Law Firms And Higher Hourly Rates: Where Is The Value Add?

An article in today’s American Lawyer outlines a tug of war between law firms and legal departments over higher hourly rates in 2010.  While law firms want to increase their hourly rates, corporate legal departments are pushing back. They want discounts up to 15% from 2009 rates, which were discounted from 2008 rates by about 10%.

What is the strategy behind raising rates? Where is the value add?

Do Higher Hourly Rates Help Preserve The Billable Hour?

Much has been said recently about the rise of alternatives to the billable hour. For example, Orrick recently agreed to provide all of Levi Strauss’ legal services worldwide for a flat annual fee. Much has been said about the demise of the billable hour. In an recent American Lawyer/Association of Corporate Counsel survey of general counsel, 39% said they spent more on alternative billing arrangements in 2009 than in 2008.

For years, a corporate law firm in Silicon Valley has done business transactions for flat fees. Its managing partner does not like billing that way. It is difficult to know at the outset of a deal how complex it will be, what issues may arise, how the negotiations will go, how much time it will take. Despite that, the firm bills that way because clients like it. They like the predictability and the ability to budget. They feel the service does not suffer under a flat fee arrangement.

Then why do the largest firms want to increase their hourly rates in 2010? They may be attempting to differentiate themselves through their higher rates. Economics Nobel Laureate Michael Spence first argued that price is a signal of quality when quality is difficult to determine. Following this line of reasoning, holding the line on higher rates, even at the risk of losing some clients, is a strategy for positioning the firm for the most complex, sophisticated legal work. Whether this is the strategy of law firm management is unclear. Regardless, differentiation through the price signal is the effect.

Will Firms That Increase Their Hourly Rates Provide Greater Value?

From a client perspective, the best way to justify higher rates is to provide added value. How will law firms do this? Fancier offices? Lower leverage through fewer associates?

Other than claiming to provide better service, law firm management has not been able to deliver a clean value message yet. “Better service” is vague and must be elaborated to translate into tangible value for clients.

Here’s a suggestion for law firm management. Better understand the business priorities of clients. As an initial step, that means understanding the economics of their business, their strategies, and their management practices.

Conclusion

Lawyers need to do a better job of building their case for higher rates — or even maintaining current rates.

As I have previously argued here and here, one strategy for adding value is to provide legally informed strategy. I will discuss legally informed strategy in forthcoming posts.

How else can lawyers add value to clients? I would love to hear your thoughts.