With spring comes warm weather and optimism. As Susan Bissonette once said, “an optimist is the human personification of spring.” It seems this optimism has extended to law firms, where more and more firms are increasing their rates at a rising pace. As we settle into spring, some firms (and ourselves) are curious as to whether this will be a lasting trend.
One trend that certainly has persisted for the better half of two decades is the prominence of the New England Patriots.
The Patriots are one of the most respected NFL teams in recent history, and many fans assumed with that pedigree they would win their sixth Super Bowl in the last 17 years earlier this year. Unfortunately, they ran into a formidable obstacle, falling to the Philadelphia Eagles in a highly competitive game.
In the same vein, it’s often a common thought that the most prominent law firms, or firms with higher lawyer rates, are less likely to have pricing sensitivities than firms with lower rates. Thus, they should have no issues in collecting all or a greater percentage of any yearly increases to their higher rates. Nonetheless, we found a different story. Unsurprisingly, by separating the segments and looking at the 10 firms in Peer Monitor with the highest standard rate values in each for 2017, we discovered that the firms with the highest rates in each segment were more aggressive in raising their standard rates than firms with lower rates.
The “high-rate firms” had an average standard rate growth of 4.4% for Am Law 100, 4.0% for Am Law Second Hundred and 3.5% for Midsize firms. However, were these firms able to see these increases through the billing process and capture them at the time of collection?
It doesn’t appear so, with the exception of the Am Law Second Hundred high-rate firms. The Am Law 100 collected rates grew only 2.4% in 2017 and the Midsize showed less realization and only grew its collected rates 1.2%. In other words, the firms with the highest rates in each segment received more push back when it came to their standard rates last year.
Conversely, the Am Law Second Hundred was able to grow its collected rates by almost the same level as its standard rates with a growth of 3.9%.
Furthermore, when looking at the 10 firms with the lowest rates of each segment in 2017, it seems that although those firms did not raise their standard rates near as aggressively as the high-rate firms, they collected a higher percentage of the increase in two of the three segments. The Am Law 100 grew standard rates 2.9%, the Am Law Second Hundred only 2% and the Midsize 2.8%. Nonetheless, in the Am Law 100 segment, firms were able to capture almost the same growth at collection with 2.8%; in contrast, the Midsize had a collected growth rate of 1.5%.
One surprising part of the story here is the fact that the Am Law Second Hundred firms with the lowest standard rate growth were able to grow their collected rate at a better pace (3.6%) than most other segmented rate groups in this analysis. Another interesting discovery is that the natural, albeit convenient, idiom of “you get what you pay for” where the stature of the price for a particular service is directly tied to its inherent perceived market value, and thus in this case, its ability to realize its new yearly rate, is not consistent. While that almost certainly is the case for certain practices within these firms or certain partners that they realize their full rate increase, when extrapolated across these firms on the whole, it doesn’t seem to hold true.
As in football, where being a team with a strong pedigree and talent doesn’t equal an unobstructed path to success, likewise, just because a firm has higher rates, does not mean they aren’t susceptible to pricing headwinds.
NOTE: an earlier version of this article included the term “price elasticity”. The term “price sensitivity” has been substituted for greater clarity.