It appears that modest annual billing rate increases are here to stay.
For the third year in a row, law firms showed restraint with hourly rate increases, inching up at a rate only slightly higher than inflation in many cases.
The average firmwide billing rate, which combines partner and associate rates, increased by 4.4 percent during 2011, according to The National Law Journal‘s annual Billing survey. That followed on the heels of a 2.7 percent increase in 2010 and a2.5 percent increase in 2009 — all of which paled in comparison to the go-go, prerecession days when firms could charge between 6 and 8 percent more each year.
“Before the recession, I think we had a seller’s market,” said Altman Weil consultant Ward Bower. “There was so much demand that law firms were in the driver’s seat and could get what they wanted. Clients are in the driver’s seat now, and they aren’t going to pay those increases. They’re exerting much more control over pricing, strategy and staffing decisions.”
Still, law firms did find room to boost rates somewhat as many clients’ economic fortunes improved — a move firms were reluctant to take during the previous two years, when clients were reeling from the recession. The average firmwide billable hour increased from $390 to $407, while the median grew by 2.2 percent from $404 to $413, according to the survey. The average partner rate increased by 3.9 percent to $482, while the average associate rate increased by 3.5 percent to $303.
The survey included billing information for 62 of the firms on The National Law Journal‘s 2010 survey of the nation’s 250 largest law firms. We asked firms to report their billing rates and use of alternative billing arrangements.
The results echoed the findings of other organizations that track legal trends and finances. Hildebrandt Institute’s Peer Monitor Index for the third quarter of 2011 indicated that billing rates were up by about 3.5 percent compared with a year ago. A survey of law firm managing partners by Altman Weil Inc. in April and May concluded that firms planned a median rate increase of 4 percent. Citi Private Bank, which offers financial services to law firms and tracks industry trends, reported rate increases of about 3.5 percent.
“The story hasn’t changed a whole lot in the past year,” said Mark Medice, who oversees Hildebrandt Institute’s index. “And I suspect that we’ll see a similar story in 2012, which is that rates will increase about 3 or 3.5 percent.”
Average rate increases don’t tell the full story of how firms and clients approach pricing, several consultants and managing partners cautioned. Instead of across-the-board rate hikes, which were popular before the economic downturn, many firms are being more targeted; they identify key attorneys and practice areas that will bear increases while largely leaving rates alone elsewhere, Medice said.
John Bouma, chairman of Southwest firm Snell & Wilmer, has seen the same thing. “Some of these lawyers are really doing outstanding work, and clients rely heavily upon them,” he said. “At that point, you kind of say to the client, ‘Maybe we can keep the rates the same for X, Y and Z, but we have a lot of people who want to work with A and B, and we’re increasing their rates.’ They are willing to pay what they consider fair for the people they view as valuable. But in this day and age, it’s tougher to tell a client [that] you are raising rates across the board.”
Being more targeted about rate increases means that rate structures overall are becoming more complicated, Bower said.
Medice believes that the rate increases reflect in part the shifting of work to more senior attorneys. Reports are legion of clients proclaiming they no longer want to pay for the on-the-job training of first- and second-year associates but want their matters staffed with experienced attorneys. Those senior attorneys come with higher price tags, he noted. Similarly, Citi attributed rate increases not to the willingness of clients to pay more, but rather to the movement of lawyers to more senior positions.
“We’re starting to get some information that firms are taking a harder look at associates,” Medice said. “The use of first- and second-year associates has declined, and there’s a stronger mix of senior associates in the pool.”
The economics within firms are changing, said Susan Hackett, chief executive officer of consulting firm Legal Executive Leadership, which offers strategic advice, retreats, surveys and other resources to law firms and law departments. Senior attorneys often bill fewer hours than their less experienced counterparts so, although their average rates are higher, that doesn’t necessarily translate into more revenue for the firm, she said.
Beyond that, fluctuations in average billing rates are also losing their relevance as more firms move toward fixed fees or other arrangements besides the billable hour, Hackett said. Firms assign hourly billing rates to partners and associates for bookkeeping purposes, but they don’t accurately reflect what clients ultimately pay. This can skew the overall figures.
“Most clients, at the end of the day, think that conversations about billing rates are tone deaf,” Hackett said. “They think the discussion should be about their all-in costs.”
Several legal consultants predicted tough times in 2012, given the reluctance of clients to accept significant rate increases. The slight increases during 2011 didn’t necessarily cover firms’ increases in direct and overhead expenses, which both Citi and Hildebrandt put between 3 and 5 percent. Those surveys noted relatively weak growth in demand. Additionally, many firms have already made “surface” cuts, such as reducing the number of new associates and axing perquisites including lavish parties, so further cost reductions are likely to hit partners in the pocketbook, Hackett said.
“I think firms are going to try to raise rates in 2012,” Bower said. “Whether or not they will be successful depends on the reaction of the clients. I think some clients are going to push back. I think, going forward, we’ll see rate increases that are more closely tied to the consumer price index.”
Even if firms do increase rates in 2012, they might not actually bring in additional revenue, since many offer discounted rates to help clients through the tough economy, Hackett said. “In many cases, firms are looking to raise rates because they offered so many discounts and they’re just trying to get back to even,” she said. “The raising rates and discount discussions is a hamster wheel everyone is caught on.”
The past three years have made clear that law firms can no longer rely on significant annual rate increases to drive revenue growth, Medice said.
“The question now becomes, ‘How do we grow revenue?’ ” he said. “I think we’re on a relatively steady path to change in the pricing and relationship model, even though alternative fee arrangements are still only about 10 to 12 percent of business. I think we’ll see a lot of law firm mergers as well.”
Karen Sloan can be contacted at email@example.com.