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Why Elite Law Firms Should Raise Hourly Rates

March 5, 2018

A recent Law.com article by Hugh A. Simons, “Why Elite Law Should Raise Rates,” reports on hourly rates at elite law firms.  This article was posted with permission.  The article reads:

Elite law’s self-confidence has taken a beating. First the great recession hit, and now talk of disruption abounds. But the recession is over and disruption is far from an existential threat. It’s time for elite law to rediscover belief in the value it provides and start to raise rates as it did before the recession. Specifically, elite firms should:

Raise rates across the board.
Discount from the higher rates where necessary.
Increase rates more for partners.
Increase rates more for more distinct practices.
Exit, or leverage up, practices where realized rates (i.e. after discounting) don’t rise.

Raise rates across the board

Billing rate increases have been on a roller coaster, see Figure 1. Before the onset of the great recession, standard rates rose 7 to 8 percent annually with realized (collected) rates rising 5 to 6 percent. When the recession hit, the standard rate increase dropped to between 1 and 2 percent and, as economics would predict, realized rates actually declined. Thereafter, things have steadily improved. The market now trundles along with standard rates rising at 3 percent and realized rates at 2.5 percent, comfortably above inflation at 1.5 percent.

The fact that realized rates have gone from declining to rising at a steady rate indicates that bargaining power has shifted back from clients to law firms. The question becomes: must the new steady-state rate of increase be lower than it was before the onset of the great recession? If law firms have the bargaining power to raise standard rates an average of 3 percent, and realize a rate increase of 2.5 percent, then do they have the power to raise rates at, say, 7 percent and realize a 5 percent increase?

Three conditions must be met for increasing rates to work for law firms. The first is that growth in the value clients derive from a firm’s offerings should exceed the increase in rates. On this, the value a client derives is formally equal to the change in the risk-weighted expected value of the outcome of a client’s business venture, or legal-proceeding, that results from the law firm’s services. As the business world grows more uncertain, complex, and volatile, then services which mitigate these new risks create greater value for clients. Mitigating these emerging risks is what the leading-edge offerings of elite law firms do. Hence, these firms are at liberty to raise rates.

The second condition required for raising rates to be effective relates to competition. If Firm A raises rates and Firm B offers the same service at the pre-increase rate then, in theory, clients turn to Firm B. However, in the elite law world, firms’ offerings are not that fungible—in the highly-specialized segments where elite firms play, there simply aren’t that many viable “Firm B” providers. Even where there are other technically-capable firms, different firms offer different levels of reassurance because of clients’ varying history and comfort with the idiosyncratic perspectives of individual lawyers. A related observation is that firms tend to raise rates at comparable rates. Thus, even where there is a viable Firm B, there may be little cost saving incentive for the client to switch firms.

The third condition is evidenced by the historical data: rate increases only stick when the economy is humming along. While there is always much uncertainty about the economy, and by historical standards we are overdue a recession, today’s economic fundamentals look fairly robust. Firms should be assertive in benefitting from today’s strong economic tailwinds, emboldened by the knowledge that they’ll be buffeted by the headwinds when the economy turns.

The reason elite law firms have not been increasing rates assertively may have more to do with the emotional than with the rational. Elite law firms’ belief in the value of the services they provide took a battering through the great recession, and gets beaten down daily by dire warnings of the industry’s imminent disruption. But the recession has ended and disruption is not an existential threat to elite law firms. Nor is it an existential threat to the differentiated service lines within the portfolio of services offered by the broader group of preeminent firms. Yes, it’ll hurt the commodity-only firms and commodity service lines within other firms, and it will require changes in how all firms operate, but it won’t destroy the core of the elite law firm profit engine: big bucks for bespoke mitigation of major risks.

Discount from the higher rates where necessary

When I suggest raising rates assertively some partners respond that their clients won’t pay any increase. True, some clients won’t. But many will and many more will bear part of the increase. Thus, it’s normal for an increase in standard rates to be accompanied by more discounting and hence a decline in realization (i.e. the ratio of realized, or collected, rates to standard, or rate card, rates). This is not of itself a problem as it’s realized rates that drive a firm’s economics. The important point is that, other than in the aftermath of a recession’s onset, the effect of an increase in standard rates is a significant, albeit lower, increase in realized rates. For example, standard rates rose by 33 percent from 2007 to 2017 and, although realization declined from 89 to 82 percent, realized rates still rose by a healthy 22 percent.

