Mid-Size Law Firms Benefit From Law Firm Rates Rise
A new report from Thomson Reuters shows midsize law firms in the US have grown their hourly rates at a pace 1.3 percentage points higher than their 2022 average. And the Am Law 100 set a new benchmark for rate growth, with their average worked rates growing by 7.3 percent, a pace not matched in the history of their data set, even prior to 2007.
Law firm rates, the fees charged for legal services, play a significant role in determining a firm’s profitability. The Big Law pay scale continues to rise despite the headwinds facing many law firms.
And earlier report from Reuters released in May 2023 showed the rates rise for Am Law 100 firms which saw rates rising by 7.2 percent in the first quarter of the year compared to the same period in 2022.
The earlier report showed that the “worked rate” growth among the largest firms was the highest in the history of the Thomson Reuters Law Firm Financial Index, which has been published since 2007. The previous high was 7.0 percent, which occurred before the global financial crisis in the late 2000s, according to the recent report.
The current survey that has just been released is to the middle of 2023. Over the past decade, the growth in hourly rates for legal work has been a primary driver of law firm profitability. In 2023, there has been record-setting growth in attorney rates, surpassing even the pre-credit crisis levels.
Nevertheless, challenges persist, as outlined in the latest report from the Thomson Reuters Institute titled “Law Firm Rates in 2023: What’s Working, What Isn’t, and How to Move Forward in 2024.”
The report focuses on four categories of law firm rates:
- Standard rates: The headline rates advertised by law firms.
- Worked rates: The rates clients agree to pay for new matters, often at a discount off the standard rate.
- Billed rates: The rates clients are invoiced by the law firm, after any adjustments (write-downs) by the firm.
- Collected rates: The rates clients ultimately pay after reviewing and making adjustments (write-offs) to the invoice.
The report primarily examines worked rates, as they reflect both law firms’ efforts to increase rates and clients’ willingness to accept these increases.
In 2023, there has been high growth in worked rates across all segments of law firms, including the Am Law 100, Am Law Second Hundred, and Midsize firms outside the Am Law 200.
Midsize firms, in particular, have increased their work rates at a pace 1.3 percentage points higher than their 2022 average, the survey shows. The Am Law 100 firms set a new record for rate growth, with average worked rates growing by 7.3 percent, an unprecedented pace.
While law firms appear to be enjoying unprecedented success in raising rates, it’s essential to consider that rates are a crucial driver of profitability only to the extent that they generate revenue.
Other factors contributing to revenue include the number of billable hours (demand) and the percentage of worked rates converted into collected rates (realization).
Demand for legal services has moved favoring Midsize firms over larger counterparts in the past two years, with technology helping level the playing field for mid-size and smaller law firms as LawFuel recently reported.
However, all segments of law firms have seen a decline in realization percentages for at least five consecutive quarters, impacting profit margins and complicating the overall picture of law firm profitability.
This special report, presented by the Thomson Reuters Institute and the True Value Partnering Institute, offers insights into law firm rates’ current and historical performance. It also delves into potential challenges that could affect law firm revenue growth and, consequently, profitability. The report is particularly relevant as many firms engage in rate-setting for the upcoming year.
