40 Percent Of Law Firms Haven't Raised Rates... It's Probably Time
With legal services demand taking a hit last quarter, some predict doom and gloom for Biglaw. But many more see the rebounding economy and an opportunity to recoup a bad Q4 with some timely rate increases. Will ratcheting up the bills finally backfire, or will companies publicly carp about it and then fork over the cash like they do every time?
Wolters Kluwer ELM Solutions just issued its LegalVIEW Insights report and for all the complaints, law firms haven't raised rates that much at all. Based on data from corporate law departments and insurance claims departments through the LegalVIEW Data Warehouse, the Insights report found that around 40 percent of timekeepers generally -- and approximately 32 percent of the Am Law 100's timekeepers -- received no rate increases at all during the reference period from July 2021 to June 2022.
The mean law firm rate increase was about 5.6 percent and the median was 1.9 percent, hardly bank breaking and well below even the flattening rate of inflation.
Not that all practice areas are created equal:
What a testament to the dereliction of government responsibility over the prior four years! Still, remove that hike and law firm rate changes are even more mild.
While the report suggests that law firms have some slack they can call upon with a rate hike or two, there's a note of caution for firms too:
The large, white-shoe firms of the Am Law 100, in contrast, have clearly not been trained to expect meager rate increases, and as of this writing, their clients seem more afraid of them ending the relationship, rather than the other way around. This despite the fact that it is almost certainly true that clients fire or discontinue relationships with law firms far more often than law firms fire their clients.
The report notes that 13 percent of timekeepers overall saw the average rate they charge across all clients decrease. What does that mean? Either they lost a high rate client or brought on lower paying clients or both. One interpretation of this development is that some of the industry's largest firms will work for less than what many of their clients are willing to pay. If that's true, corporate legal departments at small and big firms alike hold more pricing power over large firms than they may realize.
And that power is arguably stronger over the bigger firms:
One might object that the pricing power of the big firms is so great they are immovable, and there are no savings to be had with them by negotiating rates. But the data suggests this just isn't the case. Even in the Am Law 100, approximately 32% of timekeepers got no rate increase at all in the reference period. Rate increases are not, as the defeatists would argue, always inevitable and always inevitably high, although they are more likely to be both in the case of a buyer with a lackadaisical approach to rate management.
It's certainly possible, and clients will likely secure discounts and write-offs in the negotiating process, but I'm still inclined to believe that firms still have the upper hand. In fact, firms may have more leverage to raise rates now than ever. The growth of ALSPs may take work away from the firms, but it also supercharges the firm's argument that they deserve a premium for doing the work that can't be replaced by technology and cheaper labor.
Coupled with a trend line showing rates lagging behind inflation for years (especially among smaller firms), there's ample reason for firms to demand more from clients. And while clients have tools at their disposal to push back, the firm should have the better case.
It will be an interesting fight though.
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you're interested in law, politics, and a healthy dose of college sports news. Joe also serves as a Managing Director at RPN Executive Search.