Big Law Firms Prepare Record Rate Increases

Although the top half of the AmLaw 100 has seen demand drop 1.1% this year through September, headcount is up nearly 5% over that same time period, according to Wells Fargo’s Legal Specialty Group survey of more than 120 firms.

And Big Law firms expect to raise rates by 8% next year, according to Wells Fargo Senior Vice President Owen Burman, which would be the largest increase ever in the survey’s 15-year history. “The industry does defy basic economics in many ways,” Burman said.

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According to Burman, last year and this year rate increases did not keep pace with inflation, a statistic that’s also never been seen before in survey history — so perhaps law firms are just making up for lost time.

But Bruce Macewen and Janet Stanton of law firm advisory Adam Smith Esq. say raising rates has been the most effective strategy for firms to boost revenue over the past 15 years, and marginally higher rates are of little concern for clients with highly sensitive legal matters to deal with.

In some practices, law firm rates show characteristics of what is termed a “Veblen good,” Macewen said. A Veblen good is a type of luxury good for which the demand increases as the price increases.

“There are a lot of goods and services where price at the high end is completely untethered from normal laws of supply and demand,” Macewen continued.

“There is no pain threshold in Law Land,” Stanton added.

But higher rates could just be a form of damage control. Many firms are beginning to cull their associate ranks after booms in hiring and salary over the past two years, and higher rates could help ease a potentially difficult financial period for those firms.

These rate increases at Big Law firms could end up benefiting midsize firms. “Lower rate growth may have heightened the appeal of midsize firms to increasingly cost-conscious clients,” Thomson Reuters said.

However, it seems midsize firms have actually benefited from a change in the types of services clients are purchasing from law firms rather than from a disparity in rates, surpassing Big Law demand growth in practice areas like real estate, labor and employment, and patent prosecution, which are typically bargains compared with M&A and bankruptcy — areas in which AmLaw 100 firms experienced higher demand growth.

If this bifurcation continues, the price gap between Big Law firms and midsize firms will only widen, concentrating high-priced work with the biggest firms and strengthening their hold on the “luxury” end of the market. This would give them more pricing power and likely make 8% rate increases less of a rarity.