Law firms are looking to push aggressive rate increases in 2022, taking advantage of a climate in which surging demand for corporate work, in particular, has stretched them thin.
Few firms have been shy about pushing rates upward in both 2020 and 2021. But industry observers believe there’s still room for more rate growth, potentially even double-digit increases, as firms seek a financial edge that can help them attract and retain top talent.
“Industrywide, even though we’ve seen a significant increase in the past year, we’ll continue to see increases driven by significant demand,” said Munger, Tolles & Olson co-managing partner Hailyn Chen. “As much as clients grumble about it, people have continued to see strong realizations.”
Worked rates—the actual figure agreed upon by firms and clients—rose 6.1% for the Am Law 100 in 2020 compared with the prior year, according to Jim Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession. And a comparison of the second quarter of 2021 to the same period in 2019 reveals an 8.5% increase. Furthermore, the 97% realization rate for the first half of 2021 is the highest on record since 2009.
“It’s not only that firms have been raising rates, but clients have been paying them, with far less pushback that we’ve been seeing before,” Jones said.
It’s not just unprecedented demand for deal work that’s empowering firms to enact increases. There is also very strong demand for certain types of litigation and regulatory work. And this is all unfolding at the same time that talent is scarce on the ground.
“For the first time in many, many years, what’s driving top-line revenue is demand and not rate increases,” said Joe Mendola, senior director of sales for Wells Fargo Private Bank Legal Specialty Group, adding that demand is growing in double figures for many firms. “Clients are picking up the phone and reaching out to their law firms for work. We’re reaching the point in the industry that Big Law doesn’t necessarily have the supply to fulfill the work they’re being asked to do.”
That combination of factors has left the door wide open for firms to come charging through.
“For some firms, this will be a historic opportunity to make progress on rates. That’s especially true for firms that are lagging behind their peers,” law firm consultant Kent Zimmermann of Zeughauser Group said.
While these drivers have enabled a small group of firms to already raise rates twice within a 12-month period, Zimmermann believes that a much larger sector of the marketplace is looking to boost rates by 5% to 10%, and for some by even more, early in 2022.
Those that don’t, he said, will be at a disadvantage, particularly in the most competitive environment in decades for top talent.
“Most law firm leaders completely get this, but many rank-and-file partners react negatively to the idea of rate increases, let alone aggressive rate increases,” Zimmermann said.
That means it’s in the interest of leaders to connect the dots for those partners who fear having delicate conversations with their clients about increases.
“Attracting and retaining the best people, that’s language rank-and-file partners agree with,” Zimmermann said. “The available data suggests that most firms are seeing rate increases since the beginning of the pandemic stick better than anticipated. That’s another thing to communicate to rank-and-file partners.”
While many firms posted record profits in 2020, expenses have been on the rise this year, with associate salaries and compensation swelling. On top of that, a number of firms have minted record partner classes, which either creates additional expense pressure or cuts into the size of equity partners’ shares, depending on whether a firm has a two-tier or single-tier partnership.
“That will push firms in the direction of increasing rates as well,” Jones said.
These anticipated rate hikes also come against the backdrop of wider inflationary pressure in the U.S. economy, with the annual rate rising at the highest level in three decades in September.
“People in their day-to-day lives are seeing prices going up for many things they need: food, gasoline, rental cars,” Zimmermann said. “Inflationary trends don’t hurt and might help set the stage for aggressive rate increases for law firms.”
Will Clients Push Back?
At the same time, corporate clients are seeing other inputs increasing in price, and their law departments are under pressure from CEOs and CFOs to minimize costs. That could fuel some pushback against another wave of rate hikes.
“[Law departments] are making plans and being counseled at the senior levels of the company to proactively manage inflationary pressure,” said Jason Winmill, a managing partner at Argopoint who advises corporate legal departments on pricing and negotiations with firms.
Winmill acknowledged that, in a cyclical industry, law firm providers are currently in a position of enhanced market power. But he said that while some buyers of legal services would likely accept these increases as the cost of doing business, others are likely to resort to a host of cost-management strategies and approaches that have been successfully deployed over the past 15 years: comparison shopping, insourcing, alternative fees, volume discounts, and the tried and true approach of haggling over rates.
“Will this year be the one year that firms say we’re not discussing price? I’d be skeptical,” Winmill said.
But he added that for the majority of Fortune 500 companies, the approach will likely fall in between these two extremes.
Zimmermann, himself a former general counsel, also believes that, by-and-large, companies will get on board.
“Sophisticated clients don’t want rate increases, but they’re fully aware of the unprecedented transactional spike and how stretched many firms are,” he said. “Even if they don’t like it, most clients understand the rate increase help the firms attract and retain the people they need.”