A few days ago the intrepid and data-tropic Bloomberg Law reporter Roy Strom published Big law rates topping $2,000 leave value ‘in the eye of the beholder.’
Roy is a friend (disclosure!) but his story prompted some reflections hereabouts on “How high is too high?” Now, the hook for Roy’s story was the “new pinnacle [in rates] after a two-year burst in demand,” and specifically the revelation that some partners’ are north of $2,000/hour. $2,000 is a nice round number, I will grant you, but other than that….?
More than some time ago, a different journalist called me to share his discovery that some partners at some firms had broken the $1,000/hour barrier, and somewhat disbelievingly asked me if that could be sustained and if clients wouldn’t reject their pricing as completely out of control. As I recall, and I hope time has not occluded my memory on this score, I offered the thought that $1,000/hour was “just a round number” and nothing more. In a prior life, I had been a securities lawyer at a very large house that included both a retail brokerage arm and an investment bank when “Dow 10,000!!” had been the rallying cry. Emotionally, it served as some sort of rallying cry, but it also struck me that everyone saw through it. “It’s just a round number.”
Before we proceed further, Roy does marshal some data to support the premise that rates are rising to a “new pinnacle:”
- Law firm rates (as tracked by Thomson Reuters’ invaluable Peer Monitor) rose ~40% from 2007 to 2020, while the US CPI was up 28%.
- The 100 largest firms achieved their largest rate increases in more than a decade: > 6% in 2020 and another 5.6% through Novembe of 2021.
But back to rates.
Every once in awhile the notion strikes me that hourly rates are surrounded by more myth, lore, blind tradition, and irrational attachment to precedent than any other issue in law firm management. Then I am startled awake from my daydream.
Rates have no monopoly on those fellow travelers. But we can try to scrape away many of the more conspicuous encrustations.
The first, as noted, is that round numbers have any intrinsic significance beyond being round numbers. They do not. If $1,975/hour is acceptable to some clients for some matters, why would 102% of that be suddenly unacceptable? (102% x $1,975 = $2,015)
A second is that rates are derived from market locale. New York rates are one thing, but Salt Lake City rates are another. This unquestionably has some truth to it. All sanely determined and market-clearing prices must bear some relation to cost, and pretty much everything costs more in New York than Salt Lake. Fair enough. (And no surprise whatsoever to clients, by the way; their cost curves are the same.) The glaring exception to this generality is that some practice areas are truly national–even international. If your client is staring at a high-level US DOJ or SEC investigation, the work you do in (say) St. Louis is of no less consequence than what you do in New York and London. You should set one firm-wide rate card for such matters without reference to each office’s zip or postal code. (I note parenthetically that some firms have honed a profitable niche by pursuing such work and intentionally sourcing a large proportion of their staff assigned to such matters in cities with kinder and gentler economics than the global mega-Cities.)
Before Covid brought a screeching halt to such gracious opportunities, I was having lunch with the COO of an AmLaw 100 firm with historic roots in the Northeast Corridor, but outside New York or Washington. He was venting his (well justified) frustration at a prevailing attitude within the firm that its very high-end white collar defense practice should charge lower rates than its no more capable competitors because “we’re not a New York firm.” To him the firm was wantonly dropping thousand dollar bills on the sidewalk on the altar of tradition.
A flip side of this is symbolized by the partners we talk with directly and whose experiences are reported in the press when their firm is acquired or merges or chooses strategically and purposefully to move “up market.” The subset of partners we are referring to, in those contexts, are those who complain that their clients can no longer tolerate the (higher) rates being imposed in the wake of the structural change. We assume without reservation or judgment that they are right. It’s understandable that their clients do not appreciate, and may not pay, the new rates.
Essentially, the law firm those partners belonged to and those clients patronized has ceased to exist. The firm has migrated to new market sectors. What this has to do with rates (this is a column about rates, remember?) is fairly simple: A mismatch has been introduced between what the partners and those partners’ clients are comfortable charging and paying, and where the “new” firm is in the market. The answer is fairly obvious: Those lawyers and their clients should migrate to firms where they belong. This is not meant to be either harshly judgmental (Capitalism!) nor sappily empathetic (Community!); it’s just meant to be realistic advice. A few other noteworthy aspects of this type of evolution:
- It is not a “betrayal” of the partner by the law firm, any more than would the partner “betray” the firm by deciding to pursue a practice area outside the firm’s existing or intended footprint.
- “Evolution” (because that’s what it is) by firms and by human beings is:
- To be expected
- and at a profound level Essential to growth and forward progress.
- This is the kind of development, in short, to be celebrated, not mourned.
Finally, the ineffable question, “How high is too high?” or, less extravagantly, “What is the right rate for this type of work?”
The answer lies not within your firm, the answer lies with the market. The “right” rate is what the market will bear. Less crassly and more specifically, the right rate is what clients in sufficient numbers will gladly pay to keep your firm as busy as you wish to be in [Practice Area X.]
How do you know what that magic number is?
You never will with decimal point precision, but you should know two things:
- If competitors who are clearly no better than you–or who, worse, you have a nagging suspicion aren’t nearly as good–are consistently charging more and keeping busy, you are probably pricing your services too low.
- And if you regularly find clients reacting to your proposed rates with remarks to the effect that it’s a bit rich, or in excess of what they were expecting, or out of line with the market, you’ve overshot and due for a self-imposed haircut.
Aside from those rather squishy guidelines, good luck and keep experimenting! When push comes to shove, we look for consolation in this handy and hard-core realpolitik counsel: “Pricing is the dark art.”