Several articles and surveys that have come out recently suggest a looming donnybrook in 2023 between law firms and business clients. The law firms want to aggressively raise rates but their business clients claim to be outraged by such efforts. These clients also say they plan to resist such efforts aggressively.
Pardon me, but I have heard this before. Law firms annually raise rates—albeit not as much as they plan in 2023. And many clients claim outrage before swallowing hard and accepting the increases. But there is some evidence 2023 may be different.
More importantly, though, any blanket conclusions about what clients will or will not do are misplaced. As I have previously discussed, the legal marketplace is so stratified and segmented depending on who and what is involved that across the board predictions are hard. So some firms will get away with rate increases, and some will not get increases but may actually be facing rate decreases.
The easiest way to try to maintain record profits is just to raise rates. And since many clients have in the past routinely accepted increases, it’s tempting.
First, the articles and surveys. Andrew Maloney recently reported on a Wells Fargo Survey. This Survey concluded that almost 98 % of the firms surveyed plan on increasing rates in 2023 by some 7-8%. As I have discussed, the efforts to raise rates are not surprising. Law firms are facing siginifanct increased costs due to inflation and perhaps reduced revenues in 2023. The easiest way to try to maintain record profits is just to raise rates. And since many clients have in the past routinely accepted increases (or haven’t even noticed them), it’s tempting.
A Thomson Reuters Study confirms the financial pressure law firms will be under. The Study suggests that demand for legal services is declining. And overhead is growing.
But according to an article by Trudy Knockless in law.com, this time, clients may revolt. Citing several sources, Knockless concludes that legal departments are being so financially squeezed they just can’t accept increases.
Legal departments are particularly upset that law firms are seeking rate increases
Legal departments further claim to be particularly upset that law firms are even seeking rate increases. They assume the firms are fully aware of the pressures in-house legal departments are facing to cut their budgets anywhere from 5-20%. Knockless reports that according to several sources, 2023 may be the year that the traditional blind acceptance of rate increases by clients ends.
But you can’t make blanket conclusions about what clients will or will not do since the legal market is so segmented, even for business-related work. There are some matters—we typically referred to them as “bet the company cases”—where the rate doesn’t matter. What matters is the expertise of the lawyer and law firm.
Other matters may be less significant than bet the company but are still important to the company. These cases, too, may be rate resistant. In both categories, the difference in the result between an A job and a C job is so significant that rates and cost don’t matter all that much.
So in-house justifiably believes for both categories that paying the higher rates is good strategy. For both classes of matters, law firms will likely get away with substantial rate increases in 2023, just like always.
The real question is whether the lawyer can convince in-house legal (and/or in-house legal believes) that the matter falls into the two categories I have mentioned. Since lawyers are good at persuasion and risk adverse in general, it’s often easy to convince and believe that the matter is either bet the company or requires A work. So higher rates and rate increases are a necessary evil.
Then there are other matters where a C job is good enough
Then there are other matters where a C job is good enough. For these cases, paying for a lawyer with less experience and lower rates makes sense. The result may not be as good as it would be with a higher priced lawyer, but by paying lower rates, the overall cost of the matter is reduced.
We see this dichotomy most clearly with insurance companies. One of the critical components of the insurance business is litigation. For some types of cases—the defense of claims against insureds—a C job is sufficient. On an overall basis, the overall cost to the carrier for these claims will be less by paying lower rates and incurring higher substantive costs. For other types of work—insurance coverage matters, for example—getting a better result and paying higher rates is justified.
What does this mean for 2023? Some law firms and lawyers will be able to raise rates without much pushback. Others won’t. But you can’t make a blanket conclusion across the board.
What’s a law firm and lawyer to do?
And what’s a law firm and lawyer to do? Try to convince your client that the matter falls into the higher categories of work. If it doesn’t, get prepared to either not raise rates or even be forced to decrease them. Do more with automation and reduce costs by doing so.
Bottom line: If you want to raise rates, first determine whether the matters you are handling fall into the rate resistant categories.
What’s an in-house counsel to do?
What’s an in-house counsel to do? Look hard at any effort to claim that a matter is unique and that paying the increased rate is justified. You are charged with the overall result and cost of a matter. The overall cost includes what you may pay substantively for a claim, for example, and the costs of concluding the matter.
If the substantive result is significant to you and your company, then consider paying the higher rates. Like your business, law firms are under increased financial pressure too.
But whatever you do as an inside or outside lawyer, don’t jump to conclusions across the board about whether a rate increase is—or isn’t justified.