Upticks in Partner Billing, Associate Rates Prompt Shift to ALSPs

Since 2018, law firm partners have billed more hours to corporate legal departments than associates. The rift expanded in 2020, as partner billing jumped 5% to encompass 38% of average CLD billing compared to 30% for associates and maintained in 2021.

That’s according to a new Wolters Kluwer LegalView Insights report, which used the company’s e-billing tools to analyze $150 billion in ranked and unranked law firm invoices between 2020 and 2021.

The author of the report, Wolters Kluwer director of legal operations and industry insights Nathan Cemenska, said ”partner-hoarding” and substantial increases in associate rates and compensation should cause legal services purchasers to evaluate whose interests law firms are considering when it comes to staffing matters.

Those “enlightened” purchasers who have already scrutinized inefficient staffing ratios are finding reprieve in alternative legal services providers (ALSPs), Cemenska said. Though the transition is slow and staggered, Cemenska has watched as work moves from law firms to ALSPs for good.

“You see [CLDs] wake up and say, ‘We’re not going to pay for document review out of an Am Law 20 firm.’ Once they make that decision, it’s over,” Cemenska said in an interview. “It’s like a football game where the ball can only go one way. There may be some years when it doesn’t move a yard. But when the ball moves, it doesn’t go back.”

Some Big Law firms are planning for the enlightenment. In a March interview, Nelson Mullins Riley & Scarborough managing partner James Lehman said the firm continues to invest in ALSP models, including its Encompass e-discovery subsidiary and Assureg, a regulatory and compliance consulting division that launched in January.

“If everyone is going to compete against law firms, we ought to compete against them,” Lehman said. “The industry is very disrupted right now with a lot of nontraditional competition. We want to stay ahead of that.”

Tuesday’s report also suggested partner-hoarding—the practice of partners keeping work they would normally delegate in a downturn—may have contributed to the 5% increase in partner billing in 2020. However, the practice was less pronounced when Cemenska analyzed median billing data rather than mean, suggesting it may have occurred more for larger clients.

“If you’re worried about your own skin, you want to do as much work as you can and not share it with other people,” Cemenska said. “There were some concerns by various observers in the industry that there would be partner-hoarding. The data showed a little movement there, but it didn’t happen a whole lot, frankly.”

Associate shortages and client demands might also have fueled the shift toward partner-billing, said law firm consultant Brad Hildebrandt.

“It may be clients wanting partners involved in transactions because that’s who they know and trust,” Hildebrandt said.

The broad-based trend toward partner billing occurred as associate rate increases outpaced partners. According to another 2021 Wolters Kluwer report that analyzed rates, the median rate for associates at firms with more than 1,000 lawyers is higher than the median rate for partners at firms with 200 to 500 lawyers.

Partner billing rates were up 7.2% from 2019 to 2021, while associates were 12.1% more expensive for clients. Paralegal rates increased 9.9% in the same period.

The associate rate increases coincided with significant raises at the top. Market compensation for a first-year Big Law associate is up 13% from 2020; for fifth-years, salaries are up 23%.

Hikes in partner compensation are more variable, but early Am Law 100 data suggests double-digit average partner compensation increases in 2021 alone.

Between 2015 and 2020, law firm staffing ratios varied significantly by firm size and revenue, with the Am Law 50 billing about half of CLD work to associates and the Am Law 151-200 billing 49% of work to partners. Across the Am Law 200, paralegals billed 19% to 25% of CLD hours. The report also included unranked law firms but didn’t provide staffing ratios for them.

The staffing ratio analysis also found more variance in staffing ratios at smaller firms than larger firms, which consistently maintained a leverage-based model.

“Not only are smaller firms relying more heavily on partners to generate hours, but they also have more diversity, more idiosyncrasies and quirkiness going on,” Cemenska said.

By comparison, despite significant variance in rates and compensation, the Am Law 10 and the Am Law 21-50 used nearly identical staffing ratios, billing roughly 50% of CLD matters to associates, 30% to partners and 20% to paralegals.

Partner utilization was much higher among the Am Law 51-100, increasing to 46% for CLDs versus 35% for associates. For the Second Hundred, partners represented between 43% and 49% of hours billed to CLDs.

Partner-heavy billing outside the Am Law 50 may not always represent an added expense to clients, as Cemenska’s report didn’t bifurcate billing from equity partners and nonequity partners. Firms that remain strict about who becomes an equity partner may find pricing efficiencies in a diamond-shaped staffing model where the majority of timekeepers are nonequity partners or of counsels, said law firm consultant Tim Corcoran.

“It may still be a challenge if they’re doing associate-level work, but it’s far better than trying to bill senior partner rates and not getting the work because they’re priced out,” Corcoran said. “If you’re top-heavy, then shifting to a diamond approach is sensible to stay competitive and not overpay for people who don’t belong in the ownership ranks anyway.”

https://www.law.com/americanlawyer/2022/04/12/upticks-in-partner-billing-associate-rates-prompt-shift-to-alsps/

Zubair Q Britania

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