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.”