Alternative fees and invoice discounting on the rise as GCs seek to cut costs, study finds
Discounting rises to levels normally only seen in year end as proportion of US matters using flexible fees reaches double figures
Corporate counsel continue to demand better value from their legal providers with the use of alternative fee arrangements (AFAs) rising in 2019 and invoice discounting becoming more common during the Covid-19 pandemic, according to a LexisNexis CounselLink report.
An analysis of almost seven million invoices in the US showed that 12.1% of matters were billed under some form of alternative arrangement last year, up from 9.2% in 2017.
Finance, loans and investments accounted for the highest proportion of matters involving some form of AFA (30%) followed by employment and labour (25%) while M&A was the third most-popular practice area with AFAs accounting for 19% of matters, up from 10% the previous year.
The report also looked back at the last three months to see the impact of the coronavirus pandemic on billing trends, with the analysis showing an increase in invoice discounting.
By May, more than 16% of invoices had been discounted — a level of discounting that is not typically seen until year end.
Kris Satkunas, director of strategic consulting for CounselLink and author of the report, said: “As organisations seek to rein in 2020 expenses, the pressure on GCs to do their part means a continued focus on outside counsel spending. We recommend legal departments use efficient, scalable approaches to reducing outside counsel bills to navigate these uncertain times.”
She added: “Additionally, given trends that reflect reduced demand for legal services, coupled with greater discounting of legal bills, GCs need to be mindful of the cash flow challenges potentially being faced by their law firms.”
The study also found that the largest 50 firms continue to dominate high rate work. At a median hourly rate of $575, partner billing rates in 2019 were 51% higher for lawyers in the largest 50 firms with 751 or more lawyers, compared to partner rates in firms with 501-750 lawyers, where the median rate was $380.
Median billing rates at firms with 201-500 lawyers ($380) saw the biggest year-on-year increase, rising 7% compared to 2018. That increase meant partner billing rates at those firms were 29% higher than those for partners in firms with 101-200 lawyers ($295).
M&A commanded the highest average partner billing rates at $765 with the largest 50 law firms accounting for 77% of this lucrative work. Finance, loans and investments demanded the next-highest average rates ($643) followed by corporate, general and tax ($615).
Of the practice areas covered, insurance commanded the lowest average rates ($200) behind general litigation ($355) and real estate ($409).
Trends highlighted by the report for the for the first five months of 2020 found instances of new corporate and tax matters declining sharply 'such that May’s new matter volume was 68% of February’s'.
The report noted 'a gradual, but steady downward trend in litigation' with new matter volume at 82% over the same period and a much sharper decline in M&A (57%), which is reflected in Mergermarket's first-half M&A data showing US M&A to have suffered a bigger fall than during the financial crisis.
The inaugural Law Firm Leader Survey on Outside Counsel Guidelines (OCG), which was published in December, found that US law firms were writing off up to 20% of their fees as they struggled to comply with their clients’ onerous billing requirements.