Financial institutions

3 things financial institutions should consider when negotiating with an outside lawyer

Financial services companies often rely on outside attorneys for assistance in a wide range of areas, from litigation to banking. According to data from Wolters Kluwer ELM Solutions, financial institutions have historically paid the highest hourly rates of any industry, paying out 10% more than the closest (industrial) counterparts. With the majority of law firms charging more for their work recently, now is the time for financial services companies to take a hard look at what they are paying their legal partners and why.

There are many logical reasons for these higher rates in finance, including the high level of regulation in the sector. Banks and finance companies are also often headquartered in New York, which can lead them to use expensive firms also based there. But not all data is so gloomy. By digging deeper, financials have been able to contain rate increases better than many other industries, while reducing overall legal expenses. In this article, I’ll outline some data points that financial services firms should be aware of when considering and hiring legal counsel in the future, including some suggestions for negotiating lower rates.

Contain rate increases

While financial services pay a higher base rate for outside law firms, the industry did a better job last year of preventing dramatic rate increases. From 2020 to 2021, rates increased by less than 3% for financial services, unlike the double-digit rate increases seen in other sectors. In fact, only two sectors, insurance and consumer services, saw weaker year-over-year growth.

This is largely because financial services companies are more mature than other industries when it comes to legal operations and managing outside counsel. Yet, due to the previously mentioned higher baseline, a seemingly small percentage increase still translates to a decent amount of money. A 2.8% increase over the existing average rate for financial services of $620 equates to an increase of $17.36 per hour. The same rate increase in the insurance industry, where rates are much lower, would only amount to $6.40.

Reduce total expenses

Financial institutions, due to their size and regulation, tend to have very high legal expenses in absolute dollars. And yet, our data shows that financial firms have been able to consistently reduce legal costs since 2016. There are many possible explanations for this trend, including the fact that work since the Great Recession of 2008 has gradually declined, which which saved money. But financial institutions have also worked hard to adopt a legal operations mindset by “handling” bits of routine legal work, outsourcing certain legal matters, or a combination of both.

In the five years to 2020, financial institutions have reduced external legal fees by more than 15%. In fact, the largest reduced average total outside attorney fees by 26% and median outside attorney fees by 40% over the same period. Why do financial institutions succeed in reducing their costs? For one thing, the high level of trading activity creates volume and bargaining power that can, if properly leveraged, result in deep hourly rate discounts.

Shortcuts to lower fares

So far, we’ve covered that financial institutions have been able to contain rate hikes and reduce total spending. But again, the benchmark rate for financial services companies is even higher. For many financial services companies, there is still room to save money. Instead of hiring only the biggest and most elite law firms headquartered in New York, financial institutions should consider mid-sized companies for varied work. They should also research if there are ways to save money with existing providers, as some of the largest firms in the world have different pricing tiers for attorneys sitting in lower cost jurisdictions. There are instances where hiring larger companies is necessary, despite the added cost. In a litigation setting, for example, these firms can provide intimidation value and specialized talent. However, Am10 or 20 companies are not always necessary, especially for less intensive work that could be done by any law firm.

Ultimately, the weighted average billable rate paid by financial services companies varies greatly depending on the job. If these high-end companies were able to lower the rates they pay to the level paid by their peers, they would save millions every year. To do this, financial institutions should use their vast bargaining power. Law firms continue to negotiate higher rates across industries, but financial institutions have all the tools they need to control legal spending by containing rate increases, investing in legal operations, and more. .

Nathan Cemenska is the Director of Legal Operations and Industry Knowledge at Wolters Kluwer’s ELM Solutions. He previously worked in management consulting helping GC improve legal department performance and has previous experience as a legal operations business analyst. In past lives, Cemenska owned and ran a small law firm and wrote two books on election law. He is a graduate of Northwestern University, Ohio State University and Cleveland State University.