It’s instructive to take a closer look at the above realization decline. As shown in Figure 2, by far the biggest component of this decline was in the ratio of worked (i.e. negotiated or agreed) rates to standard rates—5 points of the 7-percentage point fall. This reflects growth of the volume of work being executed not at standard rates but at client or matter-specific discounted rates.

The dynamics of discounts are a competition between two irrationalities. On the one hand, clients have an irrational liking for discounts. They make clients feel they’re getting a bargain and they’re easy for the legal department to explain to management. The irrationality, of course, is that the focus should be on the discounted rate not on the distance between it and some putative standard rate.

On the other hand, firms have an irrational dislike for discounting. Too many firms still think of realization rate as a measure of profitability. It can be absurdly hard to get lawyers to internalize that, in order to assess profitability accurately, you have to look at the combined effect of leverage and realization using measures such as margin per partner hour.  Indeed, higher-leverage and higher-discount work is often more profitable than lower-leverage and zero-discount work. But partners have been conditioned to think of discounts as a demerit, and partners hate demerits. This unhelpful conditioning gets reinforced by finance departments reporting on hours and realization but not on leverage or margin per partner hour.

The look at realization in Figure 2 also shows that two percentage points of decline are due to increased billing write offs. These write offs reflect quality-of-work issues and budget overruns. As quality issues are probably fairly constant, it’s reasonable to attribute this increase to more budget overruns, in turn a reflection of more work being done under fixed, capped, or other alternative fee arrangements (AFAs). But here again, lower realization doesn’t mean lower profitability—increased leverage can more than offset the realization decline. Indeed, over 70 percent of firms say AFAs are as profitable, or more profitable, than work billed at hourly rates, (data source: Altman Weil’s 2017 Law Firms in Transition report).

Increase rates more for partners

Partners are often reticent to raise their own billing rates assertively. This is a problem of itself but also has severe second-order consequences. First, it effectively sets a cap on the billing rates of counsel and senior associates as there has to be headroom between their rates and those of partners. This becomes a constraint not just on revenue but on profitability. While typical businesses have their highest markup on their highest-value offerings, this billing rate cap leads many law firms to have a lower markup (i.e. the number of times a lawyer’s billing rate exceeds their comp on a cost-per-hour basis) on senior associates and counsel than they realize on their relatively low-value junior associates. By compressing markups in this way, firms are leaving money on the table. There’s consistent market feedback that indirectly corroborates this perspective: clients object most to the billing rates of junior lawyers.

Holding back on partner billing rates also makes it harder to raise leverage. Part of the reason some partners push back on raising their own rates is they feel some of the work they do is not truly partner level and hence shouldn’t be billed at full partner-level rates. This underlying failure to delegate is a disservice to clients (by not letting the work flow to the lowest-priced lawyer capable of doing it), to associates (who are left bereft of experience), and to other partners (who contribute disproportionately to a firm’s profit pool by leveraging more). Hence, part of the logic for raising partner rates is to realize the benefits of improved leverage.

Increase rates more for more distinct practices

If you offer customers something they need that you alone can provide then you can set the price close to the value they derive from your service. If, on the other hand, you offer customers something that many others offer, then you are constrained to pricing it at the level set by others. In reality, a law firm’s various offerings fall at different points along a spectrum between these theoretical extremes. This simple observation has a pricing implication that many law firms effectively ignore: billing rates, and hence billing rate increases, should vary markedly across the range of a firm’s offerings. In particular, the billing rates for a firm’s offerings that are most distinct from those competitors can provide should be priced more aggressively than those for its less-distinct offerings.

The low billing rate growth we’ve seen of late may well be a manifestation of firms adhering to a philosophy of a single firm-wide billing rate increase and having this increase be set by the rate that is appropriate for the less-distinct offerings. The reality is that market dynamics have evolved in recent years to the point that a firm’s pricing power varies sharply across its practices; adhering to a single increase set by the less-distinct offerings is now leaving serious money on the table. If internal firm harmony requires a single rate increase, then better to raise standard rates strongly across the board and discount from these as necessary for the less-distinct offerings.

Exit, or leverage up, practices where realized rates don’t rise

There is an old adage in strategy consulting: 80 percent of strategy is deciding what not to do. The ‘what not to do’ for elite law firms is offer commodity services. How does one recognize commodity services? By definition, commodity services are offerings that many other firms can provide. By extension, commodity services are those where a firm effectively cannot set the price but must adhere to the price level set by rivals. This translates to commodity offerings being those where the realized rates (i.e. after discounting) don’t rise following a standard rate increase.

