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Despite a hit to legal services demand in the last quarter, law firms may have an opportunity to recoup losses with timely rate increases. Wolters Kluwer ELM Solutions has recently issued its LegalVIEW Insights report, showing that law firms have not increased their rates. The report is based on data from corporate law departments and insurance claims departments through the LegalVIEW Data Warehouse and found that around 40 percent of timekeepers, and approximately 32% of the Am Law 100’s timekeepers, received no rate increases at all during the reference period from July 2021 to June 2022. The mean law firm rate increase was about 5.6 percent, and the median was 1.9 percent, hardly bank-breaking and well below the flattening inflation rate.
However, the report also suggests that large, white-shoe firms of the Am Law 100 have not been trained to expect meager rate increases. Their clients seem more afraid of them ending the relationship than the other way around, even though clients fire or discontinue relationships with law firms far more often than law firms fire their clients.
The report notes that 13 percent of timekeepers saw the average rate they charge across all clients decreases. This could mean they lost a high-rate client, brought on lower-paying clients, or both. The interpretation of this development is that some of the industry’s largest firms will work for less than what many of their clients are willing to pay. If that’s true, corporate legal departments at small and big firms hold more pricing power over large firms than they may realize.
The pricing power of the big firms is so great that they are immovable, and there are no savings to be had with them by negotiating rates, according to some. But the data suggests this just isn’t the case. Even in the Am Law 100, approximately 32% of timekeepers got no rate increase in the reference period. Rate increases are not always inevitable and are always inevitably high. However, they are more likely to be both in the case of a buyer with a lackadaisical approach to rate management.
Although clients will likely secure discounts and write-offs in the negotiating process, firms may still have the upper hand. Firms may have more leverage to raise rates now than ever. The growth of ALSPs may take work away from firms, but it also supercharges the firm’s argument that they deserve a premium for doing the work that can’t be replaced by technology and cheaper labor.
Coupled with a trend line showing rates lagging behind inflation for years (especially among smaller firms), there’s ample reason for firms to demand more from clients. And while clients have tools at their disposal to push back, the firm should have the better case.
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In conclusion, despite the predictions of doom and gloom for Biglaw due to a hit in demand, the rebounding economy allows law firms to recoup losses with timely rate increases. While the report suggests that law firms have some slack they can call upon with a rate hike or two, there’s also a note of caution for firms, especially the large, white-shoe firms of the Am Law 100. It will be interesting to see how this plays out in the coming months.
REFERENCES:
40 Percent Of Law Firms Haven’t Raised Rates… It’s Probably Time
