A recent Law 360 story by Aebra Coe, “Law Firms See Revenue Growth Amid Soaring Billing Rates”, reports that as of the end of the third quarter of 2023, U.S. law firms had increased their revenues, on average, by 4.6% year-over-year as a result of "the highest growth in billing rates we've seen," according to a new report from Wells Fargo Legal Specialty Group.  Law firms brought in more revenue even as demand continued to lag, increasing just 0.2% as of the end of the third quarter across the cohort of more than 120 law firms surveyed by Wells Fargo, according to the report.

The rise in revenue was largely fueled by a 7.9% year-over-year increase in billing rates among all the law firms, and an 8.2% increase among the respondents ranked in the top 100 in the U.S. by revenue, the report said.  With the jump in revenue, law firms also posted an increase in net income and profits per partner as of the end of September, with net income on average increasing by 2.7% and profits per partner by 1%.  However, those results were buttressed by strong numbers reported by the largest law firms, with smaller firms faring less well.

Among the top 50 law firms by revenue, net income was up 5.2%, among the top 100 firms it was up 3.7%, and among the firms ranked in the second 100 by revenue, net income actually fell by 3.9%.  For those that performed well on net income, one major contributor was an industrywide reining in of expense growth, according to the report.  Expense growth slowed to 5.6% at the end of the third quarter, down from 6.2% midyear and 12.8% this time last year.

Alongside the differences in net income, law firms' expense growth also varied based on firm size, with the largest firms seeing smaller upticks than those among the second 50 largest and second 100 largest by revenue.  One part of the expense equation for firms is lawyer headcount, which continued to increase during the third quarter, although at 3.5%, the pace was slightly slower than in the previous year.

Because of the flat demand and increases in headcount, lawyer productivity among the cohort remained low, with an average annualized pace of 1,540 billable hours per lawyer, maintaining levels logged midyear that are well below 2018, 2019 and 2021 figures, the report found.  Of the more than 120 law firms surveyed by Wells Fargo for the report, 65 were among the 100 largest in the U.S. by revenue, 30 were among the second 100, and the remainder represented regional law firms, according to the bank's legal specialty group.

A recent Law 360 story by Sue Reisinger, “GC Cheat Sheet: The Hottest Corporate News of the Week,” reports that, as several law firms have significantly increased their rates over the past year amid a slowing economy, the relative silence from corporate clients has been deafening.  Law 360 columnist Aebra Coe writes that based on her experience covering the legal industry during the fallout of the last economic downturn, the level of "meh" reactions around the increases is a major shift from the volume of outcry we heard from in-house legal during the 2010s.

So fast-forward to today.  Released at the end of May, the LexisNexis CounselLink 2023 trends report found that timekeeper rates grew on average 4.5% in 2022, the highest level the enterprise legal management platform had recorded since it first produced the report in 2013.  According to CounselLink, average partner billing rates at law firms with 750 or more lawyers increased from $656 in 2015 to $895 at the end of 2021, an increase of 36%.

And yet, Coe doesn't think we've seen the same revolutionary spirit in-house that we saw a decade ago.  Some structural changes are at play, including reducing the number of outside counsel used by legal departments, adopting alternative fee arrangements, using legal technology, outsourcing some lower-level tasks to alternative service providers, taking some work in-house, and making use of data to ensure outside counsel are performing to a high standard and providing value for the money.

A recent Law.com by Andrew Maloney, “Where Are Partner Billing Rates Surging the Most in Big Law,” reports that, while partner billing rates rose last year all over, they skyrocketed in certain practice areas in Big Law and several U.S. cities, according to a new analysis.  Going forward, billing rates are expected to continue another steep increase this year.  Partner billing rates surged to record levels last year “in all tiers of law firms and in all practice areas,” but it was high-dollar practices that commanded some of the largest rate increases, with mergers and acquisitions, commercial and contracts, and corporate practices leading the way, according to the latest trends report from LexisNexis CounselLink.

Hourly rates for all partners jumped between 2021 and 2022 by 4.5%. That’s higher than the increases in 2020 (3.5%) and 2021 (3.4%), and the highest since CounselLink first began producing the trends report in 2013.  The median hourly rate for partners in M&A shot up much more, with a 6.4% jump between 2021 and 2022.  Commercial and contracts, corporate, and labor and employment practices also notched significant rate increases, growing 5.8%, 5.6% and 5.6%, respectively, last year.