To adhere to a strategy of differentiation, firms should exit practices where realized rates can’t be increased above the rate of inflation. In some circumstances, so doing is more than the fabric of a partnership can bear. Where this is the case, an alternative that may buy some time is to operate the practice at greater leverage than the rest of the firm. So doing mitigates the effect of a commodity practice on per-partner profitability. However, it is really only a holding measure as leverage can’t be increased indefinitely and managing businesses with dramatically different fundamental strategies requires an ambidexterity that few trained business leaders, let alone lawyers, possess.

Action implications

Most people make decisions based on objective facts interpreted through a lens of emotional biases and personal predispositions. Partners are alike most people in that they employ such a lens; partners are unlike most people in that they refuse to recognize they employ such a lens. There is nothing to be gained by leaders trying to get partners to recognize what they’re doing; however, there is value in leaders shaping the lens through which partners interpret the world.

At many firms today, this lens says lawyers are of declining value and the market is stagnating. While this is true perhaps at the middle and lower tiers, this is objectively untrue for elite firms and for the differentiated practices within the broader swath of preeminent firms. This lens issue needs to be addressed first before partners can analyze robustly the case for billing rate increases. Specifically, the lens should be reshaped by restoring and bolstering partners’ confidence in the value of their offerings. To this end, firm leaders should talk to clients (many of them really value you!), share more of the positive client feedback with partners, highlight firm recognition and awards, have clients come and speak at partner meetings, host alumni roundtable discussions of the value of outside counsel, etc. The forthcoming 2017 Am Law results will probably help too: despite the pervasive gloom and doom, the top end of the market is prospering; I suspect we’ll see double-digit percent increases in profitability at most elite firms.

Having reshaped the lens, the next step is to create opportunities for partners to discuss billing rate history, profitability, and future billing rate policy. The key here is to give partners the data and let them chew on it. Don’t lecture them or tell them what to do; rather give them the parameters and let them figure it out for themselves—so doing is the first step toward adoption of the desired changes.

Partners’ deliberations should perhaps start with a review of the firm’s billing rate history and dynamics, including firm-specific versions of Figures 1 and 2 here, supplemented with the same views for individual offices, practices and key clients. It would also be useful to profile how partner rates set a cap on rates for counsel and senior associates, leading to markup compression and, perversely, a firm having the lowest markups on the time of its highest value lawyers.

Partners should then discuss some of the less-obvious dynamics around billing rates. These could include, for example: the connection between leverage and partner billing rates (particularly how low partner rates suppress leverage); the pervasive observation that leverage varies more with individual partners than with practice or client type; and, in cultural contexts where it would help, partners could debate the relationship between compensation and billing rate—the two tend to correlate at professional services firms although it’s sort of misleading as it’s not a causal relationship; rather both are separately reflective of the economic value of a partner’s practice, so proceed with caution.

The final element is for partners to discuss the process by which billing rates are set. While most partners prefer control of their own rates, many recognize that having an abstract committee set the rate allows them some plausible deniability in conversations with clients.

All this is to say it’s a new billing rate world out there. Law firm leaders would do well to buy the option of increasing billing rates assertively at year end by starting to prepare partners for such increases now.

Hugh A. Simons, Ph.D., is a former senior partner and executive committee member at The Boston Consulting Group and the former chief operating officer at Ropes & Gray.

Two Key Provisions for Your Fee Agreement

February 27, 2018

A recent CEBblog article by Julie Brooks, “2 Key Provisions for Your Fee Agreement,” writes about two keep provisions in fee agreement.  This article was posted with permission.  The article reads:

In "The Contract that Binds: Your Fee Agreement", we noted that fee agreements should not be governed by simple boilerplate and formulaic thinking. This is true, but there are exceptions to this general advice: Here are two particular provisions that should be considered and likely added to every fee agreement you draft.

When you’re part of a law firm, your fee agreement should make clear that it’s the firm being retained, not you. Even if you’re likely to perform most or all of the work, this provision will support the firm’s continuing representation of the client and the transferring of responsibilities to another attorney if you die, become disabled, leave the firm, or are otherwise unavailable to handle all or some part of a client matter. Of course, the client will retain the absolute power to discharge the firm at any time, with or without cause.

