A&O bucks City trend with plan to hike fees
Allen & Overy (A&O) is going against City trends by planning to increase its London billing rates in a bid to cover escalating costs and maintain profit.
The discussions about increasing charge-out rates are taking place as major magic circle clients such as Barclays are seeking to cut their own costs and legal spends (The Lawyer, 26 January).
A&O global managing partner Wim Dejonghe said: “You sense what the market does and our actions will definitely be marketconformed.
We’re in contact with clients and we’ll take an intelligent decision.” The proposal is being considered by the firm’s management board and a final decision on the matter will be taken when the firm’s 2009-10 budget is drawn up in May.
Dejonghe insisted that the firm had not yet decided whether to increase rates, but he added that a decrease was unlikely. He declined to comment on the rationale behind the discussions.
It is understood that A&O is currently negotiating fee deals with clients, with strong relationship clients expected to be exempt from the potential rate increases.
In its 2007-08 annual report A&O outlined how the relationships with its 250 most active clients had become more valuable as time went on. The report stated that average work volumes increased around three-fold once the client has been in the top 250 for between four and five years.
“We therefore direct most of our investment in client relationships towards building our core, long-term client base,” said the report.
The firm’s smaller clients are likely to bear the brunt of any fee increase.
Consultant William Arthur of Kerma Partners said the strategy could bolster the firm’s relationships with its key clients.
“This could very possibly be part of a process where actually the end result will be, ‘we end up with fewer clients, but we end up much closer to those fewer clients’,” said Arthur.
He went on to say that, by upping rates, A&O was probably trying to focus on key clients with enhanced service levels, adding: “In the current environment that’s what firms absolutely should be doing.”
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Readers' comments (6)
Anonymous | 2-Feb-2009 1:47 pm
Policy reversal?
Whilst this may be a case of "bucking the trend" given the current economic circumstances, my experience (as a senior lawyer at another magic circle firm) is that the A&O policy in the past couple of years has been to undercook fee quotes significantly (certainly we have lost out on mandates because A&O were offering a price that we were unable to get anywhere near matching in light of our own internal strategy - often 30-50% lower) and to adopt a volume based approach to profitability (lots of deals, utilising lots of juniors at highly competitive rates).
The problem with that approach is that if the volume dries up so do the profits. Given that one cannot rely on volume of deals in the current market, I think this is a sensible reversal of that policy and I imagine we will once again see A&O quoting fees similar to ours. There is a careful balance to be struck in the current market if a firm wishes to remain profitable and that is a balance between securing as many of the few big mandates that are available and ensuring that fees are maximised on such mandates. On these bigger deals, the concept of "reassuringly expensive" can still work if you have the CV to warrant it.
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Anonymous | 2-Feb-2009 2:57 pm
but are the clients really going to pay?
a higher official hourly rate also allows you to offer a bigger percentage discount and still make the same amount of money...
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Anonymous | 3-Feb-2009 11:52 am
losing the plot
It is the same old story - law firm economics dictated by the hourly rate - what do we wish to earn, how many people do we have, how many hours should they be required to record (offering bonuses as incentive, so they record fully...) and on that basis where should we set our rates? No risk and, more significantly, no idea.
Old school thinking reins supreme from the comfort of the City. For firms selling commoditised services such as M&A, project work, litigation etc, enhanced utilisation and leverage is king but ultimately these services are being judged and bought on cost alone. Has the City considered the concepts of risk and value? Too challenging and daunting?
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Anonymous | 3-Feb-2009 5:34 pm
Re: losing the plot
I think you are out of touch with the pricing structures adopted by most of the big law firms. You'll find that in many practice areas, the concept of hourly rates (whilst still important as an internal measure of time/value) is already outdated. For instance, most firms use risk/reward structures to price project finance deals whereby legal fees are partially or fully contingent during bid phases and success fees payable on completion. It might be correct to say that law firm budgeting is dictated by hourly rates but the economic success or failure of the big firms is nowadays dictated more by innovation in billing and pricing models.
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Sorry I wasted my time reading The Lawyer | 5-Feb-2009 5:03 pm
Fees B*llocks
This is a typical bollocks Lawyer non-story. Do you seriously imagine that any global law firm is planning to reduce its fees (voluntarily)? Every firm increases their charge-out rates year-on year (or at least not less frequently than every 18 months). That does not mean they're "increasing their fees", it just means they're increasing the unit cost at which hey charge out their people (probably at or close to the rate of inflation).
Bulk discounts, volume deals and simple market competitive pressures meant that notwithstanding the rates increase, their fees may (in some cases, will) go down in any event. The ultimate Storm in a tea-cup. No doubt The Lawyer's electronic diary had a note to kick A&O cos you haven't done so for a while - is this the best you could do? Pathetic.
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Anonymous | 6-Feb-2009 3:11 pm
re losing the plot
granted, some (a few) project finance groups do not take an innovative approach; but it remains the minority and, even so, culturally the behaviour of partners remains tied to hourly rates and their own short term take home pay rather than building value for the longer term.
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