06/21/2012 11:01 am ET Updated Aug 21, 2012

Law Firm Hourly Rates and the Future of Legal Training

One of the great mysteries of business is trying to work out what your competitors are paying for the services you are using. For example, are you overpaying for things like legal work? Without transparent benchmarking, and when you are dealing with corporate legal services, which don't exactly come with searchable pricing on the Internet, how can you really know?

Fortunately, Corporate Executive Board and TyMetrix have released their second edition of The Real Rate Report which does just that. This report analyses the actual bills paid by major companies from their law firms.

The report's primary focus is on legal services in the USA -- it looks at $7.6 billion in fees billed for legal services in the United States during the five-year period from 2007 to 2011. It also includes fees generated by roughly 121,000 timekeepers (lawyers, paralegals, etc.) at more than 4,000 law firms.

However, there are several points of interest to a U.K. corporate audience -- particularly since so many U.K.-headquartered companies buy U.S. legal services -- as well as a particularly interesting trend that could have significant implications for the future of legal training.

The first point to make is, even in a recession (or possibly because of the recession), legal costs have risen dramatically -- from an average of $439 per hour in 2007 up to $533 in 2011. While the law is not necessarily a recession-proof industry, it certainly is able to weather them better than others -- particularly through litigation and insolvency services.

Another quick observation to make is that partners in U.K. firms are billed out at significantly higher rates than their U.S. counterparts. The average partner rate in the U.K. was more than $800 an hour, while it was just more than $500 in the U.S.

Another point that emerges is that legal firms are increasingly becoming a two-tier sector. The rates for lawyers who have traditionally commanded the highest rates are increasing much faster than rates for their lower billing colleagues. While some observers might have expected the top tier to find themselves competing on price to snap up more business, this instead suggests that clients are looking for quality and experience rather than cheaper options. And they are increasingly prepared to pay even more for it.

Finally, a particularly intriguing finding from The Real Rate Report was in-house counsel attitudes toward the next generation of legal talent in law firms. Since the onset of the recession, there has been a growing trend of in-house counsel being reluctant to pay for the work of entry-level associates on legal matters. Given the relative inexperience of new lawyers, they often feel that they, in effect, pay for entry-level lawyers' on-the-job-training.

The data from the report confirms this -- and justifies their decision to do so. Our analysis reveals that use of entry-level lawyers appears to add significant costs to matters -- adding, on average, almost 20 percent to the cost of a legal matter.

The implications for legal education and training are significant. If the next generation of lawyers cannot get experience working on the big cases their law firms are pulling in, will firms suddenly find themselves with inexperienced associates in five years' time?

Similarly, it places law firms in a slightly unenviable position of not being able to push more administrative and research-based duties on to junior staff, tying up senior members of the team with more mundane tasks.

If this trend continues, will we see wholesale changes to the legal education system? It remains unlikely, but clearly law firms will want to maximize the ability of their entry-level associates to ensure they can play as full a role as possible on all their cases.

More vocational training and work placements might prove helpful in the short term to bring them up to speed -- but persuading in-house counsel that entry-level lawyers are up to the task will prove considerably more difficult. This sort of trend can only really be identified through greater transparency in the arrangements between law firms and their corporate clients.

As the legal market moves toward greater transparency -- through advances in technology, such as e-billing and matter management -- in-house lawyers will be in a better position to evaluate cost and quality and make better decisions on resource allocation. In some cases that will mean bringing more work in house and providing more concrete guidance to outside lawyers, which will help them avoid unnecessarily "over-lawyering" legal matters.