Law Review: Survey: Majority of law firms plan rate increases

Is it finally morning in America for beleaguered law firms, or just a sign of desperation?

Surely one of the more counterintuitive findings about the legal industry to emerge recently is from a survey of hundreds of law firms by the Newtown Square consulting firm Altman Weil:

The vast majority plan rate increases for 2010.

If the responses are to be believed, law firms around the country want to raise rates after waves of layoffs, salary cuts, and demands for capital from non-equity partners - and even as clients demand discounts.

This would surely seem to be a case where firms, if they have any hope at all of succeeding, need the intercession of Jude the Apostle, patron saint of lost causes. Because at the moment, all the trend lines are pointing in the opposite direction.

The findings do not appear to be an instance where a surprising, and perhaps even implausible, result can be explained by a skewed sample. The survey encompassed 288 U.S. law firms and included almost half of the largest firms in the nation.

From big firms to small, the results were remarkably consistent.

The average planned increase for all the law firms was 3.2 percent. The largest firms, those with 1,000 lawyers or more, said they planned to raise rates 4 percent, while firms with fewer than 100 lawyers planned increases of about 3 percent.

The results parallel those of a survey by the National Law Journal, released yesterday, showing that even as the industry was hobbled last year by a sharp drop in transactional work, structured finance, and other practice areas, firms managed to raise rates an average 2.7 percent.

That was way off the hefty pace of 7.7 percent during 2007, before crisis convulsed the legal industry, but still surprising during a time when clients were said to have had the upper hand.

What's going on here?

One hint is offered by the National Law Journal survey, which was retrospective and didn't ask firms what they planned to do next year. Yet the tendency over the last several years has been a clear shift from law firms to clients having the advantage on pricing.

If its numbers are correct and the trend continues, what had been a series of shrinking increases could head into negative territory over the next few years.

But if firms manage to eke out small increases until business rebounds, they likely will be smaller, far more targeted, and indeed open to much more negotiation than in the past.

Some firms will have pricing power. Others won't.

One managing partner said increases were likely to be centered on junior associates with two or three years' experience: Their rates haven't hit the stratosphere, yet because they've been practicing for a few years, they can actually do stuff.

Forget about raising rates for first-year associates, the managing partner said: Many companies don't even want them working on their engagements.

Ward Bower, an Altman Weil consultant, said firms would likely focus rate increases on new clients but won't be able to do that with longtime customers.

At the same time, they will boost profitability on the margins, relying on ever-greater cost-cutting to bolster earning power.

"There is an inevitable collision between law firms looking to push up rates and clients looking for discounts," Bower said.

Law-firm consultant Robert Denney said the planned increases suggested to him that the firms were under pressure from partners to keep their salaries at high levels.

He doubts that clients will stand for it. "It just makes no sense," Denney said.

Yet one of the more eye-catching results of the National Law Journal survey was that there are still firms out there with partners fetching $1,000 an hour, including Pittsburgh's Buchanan Ingersoll & Rooney P.C., which also has a large Philadelphia presence.

That suggests some firms can still charge what they want because what they offer is so central to a customer's business and so esoteric that it can't be purchased off the shelf.

It's true that more and more of the law has become commoditized. The growing use of contract lawyers engaged for narrowly targeted assignments and the sending of some legal work to India indicate that corners of the profession resemble an assembly line.

But the planned rate increases revealed by Altman Weil could point to another reality about the legal business that's as old as Shakespeare: Lawyers are nothing if not very good at making themselves indispensable.

It's great sport complaining about them and their rates, but when a critical matter looms and a client's fate or fortune rests on the outcome, all those antagonisms are forgotten and the only thing that matters is getting representation.

That's one reason rates and law-firm profits soared a few years ago. Clients were falling all over themselves to do deals on Wall Street, and they needed thousands of lawyers at big firms to make those deals happen. There was little complaining about rates, because everyone was making money.

That business has gone away, for now. But when a critical case emerges, or a practice area takes off, as litigation has recently, pricing becomes less critical to the client.

Then it's like the theme from Ghostbusters: "If there's something strange in your neighborhood . . . If there's something weird, and it don't look good. Who you gonna call?"

Your lawyer, of course.