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October 18, 2016

Lower Rates May Lead to Higher Demand & Revenues for Firms, Says Peer Monitor Report

Eagan, Minn., Oct. 18, 2016 A new report from Thomson Reuters Peer Monitor finds that large law firms willing to accept smaller rate increases are on average experiencing higher demand and revenue growth.

For many years, annual rate increases have been seen as a reliable means for firms to grow their revenues. But in an increasingly flat market in demand for law firm services, the report found that, over the last three years, firms with slower rate growth tended to have more growth in demand and revenues than firms that raised rates more aggressively.

Overall rate growth has been slowing steadily in recent years. After reaching a post-recession high of 3.4% in 2012, worked rates (or negotiated rates) grew only 2.7% in 2015.

But the Peer Monitor report found that firms willing to accept smaller rate increases may be rewarded with increased demand from price-sensitive clients. For example, Midsize firms reduced their average rate growth from 2.5% in the first six months of 2014 to only 2.1% in the same period in 2016. Meanwhile, the average demand for Midsize firms grew steadily over the three intervening years.

Conversely, firms in the Am Law 101-200 range accelerated their rate growth from 2.9% in the first six months of 2014 to 3.1% in 2016.  During that time, average demand reversed from growth of 1.7% to a negative 1.0%.

Am Law 100 firms, meanwhile, saw their average demand growth fluctuate between 2014 and 2016, depending on whether they raised or reduced their rate growth, respectively.

A similar pattern was found in revenues, using worked fees (billable hours worked times average worked rate) as a close proxy for revenues. Slower rate growth was associated with stronger revenue growth. In the first six months of 2016, firms with rate growth lower than 2.7% saw fees worked increase by an average of 3.2%. By comparison, firms with rate growth higher than 2.7% saw an average increase in fees worked of only 2.4%.

“It is increasingly a buyers’ market for legal services,“ said Mike Abbott, vice president, Client Management and Global Thought Leadership, Thomson Reuters. “Simply increasing rates may not be the reliable revenue generator that it used to be. Our data indicates firms that are willing to slow down their rate increases may find themselves rewarded with better demand and revenue growth. While the relationship between rates and revenues is complex, there seems to be an association between the two that suggests it may be worthwhile for many firms to re-evaluate their rate strategies in this price-sensitive environment.”

Thomson Reuters Peer Monitor examines law firm market performance using real-time data drawn from major law firms in the United States and key international markets. For more information on Peer Monitor, visit https://peermonitor.thomsonreuters.com

A copy of the Thomson Reuters Peer Monitor Special Bulletin, “Does Slower Rate Growth Increase Revenues?” can be downloaded here: http://legalexecutiveinstitute.com/peer-monitor-rate-growth/

Thomson Reuters

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