‘The next revolution in the market will be clients waking up to the fact that chargeout rates go up so much each year.’
This is the prediction of one well-known partner at a leading US firm in London in the wake of another stellar performance by the Global 100, in which total revenue climbed by 6% and average PEP increased by almost double this
figure, despite decidedly less than buoyant deal markets.
There may well be no bad time to be a lawyer but, as multiple partners acknowledge, this growth has been driven, to a relatively significant degree, by some fairly hefty increases in chargeout rates.
And, according to recent research, these increases really have been hefty.
According to PwC, the 10 largest UK law firms have ramped up hourly rates by almost 40% over the last five years, driven by inflation and the growing influence of US firms in London bumping up salaries.
Meanwhile, on the other side of the Atlantic, research from Brightflag found that billed rates for the AmLaw 100 firms increased by 10% in 2024 compared to 2023 – the most significant rate increase over the last three years and more than double the increase in 2023. And, as in the UK, it was the biggest firms pushing rates up most.
Of course, it is also true that this revenue growth reflects the fact many firms have been very busy billing more hours than they did the year before. And that this PEP growth reflects a general focus on boosting profitability and increasing efficiency.
But there’s also no denying the impact fee inflation has had on results.
And, as US firms hurtle towards the next annual associate salary hikes that are likely to push NQ rates well above the current $225k (£170k) level already in place at the most elite institutions, these hourly rates will presumably have to continue to rise further.
As we look at in our feature ‘Laws of attraction’, competition for talent at the very top end of the commercial legal market has never been fiercer,
and that means that only those firms willing to dig into their deep pockets will secure the best associates.
But where do clients stand on all of this? The increased scrutiny on both associate and partner earnings, combined with growing acknowledgement of the impact of inflation on hourly rates mean even those living in a cave will have noticed what’s been going on.
Are they really just going to keep blindly paying out on the basis that it’s the only way for law firms to compete?
It seems hard to imagine that sophisticated corporates focusing on their own bottom line will keep accepting such increases forever.
Now, clearly the genie is out of the bottle on salaries – what’s gone up can’t come down – but there is the question of whether it has to keep going up equally for everyone.
In the same way that many firms are rethinking partner pay in order to give more to a handful of absolute top performers (and less to some at the opposite end of the scale), is it time for associate salaries to go the same way? With different pay for different practices or performance levels?
Either way, firms need to be careful. Even if clients aren’t yet pushing back on rate hikes themselves, it seems likely they’re going to want more bang for their additional buck. The question for law firms at that point will be how can they protect the people delivering it.
