After years of clients working to whittle their list of businesses down to a trusted group that understands their businesses’ specific challenges, rate hikes threaten to upend those delicate relationships.
New data from accounting and consulting firm Withum provides the latest signal that companies of all sizes intend to push rates higher in the year ahead. A snap survey of law firm executives and managers found that a large majority of firms intend to raise fees by 1-5% or 6-10% for all categories of employees. The rate pressure for associates is particularly significant, in companies of all sizes, with more than 40% of respondents focusing on the 6% to 10% window. And nearly 10% of companies are considering an increase of more than 10% for their financial partners.
This is a hard pill for many in-house legal department heads to swallow. Ann Kappler, executive vice president and general counsel at Prudential Financial, has worked to get to a place where the companies that serve the insurance and investment management giant are “true partners” for the industry. ‘business. This involved winnowing its slate of outside firms so that 80% of Prudential’s legal work would go to around 30 firms that should be fully invested in the relationship.
“By that I mean they really know our business and they know where we are going strategically,” she said. “Do our team members listen to our earnings calls and know what we are looking for as a company? It’s extremely frustrating for me to have my budget cut, but law firms come to me with a 10% rate increase. »
For Carlos Brown, general counsel at Dominion Energy, outside attorneys who dramatically raise rates risk losing his firm’s job.
“I don’t hire firms, I hire lawyers,” he said. “If a lawyer’s firm decides to raise rates to a level that I think is unsustainable, we will assign that job to a firm that can do that job.
But Dominion also has a privileged relationship with a small group of companies. Here, a rate hike proposal is often the starting point for an unbiased discussion.
“I am very lucky. Among our top 10 companies we work with are strategic partners. They know our business. We have more than just transactional relationships,” Brown said. “If the company could show me that the rate they charge for our work is out of the market, I would appreciate it. I will answer that.
This means the onus is on the law firms to make the case that any increase is essential to securing the future of this relationship.
“The most common argument, and the most valid argument, is the talent argument,” said Marci Krufka Taylor, advisory group director at Withum’s law firm. This reasoning states that “we are strategic business partners, we would like our teams to stay cohesive, we understand that you are under pressure, but so are we”.
Specifically, firms may report that their direct salary expenditures for partners, attorneys, and non-participating partners are increasing, as is the pressure to pay critical partners at market rates. They may also point out that the indirect costs of recruiting talent are also increasing, particularly with respect to the competitive demands surrounding diverse talent.
Of course, internal leaders read the legal press, and they are also aware of recent record corporate revenues and the fact that spending on real estate, travel and events has plunged since the start of the COVID-19 pandemic. . Meanwhile, they are under budgetary pressure from their own customers: the rest of the society in which they are embedded.
“Law firms and general counsel could get away with it because legal fees were just a small line item in the overall company budget,” said Jason Winmill, a managing partner at Argopoint who advises corporate legal departments on pricing and corporate negotiations, said of the rate increases. “But it got bigger and bigger. It’s gotten to the point where the GC can’t make it go away and the CEO and COO say they’re not taking it anymore.
These internal leaders are aware of the pressure law firms are under to retain talent and they recognize the value of stability within their legal teams.
“All industries are dealing with this great resignation, and I think they have some empathy for their outside guidance in this regard,” Taylor said. “It’s a cost to them to having new people working on their cases, and losing the history they have with their outside lawyer because people leave.
But some believe companies should look beyond financial compensation to keep their teams intact. Indeed, for many lawyers, the promise of a more satisfying lifestyle can also be a powerful reason to stay put.
“Incentives and compensation matter, and a company that doesn’t have a viable competitive business will struggle to retain talent over the long term. But any executive or management team who thinks salary and compensation is the only leverage they have to retain top talent is extremely myopic,” Winmill said.The idea that you have to ride the Brinks Truck to retain top talent, even in competitive markets, is not true. I don’t buy it.
And bargaining power is also part of the story. Companies that have reduced the number of companies they work with are hiring and sending trusted slices of work to those partners are in a better position to push back.
“We never swallow rate increases,” Kappler said. “We really hope that by getting to a place where we can deal with 30 big companies, we can get to a place where we can negotiate reasonable, win-win rates. We want to deliver the kind of a reasonable volume so that companies are happy with the work they’re going to get and don’t have to make up for it on the price side.
The concept of “strategic business partnership” also means much more than simply concluding accommodations on prices. For Kappler, Prudential’s outside counsel can and should demonstrate their value to the business by anticipating, acknowledging upcoming challenges and identifying efficiencies in how they serve the client and how their legal department can operate.
“They should be your eyes and ears to be proactive and raise issues for you,” she said. “Rather than being called out and asked, ‘How do you put out the fire?’ they should prevent the fire from starting.
It seems fair to say that companies that do this reliably will get a more receptive audience when it’s time for relationship partners to have that tough conversation about pricing.