Amid rising law firm rates, in-house legal departments are more closely monitoring their spending on outside counsel.

They are doing so by introducing stricter guidelines for the use of outside counsel and implementing structured annual rate review processes.

Many in-house teams are also examining whether to increase their use of regional and boutique firms, which typically charge less per hour than larger outfits.

The increased focus on outside counsel management has also been sparked by the pressure legal departments feel to reduce spending and enhance legal service delivery, according to Jaime Woltjen, director, strategy and transformation practice, at Harbor Global.

“Law departments are closely scrutinizing law firm billing and annual rate reviews, and instructing their teams to be more cautious in how they use outside counsel," said Woltjen, who provides management consulting services to the legal industry.

Rate increases

The largest law firms consistently raised their rates last year, with Am Law 100 firms upping their so-called worked rates by more than 7% on average through the first 11 months of 2023, according to a Thomson Reuters report. Worked rates are the negotiated rates clients agree to pay to law firms for particular matters.

In a similar vein, the top 100 U.S. law firms charged clients an average of $961 an hour in the first nine months of 2023, a report from Brightflag found. The uptick was driven by a rise in individual fee earner rates as opposed to a change in matter resourcing, the report said.

Brightflag recommends that legal departments create a risk matrix so that only the highest risk and most complex matters are handled by Am Law 100 firms.

“You can do this by tracking a risk and complexity score on each of your matters,” the Brightflag report said. “Matters that are both high risk and high complexity can continue to be instructed to Am Law 100 firms, while other matters can go to regional firms, alternative providers, or be resourced with internal staff.”

Rate review process

Legal departments are also advised to institute formal rate review processes to help keep outside counsel spending under control. 

Roughly half of in-house legal teams executed a structured annual rate review process, according to the 2023 Harbor Law Department Survey.

Typically, legal departments require rate increase requests only be submitted once a year.

“Once rate requests are submitted, you can leverage your e-billing tool to understand the percentage increase the new request represents when compared to the rate that is currently in effect and the reason for the requested increase to determine whether it is appropriate,” according to Brightflag. 

Meanwhile, nearly one in three legal departments are planning consolidation of their preferred providers on their outside counsel panel, according to Harbor Global.

Timekeeper mix

In-house legal teams should also pay attention to the mix of outside counsel timekeepers being assigned to their matters.

For example, legal departments can work with outside counsel to make sure lawyers with the proper experience are being assigned to handle high-priority projects, according to a Thomson Reuters blog post.

“Left to their own devices, firms could assign many extra timekeepers to your matters, some experienced and some not, all billing part-time to multiple matters,” Thomson Reuters said. “This increases the number of people who must be educated on the matter and kept up-to-speed.”

Once a project is underway, the in-house legal department is advised to ensure the external counsel team is not changed without their approval.

The monitoring of the external counsel timekeeper mix is particularly important because partners typically charge far more per hour than other fee earners.

Along those lines, partners at the top 50 law firms charge rates 40-50% higher than associate rates, Brightflag reports. 

“Because of this, it’s important that firms resource effectively and do not overburden engagements with partner hours when work could be done more cost-efficiently by other fee earners,” according to Brightflag.

Strategic partnerships

Beyond reviewing rate increase requests and the make-up of external counsel teams, legal departments are also working to improve their relationships with outside law firms.

Developing strong intellectual and emotional connections with external counsel can produce more effective collaborations, according to Elizabeth Lugones, COO and senior advisor at UpLevel Ops.

“Building trust and fostering a shared understanding between in-house teams and outside counsel goes beyond transactional interactions, leading to deeper engagement and more productive outcomes,” Lugones wrote in Above the Law. “This relational approach can unlock new levels of efficiency and creativity in handling legal matters.”

“When outside counsel feels trusted and understood, they are more likely to invest more significant effort and thought into their work, leading to outcomes that may surpass expectations,” Lugones continued.