The Trouble with Billing Rates
June 9th, 2014 by Jim Cotterman
The long historic ability of the legal profession to raise rates well in excess of inflation year over year has largely ended. Two factors combine to raise a practitioner’s hourly rate –
1) an elevator lift of all rates to reflect an overall increase in pricing structure (pre-recession averaging each year 4.5% and higher than inflation’s 3.2% and post-recession from a bit more than one-third to a bit less than one-half of that which was pretty close to inflation), and;
2) the up escalator increase reflecting an additional year of experience (2% to 5% for each additional year depending on where the practitioner is in their career).
Realization, a law firm’s ability to collect those rates and the opposing force against increases, has been on a long steady decline from 95% in 1985 to 82% recently. With pre-recession increases well in excess of inflation, the minor one-half of one percent annual decline in realization was largely ignored. However, now that rate increases are modest the decline in realization is more noticed. Increased price discounting at the front end and more aggressive push back from clients on bills on the back end reflect increased pressure for lower cost and better value.
Collected hourly rate increases fueled revenue growth on a per timekeeper basis. Thus making it possible for high year over year compensation increases. Concurrently, demand, at least as measured by average billable hours, is diminished. Result: Modest revenue per timekeeper growth and in some pockets real challenges at holding the status quo. The consequence is that unless overhead and the service delivery model are radically altered, there will be little room for the historic annual compensation increases.
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