Legal Billing Rates: The Next Wave

There is a shakeout coming for law firms. It stems from three factors:

1. Corporate clients facing global competition;
2. GCs focusing on the ROI of legal services due to (1); and
3. In-house counsel having more data on (2) and tools to manage costs and results.

Yesterday, I described three price points I see emerging for corporate legal services: $499, $297 and $99.

Here they are graphically (like the Food Pyramid, but without the calories):

And also a key to decode some of the abbreviations:

– NF = National Law Firms
– RF = Regional Law Firms
– CB = Corporate Boutique Law Firms
– VL= Virtual Lawyers (solo NF/RF/ex-GC and IHC diaspora)
– CL = Contract Lawyers
– LPO = Legal Process Outsourcers

First, let’s slice away the top and bottom. The peak of the pyramid are the leading law firms, US and globally. I have called the top 20% of the US-based firms in this group “America’s Top 40″ (they were #5 in my 10 Trends for 2011). They will be able to charge premium fees for premium work. Think of large-ticket litigation, major deals, international work. The latter item benefits the larger international law firms.

On the bottom end, we see global LPOs. They could make good margins on a lot of work charging $49/hour all day long.

And a quick note about AFAs and value-based billing. Yes, it’s all good. But no, it confuses trends and ignores one major reality. All law firms in the top two levels of the pyramid operate on the cost-plus model. They have high costs and they charge even higher rates. Good for them if they can transition to a different model. Only the top firms with the best work will, and they will likely have to shed many partners and some clients who don’t fit. Because of the traction of the billable hour and the easy way to compare Lawyer A with Lawyer B for a given project, you simply have to take a cold, hard look at hourly rates.

The quick takeaway from this diagram:

Each lower level cannibalizes the one above it. Law firms try to raises prices like they have always done, but find that for much of their work, there are very good firms one layer down with highly experienced lawyers that can (and will) do the same work for $100 or $200 less per hour. Per Hour!

So let’s look at the middle. What I see coming is that corporate legal clients will simply not pay more than $500/hour for 80-90% of their legal work. Some AmLaw 200 stalwarts and other national-type firms will find that they cannot consistently hold the line over $500, and that line will start to head toward $300. How fast? Who knows!

This will particularly be the case for some of the leading regional law firms. Only one or two in the major markets will be able to hold work at the high end of the $300-499/hour range. The first signs of a problem: losing every RFP you enter, or trying a clever AFA deal and losing your shirt. The more troubling sign will be not getting new work from existing clients. A dire prospect is having work pulled mid-stream.

The reason for the trend downward? It’s the next level down. There will be a few regional firms that try to compete on price. They may do so for a while, but there will be corporate boutiques and virtual lawyers who can do work for $299/hour (or less) and make a great living doing it. Who are they? Some people know. How do you find them? Not clear right now. Some will just be their lawyers from larger firms who figure out if they trade 50-60% overheads for 10-20% overheads, you have some real flexibility in what you charge. Just navigate the ethical minefield of leaving your firm, and clients and Google you in a week.

The trend downward for pyramid levels two and three also is under pressure from levels four and five. I will take a breather here and finish the Next Wave tomorrow.