The recently released Peer Monitor Index report for the 3Q showed encouraging signs in terms of rate growth for the year so far. After 2015 saw average worked rate growth of 2.7% for the year, worked rates through 3Q 2016 actually grew 3.1% in 3Q, and are up 2.9% for the year. (For the sake of definition, worked rates are those rates that the client agrees to pay, on average, after discounts are applied to standard rates; the larger the discount, the lower the realization against standard rates.)
In addition to stronger worked rate growth, realizations ticked up as well, finishing at an average of 82.9% against standard rates, indicating that firms are doing a better job of collecting more of their rack rate fees. In fact, this is the first appreciable uptick in realizations since the midpoint of 2014.
While definitely encouraging, this does not necessarily mean that firms should be counting on finishing 2016 better than they did in 2015, at least in terms of profit. Clearly, there are many more factors that contribute to whether rate growth will convert into profit.
In fact, in a recent analysis we conducted of consistently profitable firms in the Peer Monitor sample — as contrasted with those who have struggled to grow their profits in the last few years — one interesting tidbit related to rates came to light. Both populations of firms, our “Haves” and “Have Nots”, grew their rates at a nearly identical pace for 2015. The difference was that the Haves were able to turn their rate growth into profit, while the Have Nots could not match that feat.
In short, rate growth at any pace, was not in itself a guarantee of greater year-over-year profit.
Instead, it was other factors, such as demand growth, utilization and expenses that seemed to be more powerful drivers. The Haves were able to find more work; in fact, far more new work than the average firm in the Peer Monitor sample. This may have been due to the fact that the Haves grew their Marketing and Business Development expenses by 4.5% over the previous year, compared to the 2.5% increase seen by the Have Nots. And this new work led to better utilization of attorney time. The Haves actually increased their headcount last year by a healthy margin, without seeing the typical contraction in productivity that tends to accompany headcount growth.
For those law firm leaders reading this blog post, if your firm has seen strong rate performance so far in 2016, you’ve gotten the first part of the formula right. But now may be an ideal time to ensure that the rest of the factors are lining up as well, so that you don’t find yourself in the unfortunate position of seeing additional rate dollars not adding additional dollars in your pocket.