How much is my work worth? It’s a question that law firms constantly struggle with, particularly in the first part of a new year as firms wait to see how clients will react to new rate increases.
The first quarter of 2016 showed some encouraging signs for rate growth for large and medium law firms. Overall, worked rates grew at a rate of 2.7% compared to the previous year. While this rate parallels the pace of worked rate growth throughout 2015, the fact that worked rate growth has not slowed is encouraging.
The Thomson Reuters Peer Monitor Economic Index (PMI) 1Q report issued earlier this month by Thomson Reuters Peer Monitor, shows that growth in worked rates is one of the factors that led to a slight uptick in the overall index measurement, the first such increase in nearly 18 months.
The focus on positivity in the growth of worked rates is important, because law firms are under increasing pressure to provide clients with lower fees and larger discounts off of their standard rates. If law firms raise their standard rates, but aren’t able to translate that into higher worked rates after discounts, then firms have made no progress in improving their overall revenue picture. The fact that worked rates continue to grow is an encouraging sign.
One area definitely deserving of some caution relates to the realization rates firms are experiencing. While both standard and worked rates grew in the first quarter, realizations dropped to a historic low point. Overall, the market saw realizations of only 82.2% of standard rates, marking the largest quarterly drop in realization in more than three decades.
While realizations were down across the industry, cash collections actually jumped up 4% compared to the previous year. But it must be noted that this growth in cash collections was driven entirely by performance in the Midsize law firm segment. That segment saw cash collections climb by 5.3% from the previous year’s first quarter.
Interestingly, Midsize law firms also saw the lowest rate of worked rate growth of all the segments at only 2%. While such a slow rate of worked rate growth could be seen as troubling when standing alone, that slower rate of growth paired with industry leading growth in demand and fees worked to put that segment in a very strong competitive position.
What this means is that the segment of the legal industry (Midsize law) that grew its rates at the slowest pace also saw its demand take the biggest step forward. Is slower growth in rates encouraging clients to send more of their business down market? It’s far too early to tell. But the correlation cannot be ignored, and it’s one we will be watching with interest as the year progresses.