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Analysis of a new report on $19.6 billion of approved legal department invoices reveals that to maximize firm profits, partners should focus on developing and retaining senior associates and providing clients with services in multiple practice areas. The reasons: First, the average year-over-year hourly rate increase in 2015 for associates was 7.3 percent — more than double the 3.6 percent rate increase for partners. Second, firms that provide clients legal services in multiple practice areas charge higher than average rates for most, if not all, of their services.
The message to law firm partners is to stop fighting the nature of your millennials and nurture them. And, it’s time to organize effective collaboration-based industry teams, or what some simply call cross-selling.
For the majority of U.S. firms, those with fewer than 50 lawyers, the billing rate increases revealed by the report were not as great: a 2 percent increase for partners and 2.8 percent for their associates.
The overall percentages are distorted because the AmLaw100 controls about 25 percent of domestic legal billings. But no matter firm size, associates had greater rate increases than partners in 2015 compared to 2014. And more tenured associates had higher rate increases on a percentage basis than their younger colleagues.
The data comes from “The 2016 Real Rate Report: Lawyer Rates, Trends and Analysis” released this week by Wolters Kluwer Governance, Risk & Compliance and CEB. It confirms that after a notable slowdown in 2013, which suggested increases might be stabilizing, the legal market’s overall year-on-year rate increase again rose in 2015, to 5.4 percent. That’s the highest annual jump since 2008.
The 283-page reports allows lawyers to compare their rates with local high, low and median rates in their area overall, by practice area and size of firm.
“Regardless of the market location or type of work performed, larger firms consistently charged higher rates,” the report says, adding as the likely explanation that larger law firms “have been more successful in promoting an integrated ‘one-stop-shop’ value proposition.”
Since larger firms charge higher rates, that means one-stop-shopping apparently isn’t about the client seeking or getting the lowest hourly rate.
Instead, it’s about the value of lawyers collaborating across practice areas and coming up with valuable, often unexpected, innovative solutions. Unfortunately, cross-selling and the resulting collaboration is something many law firm partners reflexively avoid.
“By bringing together professionals with different bases of expertise, a collaborative approach to serving clients has the potential to develop more innovative outcomes,” wrote a Harvard Business School professor in “Managing Talent for Success: Talent Development in Law Firms” (International Bar Association, 2013), adding that “research shows that when people face high-performance pressure — the sort of high-stakes client situation where it is most vital to access and use the firm’s best experts — collaboration becomes harder because professionals tend to become risk averse and may attempt to exert control by limiting access to their client. Ironically, collaboration suffers just when it should be most beneficial.”
That research also reveals that multi-practice client service brings in significantly more revenue for each practice area served as the number of services used by a client increases.
There is an added hidden benefit to collaboration — one that circles back to hourly rates and the “Real Rate Report” — created by cross-selling through an industry selling team:
“The more that a professional works in teams, the more he comes to identify with the firm. Stronger organizational identification means that professionals are more likely not only to stay at their firm but also to engage in pro-social, firm-building activities such as mentoring junior lawyers. These activities, in turn, enhance the desirable retention of high-performing associates.”
And it’s those high-performing senior associates who had the greatest hourly billing rate increases, the report shows.
The report analyzes $19.6 billion of approved invoices from 2010 to 2015 from more than 5,900 domestic law firms. The billings involved 85,900 associates, 60,700 partners and 66,000 paralegals who worked for 97 companies for nearly 57 million hours entering 58 million line items. Available at no charge to participating law firms, the report can be purchased here.
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