One of the more notable trends in recent months has been the signs of weakness in rate growth. The first few months of 2015 did nothing to alleviate any concerns that rate growth is languishing.
After weak 3.1% worked rate growth in 2014, it appears worked rates are taking yet another tick downwards this year, with worked rate growth dipping to 2.9% for year-to-date May.
The Am Law 100 appears to be “falling back to the pack” after a strong run in 2014, as a closer analysis reveals that much of the worked rate weakness seen in the market is attributable to Am Law 100 firms. A year ago, Am Law 100 rate growth was 1.2 percentage points higher than Am Law Second 100 firms and 1.7 percentage points higher than Midsize firms. Currently, Am Law 100 & Second 100 rate growth is the same, and the gap with Midsize firms has been cut nearly in half to 0.9 percentage points.
Worked Rate Growth
Taking a closer look into the Am Law 100, the Am Law 50 appears to be driving the decline in rate growth. A year ago, Am Law 50 rate growth was nearly a percentage point greater than the Am Law 51-100, 1.2% greater than the Am Law Second 100 and 1.7% (nearly double!) greater than Midsize.
Now, that gap that been narrowed or even reversed. Am Law 50 rate growth is now below Am Law 51-100 and Second 100 so far this year. Worked rate growth for the Am Law 50 is 3.1% year-to-date. The Am Law 51-100 is on stronger footing at 3.3% in 2015—on par with 2014.
Possible contributors to the sharp decline to worked rates for the Am Law 50 include pricing pressures from their largest clients, as well as the recent strengthening of the U.S. dollar against foreign currencies. Peer Monitor data indicates that much of the weakness in rate growth is attributable to offices outside the U.S., which disproportionately impacts the larger global firms. Meanwhile, rate growth for U.S. offices is holding much steadier.
The pressure did not ease for standard rate growth either, with growth at a mere 2.9% year-to-date compared to 3.4% in 2014. Both associates and equity partners across all segments have decelerated standard rate growth—most noticeably for associates—which stunted at least one percentage point in every segment compared to the same period last year.
Standard Rate Growth
The Am Law 50 are taking the hit for standard rate growth as well, declining 1.6% from this time last year, at which point the Am Law 50’s rate growth was nearly (if not over) two percentage points higher than those of the other segments—whereas in 2015 they are barely one percentage point higher.
In looking at the decaying rate growth for both standard and worked rates, consequently, a new pattern could be emerging: just three years ago worked rates were growing 0.4% less than standard rates; however, this gap is narrowing and in most instances, we are now witnessing worked rate growth on-par with standard rate growth. One robin does not make a Spring, however, and as time progresses we will see if this is an aberration or a fundamental change. If the latter bears fruit, many questions come to mind: Is the gap between rates narrowing similarly to pre-recession times? Is this a conceived approach by firms—in what has become a buyer’s market—to regain some negotiating power? Could this be a result of improved resource management and efficiencies?
Rate weakness exacerbates soft demand. So far this year, both rate and demand growth is running below last year’s levels—a combination that, should it continue, could leave firms challenged to meaningfully boost profitability. In addition, lower rate growth coupled with historically low collection realization is becoming a drag on revenue. To get a better understanding of declining realization, a recent survey of Peer Monitor clients asked what the primary purpose of continued rate growth given ever-deepening discounting was—46% responded this tactic was used to net higher profit; 41% responded it was to increase business. Given the lag in rate growth in 2015, it will be interesting to see if discounting to this extent yields the desired results.