Here is sample language you might use for this provision (when applicable, the bracketed language at the end may clarify the situation and assure the client):

RETENTION OF FIRM RATHER THAN PARTICULAR ATTORNEY. You are retaining the _ _[name of law firm]_ _, not any particular attorney, and the attorney services to be provided will not necessarily be performed by any particular attorney. _ _[It is anticipated, however, that the services will be performed principally by _ _[insert name(s) of attorney(s)]_ _.]_ _

If you’re being retained as counsel but may delegate performance of some of the services to other attorneys and legal professionals, you need to make that clear to the client at the outset. See California State Bar Formal Opinion No. 2004-165 (if attorney anticipates delegating services to outside contract attorneys, issue should be addressed in fee agreement). Under Cal Rules of Prof Cond 2-200, the client must specifically consent in writing to an attorney’s sharing part of a fee with another attorney who isn’t a partner or associate in the same law firm. An attorney who is “of counsel” to the firm is not considered a partner or associate (i.e., an employee) in the law firm. See California State Bar Formal Opinion No. 1994-138.

Here is sample language you might use for this provision:

DELEGATION OF ATTORNEY AND PARALEGAL SERVICES. You agree that we may delegate to other attorneys and legal professionals, such as contract attorneys and contract paralegals, some of the attorney services to be provided to you. Such services will be billed to you at the same hourly rates that we bill our services, and any such delegation will not affect your obligation to pay attorney fees as provided for in this agreement.

Approval of Attorney Fee Defense Provisions Post-Asarco

February 19, 2018

A recent Legal Intelligencer article by Rudolph J. DiMassa Jr. and Jarret P. Hitchings, “Approval of Fee Defense Provisions in Retention Agreements Post-ASARCO,” on recent approval of fee defense provision in retention agreements post-Asarco.  The article reads:

The Bankruptcy Code authorizes a debtor (or its bankruptcy trustee) to retain and compensate attorneys and other professionals during the course of the debtor’s bankruptcy case. Specifically, Section 327 allows a debtor, with bankruptcy court approval, to employ attorneys, accountants or other professionals to represent or assist the debtor in connection with its bankruptcy case. Section 328, in turn (and again subject to court approval), allows the debtor to retain such professionals “on any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis or on a contingent fee basis.” Finally, Section 330 permits a court to award to a professional retained under Section 327 “reasonable compensation for actual, necessary services” and “reimbursement for actual, necessary expenses.” Given this framework, the retention and compensation of professionals in a bankruptcy case is often a routine affair. The debtor will seek, and usually receive, authority to retain its professionals on specified terms. Thereafter, professionals may periodically file applications seeking payment of fees and expenses incurred during the course of the bankruptcy case. If the court concludes that the requested compensation is reasonable, it will award payment by the debtor’s estate. However, if any party objects to a professional’s fee application, this process can take an unwelcome turn.

Contested fee application litigation can result in additional professional fees and expenses. Vexingly for the professional, these “fee defense” costs may not be payable from the debtor’s bankruptcy estate: In Baker Botts v. ASARCO (135 S. Ct. 2158 (2015)), the U.S. Supreme Court held that fees and costs incurred by a professional on account of fee-defense litigation are not compensable under Section 330. To mitigate this risk, bankruptcy professionals have begun to include fee-defense provisions in their retention agreements. While these types of provisions have been met with objection, the U.S. Bankruptcy Court for the District of New Mexico in In re Hungry Horse, Case No. 16-11222 (Bank. D.N.M. Sept. 20, 2017) recently approved a retention agreement between a debtor and its counsel that entitled counsel to payment of all reasonable fees incurred in defending its fee applications. Importantly, the bankruptcy court determined that such a provision was not barred by the Supreme Court’s holding in ASARCO.

In ASARCO, the Supreme Court began its analysis by recognizing the “bedrock principle known as the American Rule” which requires each litigant to pay its own attorney fees—win or lose—unless a statute or contract provides otherwise. Because none of the parties in ASARCO relied on the contract exception to the American Rule, the Supreme Court considered whether Section 330 of the Bankruptcy Code provides a statutory exception to the American Rule in the context of fee defense litigation. On this point, the Supreme Court concluded that nothing in Section 330 warranted an exception to the American Rule. Indeed, the Supreme Court recognized that Section 330(a)(1) authorizes compensation only for “actual, necessary services rendered” by the professional. The Supreme Court therefore concluded that because “litigation in defense of a fee application is not a ‘service’ [to the debtor’s estate] within the meaning of Section 330(a)(1),” fees and expenses incurred in connection therewith are not allowable as compensation under Section 330.

