Business Impact of Hourly Rates on Corporate Clients
The Buying Legal Council conference (Sept. 30–Oct. 1) once again packed a lot into a short program. Although I couldn’t attend all of day one, the sessions I did catch—especially the procurement-focused panels aligned with BLC’s core mission—were excellent.
The highlight for me was DHL CLO Mark Smolik’s presentation on law firm rates. As many of you know, tracking firm rates in the context of legal headcount and company revenue is something I watch closely.
With respect to hourly rates, Smolik noted the following:
- For the AmLaw 25, rates are up 83% since 2014; CPI over the same period is 35%.
- Profits per equity partner roughly doubled. For an AmLaw 100 view, see the Ops in a Box, Legal Edition post Law Firm Rates Circa 2023.
- Smolnick’s team projects an AmLaw 25 partner rate of $4,795/hour by 2034—nearly 3x today’s average of $1,680/hour.
Most compelling was his analysis of the business impact of hourly rates. Using average U.S. profit margins across several core industries, Smolik calculated the revenue required to net $1.00; the examples ranged from $7.25 to $38.46. At the midpoint ($15.61), a company would need $74,826 in revenue to cover a single hour of AmLaw 25 partner time at the projected rate ($4,795 × $15.61).
Key takeaway: In order that 2034 rates don’t translate into an untenable situation for the legal department, treat outside counsel spend as a rate-inflation risk and pursue alternate delivery models (law companies, Generative AI, pulling work in house) in addition to limiting costs outpacing inflation by requiring rates to hold for 2 or more years, consider panels, CPI-capped pricing, and focused matter scoping with flexible fixed fees (flexible to accommodate legitimate scoping changes).
How to operationalize:
- Lock in price discipline: Require firms to lock in rates for several years, or adopt preferred panels with CPI caps. Make good use of RFPs by practice area.
- Default to AFAs: Portfolio and phase-based fixed fees (consider success fees for results); prohibit open-ended hourly on defined/recurring matters.
- Right-source the work: Disaggregate by complexity; shift routine/process work to price conscious small firms and law companies; reserve premium partners for high-stakes issues.
- Enforce scope & budgets: Institute budgets tied to early case assessment narratives; adopt change-order rules, and matter staffing plans.
- Measure value, not time: Use a “revenue-to-pay” KPI alongside rate and outcome benchmarks; publish firm scorecards that blend cost, cycle time, and results.
- Invest inside the house: Self-serve playbooks, CLM/templates, and GenAI apps to reduce external demand while improving predictability.
Additional OBL resources: