In particular, we looked at what role higher rates charged by some of the class of Dynamic law firms might have played in helped those firms rise to the top. Left undiscussed was the finding that, not only did Dynamic firms have higher average hourly rates, but they also beat the market in terms of year-over-year worked rate growth. In other words, these firms managed to find ways to convince their clients to pay them among the largest year-over-year increases in their agreed rates seen in the market.
So why leave that part of the story out?
It’s not that the finding is unimportant. But the more I’ve examined the results of this study, the more I’m convinced that the more interesting story in terms of rate growth isn’t the better-than-average growth seen by Dynamic firms — it’s the lackluster growth seen by Static firms, those that struggle to find growth.
In 2017, Dynamic law firms grew their worked rates by an average of 3.6%. Static firms grew their worked rates by only a 2.4% average. This is clearly a stark difference, but there’s more to the story when you compare these figures to the market average.
The average firm in the market grew their worked rates by 3.1%, closely on par with the average rate-growth performance seen across the market for the last several years. It’s notable, but perhaps unsurprising that Dynamic firms grew their rates at a faster pace than the average.
But what is more notable to me is how far behind the average the Static firms fell, nearly 0.7 percentage points. Why the lag?
The market on average would clearly tolerate much more aggressive rate growth, so it can’t be that these firms pushed the market and their clients as far as they could. Even giving some leeway for geographic rate-tolerance differences doesn’t account for the disparity. Both the Dynamic and Static populations were well distributed across the country and Dynamic firms seemingly had no problem driving better than average growth.
Not only did Dynamic firms have higher average hourly rates, but they also beat the market in terms of year-over-year worked rate growth. In other words, these firms managed to find ways to convince their clients to pay them among the largest year-over-year increases in their agreed rates seen in the market.
Differences in practice mix may account for some of it, but there is no indication that one particularly under-performing practice played an outsize role among Static firms. And segmentation does not appear to play a role. It’s true that the Static population had a higher representation of Midsize law firms than did the Dynamic firms — 22 Static Midsize firms compared to 13 Dynamic Midsize firms. But even the Midsize firms among the Dynamic population managed to drive above-market-average worked rate growth.
One (although far from the only) plausible explanation is that the Static firms had experienced a bad 2016 in terms of demand and may have been trying to goose demand by controlling price. Economic theories would tend to favor the idea that something seen as more competitive in terms of price would experience a bump in demand. With this in mind, Static firms may have been trying to drive demand by keeping rate growth in check.
However, there’s a problem with this strategy. As we’ve previously discussed, Static firms cut back significantly on their marketing and business development spending in 2017. Are you giving yourself a competitive advantage if you’re trying to make your pricing more favorable, but simultaneously limit your ability to tell your potential clients about it?
The fact remains that in 2017, Static firms drove much more anemic rate growth than did even the average firm in the market. The reasons for this are unclear, but it doesn’t appear to be because the market wouldn’t tolerate higher increases. If the restraint in growth was intentional on the part of Static firms, that strategy does not appear to have worked out in their favor.
As firms look to set their new rates and implement the changes, the data from the Static firms seems to provide a bit of a warning around overly conservative rate structures.
If your firm is leaning toward holding rate growth low, ask yourself “Why?” If it’s out of fear of what clients may tolerate, ask yourself what data you have collected and analyzed to support that apprehension? And if it’s a strategic plan to gain price favorability, have you also put in place the necessary means to tell the clients what you’re doing?