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The upcoming singularity — when in-house costs equal outside billing rates

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We are edging toward a singularity, a major inflection point caused by three trends: (1) law departments shed junior lawyers, calculate fully the hourly costs of the remaining senior lawyers, and find the costs are north of $250 an hour; (2) law departments migrate more work to regional law firms and smaller firms, whose average hourly partner rates are $275-$300 an hour and associate rates are much further south; and (3) law departments squeeze those rates further with discounts and other cost-control vises. Comes the singularity, it will cost less per hour for some companies to use outside lawyers than inside lawyers.

This doomsday scenario may not be as far-fetched as you think.

(1) The fully-loaded internal cost of a lawyer hour, if all expenditures related to them are wrapped into the calculation and departmental layoffs tip toward higher-paid, senior lawyers remaining, even now approaches $250 an hour (See my post of Aug. 27, 2008: fully-loaded cost per lawyer hour with 31 references; and March 9, 2009: fully-loaded costs with 7 more posts.).

(2) Among belt-tightening law departments, the use of smaller or less-expensive firms is gaining traction, where billing rates of partners and associates are more modest. The 2008 Altman Weil Survey of Law Firm Economics states that that average billing rate of partners in large law firms (more than 150 attorneys) was $375 while at small firms (less than 20) the rate was $250.

(3) Law departments routinely insist on discounts of 10 percent or more (See my post of April 11, 2009: PetSmart demands 30%.). Fixed fees for phases of work, hold-backs, core staff differentials and other techniques further reduce the effective billing rates (See my post of March 9, 2009: effective billing rates with 9 references.).

At the singularity, inside lawyer costs will sometimes match or exceed rates of outside lawyers.

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One response to “The upcoming singularity — when in-house costs equal outside billing rates”

  1. ubuwalker31 says:
    April 18, 2009 at 8:59 am

    Your analysis is flawed.
    My estimates of the “fully loaded cost” of a 10 member law department is $3.1 million assuming median salaries are paid. This department works at least 20,000 hours a year.
    This yields an hourly billing rate of $155 an hour. Its less if more hours are worked.
    In order for the cost of in-house counsel to equal $250 an hour, each counsel working for the company would have to have a yearly salary of $250k with a fully loaded cost of $500k.
    Comparing costs like this is silly though. An analysis of the marginal costs, including the possibility that the rates of outside counsel might increase, and the possibility of complex litigation requiring more work would drive up the costs of outside counsel significantly.