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The three-way vector that determines billing rate increases at law firms

As this year draws to a close, law firms mull how much to raise their billing rates – and law departments grapple with whether to accept the increases. One force driving up rates within law firms is likely to be internal calculations about firm profitability – what partners want to earn. Another vector for a firm’s rate hikes are rate changes announced by competitor firms (See my post of May 1, 2006 on “signaling” functions.).

The third vector is the one that law departments can most affect: with what tenacity will the department dissect and reject requests for rate increases. Law departments are not responsible for law firm profitability nor should they roll over before the “going rate” at peer firms. Law departments ought to thumbs up or down rate increases based on changes in productivity or experience of the law firm’s lawyers, not extraneous forces or the passage of time (See my posts of Nov. 21, 2005 on need for law firms to show productivity; and March 12, 2006 on billing rate differentials by lawyer within the same class year.).