Billable powers: outside counsel facing pressure to lower rates.

Every year, Seth Weisberg factors billing rates into the overall budget of his law department at Stamps.com Inc., and as of last month, he was told by some firms he hires that billing rates will go up--again.

But maybe not quite as much as in past years.

Legal experts estimate that rates at large law firms should jump an average of 5 percent from 2005, with record high rates at $800 to $950 per hour. But the increases are not as startling as those of past years, when rates increased by as much as 10 percent to 20 percent each year.

The lower rate increases come as many in-house lawyers are putting pressure on their outside law firms to reign in costs and meet certain budget estimates.

"The bottom line is they can only charge as much as folks are willing to pay, and there's starting to be a push-back from law departments," said Ron Peppe, vice president of law and technology for the Association of Corporate Counsel. "What a lot of law departments are doing is consolidating the law firms they use, negotiating discounts and requiring budgets and tracking where the money is spent."

Belt lightening

Since the days of the dot-com bubble, law firm billing rates have skyrocketed, particularly at L.A.'s largest firms. Most of the jumps have been in complex bankruptcy work and big-ticket corporate deals.

In recent years, the heads of corporate legal departments have protested their legal bills by negotiating for discounts or sending out requests for proposals on individual projects. In a survey of in-house counsel by the Association of Corporate Counsel, more than half said they fired an outside law firm last year, partly because of high fees and costs. That same survey found that more than 56 percent of legal matters were required by in-house counsel last year to have budgets.

"That does not mean it's a requirement, and it doesn't mean we'll pay that amount and only that amount," said Leonard Venger, executive vice president of the litigation division of Sony Pictures Entertainment. "We'd like to have a guideline of what we'd like to spend on a case. That helps us assess the case and whether it's pursued or settled. It also helps business executives so they can understand what a case can cost."

Most of the change is anticipated at the region's largest law firms. But even mid-sized firms, which represent several of the middle-market mergers and acquisitions in Los Angeles, are getting squeezed by the budget pressures of their clients.

"In 2000, we saw skyrocketing rates that were a function of people almost not caring what the hourly rates were," said Pamela Webster, chief financial officer of Buchalter Nemer PC. As litigation has picked up over the past few years, she said, "the market is not accepting big increases in hourly rates."

Increased pressures

At Buchalter, a mid-sized firm that represents several banks, Webster said steady annual rate increases of 2 percent to 3 percent in its corporate department are expected to flatten for 2006.

Only one lawyer in the firm's corporate department is raising rates, while clients have made "specific statements that they will not permit any increases over the last year," she said.

One client sent a letter to the firm, demanding that they not increase their rates over last year. That was the first time Buchalter had ever received a letter of that type from one of its clients.

The firm sent its estimated hourly rates for 2006, along with invoices to clients in November, but many clients have controlled how much they are going to pay by re-issuing requests for proposals for work each year--and selecting a lower cost alternative law firm.

That's how Stamps.com has reined in costs. After receiving proposals for legal work on an individual project, Weisberg, vice president and general counsel and secretary, says he presents the information to executives.

"That's a major part of the job of in-house counsel," he said. "A significant portion of the job is scrutinizing the billings that are done and being good consumers, essentially to make sure we get a good price on what's done."

But too many of those pressures have affected firms' realization rates, or the rates at which actual legal bills get paid in full. Clients have negotiated for so many discounts that the actual payments made to outside taw firms are lower than what the firms originally estimated.

As a result, realization rates have been falling, said Blane Prescott, a partner at Hildebrandt International, a legal consulting firm.

"It's just more negative client reaction across the board," he said. "Clients are saying, 'We just came off of three years of really hefty rate increases and we need a little bit of relief."

Climbing Costs

Companies are trying to tighten outside legal expenses.

Year        Outside           Total          % Outside
          Legal Costs      Legal Costs      Legal Costs

2001        $10.5 *          $24.8             42.2%
2002         11.6             25.4             45.7
2003         14               27.2             51.4
2004         14.6             25.4             57.6
2005         16.9             26.6             63.4

* in millions, for Fortune 500 companies

Source: BTI Consulting Group Inc.