Record Growth in Attorney Rates in 2023: More of the Same in 2024?
Just in time for fourth quarter – when many law firms are exploring rate setting with clients for the coming year – is a new Thomson Reuters report, Law firm rates in 2023: What’s working, what isn’t, and how to move forward in 2024. It examines the current and historical performance of law firm rates and provides insight on factors that affect law firm revenue and profitability.
With 2023 seeing record-setting growth in attorney rates, the report considers what’s in store for 2024. “Lawyerly rate hikes could continue,” Joe Patrice noted in coverage of the report on Above the Law, and the increases may not be due to inflation. As firm leaders make decisions about what to charge for legal work performed, Legal Current shares key takeaways from the report.
- Historical context is helpful for understanding the significance of the current growth in law firms’ worked rates. Following the global financial crisis of 2008-09, firms’ worked rate growth dropped. But rate growth soon stabilized – until the start of 2020. Of course, the pandemic marked a turning point, with the second quarter of 2020 seeing an average law firm post worked rate growth in excess of 5% for the first time since the global financial crisis. Then rate growth cooled again in 2021 but accelerated dramatically into 2022 on through today.
- It’s been a remarkable year for rate growth. The pace of worked rate growth for large law firms this year has far exceeded the growth of 2022. Of note, Am Law 100 firms set a new high-water mark for rate growth in the first half of 2023, with worked rates up by 7.3%.
- Multiple factors affect rates, and in turn, firm profitability. Among the factors shaping rates are inflation, firm productivity, expenses, and demand mobility – the shifting of work from one law firm to another seeking lower costs, greater value, or both. Firms will be considering all of these factors as they engage in year-end rate-setting exercises.
- While rate growth has been a driver of revenue growth for many firms, it doesn’t tell the whole story. Billing realization and collected realization are two additional metrics that are key to getting a complete picture of a firm’s profitability; looking at collected realization against worked rates rounds out a law firm’s revenue picture. And with all large law firm segments experiencing declines in realization for several consecutive quarters, this insight into profit margins clouds an otherwise strong picture for firm profits.
For more on the performance of law firm rates and how firms are engaging in rate setting for 2024, download the report.