PMI Q2: What Are Law Firms Realizing with Increasing Rates?

Topics: Billing & Pricing, Business Development & Marketing Blog Posts, Client Relations, Law Firm Profitability, Law Firms, Midsize Law Firms Blog Posts, Peer Monitor, Thomson Reuters

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Rates continue to be an unsurprisingly key concern for law firms as we move through 2017.

Just one quarter after reaching a two-year high in Q1 2017, worked rates slipped ever so slightly in Q2, though still up 2.9% relative to Q2 2016, according to the Thomson Reuters Peer Monitor Index report. Similarly, standard rates were up an average 2.9% across all three segments of the law firm market, with Am Law 100 firms seeing the most significant increase at 3.4% in Q2.

And in perhaps even more encouraging news, collected realization against worked rates rose to 89.1% on average across all segments, after hitting an all-time low in Q1. Here, though, Am Law 100 firms fell behind their competitors. While Am Law Second Hundred and Midsize law firms have enjoyed steady collected realization of 89% to 90% over the past two years, the average Am Law 100 firm has steadily decreased their collected versus agreed realization. With the gap in the realization rate between Am Law 100 and the other two segments widening, the question that remains is obvious: Why?

Am Law 100 firms have raised their rates on average the most aggressively of any of the three segments. Over the last two years, Am Law 100 standard rates have increased by an average of $40 per hour. Comparatively, Am Law Second Hundred standard rates have increased by $30, and Midsize by $21 over the same time period. Perhaps what we are witnessing is as simple as client pushback to those rates that are increasing much more quickly than the competition in other segments.

The aforementioned pushback is just as noticeable when observing worked/agreed rates. Am Law 100 firms increased their worked rates by $33, whereas Am Law Second Hundred agreed rates were up $26, and Midsize worked rates increased $18 over the same time period.

In the end, Am Law 100 firms on average have the largest discrepancy between their standard and worked rate growth, perhaps demonstrating a feeling on the part of Am Law 100 lawyers to offer larger discounts — a factor that most certainly contributes to realization woes.

The simplest explanation would lead us to the conclusion that the higher the absolute dollar value the rate increase, the less willing the lawyer may be to bill at full value and the less willing the client is to pay, and therefore, the lower the realization percentage becomes.

Or could this be something different altogether, where some law firms are more willing to offer discounts to increase the perceived value their clients receive? We must note that as Am Law 100 firms have shown the most aggressive rate growth, they’re also leading the market in terms of average demand growth. But it bears watching whether this growth in demand will be sustainable, or if price elasticity will come back around to the Am Law 100.

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