The general approach to law firm billing rate increases continues to baffle me. The overall demand for law firm services has been flat to declining for more than a decade while the quantity of licensed lawyers continues to grow.
Traditional economic theory holds that when supply increases and demand falls or remains flat, prices fall.
Not so in the world of law firm billing rates. According to a recent report released by CEB consulting company and Wolters Kluwer NV’s ELM Solutions, law firm billing rates increased 5.4% last year, double the inflation rate. Law firm billing rates have increased more than the inflation rate annually for more than a decade. How can this be?
One answer is that increased billing rates don’t necessarily mean increased revenue. In fact, as rates have continued to move up, realization rates have fallen. The decrease isn’t in exact proportion to the increase; but there is strong leakage in the billing to collection equation.
I wasn’t surprised by the above report but it included one other finding that was equal part surprising and disappointing. The report describes finding that 21% of lawyers “padded” their bills by rounding up to the nearest half hour or, in some cases, the next hour. A number of descriptors come to mind for this practice. The most appropriate seems to be theft.
The continued push to make more or a lot more money for the same service threatens to significantly weaken the future of the profession.
A great perspective on the issue is offered in this video from Verizon’s General Counsel.
Law firms, like any other business wanting to grow and thrive, must eventually recognize that the path to increased profits and stability is to innovate, become more efficient and/or deliver a higher service level.
Notwithstanding efforts to explain or justify, repeatedly turning to higher rates as the foundation for growth (never mind those breaches of ethics) will inevitably kill the goose, and the legal profession that has been a golden egg for so many.
Adding more value to make more money is old fashioned; but it is the surest key to success!