In response to ASARCO, bankruptcy professionals have incorporated fee defense provisions into their retention agreements. By including such provisions, the professionals hope to come within the contract exception to the American Rule. Unfortunately, this approach was analyzed—and rejected—by the Delaware Bankruptcy Court in In re Boomerang Tube, 548 B.R. 69 (Bankr. D. Del. 2016).

In Boomerang Tube, proposed counsel for the unsecured creditors’ committee included a term in its retention agreement that provided for payment of expenses incurred defending counsel’s fee applications. The U.S. trustee objected to the inclusion of this fee defense provision as contrary to Section 328 and ASARCO. The court sustained the trustee’s objection on several grounds. First, relying on ASARCO, the court concluded that Section 328 does not contain a statutory exception to the American Rule because it lacks any specific and explicit language awarding litigation fees or costs to a prevailing party. Second, the court determined that the retention agreement between the unsecured creditors’ committee and its counsel was insufficient to trigger the contract exception to the American Rule. The court noted that the retention agreement was “not a contract between two parties providing that each will be responsible for the other’s legal fees if it loses a dispute between them.” Rather, the court found, the retention agreement provided that a third party (i.e., the debtor’s estate) would pay counsel’s defenses, even if the estate were not the objecting party. Because the retention agreement could not bind the debtor’s estate, it failed to establish a contract exception to the American Rule. Finally, the court determined that fee defense provisions could not be approved under 328 because such a provision could never be deemed reasonable. According to the court, fee defense provisions are de facto unreasonable since they inure to the benefit of the professional and not the professional’s client.

The bankruptcy court in Hungry Horse considered a similar issue but reached a different conclusion. There, the debtor sought court authorization to retain bankruptcy counsel. The parties’ retention agreement expressly provided that the debtor agreed “to pay all reasonable legal fees incurred in obtaining court approval of all employment and fee applications including dealing with any objections to any of the applications.” The debtor’s unsecured creditors’ committee objected to the approval of this fee defense provision as contrary to ASARCO.

The Hungry Horse court overruled the objection and approved the fee defense provision. In doing so, the court concluded that nothing in ASARCO prevents approval of a fee defense provision in a retention agreement as a “reasonable term and condition” under Section 328(a). As the bankruptcy court pointed out, the Supreme Court in ASARCO construed Section 330 as limiting an attorney to compensation for services rendered to the client. However, the ASARCO court did not consider any contractual fee defense provision or consider whether such a provision could be approved under Section 328. The court also rejected the Boomerang Tube holding that a fee provision can never be a reasonable term under Section 328, since nothing in the Bankruptcy Code requires that all the terms of a professional’s employment directly benefit the estate.

The court distinguished Sections 328 and 330, noting that “if employment terms and conditions are approved by a bankruptcy court under Section 328(a), then the professional’s compensation is governed by those terms and conditions, rather than the general ‘reasonable compensation for services rendered’ language of Section 330(a)(1)(A).” The court specifically relied on the fact that the authority of the bankruptcy court to award compensation under Section 330 is expressly subject to the provisions of Section 328. As a result, the court held that Section 330 does not preclude payment of fee defense costs if the terms and conditions of a professional’s compensation include a fee defense provision approved under Section 328.

The court also considered practical realities to reach its conclusion. It recognized that in smaller bankruptcy cases with smaller fees, fee defense costs can become a sizeable percentage of the total amount of fees billed in a case. Consequently, “if estate counsel were forced to successfully defend its fees ‘on its own dime,’ the net compensation in a bankruptcy case could be substantially reduced,” minimizing the incentive for counsel to undertake a debtor representation. Moreover, allowing a professional to recover fee defense costs from the estate limits objections to fee applications to bona fide disputes.

In conclusion, the court in Hungry Horse offered an example of a fee defense paragraph that might be approved as reasonable under Section 328(a): “Fee Defense. The client agrees to pay all reasonable legal fees and expenses incurred by the firm, and also by any counsel retained by the unsecured creditors’ committee (if one is formed in the client’s bankruptcy case) for successfully defending their respective fee applications. The bankruptcy court must approve all of such fees as reasonable. The client will have no obligation to pay for any fees or expenses the firm incurs defending fees that are not allowed.”

