6 Ways to Improve Outcomes in Annual Law Firm Rate Negotiations

Dear Client,

We request an increase in our timekeeper rates as per the attached spreadsheet effective next month.

This increase in our rates has been necessitated by internal overhead costs, inflation, and the recent spike in market rates….

Sound familiar?

Like clockwork every year, law firms approach their clients to request an increase to their contractually agreed hourly rates. This inevitably leads to dozens of email exchanges with pricing managers, sourcing specialists, and stakeholders, along with hours of research, benchmark analysis, contract re-papering, and a series of internal signoffs and approvals.

Even though rate increases are unavoidable, there are several ways that clients can take the reins and make sure a cumbersome exercise turns into an advantageous process.

1.  Set up a rate revision process

Make sure you have a robust internal procedure in place to tackle rate increase requests.

Below are good starting points for potential process mapping:

  • Set a strict timeline for reviewing rate requests

For example, accept a request for analysis only during Q4 of each year. All the demands outside of the defined timeframe shall not be considered until the next review period, often in the following year.

  • Define clear eligibility criteria

Potential criteria might include: a firm’s status in your outside counsel structure, current contractual arrangements, its annual spend, and the frequency of the rate increases. The following questions might help you define if a firm is eligible for a rate increase request:

  1. Is the law firm on the approved list of preferred firms?
  2. Does the law firm have a master engagement letter with a rate card in place?
  3. Has the firm reached a pre-set annual spend threshold?
  4. When was the last time this firm was granted a rate increase?
  • Establish a smooth process workflow

Make sure that your process steps are coherent, precise, and simple. Define a maximum % of a rate increase your company is able to grant annually (e.g., max 1.5% per year). Involve only relevant stakeholders and set a clear deadline for rate negotiations.

2.  Consider staff allocation

Not all timekeeper roles are equally important. Make sure to leverage your historical spend data with the law firm requesting an increase to determine how they typically allocate staff to your matters and what timekeeper roles are most frequently billed. This will give you a better understanding of their approach to staffing matters and allow you to focus on the key timekeeper roles during rate negotiations.

You can use a 100-hour model to compare true final costs for 100 hours of work with each of the firms based on selected staff allocation:

3.  Ask for some goodies

As a rule, all rate negotiations ultimately end with a law firm getting at least a symbolic rate increase sooner or later. Before you can draw a proverbial line in the pricing sand, make sure you are not walking away from the table empty-handed. Ask your law firms for incentives in form of various added-value offerings:

  • Volume discounts: set a % by which your newly negotiated hourly rates shall be reduced once the law firm’s billings hit a certain threshold.
  • Client relationship credits: agree on a fixed number of credits that your company gets once your law firm’s annual billings exceed a certain amount. These credits can be exchanged in form of a cashback, discount on a future matter or a secondment, free legal advice, or trainings:

4.  Freeze your rates

Make sure to add language to your engagement letters that define a timeframe during which the rates are applicable and cannot be modified.

It’s advisable to leave a door open for potential increases without committing to a fixed date, for example: “The Rates shall remain in effect for no less than 30 months”.

5.  Request a decrease

Make sure you have a possibility of renegotiating and decreasing the rates by including a hardship clause in your contracts. In this particular situation, you can still fulfill all contractual obligations, while allowing for some modification to address an unanticipated hardship, i.e., a change in pricing. The Federal Reserve raising interest rates, for instance, would be an excellent example of a triggering event that would bring the hardship clause into effect.

6.  Leverage PERSUIT for rate negotiations

Once you’ve gotten the proposed rates submitted on PERSUIT, the Request for Proposal Revision (Counter Proposal) feature can be utilized to negotiate rates further with one or multiple firms. With the help of this feature, you can easily suggest changes, or 'redlines', to proposals and wait for the firms’ feedback. 

We’ve got more on rate negotiations. Check out insights from our in-house experts on what questions to ask firms when negotiating legal rates here.

Katerina Avina

Strategic Sourcing Manager at PERSUIT