Varsha Patel, Senior Reporter for Law.com, published this article on 11 April 2022 in Law.com.
In-house lawyers are denouncing steep fee rate increases from their legal advisers, labeling them “astronomical” and “out of kilter with reality”.
Several general counsel have expressed frustration with the bigger bills, which in some cases are more than double what they were around a year ago.
A U.K. bank head of legal said on work they would typically have been charged £15,000-£20,000 a year or so ago they are now being quoted around £35,000 on a similar transaction.
Even for very small pieces of work—such as where a law firm is asked to amend the terms of a loan agreement, requiring only one or two commercial changes—law firms are charging the bank £7,000—a figure the GC says is “not fair”. They added: “Some things can be done in a matter of hours, but firms are charging loads and then completing work in two days’ time.”
The average year-on-year increase for rates has historically tracked inflation at around 2% to 3%. But a general counsel at an asset management company said that in the U.K. law firms are setting their own inflation rates, which in most cases is likely to be substantially higher. The GC said firms are seeking to “claw more cost” in their billing.
In particular, they’ve noticed their law firms giving the excuse of increased U.S. competition as a basis for the increases. “They throw that excuse at me a lot more”, they said. “I expect my firms to try and push through higher rates this year too”.
They added they are hearing some firms are charging hourly rates of “well over £1,000″.
Increased fees have even been openly criticised during court proceedings. On Thursday, a U.K. Court of Appeal judge slammed Cleary Gottlieb Steen & Hamilton for charging rates of £1,131.75 an hour while advising electronics giant LG. Meanwhile, in 2021 a Dutch judge labelled a near-€1 million bill issued by Simmons & Simmons as “excessive”.
Although pricing has been a continued point of contention between law firms and in-house teams, the latest tension comes as several U.K. in-house leaders expressed concern around increased rates flowing through to them off the back of recent junior lawyer salary raises.
Competition or complexity?
A general counsel at a U.K. mortgage provider said that while different fees do of course apply to different types of deals, the difficulty for GCs currently is to ascertain whether the increased rates are “legitimate due to changes in deal structures or just because of the salary increases in private practice”. They believe it’s likely a mix of both factors.
Either way, some general counsel are particularly disappointed in the increases, given their long history with some of their law firms.
“It’s not what I imagined with my long-term relationships. We’ve been tied in with some firms for a number of years and they have been cheaper before than they are now”, the same GC said.
Somaya Ouazzani at specialist legal partner search firm Mimoza Fleur, said there is definitely much more “fee sensitivity” regarding what general counsel are prepared to pay their external lawyers, with clients more willing to have awkward conversations and are seeking “greater transparency” on the charging process.
Whereas clients were happy to “swallow fees” for longstanding relationships, Ouazzani said this is no longer the case.
“It’s making clients look elsewhere for lawyers – they’re not going to the usual suspects anymore and want to speak to three or four firms before making their decision. They’re not just trusting the big names”, she added.
GCs are ‘price-takers’
However, there’s often “no traction” when trying to negotiate or discuss capping a fee, the fintech GC has found, because of just how busy firms are. “You’re a price-taker and you’re not that important relative to everyone else”, they said.
“They can tell you to find someone else – and they are. That’s the reality of the market: law firms are turning work away”, they added.
The investment management GC emphasised that if GCs are truly unhappy with the fee quotes, they can always turn to different firms, who “offer lower cost work but have lots of talented lawyers”.
“It falls to the GC on how to use your law firms efficiently”, they explained, adding that GCs ought to pick and choose their pricing battles. “I won’t shout after every bill.”
But the fintech GC countered that for particular deals, the larger resource and capacity is needed. That comes with the negative effect of not being able to control the costs, however.
The private practice defence
Many blame the problem on law firm salary hikes, which show no sign of ending. In March, U.S.-headquartered firms Gibson Dunn & Crutcher, Simpson Thacher & Bartlett and Covington & Burling all raised pay for newly-qualified lawyers in London. In April, Freshfields Bruckhaus Deringer set the new Magic Circle pay rate for London NQS at £125,000, while its rivals offer £107,500.
A Law.com International poll in February found that the overwhelming majority of law firm partners believe that NQ associates at their outfits earn too much money, calling for a cap on the salaries at £90,000.
Despite this, a London finance partner at a U.S. firm said they need to keep salaries high as “young talent have a lot of options available now”.
He said they certainly need to “keep client concerns on fee rates in mind”, but he doesn’t believe the costs are out of line compared to other professional service providers, such as banks.
The partner also believes that the client isn’t solely paying for quality legal advice, but also managing a transaction “round the clock” and pushing it over the line – something which “requires a lot”.
To do so, law firm teams are “on call literally 24/7”, he explained. When it’s those high-profile, pressurised deals, clients have to turn to the firms with the best people available, who are charging a lot.
The mortgage provider GC added that it’s not just salary increases playing into fees, but generally fixed costs have gone up anyway, such as offices.
“It’s tough for firms because they have to maintain their margins too”, they continued. But either way, they point out that in-house legal budgets are not increasing.
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