Whether such language will be approved by other courts remains to be seen. In the meantime, in order to reduce the risk that they bear the expense of their own fee defense, bankruptcy professionals should consider specifically providing for the payment of such costs in their retention agreements.

In California, Did You Know You Can Collect Fees for Time Spent Collecting Fees?

February 12, 2018

A recent CEBblog articles by Judy Brook, “Did You Know You Can Collect Fees for Time Spent Collecting Fees?reports on collecting on attorney fee awards and enforcing judgments.  This article was posted with permission.  The article reads:

Collecting attorney fee awards and enforcing judgments can be very time-consuming. Don’t forget to collect attorney fees for time spent chasing down your fees in collection efforts.

Under California law, attorney fees incurred in enforcing a judgment are compensable post-judgment enforcement costs when the judgment includes a fee award based on a contract (see, e.g., Chelios v Kaye (1990) 219 CA3d 75) or a fee-shifting statute (see, e.g., Ketchum v Moses (2001) 24 C4th 1122, 1141 n6). CCP §685.040. This is consistent with the general principle that “reasonable” attorney fees include compensation for time litigating the fee portion of the judgment (see Serrano v Unruh (1982) 32 C3d 621).

Here are a few finer points to know:

  1. Seek collections fees within two years. Fee motions must be filed within two years after the enforcement fees have been incurred. CCP §685.080(a). Keep in mind that the Enforcement of Judgments Law generally doesn’t apply to enforcement actions against governmental entities (CCP §§680.010–724.260).
  2. Consider seeking collections fees from nonsignators. In Cardinale v Miller (2014) 222 CA4th 1020, the court held that under the plain language of CCP §685.040, enforcement fees could be awarded against nonsignator brokers who conspired with the judgment debtor to avoid collection because the judgment included an award of contractual fees. Under this interpretation, the fact that the fees couldn’t have been awarded against the nonsignators under the contractual fee clause was irrelevant; CCP §685.040 authorized fees to the judgment creditor for expenses incurred in enforcing the judgment. 222 CA4th at 1026.
  3. Don’t limit collection fees to trial court activities. In Downen’s Inc. v City of Hawaiian Gardens Redev. Agency (2001) 86 CA4th 856, the court held that the plaintiffs’ entitlement to fees in an inverse condemnation action included fees for bringing a petition for writ of mandate to collect the judgment.
  4. Consider including collection fees for separate actions. In Globalist Internet Technols., Inc. v Reda (2008) 167 CA4th 1267, 1276, the court held that under CCP §685.040, plaintiff was entitled to recover the fees incurred in defending a separate action filed by the defendant/judgment debtor because, if that action had been successful, it would have reduced the judgment collectible by the plaintiff. In Slates v Gorabi (2010) 189 CA4th 1210, 1214, however, the court refused to extend Globalist to defending attacks on a judgment by third parties unrelated to the judgment debtor.
  5. Include collection efforts in bankruptcy court. Actions taken in bankruptcy court to collect a judgment also may be recovered under CCP §685.040. See Chinese Yellow Pages Co. v Chinese Overseas Mktg. Serv. Corp. (2008) 170 CA4th 868, 885; Jaffe v Pacelli (2008) 165 CA4th 927, 929.

The procedure for claiming collection fees is stated in CCP §685.080. You’ll need to file a noticed motion no more than two years after the costs were incurred, supported by a declaration stating, among other things, that the costs were “reasonable and necessary.” CCP §685.080.

Report: Lawyers Bill Fewer Hours Than a Decade Ago

February 6, 2018

A recent Big Law Business story by Elizabeth Olson, “Lawyers Bill Fewer Hours Than a Decade Ago: Report,” reports that on a recent report that was released.  The article reads:

One figure jumps out of a new Georgetown law school report on the legal industry: $74,100. That’s the amount per lawyer that a law firm loses annually, according to the research that found an average attorney bills 156 fewer hours than was charged just a decade ago.

Flat client demand, declining profit margins, weaker bill collection and lower market share due to alternative legal service providers are undermining firm profitability, the “2018 Report on the State of the Legal Market” concludes. Despite this underwhelming climate, rates edged up.

Firms also overestimate the strength of the demand for their services, and have not taken steps to increase efficiency that clients demand, said the report by Georgetown University Law Center’s Center for the Study of the Legal Profession and the Thomson Reuters Legal Executive Institute.

