and tracking the negotiation communications and relationship history scattered amongst various relationship stakeholders.
🤪 Ensuring all internal stakeholders — procurement, legal ops, legal leadership, and the lawyers who themselves are most directly managing those firm relationships — are all on the same page and coming to the negotiating table with a unified voice.
Now multiply those efforts across the average 97 firms that GC teams with $10 million or more in external legal spend have relationships with, not to mention multiple practice areas, locations, and timekeepers.
The process is no less glamorous for firms, tracking multiple email threads and finding that engagement letter from years ago, multiplied across hundreds of clients.
Can we all agree that the rate review process is a giant waste of clients’ and firms’ increasingly scarce resources?
Both in-house teams and their firms are getting better at scoping and pricing using AFAs and are seeing the benefits they provide for both parties.
💰 Firms are improving their margins as they work out new GenAI-enabled ways to deliver the same outcomes in less time.
🏆 Clients get transparency, cost predictability, and defensibility in showing that they are proactively managing their legal spend.
Over $13.5 billion in RFP value from over 3,000 firms and legal service providers has been submitted on PERSUIT to date.
In 2023, two-thirds of those matters utilized AFAs. In 2024 we’re tracking at around 70%. This is against the industry average of 23%.
The way legal services are brokered is changing right in front of us.
It’s hard to see why clients continue to place an outsized emphasis on the rate review process and negotiating better hourly rates when the margins of return on that investment will just continue to narrow.
Imagine if in-house teams and their firms shifted the resources they currently pour into managing rate negotiations and used them instead to build and strengthen their AFA muscle? 💪🏼
What can in-house teams do right now?
All of that said, rates continue to climb and in-house teams do need a strategy to manage those hikes.
Here are two ways I suggest you do it:
(1) Use the rate hikes to marshal your team and resources into action!
What better motivation exists than the pain of rate negotiations to start building — or strengthening — your team’s AFA muscle.
Some in-house legal teams are already using AFAs across 40-80% of their external legal spend. Those potential savings — especially if the AFAs are competitive — have the potential to dwarf the hard- fought savings achieved through cumbersome rate negotiations.
(2) Get better and faster at negotiating rates (which, incidentally, PERSUIT’s new Rate Review Pro is specifically designed to do. You can read more about it below.)
These two solutions are as close as you'll get to magic 🪄 so you can start caring less about rate hikes and move on to the things that drive true impact.
Cheers,
Jim
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