21 Nov 2024

Law firm rate increases are here again: How to assess law firm proposals

We all know that managing legal costs is becoming harder every year. Law firm rate increases have become a constant challenge, and organizations that fail to manage their legal spend risk serious budget overruns and lost profits. But while rising law firm rates are concerning—U.S. partners now average $1.4 million in compensation, up 26% in two years—focusing only on these headline numbers creates blind spots.

The real challenge isn't just about hourly rates. It's about understanding the complete picture: how partners and associates split the work, what billing patterns reveal over time, and whether you're getting efficient service. Getting this right means looking beyond the surface of rate proposals to understand what you're really paying for.

This post will show you how to assess law firm rate increases the smart way. We’ll start with understanding what causes spikes in partner rates.

Beyond partner rates: What really drives legal costs

Most legal teams understand that partner rates don't tell the whole story of legal spend. While these headline figures command attention during budget discussions, the real cost drivers often lie in the underlying rate structure and resource allocation patterns.

The reality is that associates typically perform the majority of billable work on complex matters, particularly in areas like M&A due diligence, litigation document review, and regulatory compliance. This means that associate rate adjustments can significantly impact total costs - sometimes outweighing partner rate increases in their effect on overall spend.

Consider the mathematics of rate increases across a typical matter profile: When associate rates increase while their proportion of billable hours remains high (typically 70-80% of total hours), the impact on final costs can be substantial. A 10% increase in associate rates across a large litigation or transaction can add hundreds of thousands to the bottom line—often a larger absolute impact than an equivalent percentage increase in partner rates.

This points to the critical importance of understanding a firm's "gearing" (sometimes called staffing) – the ratio of partner to associate billing. Some firms appear competitive based on partner rates but operate with a leverage model that pushes more work to associates, ultimately driving higher total costs.

The most cost-effective approach typically combines strategic partner oversight with efficient associate execution, but this balance varies significantly by matter type and complexity.

Without analyzing these structural elements of a firm's staffing and pricing model, legal teams risk overlooking the true cost implications of their outside counsel relationships.

Now, we’ve looked at why costs increase. Let’s move on to best practices that help get legal spend management under control.

#1. The gearing factor: Balancing partner vs. associate billing

When evaluating law firm costs, understanding "gearing" is essential but often overlooked. This ratio of partner to associate billing can make the difference between staying on budget or cost overruns, yet many legal teams focus solely on individual rate cards.

Think of gearing as your law firm's force multiplier. While high partner rates might raise eyebrows at first glance, they often signal a more sophisticated staffing approach. The most effective firms use their partners like strategic conductors—directing complex work streams, providing high-level guidance, and leveraging their expertise at crucial decision points. Meanwhile, associates handle the detailed execution, from document reviews to drafting agreements, at more moderate rates.

This balance matters because it directly impacts your total spend. A firm charging $1,000 per partner hour but maintaining efficient gearing might deliver better value than one charging $800 but with partners handling routine tasks. The key lies in how effectively firms allocate their talent across different aspects of a matter.

Effective gearing looks different across various types of work:

For complex M&A transactions, you might want more partner oversight to manage deal-critical issues.
In large-scale litigation, associate-heavy staffing often makes sense for document review and research.
Regulatory matters might require a mix, with partners handling agency interactions while associates manage compliance documentation.

The most successful legal teams evaluate gearing patterns alongside rate cards when assessing their law firm relationships.

#2. Historical rate analysis: Tracking trends for better benchmarking

Smart legal teams know that law firm rate increases don't happen in a vacuum. Looking at these changes through a historical lens reveals patterns that can make or break your budget planning. But many teams miss crucial insights by looking only at year-over-year changes without considering the broader context.

Historical rate analysis is about connecting the dots. When you track how a firm's rates evolve over time—particularly within specific practice areas—you start to see the full picture. Maybe your M&A firm's rate increases have outpaced their litigation team's, or perhaps their regulatory practice shows unusual pricing spikes during certain periods. These patterns help you anticipate what's coming and plan accordingly.

