Legal Departments Dinged for Acquiescing to Rate Hikes That ‘Defy Gravity’

The report characterized the increase as “defying gravity,” given that 2024 was the fifth straight year average rates rose more than 3% and that lofty inflation, which firms had been using to justify rate increases in recent years, has subsided. Excluding food and energy, 2004 inflation was 2.3%, down from a recent peak of 7.3% in June 2022. That meant “real rate growth” in 2024 was 4.2%, double the average for the past decade.

While the report chalked up part of the increase to a change in the mix of lawyers working on matters—law firm hiring has focused less on associates and more on experienced laterals—it suggested that companies have largely themselves to blame for letting the increases happen.

“Pushback from clients appears minimal,” the report said, noting that realization rates—the percentage of firms’ hourly billings that clients are actually paying—are holding steady.

“Obviously, there are questions as to how long such growth can continue in the absence of inflation as a justification, but if the signals from other regions such as Australia (which is about halfway through its fiscal year) are any indication, firms so far are managing to continue defying the gravitational forces that should be slowing the pace of rate growth,” the report said.

The behavior of law firms in recent years has made clear that as long as realization rates remain in check—ensuring that rate increases aren’t washed out by realization rate decreases—firms will continue to raise rates, according to the report’s authors.

While 2024 was “an incredibly successful year for firms from a rate-setting perspective,” the report said, “it does beg the question for 2025: If inflation remains relatively low, how much are clients prepared to push back on further rate increases?”

Especially aggressive in raising rates last year were Am Law 100 firms, which pushed through increases topping 8%, capitalizing on the reality that legal departments were going to hire them for make-or-break matters almost regardless of cost. The 2024 run-up was on top of a more than 7% increase in 2023 and a more than 6% increase in 2022.

While most general counsel insist they do push back on rates, a chorus of consultants and industry analysts say they need to do better.

“It is all too easy for in-house teams to continue instructing work to the same firms they have always used, without considering the savings that can be gained from a more structured approach to resourcing,” the-e-billing platform Brightflag said in a July report.

While corporate legal departments have substantial negotiating power over the hourly rates at both small and large law firms, they limit most of their pushback to smaller firms, according to a 2023 report from Wolters Kluwer ELM Solutions.

“As long as corporate law departments continue to stand in awe of their largest firms and steer away from the application of any serious pressure to rates at the biggest firms, hourly rates at those firms will compound year over year and become outrageous by any definition,” Nathan Cemenska, a longtime industry consultant who now runs Forthright Legal Ops, told Law.com in 2023.

One common mistake legal departments make, according to legal observers, is putting an in-house attorney in charge of negotiating rates who is essentially a buddy of the law firm attorney on the other side of the table.

“You’d think legal department leaders, as attorneys, would be savvy negotiators, but personal relationships often get in the way,” former Uber legal ops chief Ken Callander told Law.com in 2022.

Another problem, legal consultants say, is that many legal departments hire and fire law firms based on gut feelings, rather than rigorous analysis.

Blickstein Group’s recently released Legal Department Operations Survey found that just 33% of legal departments use consistent metrics to evaluate their outside law firms, and of those with consistent metrics, a mere 25% shared them with law firms.

“This lack of shared information makes it difficult to align expectations and improve performance, ultimately impacting value,” Jennifer McIver, associate director of legal operations at Wolters Kluwer, said in the Blickstein report.