Hi there,
Firms are still partying like it’s 1999 (yep, I’m older than I’d like to admit). 🎉
At least according to what I’m hearing in my recent discussions with law firm managing partners. One in particular said that times have never been so good.
“We continue to raise our rates and our clients continue to pay.”
(Lucky my wife does not read this newsletter 🫣. For the uninitiated, if I hadn't chosen to start PERSUIT that firm partner could have been me.)
One PERSUIT customer even told me that a very senior partner who was long-tenured with that customer was asking for a 30% increase in their own $2000+ hourly rate.
When she asked how that partner could possibly justify a 30% increase in his already eye-watering rate, he responded (apparently, with a completely straight face):
“I have a family to feed.” 🤯
Of course, this news got my head spinning. 🤬
If firms are getting 6-7% — or even double-digit rate increases year-over-year from what we hear — isn’t it inevitable that law firm profits would be vastly outpacing that of their clients?
And is that fair?
Firms are realizing outsized year-over-year growth while in-house teams are struggling to find “creative” solutions to reduce costs or even “right-size” their teams.
So I asked my team to find the smoking gun.
Are firms growing faster in CAGR than their clients?
(To save you a Google search, CAGR = compound annual growth rate.)
Here’s what we discovered.
How firms and their clients are pacing against one another in CAGR isn’t all that different.
Both the F500 and AMLAW firms come in around ~10% over the last decade.
But the how in their respective approaches to achieving that growth is very different.
Here’s what we know about firm profits over the last decade.
☑️ Demand growth for legal services has stayed flat over the past decade.
Increased rates and competitive pressure are pushing work down-market and leading in-house teams to take more work in-house.
☑️ Firm headcount grows while lawyer productivity continues to decline.
Despite decreased demand, firms are growing their ranks. More lawyers and no additional work means there are less hours to go around for everyone.
☑️ When a firm wants to grow their book, they either lateral partners from other firms or merge.
Nice work if you can get it.
☑️ Non-equity partners are doing more of the work.
But they are often still billing hourly rates on par with equity partners.
☑️ Firm revenue potentials — measured by the rates they’ve negotiated with clients — are still growing.
Despite stagnant demand and declining lawyer productivity, worked rate growth is now the highest it’s been since 2007, with the AMLAW 100 exceeding 7%!
All of this leads me to only one conclusion.
Firms are propping up their positive CAGR almost solely with one functional lever — rate increases.
But what about their clients?
Like firms, they’ve also raised their prices.
That glass of lemonade🍋 that used to cost $1 a decade ago now costs $3.
But at the same time:
🍋 They’ve been busy finding new ways to source their lemons
🍋 Developing new techniques to get more juice from each lemon
🍋 Improving their formulas to drive greater demand, and
🍋 Streamlining their distribution channels to organically grow revenue
Firms, on the other hand, are simply charging you $10 for the same old glass of lemonade (or maybe even an inferior version) that they’ve delivered largely in the same old way using the same old methods.
The only difference is that they’ve grown their revenue over 100% while you’re the one stuck paying 10X for the same glass of lemonade that you used to get for $1.
In other words, instead of innovating like their customers have to, law firms are just extracting more from customers using the same, overused lever — billable hour increases.
Which leads me back to one of my favourite questions:
Whatcha gonna do about it? 🤔
Cheers,
Jim
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