But here's where it gets interesting: comparing your firm's rate history against market benchmarks can reveal whether those increases are justified. Perhaps what looks like an aggressive rate hike is actually in line with market trends for specialized practice areas. Or maybe your "reasonably priced" firm is quietly outpacing market rates year after year.

Consider tracking:

Year-over-year rate changes by practice area
Rate increase patterns during different economic cycles
Comparison of rate growth against industry benchmarks
Practice-specific rate trends in specialized areas
The relationship between rate increases and matter complexity

This historical perspective transforms rate negotiations from reactive conversations into strategic discussions. Instead of simply accepting or pushing back on increases, you can engage in informed dialogue about fair pricing based on solid data and market context.

#3. Efficiency in matter completion: The hidden cost driver

Here's something that often gets overlooked in rate discussions: a firm's hourly rate matters less than you might think. What really drives your total costs is how efficiently they get the work done. Think of it like this: paying $800 an hour for 10 hours of work costs less than paying $600 an hour for 15 hours of work.

The math here is straightforward, but the implications are significant. A firm charging premium rates might actually be your most cost-effective option if they:

Know your industry inside and out
Have handled similar matters repeatedly
Use standardized processes and templates
Staff matters with experienced associates
Leverage technology effectively

On the flip side, those attractively low rates can hide expensive inefficiencies. When a firm lacks experience in your industry or matter type, you're often paying for their learning curve. This shows up in subtle ways:

Extra hours spent researching basic industry concepts
Multiple layers of internal review
Revisions that could have been avoided
Time spent getting up to speed on your business
Inefficient staffing decisions

Smart legal teams look at their firms' efficiency patterns over time. Maybe that high-priced M&A firm consistently closes deals faster than their competitors. Or perhaps your "budget-friendly" litigation firm bills twice the hours of their peers for similar matters. These patterns tell you more about true costs than any rate card ever will.

Your roadmap: Evaluating rate proposals step by step

We’ve covered quite a few points so far. Before you start negotiating your next rate increase, here's a practical framework to help you assess what you're really paying for:

Step 1: Gather your data

Start by collecting key information from your firms:

Complete rate cards for all timekeeper levels
Historical rate data for the past 3-5 years
Staffing patterns for typical matters
Recent matter budgets and actuals

Step 2: Analyze current patterns

Look at how your work is actually getting done:

Break down hours by timekeeper level across matter types
Calculate the real cost impact of associate vs partner time
Map out which tasks are handled at which levels
Identify where you might be overpaying for routine work

Step 3: Compare historical trends

Use your historical data to spot patterns:

Track law firm rate increases year-over-year by practice area
Compare increases across different firms
Look at how staffing patterns have evolved
Note any correlation between rates and matter complexity

Step 4: Evaluate efficiency metrics

Measure how effectively firms deliver their work:

Average time to complete common matter types
Budget accuracy on recent projects
Staffing consistency across similar matters
Use of technology and standard processes

Step 5: Consider value indicators

Look at what you're getting beyond the rates:

Expertise in your industry and matter types
Quality and reliability of work product
Responsiveness and communication
Knowledge sharing and training offerings

Step 6: Make your assessment

Bring it all together by asking:

Do the proposed rates align with historical patterns?
Is the firm's efficiency offsetting higher rates?
Are we getting appropriate value for premium rates?
Could restructuring how we use the firm reduce costs?

Ultimately, this helps you understand how partner rates, associate time, staffing patterns, and efficiency all work together, giving you a clearer picture of what you’re really paying for. And this allows you to move beyond basic rate negotiations into smarter conversations about value.

The bottom line? As law firm rate increases continue, having this complete view becomes even more important for getting the most from your legal spend.

Learn more ways to optimize legal spend:

Maturity curve legal spend management ebook

Author:

Chris Perry

VP Sales