We haven’t talked yet about realization. Shall we?
The first time I saw this chart below, it hit me between the eyes; your reaction may be similar. In a nutshell: Even if litigation “demand” is more or less steady, what about revenue to law firms from that demand?
In somewhat more detail: This shows the last three years of realization against “standard” (rack) rates for litigation and transactional work from the Thomson Reuters Peer Monitor dataset of firms (I’ve added the red arrows to highlight the trends.) The story it tells is simple:
- Realization for transactional work is consistently, materially, higher than for litigation; and
- Transactional realization is holding steady, starting at 85% and ending at 85%, while litigation is in virtually straight linear decline over the period, starting at 81.5% and ending at about 79%.
- Stated differently, for every $1.00 of transactional work you billed in 2014 you collected 85 cents, and for every $1.00 of litigation you collected 81-½ cents. Today you still collect 85 cents for transactional, but barely 79 cents for litigation.
- The ratio is now 92% (inversely, 107%); if your average timekeeper bills 1,800 hours per year (and if rates across practice areas are equivalent), this means an 1,800 hour/year transactional lawyer brings in as much revenue as a 1,925 hour/year litigator. Stated a bit more symmetrically, you should treat a transactional lawyer billing 1,735 hours as productive as a litigator billing 1,865 hours,
Let’s step back for a moment from the litigation/transactional differences: This is not a pretty picture no matter how you slice it. If clients are consistently, across our industry, saying that they value our work at 80 to 85 cents on the dollar, one or both of two things are wrong:
- Clients think we’re charging too much (and theirs, after all, is the only opinion that counts); and/or
- Clients might be OK with the price if they got what they thought they bargained for, but they didn’t so they want some tangible recognition of their disappointment.
As Warren Buffett famously said, “Price is what you pay, but value is what you get.” There’s a sizable and growing mismatch here between Law Land and its clients.
By the way, some more inquisitive observers have objected that measuring realization against “standard” rates is unrealistic because “nobody pays standard rates.” Ahem, that could be a problem right there, but moving right along, the quants at Thomson Reuters have been good enough to compile a chart of realization against “worked (negotiated)” rates. In other words, realization against the agreed-to-in-advance discounted rate.
This chart is firmwide (all practice areas), but the inquisitors’ point is a firmwide point, so this serves nicely.
Not much solace here.
From an economic perspective, you could describe what’s going on in terms of price elasticity of demand: It’s evidently higher for litigation than for transactional services. That simply means that clients are less willing to demand “as much” litigation services as transactional services for the same price. The higher the clients’ price elasticity of demand, the worse for the providers of the service.
To read the full article go to AdamSmithEsq.com. You can also read Part 1 of this series. This has been republished with permission.