Law Firm Leaders Struggle With Setting Firmwide Rates

The collective weight of the new year is upon law firm managing partners, with the season being that of collections, partner compensation and rate-setting. And the latter has proven a bit vexing for firm leaders as they grapple with setting rates in an era where firms span multiple markets and practice concentrations, clients aren't willing to pay the published rates and alternative fee deals are a growing part of firm revenue.

As a result, firms are moving away from a uniformly applied rate structure across the firm to a specialized approach that may result in stark differences in rates charged across offices, practices and attorney level.

“I think rates are more of an art than a science and it's becoming more and more that way as the years go on,” Cozen O'Connor CEO Michael Heller said. “It's much harder and it requires a much more in-depth analysis to modify rates now than it used to.” For Heller, setting rates has become a customized approach that allows for some markets or practices to make more aggressive changes than others.

The 'New Normal'

A number of managing partners who spoke to our ALM sibling The Legal Intelligencer said the struggle of setting rates at a national or global firm is not an entirely new phenomenon, but some have acknowledged there are new factors at play as we enter the new year.

Fox Rothschild firmwide managing partner Mark Silow said there is a dynamic in the market right now where people are both feeling more encouraged and emboldened about the ability to increase rates and salaries, and, on the other hand, “everybody remains pretty scared” given the recession is not far in the rearview mirror.

Silow said some practices are back to boom times while others are operating in the “new normal,” making rate-setting much more complicated.

Ballard Spahr Chairman Mark Stewart echoed Silow's point about the differences in what various practices will bear when it comes to rate increases. He also noted that the increase in alternative fee agreements means rates don't mean as much. That is coupled with the fact that every client is different, with some willing to pay higher partner rates but not associates, while others feel the opposite.

“The rate-setting is becoming much more complicated,” Stewart said. “And I think it's losing its appeal as a budgeting tool because there are so many of these things going on, including clients saying, 'I don't care what you tell me your rate is.'”

The end result is associates of the same class year, working in the same office, charging significantly different rates, Stewart said. All of this is putting pressure on associate compensation models, he said.

“Any type of lockstep system is under assault,” Stewart said, adding he didn't think that was a bad thing.

Multiple Offices Add to Difficulty

For Silow, the issue starts at the first-year associate level where his firm is seeing upward movement in starting salaries in certain markets, such as New York, Philadelphia, Los Angeles and San Francisco, but not in others. He said his firm is struggling with how to deal with that market differentiation.

“If you have multiple offices in lots of different markets like we do and you run your firm as one, integrated firm where work flows all over the firm to different offices, how do you deal with the fact that associates may be of the same rank but are being paid different amounts and charge different amounts?” Silow asked.

He said his firm tries to keep associates within a “fairly confined boundary” in terms of the spread in rates charged. The same goes for partners. Silow said there are some matters or practices for which clients will pay a higher partner rate if a certain expertise is required.

“But for the day-in, day-out, nuts-and-bolts kind of work, it is difficult to have a $700-an-hour lawyer working shoulder-to-shoulder on the same matter with a peer that is charging maybe $300 or $350 an hour,” Silow said.

As Silow's comments suggest, the issue comes into stark focus when firms cross-sell across office locations.

Increasing Rates

Silow said the firm and the industry are at a crossroads, and he expects to see more market segmentation because markets are simply distinct these days. That creates complications, however, on how firms approach people within the same class, he said.

For Buchanan Ingersoll & Rooney CEO Jack Barbour, his firm views different markets as requiring different rates.

“If you charge New York rates in Harrisburg, you'd never get them, and if you charged Harrisburg rates in New York, you'd go broke,” Barbour said.

While there isn't as much pressure on rates as there was five years ago, there is still pressure on rates, Barbour said. Some clients send out letters saying they won't accept rate increases for the coming year. Barbour said a discussion then takes place considering that is the second or third year in a row the letter was sent out with the firm's costs increasing all the while.

Barbour's job is one of balancing client expectations with running a business.

“It's a balance, that's why there is no black-or-white answer,” Barbour said, noting the only absolute is that the days of passing through across-the-board rate increases are over.

Heller also noted those days were gone. Now firms have to take a much closer look at the nature of the practice, the nature of the clients served and the lawyers involved. And despite the growing percentage of revenue derived from alternative fee agreements, Heller said, hourly rates still make up the bulk of most firms' business.

“You can't ignore it,” Heller said.

At K&L Gates, the goal is to finish up the rate-setting process by Sept. 30 because some clients require 90 days' notice prior to any rate change, said K&L Gates Chairman Peter Kalis in an e-mail.

The firm is in 47 geographic markets across five continents and many practices, he noted. But Kalis said the process was not more difficult last year than in prior years.

Altman Weil principal Ward Bower said nearly all firms are looking to raise rates, in part to combat the, albeit low, inflation and subsequent rise in costs. Firms are also looking to set baseline rates in anticipation of discounting them upon client requests. Ultimately, Bower said, the firm has to decide whether it will work for three-year-old rates or not.

Bower said partners generally don't want their rates to go up, either, because they don't want to upset clients, meaning firm leadership gets both external and internal pushback. Bower said that is why he encourages law firms to inform clients that the lawyer relationship is between the lawyer and the client and the business relationship is between the firm and the client.

Now it is up to firm leadership to figure out just what those business relationships will look like.

Gina Passarella is a Senior Staff Reporter for The Legal Intelligencer, an ALM sibling of Accounting and Financial Planning for Law Firms. She can be contacted at [email protected], and on Twitter @GPassarellaTLI.

