Slower billing rate increases may limit compensation adjustments

December 10th, 2010 by Jim Cotterman

The 2010 NLJ Billing Rate Survey results indicate a 2.7% increase over 2009.  This is a significant departure from pre-recession increases.  But it is roughly consistent with inflation, which may offer some measure of solace.

In the past, rate increases alone were sufficient to largely fund increased compensation levels.  Absent rate increases, lawyers will need to work harder (more billable hours), work more efficiently (better realization), and discount less (also better realization) to fund equivalent pay hikes.  How likely are each of these? 

Peak billable hours for lawyers occur during the 6th or 7th year of practice and exhibit a steady decline for the remainder of their careers (rate increases largely fuel the ever rising revenue curve of a lawyer over a career).  Add an aging lawyer population and the increased effort required to develop business to that hours profile and working harder is unlikely.  It is also unlikely that associates can sustain a much more aggressive work routine.  Many would argue that the job already has extreme hour expectations at all levels.  And there needs to be sufficient additional work to absorb the additional billable hours.

Improving practice skills and methods is an ongoing process.  Legal project management and more aggressive use of technology will aid in this area.  Some experts have postulated that 15% greater efficiency is achievable.  If you charge on an hourly basis this benefit inures to the client, unless you can raise rates.  Alternative fees may offer the provider some means to retain some of that benefit without an obvious rate increase. Otherwise the full revenue loss from efficiency gains must come from more work volume.

How about fewer discounts?  An argument can be made that increased efficiency should allow the provider to hold the line on discounts.  But this is a market populated with aggressive clients eager to negotiate discounted rates.

To increase compensation, revenue must increase or costs must decrease. Revenue increases are going to be harder to obtain when the primary driver — rate increases — is constrained, and the remaining drivers are significantly more difficult to improve.  My bet is on improved efficiency, greater use of AFAs and restructuring.

Cost reductions are also going to be harder to realize.  During the recession firms cut everywhere they could.  Much of what’s left to exploit will likely primarily benefit clients — the outsourcing of certain legal services.

The forecast for increased per timekeeper revenues is probably the bleakest it has been in some time.  The easy adjustments have been made.  In this environment, compensation expectations need to be equally muted.  And the job of making compensation decisions will be equally more challenging.  Or as one partner told me, “Playing Vegas is easier then making some of these decisions.”

This entry was posted on Friday, December 10th, 2010 at 2:06 pm and is filed under Economics, Partner compensation, Associate compensation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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