Questions to Ask Firms When Negotiating Annual Legal Rates

It’s a new period, and you’re negotiating legal rates with your preferred law firms. Where do you start? What are the most important questions to ask?
We’ve created a short list of questions that you can ask to ensure that you’re getting the best legal rates possible. 

  1. What is your firm’s average discount off standard rates, across all clients? 

This is an important question to ask initially, because you can obtain a good idea of the real discount rate between yourself and other clients without having to obtain detailed benchmarking information. For example, if the average discount across all clients is 10% and your discount is 5%, then you’re not really getting a discount (but if you’re getting 15% while others are getting 10%, then that’s a good 5% discount relative to peers [consider % change between first and second discount negotiation vs % difference between yourself and other clients]). 

  1. What is your firm’s average discount off standard rates across your Top 10 clients?

Like question #1, this question gives you a good idea of your real discount rate but compares against a firm’s Top 10 clients instead of all clients across the board. If your company is not in the Top 10, your discount rate might be lower than theirs, and by a significant amount (not good). With this information, you can (1) generate more transparency regarding what the market price might be for a similar client and (2) decide whether your discount rate relative to a firm’s Top 10 is satisfactory. 

  1. Considering demand for legal services has been relatively flat, how do you justify a rate increase?

You might run into a rate increase from your firm, and the firm might indicate that it’s because ‘all the other firms are doing it;’ there is an increase in demand for legal services (this is a “market-based” justification). Don’t accept that answer just yet: 

Note that since 2010, demand across all firms has actually been flat;. If a firm can demonstrate that demand for its services has increased, then a rate increase might be justified. See Figure 2 below from Thomson Reuters Peer Monitor showing that growth in demand for law firm services has hovered at or under 1% since 2010. Figure 4 demonstrates how hourly rate growth is widely outpacing demand growth. 

If these rate increases are indeed based on market factors, then what benchmarking information do you have? 

Again, do not stop your inquiry at the reason that ‘other law firms’ prices are going up so ours should too.’ Look for information drawn from client billing services, or ask for other benchmarking information to determine if there are increasing demand factors that justify a rate increase. 

  1. If these rate increases are based on internal cost increases, then what information do you have to support this? 

Firms might say that their internal overhead (or other costs) have increased (which is a “cost-based” justification). If a firm’s costs have increased, then they must 1) indicate that their hourly rates were set in accordance with internal costs to provide the service (unlikely) and 2) provide supporting evidence as to how costs have increased. For instance, “real estate prices have increased x%, associate salaries have increased y%, etc”

For more information on how other factors may be brought into the negotiation conversation, check out this chart from our webinar on Annual Rate Negotiations with our in-house expert, David Falstein.