Demand Is Down, So Why Are Billing Rates on the Rise?

Confidence Building

Consultants and law firm leaders say they aren't surprised by the survey findings. “There's a general belief that the worst is over, and firms can gradually start pumping rates up again,” says law firm consultant Peter Zeughauser. “They're getting out front of inflation.”

Jeffrey Lowe, global practice leader of the law firm group at Major, Lindsay & Africa, agrees. “Firms are willing to push the envelope more than they have in the previous five or six years since the Great Recession,” says Lowe, who oversees MLA's annual partnership compensation survey. “In a world that's enjoyed pretty significant compensation gains over the past few years, more firms are feeling that it's time to push back on price,” he says.

The last time a similar pattern emerged, Lowe notes, was in the early 2000s, when law firms similarly pushed through price increases of at least 5% annually while demand lagged far behind. See, “Partnerships More Elusive at Law Firms, Survey Says,” The New York Times (March 1, 2005). But back then, “it was a given that there were going to be rate increases and that those increases were going to be passed onto the client,” Lowe recollects. “The recession changed all that.”

If an imbalance between demand and price persists, that could trigger another correction, he says.

Following the Herd

Citi and other surveys determine the effective hourly price increases by dividing total revenues by lawyer hours worked. But the chief of one top-tier Am Law 100 firm says the “rack rates” at firms like his have really risen much faster ' by close to 5% for the most profitable firms. He says that, at his firm, the increase in the “realized” rate, accounting for discounts up front and in collections, is up about 3%.

Firm leaders say they continually strive to balance client resistance with the need to preserve their place in the profitability pecking order. “If you're just below the top tier,” says one, “you're saying, 'OK, I probably can't close that gap. I know Cravath and Sullivan are going to raise rates 5%, and, if I don't raise rates too, the gap's only going to increase.”

There are good reasons to follow the herd on pricing. “If you're trying to close a gap in profitability, and you don't raise your rates at comparable levels, the gap becomes too big and the benefit of compounding makes it harder and harder to close it,” Zeughauser says.

According to Zeughauser, many firms would rather lift the rates they charge ' knowing they can't collect them ' than reduce those increases to sustainable ones. “They believe that it will be easier to go back to clients when the recession is over and say 'We're eliminating discounts,' rather than to say 'We're going to have a 20% rate hike because we haven't raised rates in four years,'” Zeughauser says.

Still, many firms are trying to match pricing more closely to what their clients will pay. “We have not raised our [rack] rates that much” in 2016, says the head of a firm in the Am Law Second Hundred. “We're at about 2%. We can't get more.” Almost all of that lower increase, however, has been realized, he adds.

Effect of Staffing

Evolving approaches to staffing have also changed the pricing picture at large firms. Many have been moving more work away from their junior-most lawyers to more senior attorneys, with a corresponding lift in overall rates. In some cases, the lower-paid work formerly handled by junior associates is now gone entirely, handled by alternative or lower-cost legal providers.

In recent years, “the mix of practicing attorneys has changed,” said another leader at an Am Law 100 firm. “That makes the billing rate appear to go up.”

The most successful law firms have adjusted their practice mix and partnerships to go after the work that's the least price-sensitive, he said. “The top of the Am Law 100 is dealing off the bottom of the deck, taking out the less productive partners and practices,” he says.

Julie Triedman writes for The American Lawyer, an ALM sibling of this newsletter. She can be reached at [email protected] or on Twitter @julietriedman.