With the exception of labor and employment, the median hourly rates charged by partners in each of those practices was $675 or more, according to CounselLink.  The median rate for M&A partners was $955, the highest rate of any practice area in the report.  For commercial and contracts, it was $706. And for corporate work, it was $675.  The median hourly rate for partners in labor and employment was $530.  The trends report is based on $52 billion in legal spending across 420,000 timekeepers and 1.4 million legal matters.

Kris Satkunas, director of strategic consulting for CounselLink, noted that partner rates were on pace to rise 5.4% in 2023, even higher than last year’s record growth.  “There’s still a lot of work to be done in 2023 that has yet to be billed.  So, could that change?  Yes, of course,” she said.  “But we’re on this trajectory right now, and my gut feeling is that it probably won’t go down.  It may go up even a little bit.”

While the 2022 rate growth happened in a year of slower demand, she said she’s not convinced there’s a correlation between rate growth and demand at the practice level.  More often, she said, it’s a firm-wide decision.  She noted that M&A rates, for instance, were still growing at a decent clip a couple of years ago when the practice area was as busy as ever.  In 2022, as demand faltered, the rates grew more than ever.  Analysts told Law.com that partner billing rates rose partly because law firms were feeling the effects of inflation and trying to maintain profitability as demand took a hit.

Rates are higher for practices such as M&A partly because that work is more often done by the larger, more expensive firms, Satkunas said.  “These are kind of the big, high-risk, bet-the-farm sort of matters, and those corporate counsel want to go to the firms they have the most faith in, and those tend to be the larger firms,” she said.  Indeed, the trends report noted that in 2022, the “Largest 50″ firms handled 68% of M&A work. “With regard to the other high rate practices of regulatory & compliance, commercial & contracts and corporate, the ‘Largest 50′ firms had 57 percent of the work from these practices,” the authors wrote.

Overall, the largest firms increased market share, the report noted, with their largest gains in regulatory and compliance, corporate and real estate work.  But head count size didn’t always determine the largest rate increases.  In 2022, the median rate at firms with 501-750 lawyers grew by 9%, but only 3% for the largest firms, the report said.

Rates by City

The report also noted many of the largest legal markets saw the biggest jumps in rates.  Six major metropolitan areas saw median partner rate growth climb higher than 5%: Washington, D.C. (a 6.6% jump, to $925 per hour), Chicago (5.8%, to $765 per hour), Los Angeles (5.7%, to $795 per hour), New York (5.5%, to $975 per hour), San Francisco (5.5%, to $608 per hour) and Seattle (5.1%, to $780 per hour).

“On the opposite side of the spectrum, two cities saw hourly growth rate below 2 percent: Dallas and Detroit,” the report noted.  Utah led the way in terms of partner billing rate growth among states, with the median rate climbing 6.2% in 2022, up to about $350 per hour.

Satkunas said some of the growth among cities and states is a reflection of the size of law firms there. Dallas and Detroit have some large firms, but also plenty of midsize and smaller firms that didn’t raise rates quite as much.  Law firm partners in Utah had more double-digit increases than partners in other states, she noted. Utah just has a smaller population of law firm partners than most states and is thus more susceptible to outliers.

A recent Law.com by Maria Dinzeo, “Law Firm Partner Hourly Rates Rose Last Year at Biggest Clip in at Least a Decade,” reports that hourly rates for law firm partners jumped 4.5% in 2022, driven in part by law firms’ fears of profitability losses from inflation and a drop in M&A activity, according to a report from LexisNexis CounselLink.  The report, based on $52 billion in legal spending across 420,000 timekeepers and 1.4 million legal matters, says that annual percentage increase was the largest since CounselLink put out its first report in 2013.

The largest portion of corporate spending went to partners at the 50 largest firms, those with 750 lawyers or more, where the average partner billed at a 46% higher rate than the next tier of firms with 501-750 lawyers.  The 50 largest law firms also saw their market share swell to 47.3%, particularly in regulatory and compliance, mergers and acquisitions and financial matters, where the 50 largest firms consumed 55% of legal billing in 2022.

“There’s all this increased regulatory pressure going on out there.  And who do you want to handle this stuff?  You’re gonna go to the firms that you think had the most insight into this and that’s going to be the big firms,” said report author Kris Satkunas, director of strategic consulting for CounselLink.  She also recently took a preliminary peak at this year’s numbers, and partner rates are on track to rise 5.4%, an even bigger increase than the 2022 record.  Those rates rose 3.4% in 2021 and 3.5% in 2020.

