A Closer Look into the PMI: Reliable Rates

Topics: Client Relations, Law Firm Profitability, Law Firms, Peer Monitor

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Despite the oft volatile nature of the legal industry over the past decade or so, there remain a few constant factors. One of the unvarying aspects in recent years has been the assurance that rates will grow.

According to the 2017 Report on the State of the Legal Market, produced by The Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute, average standard rates have grown by 30% over the past decade, leading to growth in average collected rates of around 18%. The ability for law firms to consistently push rate escalations onto their customers has been truly instrumental in maintaining a certain level of firm profitability.

This story may sound familiar, as quarterly rate growth has never dipped below 2.0% in the past decade, including this past fourth quarter when rates grew at a 2.9% clip. While the legal market is a laggard industry — it continued to show the effects of the Great Recession approximately one year after many other markets had recovered — law firms were still able to drive positive rate growth during a rather bleak time for the U.S economy.

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Historically speaking, the fourth quarter has been a time firms are apt to lower their rates to increase realization before year’s end. However, 2016 bucked the trend. In each of the last four years, rate growth has slowed from the first quarter to the fourth, except in 2016. In this past year, the pace of rate growth was higher in the fourth quarter than in the first, improving to 2.9% at the end of the year, as compared to 2.7% in the beginning. This further highlights the strategy of driving profitability through rate growth, which firms have continuously leveraged over the past decade.

Moreover, demand fell 1.4% in the fourth quarter, its third consecutive quarterly decline and the largest decline since the first quarter of 2013. Additionally, collected realizations contracted to 82.5%, only one-tenth of a percentage point from the all-time low. In spite of both decreasing demand and collected realization, cash collections increased by 0.9%. This was only possible as a result of significant rate growth, and further highlights the positive effect on profitability that rate growth carries.

Cash collections are always important, but never more so than in the fourth quarter when firms are closing their books. Sustained rate growth has provided confidence that year’s end is not a time to dread.

In a legal market that is plagued by uncertainty, positive year-over-year rate growth has been one constant that law firms have been able to rely on.