The recently released Dynamic Law Firms Study runs deep on lessons and insights for law firms. As the data shows, there are ways to increase the amount of money a law firm keeps as profit beyond simply relying on rate increases.
But the findings around rates are fascinating in their own right.
Common sentiment in the market largely holds that firms with higher rates or higher rate growth are the ones most likely to lead the industry in terms of better profits. Our study puts some interesting perspectives on that thought.
First, it was true that, in general, the Dynamic law firms — as we defined in our study, those with the best average growth in financial performance over the studied period — did have generally higher average rates. But it’s actually an open question whether higher rates were a cause of better performance or an artifact of the Dynamic population’s demographics.
It is an open question as to whether more Am Law 100 firms ended up as Dynamic firms because they charge higher rates, or whether these firms were doing other things that helped boost their performance and the average rate metric followed suit as a result.
The Dynamic law firm population was almost evenly split between Am Law 100, Am Law Second Hundred and Midsize law firms. In contrast, the Static firms — those we defined that struggled to find growth — were more heavily weighted to Midsize firms, with only five of 39 Static firms (roughly 13%) falling into the Am Law 100. Without question, the higher proportion of Am Law 100 firms in the Dynamic population helped drive average rates for Dynamic firms up. But here again, it is an open question as to whether more Am Law 100 firms ended up as Dynamic firms because they charge higher rates, or whether these firms were doing other things that helped boost their performance and the average rate metric followed suit as a result.
My instinct tells me it’s actually the latter. Why? Because there were plenty of other Am Law 100 firms that charge similarly high rates that ended up in the middle of the pack or worse in terms of their growth in revenue-per-lawyer, overall profits, and profit margins. If the key variable was the rates being charged, why wouldn’t more of these firms have also risen to the Dynamic firm ranks?
There had to be other factors beyond the rates that helped some of these high-rate firms rise to the top.
On average, the Dynamic firms outperformed the average firm in the market in terms of average annual demand growth by about two percentage points. Looking at it on a daily basis, 51% of Dynamic firms averaged six hours or better in terms of average daily demand per lawyer, with 15% of Dynamic firms generating 6.5 hours per lawyer per day or more. In contrast, only 45% of the average firms in the market managed six hours or better for average daily demand, and only 13% managed 6.5 hours more.
The higher rates being charged by the Dynamic firms don’t provide a ready explanation for why they are also outperforming the market averages in terms of demand growth or average daily demand. But these demand stats likely have a lot to do with why these firms ended up as Dynamic firms.
None of this is should be seen as suggesting that firms should not try for the largest rate increases their clients will allow. Rather, this should be seen as encouraging news for firms who feel that their hands are tied in terms of what they can get for rate increases. Fully two-thirds of the Dynamic law firm population fell outside the typically high-rate Am Law 100 ranks. And even for those higher rate firms among the Dynamic population, there were other factors at play besides their rate structures.
As your firm moves through rate-setting and implementation season, it is important to keep in mind that rates, while a crucial factor, are not the only path to future success.
For a full discussion of the lesson Dynamic law firms can teach download a copy of the report.
Check back with us for Part 2 of this series as we look at the lesson Static firms have to teach about rate setting as well.