“Law firms have not been stepping up and introducing bold strategies so they are unprepared for the rapid transformations sweeping the legal industry,” James W. Jones, senior fellow at the Georgetown center and the report’s lead author, told Big Law Business.

Clients are demanding more e-discovery, document review and investigative support, according to a separate study last year, also by Georgetown Law and Thomson Reuters.

Many firms “are making only cursory investments” to offset some of the market forces, said Eric Seeger, a report co-author.

The findings mirror other studies, including the annual legal industry assessment from Altman Weil, Inc. issued in May 2017.

“There’s a culture that needs a wake-up call,” said Jones. “The levels of productivity are shocking, but these are not new issues. Many of them predated the great recession in 2007.”

The Georgetown study was based on data collected monthly from 168 firms participating in the Thomson Reuters Peer Monitor tracking system for law firm metrics. It researched specifics on a variety of metrics, including hours billed, time spent on business development, and overhead expenses.

Figures cited are for an average lawyer in one of the firms, which include 56 in the American Lawyer top 100, and outside of that list, 47 in the second-tier of firms and 65 mid-size firms.

The report found a 1.3 percent increase in the number of lawyers employed by law firms last year, but overall legal business was flat. AND A slight growth of around 1 percent in demand among the largest 100 firms was offset by a drop of more than 1 percent in demand among firms ranking between 101 and 200 in size, according to the research that tapped a Thomson Reuters database of client metrics.

Most firms continue to rely on a traditional model of employment: hiring associates from the pool of top law school graduates, and then eventually promoting them to the well-paid lifetime job of partner.

While associates and equity partners rank “reasonably well” in their level of productivity, “it really falters below that,” Jones said.

The lower performers would include non-equity partners and of counsel attorney, the report found. As a result, Jones said that when comparing hours billed in January 2007 to those billed in November 2017 (the latest figures available when the study was being written), he calculated that a typical firm attorney billed 156 fewer hours by the end of that ten-year period.

The calculation was based on a rate of $475 per hour, a figure that comes from averaging the rates of lawyers ranging from associates to equity partners, Jones said.

Overall, Jones concluded that based on those figures, a 300-lawyer firm “would be experiencing an annual loss currently of $22.2 million.”

The variation could be wider, he noted, because the top layer of two dozen Big Law firms have greater revenues than those in the rest of the top 200 largest U.S. firms. The top two dozen firms have been carving away the most high-end business as corporations seek out top level expertise for complex corporate matters.

Stagnant business growth, however, occurred even as the top 100 firms hiked rates by 3.7 percent last year. The second set of 100 firms increased rates by slightly less, 2.8 percent.

Yet, even in pricing and billing for clients, law firms largely cling to tried-and-true ways of interacting with clients, according to the report. Most firms still rely on the billable hour for their client dealings. And only about 14 percent of firms use alternative fee arrangements, according to a separate study issued last August by legal technology firm Aderant North America, Inc.

Few law firms have effective models for one of their most basic services, document management, the Georgetown report found. That absence has opened the way for rapid growth of alternative legal service providers, such as UnitedLex Corp. and Axion Global, Inc.

According to the Thomson Reuters outsourcing report last year, the market for alternative legal services providers stood at $8.4 billion and was forecast to keep growing as much as 25 percent or more annually.

The reluctance to adopt new ways of billing, document management and other technologies, Jones concluded, stems in large part from “the fragility of partnerships.”

Law partnerships, he said, “are not like other businesses. They cannot protect their assets, which are their people, and they can’t impose non-compete agreements, unlike other businesses.”

A firm’s “only other asset is the client, who can leave the firm at any time” because clients have the right to have the lawyer of their choice,” Jones said.

To help solve their dilemma, he recommends that firms need to “reengineer” their models. This might include flexible staffing, redesigned work processes, partnerships with other organizations and alternative pricing.

“They say they do some of these things, but most don’t,” he said. “And their market is oozing away.”

4 Reasons to Get Help on a Fee Requests

November 24, 2017

A recent CEBblog article by Julie Brook, “4 Reasons to Get Help on a Fee Motion,” reports on attorney fee requests.  This article was posted with permission.  The article reads: Just because...

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Mootness Attorney Fee Awards

October 16, 2017

A recent New York Law Journal article by David F. Wertheimer and Justine S. Brenner, “Mootness Attorney Fee Awards: Will New York Prove Friendly Than Delaware?,” reports on mootness attorney fee...

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