With outsized billing rates making even mainstream news reports—a Kirkland & Ellis partner’s $1,745 hourly rate in the Toys R Us bankruptcy recently caught the attention of The New York Times—there’s no question clients are watching the numbers closely.
But are they balking? It depends on whom you ask.
The vast range of pricing markets in the legal business means some Big Law partners have long operated on a different playing field from their counterparts elsewhere when it comes to billing rates.
As stratification between the very top firms and the rest of the Am Law 100 and NLJ 500 grows ever more pronounced, that billing chasm is only growing wider.
Jim Cotterman, principal at Altman Weil, noted that only a handful of firms truly compete for the work at the top of the rate spectrum.
“It is important to note that the very top-end dynamics appear very different from those firms just outside of there, and for much of the rest of the profession,” Cotterman said in an email. “The top-end firms appear to be able to raise rates at a level greater than inflation, sustain those increases all the way to collections and without diminishing demand.”
And, Cotterman noted, other firms aren’t realizing significantly greater gains even when they are raising their published rates. “Much of the rest of the market must be much more restrained increasing rates, may give much of the increase back in discounts, billing adjustments and receivable adjustments, and may experience a decrease in demand as a result,” he said.
Uniform rate increases may not be quite as common as they once were. Lisa Smith, head of Fairfax Associates’ Washington, D.C., office, said she has witnessed firms looking at rate increases more selectively; person by person and practice by practice. Smith said she has noticed less of a focus on increasing all partners of the same seniority level at a certain rate.
At smaller and midsize firms, the top-end rates hit a ceiling that appears to be spread out across a fairly narrow group atop the firm’s partnership, Smith said. Bigger firms, she added, were much more likely to push the most senior or most valuable partners’ rates up.
“The interesting thing we see at smaller and midsize firms is rate compression,” Smith said.
The growing divide between the top 50 firms and the rest of the pack is partially attributable to the brand dominance of leading firms, said Jeff Grossman, managing director of Wells Fargo Specialty Group in North Carolina. Grossman said strong practice areas, particularly in transactional matters and M&A, alongside prudent fiscal management at premier Big Law firms, has increased the gap.
The gap between the largest Big Law firms and all others appears evident in new data collected by ALM Intelligence, which culled billing rate information from bankruptcy filings and other sources. For example, the data show an average partner billing rate at Jones Day of $950, while the average partner billing rate across all firms included in the data was $804.87. ALM analyzed partner billing rates data from 53 individual firms.
Other surveys found starker differences. Partner hourly rates at the largest 50 firms—having more than 750 lawyers—recorded billable rates that are 40 percent greater than firms with 501 to 750 lawyers, according to an 2017 analysis from CounselLink, a LexisNexis subsidiary. CounselLink’s data found the gap grew 10 percent over the previous year.
The hourly rate growth in Washington last year was approximately 4 percent and lagged behind the hourly rate growth of several other markets, according to CounselLink’s data. New York City, Seattle, Atlanta, Minneapolis, Chicago and Los Angeles all experienced rate growth last year greater than Washington.
Jeffrey Lowe, managing partner of Major, Lindsey & Africa’s D.C. office, said the strong economy in 2017 “absolutely” emboldened firms to raise billing rates, but the rate of billing growth isn’t quite back to its pre-recession levels.
Lowe said the recession shifted how clients view their role in determining rates, and many clients have become more sensitive. A vast majority of cases involve a discussion of what the rates are going to be, Lowe said, leading to firms deciding to set artificially high rack rates.
Available third-party data on billing rates can sometimes provide an incomplete picture of how firms set and adjust rates. Terry Mahn, managing principal of Fish & Richardson’s D.C. office, said the firm adjusts its rates firmwide, but individual markets look for individual ways to drive down pressure on rates.
Fish is moving into new offices along the Potomac River waterfront in southwest D.C., and Mahn said the firm’s lease is structured to allow them to give back space in the future. Mahn said the firm is always trying to manage its real estate and other expenses to alleviate pressure on rates.