Over the last two weeks some attention has been given to the topic of law firms raising rates. Bill Josten recently wrote about information coming from Thomson Reuters’ Legal Executive Institute and Peer Monitor that suggests that raising rates may undermine firms’ goals of greater profitability. A similar report followed, also drawing on Thomson Reuters’ Peer Monitor, and indicates that many firms are seeing increased demand if they take rate growth more slowly. As a matter of basic supply and demand applied to an industry that has seen softness in demand, the Thomson Reuters reports are not surprising.
Will this data concerning the efficacy of aggressively raising rates cause more firms to de-accelerate rate growth for a while? For many firms in which rate growth is a way of life, particularly larger ones, the answer is likely “no.” For a number of reasons, however, firms should take these reports to heart and consider pausing the annual practice of raising rates, or at least be more modest in the increase implemented. Besides what the reports are telling firms, an aggressive increase of rates can be ineffectual because it may:
Exacerbate a Demand Decline. If a firm decides to raise rates in order to maintain or increase gross revenue in the face of declining demand, the increase in rates may only drive demand down further. Raising rates to offset softness in demand may be the worst thing to do.
Diminish the Connection with your Client. Every less hour a client needs you means there is less opportunity to show your indispensability. A rate increase can limit the amount of time your client wants you to help in an already opened matter. High demand “keeps you in the game” by increasing interaction between you and your clients. There is nothing better for furthering client relationships.
Drive Away Clients in Two Ways. When you raise your rates it can evoke a “here we go again” response from your client. That reaction can morph into a client questioning whether a rate increase is deserved and strain the relationship. Further, a second and more direct impact happens if the client decides that a “lower rate shop” may deserve a chance. There are a lot of good lawyers willing to do their best for less. If you raise your rates when a raise is not deserved, you may find out how many.
Mask Other Issues. If revenues will go down without rate increases because your lawyers are not as busy, you’ve got a demand problem, a client-relationship problem, and/or a quality of legal work problem. Your problem probably is not that your rates are too low. Charging higher rates so you can keep revenues up may succeed in the short-term, but the rate increase does little to fix what may be the more systemic issues. The short-term solution may leave unaddressed underlying issues that compound and fester. Better to address the root of the problem rather than cover it up with an unearned raise.
Fuel a Sense of Entitlement. In most cases the rate increase is a response to increased pressure to boost gross revenues. Perhaps additional expenses need to be paid; new lawyers with increased starting salaries need to be hired, and annual pay raises for partners are expected. If increased partner compensation is not deserved, should clients nonetheless see the rates they pay go up? A rate raising solution to partner compensation expectations is fraught with peril.
Law firm staff members and associates don’t dictate to managing partners their next annual raise. However, if staff and/or associates earn a raise by their performance, a reward is more likely as it is deserved. Should your firm risk the consequences of raising rates if the rate increase you intend to impose on clients is not deserved?