Altman Weil recently released the results of its sixth annual Law Firms in Trasition survey. Pricing is, once again, front-and-center. Whereas law firm pricing played a prominent role in last year’s survey, this year pricing is the major theme of the 2014 report:

Large majorities of law firm leaders responding to the survey agree that greater price competition, practice efficiency, commoditization of legal work, competition from nontraditional service providers, and non-hourly billing are all permanent changes in the legal landscape. For the most part, these are changes that have been imposed upon them from without – from more demanding clients and more competitive newcomers who are challenging the rules of legal service delivery.

The survey’s overview highlighted several specific law firm pricing trends:

  • 73% of firms are developing data on the cost of services sold
  • 49% of firms are training their lawyers to talk with clients about pricing
  • 45% of firms are identifying their clients’ unique pricing preferences
  • 30% of firms are changing their strategic approach to pricing
  • Overall billing rates increased by 4%; average hourly rate discounts fell between 21-30%

The survey challenged firms to marry pricing and strategy in order to have long-term success:

The large and critically important topic of pricing must be part of every firm’s strategy. The overarching goal is to align pricing methods, communications and metrics with clients’ value proposition. Without doing so, too many firms will fall into the ‘discounting trap’ which can destroy margin and profitability over the long-term. It’s tricky because clients are not all alike in what they want. Law firms have to assess pricing/value propositions for each client, their appetite for alternatives to hourly billing and their need for predictability, then customize their responses accordingly.

Last year’s 2013 survey included one section on Pricing, divided into three categories; this year each is a stand-alone section, emphasizing the significance Price is playing in the legal industry. Each section — Pricing Strategies, Alternative Fee Arrangements, Billing Rates — is summarized below:

Pricing Strategies

  • For the third year in a row, more than 90% of firms believe “more price competition” is a permanent trend.
  • Only 29.5% of firms have “significantly changed its strategic approach to pricing strategy” (unchanged from last year).
  • 71% of firms report clients are the primary driver of changes to pricing strategy
  • The majority of large firms (250+ attys) are developing data on costs, training attorneys to talk about price, and identifying clients’ unique pricing preferences.
  • The majority of other firms (under 250 attys) are only developing data on costs.
  • This year’s survey did not report the number of firms that require attorneys to secure some form of approval before discounting hourly rates.

Alternative Fees

  • 82% of firms report “more non-hourly billing” will be permanent trend (highest recorded score).
  • 92% of firms report using “non-hourly based billing” (down from 96%).
  • 100% of firms report at least 1% of total fees from “non-hourly based billing.”
  • 41% of firms report more than 10% of total fees from “non-hourly based billing.”
  • 49% of firms increased the amount of alternative fee revenue it collected (up from 46%).
  • 72% of firms use non-hourly billing rates only when requested by clients (“reactive”)(up from 69%).
  • The number of firms that are proactive in the use of AFAs has declined by almost one-third since 2010 (28% v. 41%)!
  • How profitable are alternative deals? 16% more profitable, 40% as profitable, 30% less profitable, 14% don’t know.
  • “More profitable” AFAs continued three-year upward trend: ’11 = 12%, ’12 = 14%, ’13 = 16%; ’14 = 32% (doubled!).

Billing Rates

  • 96% of firms raised their standard hourly billing rates in 2014 by at least 2% (a significant jump from ’13).
  • 30% of firms raised their hourly rates by 5% (mostly in associate rates) (a significant drop from ’13).
  • “Smaller annual billing rate increases” as a permanent trend stayed the same at 68% (after a 10% jump in ’13).
  • “Effective (realized) rates” continued three-year fall: ’11 = 72%, ’12 = 69%, ’13 = 67%; ’14 = 65%.
  • Firms under 250 lawyers report, as a median, 21-30% of firm revenue comes from discounted rates (unchanged).
  • Firms above 250 lawyers report a higher median: 31-40% of firm revenue from discounted rates (unchanged).

The survey was conducted in March/April 2014. Law firm leaders (i.e., managing partners and chairs) from 803 U.S. law firms (with more than 50 attorneys) participated in the study. Overall, 304 firms (38%) participated, including 42% of the NLJ 350.

Full report is available at: