The billable hour is effectively dead
January 23, 201723 January 2017
The 2017 edition of the annual Georgetown/Thomson Reuters Report on the State of the Legal Market is out. Almost a decade following the global financial crisis of 2007-2008, the report describes a lost decade of sorts marked by stagnating demand for law firm services, decline in productivity for many lawyers – measured as a reduction of 144 billable hours per year per lawyer, and client pushback against rate increases:
In considering realization rates, it must be noted that comparing collection realization to standard rates undoubtedly produces a somewhat skewed result, since in most firms standard rates have long since ceased to have any real significance for most clients. Like “rack rates” in hotels, standard rates in law firms have effectively become nominal rates that are arbitrarily set and are almost never paid by any significant client. Accordingly, it is perhaps more meaningful to look at the decline in realization over the past decade as measured against worked rates, or the rates actually negotiated with clients.
The report points to evidence that firms have managed to keep their expenses under control but warns of declining realization rates and calls into question the ability of firms to rely much longer on rate increases no matter how modest they may be:
Since 2007, collection realization as measured against standard rates, has declined 11 percent for Am Law 100 firms, 7.6 percent for Am Law Second 100 firms, and 7.3 percent for midsize firms. During 2016, the average realization rate for all firms has been consistently below 83 percent, the lowest level ever recorded.
All of this is contributing to stagnant or declining profit margins, making it increasingly difficult to ignore the emergence of a “buyer’s market” for legal services, the effective demise of the traditional billable hour, the proliferation of non-traditional competitors, cracks appearing in the traditional law firm franchise, and a move “down market” by a growing number of clients.
According to the report, there is an opportunity for law firms who recognize the new reality of this disaggregation of work among different types of legal service providers. Firms might explore the idea of taking on a new chain management role by coordinating and supervising those legal service providers, all the while retaining their core services.
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