The collective weight of the new year is upon law firm managing partners, with the season being that of collections, partner compensation and rate-setting. And the latter has proven a bit vexing for firm leaders as they grapple with setting rates in an era where firms span multiple markets and practice concentrations, clients aren't willing to pay the published rates and alternative fee deals are a growing part of firm revenue.

As a result, firms are moving away from a uniformly applied rate structure across the firm to a specialized approach that may result in stark differences in rates charged across offices, practices and attorney level.

“I think rates are more of an art than a science and it's becoming more and more that way as the years go on,” Cozen O'Connor CEO Michael Heller said. “It's much harder and it requires a much more in-depth analysis to modify rates now than it used to.” For Heller, setting rates has become a customized approach that allows for some markets or practices to make more aggressive changes than others.

The 'New Normal'

A number of managing partners who spoke to our ALM sibling The Legal Intelligencer said the struggle of setting rates at a national or global firm is not an entirely new phenomenon, but some have acknowledged there are new factors at play as we enter the new year.

Fox Rothschild firmwide managing partner Mark Silow said there is a dynamic in the market right now where people are both feeling more encouraged and emboldened about the ability to increase rates and salaries, and, on the other hand, “everybody remains pretty scared” given the recession is not far in the rearview mirror.

Silow said some practices are back to boom times while others are operating in the “new normal,” making rate-setting much more complicated.

Ballard Spahr Chairman Mark Stewart echoed Silow's point about the differences in what various practices will bear when it comes to rate increases. He also noted that the increase in alternative fee agreements means rates don't mean as much. That is coupled with the fact that every client is different, with some willing to pay higher partner rates but not associates, while others feel the opposite.

“The rate-setting is becoming much more complicated,” Stewart said. “And I think it's losing its appeal as a budgeting tool because there are so many of these things going on, including clients saying, 'I don't care what you tell me your rate is.'”

The end result is associates of the same class year, working in the same office, charging significantly different rates, Stewart said. All of this is putting pressure on associate compensation models, he said.

“Any type of lockstep system is under assault,” Stewart said, adding he didn't think that was a bad thing.

Multiple Offices Add to Difficulty

For Silow, the issue starts at the first-year associate level where his firm is seeing upward movement in starting salaries in certain markets, such as New York, Philadelphia, Los Angeles and San Francisco, but not in others. He said his firm is struggling with how to deal with that market differentiation.

“If you have multiple offices in lots of different markets like we do and you run your firm as one, integrated firm where work flows all over the firm to different offices, how do you deal with the fact that associates may be of the same rank but are being paid different amounts and charge different amounts?” Silow asked.

He said his firm tries to keep associates within a “fairly confined boundary” in terms of the spread in rates charged. The same goes for partners. Silow said there are some matters or practices for which clients will pay a higher partner rate if a certain expertise is required.

“But for the day-in, day-out, nuts-and-bolts kind of work, it is difficult to have a $700-an-hour lawyer working shoulder-to-shoulder on the same matter with a peer that is charging maybe $300 or $350 an hour,” Silow said.

As Silow's comments suggest, the issue comes into stark focus when firms cross-sell across office locations.

Increasing Rates

Silow said the firm and the industry are at a crossroads, and he expects to see more market segmentation because markets are simply distinct these days. That creates complications, however, on how firms approach people within the same class, he said.

For Buchanan Ingersoll & Rooney CEO Jack Barbour, his firm views different markets as requiring different rates.

“If you charge New York rates in Harrisburg, you'd never get them, and if you charged Harrisburg rates in New York, you'd go broke,” Barbour said.

While there isn't as much pressure on rates as there was five years ago, there is still pressure on rates, Barbour said. Some clients send out letters saying they won't accept rate increases for the coming year. Barbour said a discussion then takes place considering that is the second or third year in a row the letter was sent out with the firm's costs increasing all the while.

Barbour's job is one of balancing client expectations with running a business.

“It's a balance, that's why there is no black-or-white answer,” Barbour said, noting the only absolute is that the days of passing through across-the-board rate increases are over.

Heller also noted those days were gone. Now firms have to take a much closer look at the nature of the practice, the nature of the clients served and the lawyers involved. And despite the growing percentage of revenue derived from alternative fee agreements, Heller said, hourly rates still make up the bulk of most firms' business.

“You can't ignore it,” Heller said.

At K&L Gates, the goal is to finish up the rate-setting process by Sept. 30 because some clients require 90 days' notice prior to any rate change, said K&L Gates Chairman Peter Kalis in an e-mail.

The firm is in 47 geographic markets across five continents and many practices, he noted. But Kalis said the process was not more difficult last year than in prior years.

Altman Weil principal Ward Bower said nearly all firms are looking to raise rates, in part to combat the, albeit low, inflation and subsequent rise in costs. Firms are also looking to set baseline rates in anticipation of discounting them upon client requests. Ultimately, Bower said, the firm has to decide whether it will work for three-year-old rates or not.

Bower said partners generally don't want their rates to go up, either, because they don't want to upset clients, meaning firm leadership gets both external and internal pushback. Bower said that is why he encourages law firms to inform clients that the lawyer relationship is between the lawyer and the client and the business relationship is between the firm and the client.

Now it is up to firm leadership to figure out just what those business relationships will look like.

Gina Passarella is a Senior Staff Reporter for The Legal Intelligencer, an ALM sibling of Accounting and Financial Planning for Law Firms. She can be contacted at [email protected], and on Twitter @GPassarellaTLI.