Dive Brief:

• More than eight in ten legal departments (83%) use discounted hourly rates to pay outside counsel, the most common billing approach, according to a report based on survey data. 
• Standard hourly rates are also frequently used, with more than three in four (77%) in-house teams employing them, the 2023 Law Department Management Benchmarking Report found. This information highlights that the traditional billable hour still has strong traction in the legal industry.
• The median legal department engaged 10 law firms in 2022, a figure that remained unchanged from last year’s report that was also produced by the Association of Corporate Counsel and Major, Lindsey & Africa.  

Dive Insight:

Legal departments are constantly seeking ways to reduce costs, particularly during tight economic times, so discounted outside counsel rates are one way to help achieve that objective.

Stacy Lettie, chief of staff to the GC at Organon Pharmaceuticals, has said she asks law firms to discount their rates in exchange for the business they get.

Such discounts are particularly helpful for legal departments amid law firms increasing their rates in a historic fashion. 

The 83% of in-house teams using discounted rates was up two percentage points from last year’s ACC benchmarking report. 

Besides discounted or standard hourly rates, the other billing method used by more than half of legal departments is flat fees.

Roughly 61% of in-house teams report using flat fees for entire matters or stages of a matter.

Capped fees are used by 46% of departments, retainers are used by 38% and blended hourly rates are used by 37%. 

One type of fee that has been in the news lately is a success fee paid to a law firm for achieving a particular result or strong performance. Twitter is seeking to recoup a large success fee paid to Wachtell, Lipton, Rosen & Katz for its legal efforts to ensure Elon Musk followed through and purchased the social media company. 

Just 12% of legal departments use success fees or incentives, though 31% do so at companies with $5 billion to $20 billion in revenue.

The largest companies, particularly those with more than $20 billion in revenue, say they use a wider range of outside counsel fee types.

“Seventy-five percent or more among these organizations use discounted and standard hourly rates, flat fees, capped fees, and blended hourly rates,” the benchmarking report said. “Smaller companies with up to $1 billion in revenue, on the other hand, mostly use discounted and standard hourly rates.”

The mix of fee types employed by companies comes amid their legal spending rising at a strong clip, particularly at businesses bringing in the most revenue. 

The report notes that large legal departments that tend to spend more on outside counsel use more external providers than smaller businesses. 

For example, companies that spend less than $1 million on outside counsel use an average of five law firms and those that spend $1 million to $5 million use 12 firms on average.

By comparison, organizations that spend $10 million or more on legal matters use 92 outside firms on average.

The majority of departments (57%) reported that the number of law firms engaged last year stayed the same compared to the year before.

Meanwhile, 30% reported an increase in the number of firms engaged and just 13% said they worked with fewer firms last year.

The benchmarking report’s findings are based on responses from 449 legal departments in organizations spanning 24 industries, 20 countries and all company sizes. The online survey opened Feb. 16 and closed April 14.