Practice Management

Reflections on the 2007 ALM Billing Rates & Practices Survey

By Brian J. Ritchey

"Is the billable hour dead, as many like to proclaim (whether wistfully or presciently?)"  So starts the Executive Summary for the 2007 ALM Billing Rates & Practices Survey.   The relentless assault against the hapless billable hour continues.   Here is yet another blog post arguing against hourly billing.  Yet if you look at billing rates, they continue to increase.  The 2007 ALM Billing Rates & Practices confirms this, but also drills down into respondent's use of alternative fee arrangements.

According to the ALM survey, the average billing rate nationally is $240.  This is in line with the 2007 Law Firm Economic Survey from LexisNexis, where nationally, attorney rates were at $249 (broken down: equity partner rates were at $263 and non-equity partners billed at $235 on average).  In the ALM survey, "[a]ll but a small percentage were the leader, managing partner, shareholder or owner of their firm", so I didn't include the firm effective rate that includes associate and paralegal rates in calculating the $249 (for those of you thumbing through the LexisNexis survey).  Only 8% of the ALM respondents were associates, so it may very well be that average rates were lowered to $240 in the ALM survey by the associates (who in the LexisNexis survey billed at $175 per hour).

The survey is heavily weighted to small firms, with about a third of respondents being solo practioners and 58% from "small firms" defined as between 2 and 39 attorneys.  Why ALM decided to include mid-sized firms (Juris defines mid-size to include firms with attorneys with over 10 attorneys) in the small firm category, I don't know, but it might be due to a small amount of respondents in that 11-39 range.

As further comparison, the average national billing rate for equity and non-equity partners in the 2007 Altman Weil survey was $315.  The National Law Journal Billing Survey partner average was $427.  Both the Altman Weil and NLJ surveys target larger firms.

One of the observations of the survey was that size of the law firm matters and the above figures certainly indicate this.  However, in the LexisNexis survey, the observation was different:  it isn't the size that matters, but "that law firms that outperform with regard to per-partner income do so because they excel in performance on the key law firm profit drivers."  The ALM Billing survey doesn't profile the firms for per-partner income and thus only looks at part of the picture.

In the chart above, each quartile was ranked for the following key profit drivers:  productivity (billable hours), leverage, billing realization, effective rate, and operating margin.  The highest performing firms ranked the lowest in all of the indicators. 

Size, on the other hand, didn't make as much of a difference.  For example, the per partner income of the top performing firms with 25 or more attorneys in the LexisNexis survey was $609,548.  Income per partner for firms with 11 to 24 in the top quartile was $548,557 and with 10 or fewer attorneys, $512,896.    However, the difference between quartile 1 and 2 across all sizes is substantial:  $325,986, $322,876, and $294,871 respectively.  While there is less than $100,000 that separates the smallest surveyed firms from the largest ones, there is nearly $300,000 difference between quartile 1 and 2 across firms of all sizes.

Which brings us back to the ALM Billing & Practices Survey.  88% of respondents to the 2007 ALM Billing Rates & Practices Survey reported that they offer "alternatives" to the billable hour and it made up an average of 37%  of their revenues.  That is a pretty substantial number.  Given that the survey is made up of smaller firms, you may be tempted to conclude that smaller firms are moving away from the billable hour in order to compete better with larger firms. 

That may well be the case, but it is just as likely that some small firms that continue to not operate like a business could be getting caught up in a trend that in the long run will drop their profits even lower while the solo practioner next door is making half a million.  If you don't measure performance, you won't know.

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Full post as published by More Partner Income on January 11, 2008 (boomark / email).