Why Use of “Blended Rates” May Actually Increase Legal Costs

For the non-business readers of this blog, “blended rates” are negotiated rates with a law firm that involve blending or averaging partner and associate hourly billing rates of a law firm.  Insurance companies are big users of blended rates.

The way blended rats work is simple. If the partner’s hourly rate is $400 an hour and the associate’s hourly rate is $300, a blended rate might be $350. But whether you can save by using blended rates in a particular case actually will depend on the type of case.  For example, if the case is complex and heavy partner involvement is anticipated, you can save on legal costs.

But if a case is the type of case where both the partner and associate are expected to work an equal amount of hours, there will be no cost savings. And if the case is the type that the associate does most of the work, then you will wind up paying more in legal costs than if you just paid the firm’s regular hourly billing rates. And frankly, the situation where associates do most of the work describes most of the blended rate cases I see.

But even in a complex case where ordinarily you might expect the partner to do more of the work, paying blended rates may actually disincentivize the partner from doing more of the work.  More often than not, the partner will choose to work on those cases where the hourly billing rates are higher and look to delegate as much work as possible on those cases where the parther’s billing rates are lower.  (Remember that year end bonuses are at stake.)

In a complex case where an associate does more of the work than the partner, it may look you are saving even more than anticipated on legal costs. But in a sense, this is a false savings.  If the partner may not doing some of the work that the partner should have been doing, the quality of the work and potentially the overall results in the case may suffer.  And if the associates are doing most of the work in a blended rate case, all that has been done is to give the associates a raise in their hourly billing rate.

I would suspect that any company that wanted to seriously study the issue would find that not only do blended rates not save on legal costs, they may actually lead to increased legal costs. If this is so, why use blended rates?

A few years ago, while working for an insurer that was a big user of blended rates, I presented the litigation manager with some information I had collected on the company’s use of blended rates in some typical cases which showed that the company was spending more on legal costs using blended rates. He said it confirmed what he had thought all along. But he doubted it would dissuade his V.P. of Claims from continuing to use blended rates as he had convinced the company president that a big way to keep legal costs down was to negotiate blended rates. So he thought it unlikely that the V.P. of Claims was going to admit to his boss that he had been wrong all this time about the use of blended rates.

So call it vanity or pride, I do know that there are some companies where keeping hourly rates under a certain dollar figure is the paramount concern. But where saving on legal costs is the primary reason for using blended rates, blended rates may not actually produce the anticipates savings on legal costs. And as noted, blended rate cases may in fact incentivize a partner to do less rather than more work.

But if a company is bound and determined to negotiate blended rates, two things must be done to ensure that the blended rates negotiated for are actually going to save on legal costs. The first thing to do is to determine on a case by case basis if a case is the type that heavy involvement by the partner is anticipated.  If it is, then this case is a good candidate for using blended rates.

The second step that needs to be taken is the harder step. And that step is to manage the law firm work done in a matter to the expectation that the partner will actually spend the majority of the time on the case.  And this is where I find most companies falling short. But unless a company is willing to take this critical step it is more likely than not that use of blended rates will actually result in increased legal costs.