As recently as five years ago, law partners charging $1,000 an hour were outliers. Today, four-figure hourly rates for in-demand partners at the most prestigious firms don’t raise eyebrows — and a few top earners are closing in on $2,000 an hour.
These rate increases come despite hand-wringing over price pressures from clients amid a tough economy. But ever-rising standard billing rates also obscure the growing practice of discounts, falling collection rates, and slow march toward alternative fee arrangements.
Nearly 20 percent of the firms included in The National Law Journal‘s annual survey of large law firm billing rates this year had at least one partner charging more than $1,000 an hour. Gibson, Dunn & Crutcher partner Theodore Olson had the highest rate recorded in our survey, billing $1,800 per hour while representing mobile satellite service provider LightSquared Inc. in Chapter 11 proceedings.
Of course, few law firm partners claim Olson’s star power. His rate in that case is nearly the twice the $980 per hour ­average charged by Gibson Dunn partners and three times the average $604 hourly rate among partners at NLJ 350 firms. Gibson Dunn chairman and managing partner Ken Doran said Olson’s rate is “substantially” above that of other partners at the firm, and that the firm’s standard rates are in line with its peers.
“While the majority of Ted Olson’s work is done under alternative billing arrangements, his hourly rate reflects his stature in the legal community, the high demand for his services and the unique value that he offers to clients given his extraordinary experience as a former solicitor general of the United States who has argued more than 60 cases before the U.S. Supreme Court and has counseled several presidents,” Doran said.
The data we drew upon were compiled by ALM Legal Intelligence, the research arm of the NLJ’s parent, ALM Media LLC. This year, we took a new approach, asking each firm on the NLJ 350 — our survey of the nation’s 350 largest firms by attorney headcount — to provide their highest, lowest and average billing rates for associates and partners. We supplemented those data through public records. All together, this year’s survey includes information for 159 of the country’s largest law firms and reflects billing rates as of October.
The figures show that, even in a down economy, hiring a large law firm remains a pricey prospect. The median among the highest partner billing rates reported at each firm is $775 an hour, while the median low partner rate is $405. For associates, the median high stands at $510 and the low at $235. The average associate rate is $370.
Multiple industry studies show that law firm billing rates continued to climb during 2013 despite efforts by corporate counsel to rein them in. TyMetrix’s 2013 Real Rate Report Snapshot found that the average law firm billing rate increased by 4.8 percent compared with 2012. Similarly, the Center for the Study of the Legal Profession at the Georgetown University Law Center and Thomson Reuters Peer Monitor found that law firms increased their rates by an average 3.5 percent during 2013.
Of course, rates charged by firms on paper don’t necessarily reflect what clients actually pay. Billing realization rates — which reflect the percentage of work billed at firms’ standard rates — have fallen from 89 percent in 2010 to nearly 87 percent in 2013 on average, according to the Georgetown study. When accounting for billed hours actually collected by firms, the realization rate falls to 83.5 percent.
“What this means, of course, is that — on average — law firms are collecting only 83.5 cents for every $1.00 of standard time they record,” the Georgetown report reads. “To understand the full impact, one need only consider that at the end of 2007, the collected realization rate was at the 92 percent level.”
In other words, law firms set rates with the understanding that they aren’t likely to collect the full amount, said Mark Medice, who oversees the Peer Monitor Index. That index gauges the strength of the legal market according to economic indicators including demand for legal services, productivity, rates and expenses. “Firms start out with the idea of, ‘I want to achieve a certain rate, but it’s likely that my client will ask for discounts whether or not I increase my rate,’ ” Medice said.
Indeed, firms bill nearly all hourly work at discounts ranging from 5 percent to 20 percent off standard rates, said Peter Zeughauser, a consultant with the Zeughauser Group. Discounts can run as high as 50 percent for matters billed under a hybrid system, wherein a law firm can earn a premium for keeping costs under a set level or for obtaining a certain outcome, he added. “Most firms have gone to a two-tier system, with what is essentially an aspirational rate that they occasionally get and a lower rate that they actually budget for,” he said.
Most of the discounting happens at the front end, when firms and clients negotiate rates, Medice said. But additional discounting happens at the billing and collections stages. Handling alternative fee arrangements and discounts has become so complex that more than half of the law firms on the Am Law 100 — NLJ affiliate The American Lawyer’s ranking of firms by gross revenue — have created new positions for pricing directors, Zeughauser said.
THE ROLE OF GEOGRAPHY
Unsurprisingly, rates vary by location. Firms with their largest office in New York had the highest average partner and associate billing rates, at $882 and $502, respectively. Similarly, TyMetrix has reported that more than 25 percent of partners at large New York firms charge $1,000 per hour or more for contracts and commercial work.
Washington was the next priciest city on our survey, with partners charging an average $748 and associates $429. Partners charge an average $691 in Chicago and associates $427. In Los Angeles, partners charge an average $665 while the average associate rate is $401.
Pricing also depends heavily on practice area, Zeughauser and Medice said. Bet-the-company patent litigation and white-collar litigation largely remain at premium prices, while practices including labor and employment have come under huge pressure to reduce prices.
“If there was a way for law firms to hold rates, they would do it. They recognize how sensitive clients are to price increases,” Zeughauser said. But declining profit margins — due in part to higher technology costs and the expensive lateral hiring market — mean that firms simply lack the option to keep rates flat, he said.
Contact Karen Sloan at firstname.lastname@example.org.
Clarification: This article has been modified since first published to note that the data cited were compiled by ALM Legal Intelligence, the research arm of the NLJ’s parent, ALM Media LLC.