Demand is down – so why are billing rates on the rise?
Survey of 180 US-based law firms finds hourly rates on the rise despite flat demand
August 19, 2016 at 12:00 AM
4 minute read
Contradicting the ordinary rules of supply and demand, many firms are continuing to increase hourly fees faster than flat demand, according to a survey of 180 large US-based law firms.
The survey, released this week by Citi Private Bank's Law Firm Group, shows demand for services grew by just 0.3% in the first half of the year. At the same time, Citi found, average rates per hour have grown by 3.2%, surpassing last year's 3.1% hourly average price increase.
The findings echo those by Thomson Reuters' Peer Monitor earlier this month, and the rate trend seems likely to continue. Citi's report states that "rate increases will likely be the key drivers of full-year profitability growth in 2016″.
Consultants and law firm leaders said they were not surprised by the survey findings. "There is a general belief that the worst is over and firms can gradually start pumping rates up again," said law firm consultant Peter Zeughauser. "They are getting out front of inflation."
Jeffrey Lowe, global practice leader of the law firm group at recruiter Major Lindsay & Africa, agreed. "Firms are willing to push the envelope more than they have in the previous five or six years since the Great Recession. In a world that has enjoyed pretty significant compensation gains over the past few years, more firms are feeling that it's time to push back on price," he said.
The last time a similar pattern emerged, Lowe noted, was in the early 2000s, when law firms similarly pushed through price increases of at least 5% annually while demand lagged far behind. 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", he noted. "The recession changed all that."
If an imbalance between demand and price persists, that could trigger another correction, he said.
Citi and other surveys determine the effective hourly price increases by dividing total revenues by lawyer hours worked. But the chief of one top US law firm said the "rack rates" at firms like his have really risen much faster – by close to 5% for the most profitable firms. He said that, at his firm, the increase in the 'realised' rate, accounting for discounts up front and in collections, is up about 3%.
Firm leaders said 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," said 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 said.
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 then to say: 'We're going to have a 20% rate hike because we haven't raised rates in four years'," Zeughauser said.
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