There has been a fair amount written in recent days following an article published in the Wall Street Journal that ‘Legal Fees Cross New Mark: $1,500 an Hour‘. Most of the published articles I’ve read talk to the outrage of commanding such a high hourly charge-out rate, but this article by Stephen Harper caught my attention.
In the article, citing data from ‘The 2016 Report on the State of the Legal Market‘ by Georgetown University Law Center and Thomson Reuters Peer Monitor, Harper states that:-
“In 2005, collections totaled 93 percent of standard rates, the report found. By the end of 2015, the realization rate was down to 83 percent.”
Although US-based, this sad statistic very much reflects on an issue I touched on in my post on fixed fees in the Australian market yesterday; namely that 25% of Australian law firm revenue is now derived from “discounted” hourly rates.
If we say then that roughly 1/4 of a law firm’s revenue comes from discounted hourly rates, and that the firm is being paid approximately 83c in the $1, [compounded] we have a very serious profitability problem.
On these numbers alone, any law firm looking at its profit margin should be rushing into fixed fees – while admittedly upskilling themselves (including tracking data) on how to do this better.
And part of this process should also include an understanding of, as well as tracking, what each individual lawyer’s Average Billing Rate (ABR) is.
In the many hundreds of tenders I have done and the numerous conversations I have had with lawyers over the years, I have never once come across either a request for what the particular lawyer’s ABR is, nor heard the lawyer freely admit this rate. I have, on the other hand, heard daily the hourly rates that particular lawyers charge as if this were the reason why they were hired (there being an assumption that the higher your charge-out rate, the better value you provide!).
And therein lies the problem, as Harper says:-
“How much a firm bills doesn’t matter; what it actually brings in the door does.”
Too right. So the next time you hear a lawyer talk up their hourly rate, you might want to ask them what their ABR is – because that’s going to be a far better indicator of the value their clients see them providing. And if you get an answer, you might then want to talk to them about the benefits of fixed fee pricing.