For those firms that have not yet notified their clients of their intentions to increase rates after the first of the year, it’s already too late.
Not every company budgets on a calendar year annual basis, but for those that do, that process is nearly complete by mid-October. In-house counsel typically draft budgets in September, tweak them in October and are now deep in the process of finalizing for 2015. This cycle is complete well before the late January rate increase letter sent by most firms, and sending letters at that time only frustrates and angers many clients.
One of the all-time great comments from a law firm managing partner is: “Law firms are the only businesses that expect to make money every year regardless of what happens to their clients.”
Underneath that comment is a tacit acknowledgment that most law firms expect to accomplish financial success by simply declaring their time is more valuable because there has been a change in the calendar year. Of course, some firms strategically engage their clients in conversations that result in greater efficiency, which can have the simultaneous effect of decreasing fees to the client while also increasing the profitability of the firm.
In the absence of those strategic conversations, the firm is left with only a handful of tools to increase revenue (and possibly increase profits). And while many firms are talking about project management, fee arrangements and efficiency, most firms still resort to the age-old strategy of the annual rate increase.
Of course, clients have a varying degree of tolerance for the annual rate increase. For the rarefied exceptional lawyer whose demand is extremely high, the market will pay for that increase. But basic economics dictate that the marginal value of every lawyer at a firm is not equally higher or lower year over year. Keep that in mind before you make plans to send out rate increase letters.