You're Crazy to Raise Rates in this Market

By Larry Bodine, Esq. of Glen Ellyn, (Chicago) IL, a business developer with 18 years experience who helps exclusively law firms attract and keep more clients. He conducts business development training through Apollo Business Development. He can be reached at 630.942.0977 and Lbodine [at] Lawmarketing [dot] com.

Early indications are that billing rates will continue to creep up in 2010. A recent Altman Weil survey of 288 U.S. firms revealed that firms anticipate an overall average rate increase of 3.2% next year. The American Lawyer recently surveyed 142 managing partners from the country's 200 largest firms, and 81% said they expect to raise billing rates in 2010. The majority of those firms — 77% — said that increase would amount to 5% or less.

The leaders of these law firms are either crazy, are drinking martinis before Noon or are ignoring the sea change occurring in commerce between lawyers and clients.

Somehow they missed:

• Unemployment is at 10%. Layoffs have gotten less bad than last spring, but business clients are still downsizing and the economy is still losing jobs.
• The stock market (Dow Jones Industrial Average) is around 10,300 today -- just where it was in October 2009 and way down from its 13,930 peak of October 2007. Businesses in general have not recovered economically.
• The 45,510 business bankruptcies recorded during the first three quarters of 2009 (Jan. 1 – Sept. 30) have eclipsed the full year 2008 (Jan. 1- Dec. 31) business filing total of 43,546. Business filings during the three-month period ending Sept. 30, 2009, totaled 15,177 filings, up 32 percent over the 11,504 business filings in 2008.
• 49% of clients are using alternative fees and want to get off the billable hour.
• Approximately one-half of in-house counsel have terminated relationships with some of their outside counsel during the prior year. Given this year’s focus on reducing legal spending, the top reason for termination was “fees and costs that are too high,” according to the ACC/Serengeti Survey.

Clients laugh at proposed fee increases

Susan Hackett, senior vice president and general counsel of the Association of Corporate Council (ACC), expressed surprise that any firm would boost rates right now. "I can tell you that whenever I talk to clients they actually laugh when they hear about firms raising rates in this environment," Hackett told Law.com. "Every one of them should have been involved in some kind of cost-cutting or efficiency exercise, just like their clients, and the idea that the way to counter possible decreasing workloads or excess capacity is to raise prices is totally contrary to good business judgment."

Meanwhile four law firms reported partner billing rates of $1,000 or more, including Buchanan Ingersoll & Rooney at $1,020, Foley & Lardner at $1,035, Jenner & Block at $1,000 and Locke Lord Bissell & Liddell at $1,045. I don't care what kind of specialized expert you are, unless you can shoot laser beams out of your eyes, no lawyers is worth $1,000+ per hour.  To use a tech analogy, it is the equivalent of Garmin selling a GPS device for $500 when you can get the same thing for $99 on a Droid cell phone.

Wait until your clients hear about your proposed rate increase.  The 2009 ACC/Serengeti Managing Outside Counsel Survey Report reported in October 2009 that they are willing to pay a rate increase of 0.00%.

One silver lining Hackett has found in the current economy is that more clients are ditching the billable hour. Increasingly, clients are asking firms to enter into alternative fee arrangements that take into account the overall costs of their legal matters. "Some might say, 'I really don't care what your rates are — that's not my problem. This is what I'm willing to pay for the work…you figure it out from there,'" Hackett told Law.com.

The National Law Journal's annual survey of billing rates, released on Dec. 7, 2009, highlighted the degree to which alternative billing arrangements are becoming an important part of the way law firms generate revenue. Nearly every firm that responded to the survey said that it charged fixed or flat fees, retrospective fees based on value, contingency fees or a hybrid of those options.

• Among the firms that reported the percentage of revenue derived from alternative fee arrangements, 57% said that amount represented 10% or more of their revenue during 2009. By comparison, only 50% of firms during 2008 reported that alternative fee arrangement accounted for 10% or more of their revenue.
• An October survey of 587 general counsel by The American Lawyer and the ACC revealed that 39% of those chief legal officers saw an increase in the amount of their legal work handled through alternative fee arrangements in 2009.

"I get a sense in the past 18 months that in-house counsel's concern with the billable hour is deeper than it’s has ever been," John Murphy told the NLJ. He is chairman of Shook, Hardy & Bacon, which reported that 25% of its revenue now comes through alternative fee arrangements. "I don't think I've seen an RFP [request for proposals] come across my desk in the past year that didn't ask if you are amenable to an alternative arrangement, and what that might look like."

Shook, Hardy & Bacon has offered alternative fee arrangements for years — most notably including its agreement to provide products liability defense for Tyco International Ltd. for a monthly fixed fee, which has been in place since 2004. Murphy predicted that the percentage of revenue generated by alternative fee arrangements would grow in the coming years.

"It wouldn't surprise me if we are in the 30% to 35% range," he told the NLJ in speculation about 2010.

During the past 15 months, Orrick, Herrington & Sutcliffe has roughly tripled its volume of alternative fee arrangements, chief client service officer David Fries told the NLJ.  He oversees the firm's pricing. Approximately 25% of the firm's revenue is generated through alternative fee arrangements, which include its deal to handle all of Levi Strauss & Co.'s legal work, with the exception of intellectual property matters. "Before this year, there was a lot of talk about alternative fee arrangements, but not much action," Fries said. "There really wasn't a huge movement from law firms, and there was little interest from most legal departments in doing things differently."

"There is no doubt in my mind that there is enormous inefficiency in the historic hourly billing model," Fries said. "People just threw bodies on the matter."

Although there is no question that alternative fee arrangements are growing in popularity, it's unclear whether those arrangements could ever produce the record profits to which firms had grown accustomed. "I don't think we're going to see increases in law firm revenue that we saw from 2003 to 2008," Murphy said.