“It’s a very big leap compared to where we have been running for the last 10 years.  But that number will change.  Will it go up or down?  I don’t know,” she said.  “But that’s where things stand today through the first four months of the year.”  Satkunas noted that 25% of partners had increases of over 10% last year.  She said some legal departments also reported seeing double-digit rate increases.  The hikes could be attributed to firms beginning to feel the effects of inflation and less demand for certain types of work.  “I think there’s some fear about being able to hit profitability,” she said.

M&A activity also declined in 2022 after hitting an all-time high in 2020, experts say, when high demand for M&A work, with accompanying litigation, tax, real estate and intellectual property issues, gave firms more work than they could handle.  “M&A was the gift that kept on giving in 2020 and 2021,” said law firm consultant Kent Zimmermann of the Zeughauser Group.  “The massive demand for talent led to a big rate increase and that caused some firms to pull away a lot relative to their peers on profitability and talent advantage.”  Even though M&A work has slowed, Zimmermann said firms are still vying to attract the “best” lawyers as a path toward profitability.

“Even though demand is soft, that rate lever is still important,” he said.  “If there is any recession, it’s looking like it’s going to be short and shallow, so law firms are thinking.  We need to plan two to four years ahead.  We can’t under-do it on the rate increases.  It’s a big driver of our ability to enhance profitability and compete and attract the best lawyers.”

Some firms raised rates twice over the span of 12 months to keep up.  “The internal messaging was we need to pay to be competitive in the market for associates and their pay is going up,” Zimmermann said.  “You need the best and brightest associates and this is what it takes.”

If law firms have only two levers to profitability- raising rates or drumming up more work— raising rates is the easier of the two, Satkunas said.  “Typically, they are more comfortable raising rates.  It’s actually easier to raise rates and go find new customers or find new new work,” she said.  Though alternative-fee arrangements have grown more popular in recent years, this year’s report notes that their adoption remains largely unchanged, and represented 6.3% of total legal billings in 2022, according to the CounselLink report.

“At the end of the day, I believe that most corporate counsel are just more comfortable negotiating an hourly rate discount than being creative.  It’s easier to negotiate a rate than it is to have to think about, what’s the value of this matter, what am I willing to pay for the outcome I want?” Satkunas said.  “I’m disappointed and I really would love to see a real meaningful uptick in the use of AFA’s but it just hasn’t happened.”

A recent Bloomberg Law by Roy Strom, “Big Law Attorney Billing Rate at 15-Year Low, Wells Fargo Says,” reports that big law firms face pressure to downsize as attorneys bill hours at a historically low rate, a Wells Fargo & Co. survey of 66 of the largest US law firms shows.  The first quarter data shows attorneys billed at an annual pace of less than 1,600 hours, the lowest figure in at least 15 years, said Owen Burman, managing director of the Wells Fargo legal specialty group.

Firms including Cooley, Gunderson Dettmer and Goodwin Procter have already laid off lawyers this year, and “I would not be surprised to see more announcements of that sort,” Burman said.  Corporate transactions have dried up in the wake of frenzied hiring during the pandemic, causing demand for lawyers’ time to drop.  Demand fell 1.5% from the year-ago period while the number of lawyers rose nearly 5%, according to the survey.

The drop in productivity squeezes firms’ bottom lines.  Profits per partner fell 4% last year, Wells Fargo reported earlier.  While law firms remain highly-profitable businesses that can choose to invest in a recovery by keeping lawyers employed, less than 1,600 annual billable hours is “not something firms have historically accommodated,” Burman said.

The big associate classes scheduled to join firms, along with attrition that has been below expectations, will add pressure for firms to shed headcount, he said.  The 66 of the 100 largest US law firms that responded to the Wells Fargo survey saw revenue increase 4.7% from the first quarter last year.  That is largely thanks to rate increases and healthy collections from work done in 2022.

Firms will shed lawyers while at the same time adding talent in key areas, said Kent Zimmermann, a partner at law firm consultancy Zeughauser Group.  “Targeted right-sizing will continue to pick up with a focus on lawyers who underperform expectations for years,” Zimmermann said.  “Simultaneously, firms will continue to invest in teams of lawyers who are highly productive in doing the work and bringing it in at rates that drive increased profitability.”

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