Hi there,
Just when I think my same rant about billable hours is getting stale, I read something like this, (taken from the preface of Thomson Reuter's recently released rate review report for firms):
"For most of the past decade, the growth in hourly rates for attorney time has been one of the key drivers of the growth of law firm profitability. In fact, when applying the classic RULES framework...which stands for Rates, Utilization, Leverage, Expenses, and Speed of billing — it is rates, and more broadly their impact on driving revenue, that has been the most highly functional lever for law firms to positively influence their profit outlook."
In other words, law firm profitability still mostly relies on raising rates (stunner, I know 🤦♂️).
What else does the report say?
Year-over-year rate increase growth is returning to pre-Global Financial Crisis levels. Inflation being the biggest justification.
Inflation huh? 🤔
Now consider that there has been flat to little growth in demand for firm services — less than 1% growth for firms overall. Yet the first half of 2023, revenue potential as measured by fees worked grew 6.7%.
How did firms accomplish this not-so-shabby feat?
In large part, because of a 5.7% increase in rates over this same six-month period.
The statistics for the Am Law 100 are even more stark — despite negative demand growth, they’ve achieved a 6.9% increase in fees worked in the first half of 2023, thanks mostly to a 7.3% increase in rates over this same period.
It’s inevitable that firms will continue to see hours and demand shrink as Gen AI-enabled efficiencies become commonplace.
In response, some firms will continue to pull the same tiresome lever — raising annual rates — to prop up their growth.
Still, others are taking advantage of Gen AI and other technological innovations to become more profitable by finding ways to innovate and change their business model.
How?
I love how HSBC’s Head of Legal Market Engagement, Chris Grant, explained in a recent webinar we hosted on how AI is enabling transformation in the legal industry.
As Chris shared, alternative legal service providers and some firms are already finding ways to use AI to deliver results more quickly and efficiently, which then allows them to pick up more work and be more profitable.
And, Chris adds:
“Just because you put AI in place doesn’t mean I won’t pay the same price as I was paying before because you’re doing it more quickly and faster. In fact, I might pay a premium because you’re doing it a little bit quicker. But that conversation won’t be had if we’re talking about the hourly rate.”
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