November 23rd, 2009 by Jim Cotterman
Law firms generate profits pushing chargeable hours, billing rates, realization, leverage and margin. Since 1985 (as shown in this table) law firm profits have been driven upwards largely because of increasing billing rates. Rate increases are comprised of three elements — experience, inflation and value. The experience curve of billing rates in the profession is how lawyers increase their productivity over a career when chargeable hours decline after about six to seven years of experience. These graphs illustrate the profession’s billing rate and chargeable hour profiles across a career.
We observed that the market struggled with rate increases (compared to historical patterns), realization (adjustments to pricing for discounts, inefficiencies and the like) and turnover (speed of collections) during the recession. And all of those were to the detriment of the law firm. This began in late 2007 and carried its way in varying degrees through 2009. In early 2009 Altman Weil surveyed law firms on a host of topics law firms were grappling with in response to the unprecedented economic conditions. In Law Firms in Transition we learned that a majority of the law firms participating (which included 32% of the NLJ 250) had made smaller than normal billing increases for 2009. This puts pressure on revenues. Missing a year in rate increases is not so bad in isolation, but when the cumulative effect is considered out into the future the compounded lost increase in pricing is significant.
It will be interesting to see if the law firms hold to the GC expectation of law firms holding the line on billing rates for 2010. In a recent ACC survey, general counsel identified reducing expenditures on outside counsel as their primary concern. They also predicted that law firm billing rates would not increase in 2010. Altman Weil has recently conducted a study on law firm billing rate intentions. With 40% of the NLJ250 participating we will soon know how law firms intend to respond.
And on December 3rd my partners Ward Bower, Tom Clay and Dan DiLucchio will present their thoughts on the changing legal market and what’s in store for law firms in 2010 in a special Altman Weil Advisory webinar. They will discuss pricing and a range of other issues such as service delivery models, staffing structures and balancing value and profitability.