Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we make a new rule in light of another increase in law firms’ billing rates. Sign up to receive this column in your inbox on Thursday mornings.
In January, I made a mistake. I broke what should be considered a Cardinal Rule of Big Law Prognosticating: Never underestimate firms’ ability to raise billing rates.
Back then, I was naïve. I said law firms could struggle to raise rates this year after they reported blowout financial success in 2020.
That isn’t the case. From the second quarter of 2020 through the second quarter this year, rates have increased 3.4%, according to Thomson Reuters data. That’s roughly in-line with the growth rates for a couple of years leading into the pandemic.
Lesson learned. Billing rates can always go up.
Law firms have two basic ways to grow their business. Work more hours, or charge more per hour. Raising rates has been the more reliable strategy since the Great Recession, when demand for law firm hours stalled.
The encouraging part of the pandemic recovery has been that it was driven by a surge in demand.
Lawyer-intensive activities like M&A, issuing debt, and taking companies public have set records. And if you look at year-over-year comparisons, demand is, in fact, surging: It went up more than 7% in the second quarter compared to the same April-to-June period a year ago, Thomson Reuters data show.
But that year-ago period coincided with the worst economic conditions of the pandemic. Unemployment rates spiked to nearly 15% last April and gross domestic product plummeted more than 30% in the second quarter, the biggest-ever drop.
So the second quarter of 2019 is a better period for comparison’s sake. By that measuring stick, demand for lawyers’ time has ticked up a mere .6%, while rates have surged 8.4%, according to the Thomson Reuters data.
Please, no. It’s the same old story!? Rates did all the work?
Maybe at top-line levels. But those aggregate numbers mask vast differences among practice groups and individual law firms.
In short, the recovery has been uneven.
Demand for corporate lawyers has surged, while litigators’ hours are still down from 2019. Nearly 30% of firms saw rates grow less than 2% since the second quarter of last year, while 20% saw rates rise more than 6%,
Thomson Reuters data show.
What’s not entirely clear is which firms have been raising rates, and for what reasons.
If you’ve been reading stories about firms with large M&A practices being swamped with work, your eyes haven’t deceived you, says Kent Zimmermann, a consultant for Big Law leaders at the Zeughauser Group. Law firms that rode a surge in M&A have raised rates, he said.
“They had more work than they could do,” Zimmermann said. “What does any smart business do when they have more work than they can handle? They raise prices.”
Other firms raised rates to compensate for associate salaries going up, said Jim Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession. He said many firm budgets project lower profitability this year compared to 2020 because of the increase in salary costs. Raising rates is a way to counteract that effect.
“That’s really what is driving the higher rates. It plainly is not a demand-driven price rise. If anything it’s cost-driven,” Jones said. “It will be interesting to see how clients respond. I’ll be looking very carefully this year at the realization data. I’d expect to see realization go down some. But I expect firms will get most of what they are asking for.”
Whatever the reason, rates have gone up. I’ve learned my lesson, so let me be clear: They probably will again.
Worth Your Time
On Associate Life: Julian Sarafian, a 2018 Harvard Law School graduate and former corporate lawyer at a large law firm, writes for Bloomberg Law about why he decided to step away from life in Big Law after experiencing burnout starting in December 2020.
On Biden’s Picks: President Joe Biden will nominate acting Solicitor General and former Cooley LLP partner Elizabeth Prelogar to take the job on a permanent basis. And Damian Williams has been chosen to take charge of the U.S. attorney’s office in Manhattan. If confirmed, the ex Paul Weiss attorney will be the first Black lawyer to lead the high-profile office.
On Time’s Up: Roberta Kaplan, who helped start the Time’s Up Foundation, has resigned from the organization after being criticized for her law firm’s work in a probe of New York Gov. Andrew Cuomo (D), Brian Baxter reports.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.