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Law Firms Face Slashed First-Year Billings

As if lawyers needed to be told again about the increased competition and soft market driving down their billing rates.  Now a new study into the US legal industry, sitting at over $16 billion in firm invoices, and found that the “soft spot” has been first year associates, whose billing rates have been slashed.

From the New York Times:  Since law firm revenues are largely based on self-reporting, what drives the billable hour has often seemed a bit murky, but entry-level lawyers long pumped up profits for law firms, which routinely charged high rates for the services of the associates, however inexperienced they were.

But as corporations keep a tight rein on outside legal costs, they are paring back the use of the lowest-rung lawyers at firms, according to the 2014 Real Rate Report. That has resulted in a 60 percent drop in billings for first-year lawyers, to 1.2 percent of all firm hours billed, down from 3.4 percent five years ago, the report found.

Companies are instead using the services of the more senior partners — but for lesser amounts of time — a switch that helped contribute to nearly flat revenues for law firms. Last year, firm revenues rose only 3.7 percent, compared with 7 percent in 2007 when the legal industry’s fortunes were flourishing, according to findings by CEB, a research and consulting firm, and Datacert/TyMetrix, the legal management software and services provider.

The report examined invoices from 2007 through 2013, the period when law firms struggled to maintain steady revenues after companies, pushed by shrinking economic activity, began concerted efforts to trim back spending on outside legal counsel.

The findings “demonstrate the growing power in the hands of legal departments to demand more affordable pricing alternatives for their legal work,” said Craig Raeburn, vice president for legal analytics at Datacert/TyMetrix, which maintains a database of fees paid by 90 companies to more than 5,600 law firms, and covers about 141,000 partners and associates across more than 350 metropolitan areas and 15 international locations.

Underscoring the control that corporate legal departments are now exerting, another new study, by HBR Consulting, which also tracks legal metrics, concluded that while companies worldwide increased their total legal spending by 2 percent last year, spending on outside law firms fell 2 percent.

“The aggressive measures taken by law departments to control and manage their costs are having a direct impact on legal spending,” said Lauren Chung, consulting senior director, and survey editor for the HBR 2014 Law Department Survey.

The Datacert/TyMetrix study found that consolidation in the legal industry has also affected billable rates.

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