Crunch-busting magic circle ups fees by half

The findings by costs lawyer Jim ­Diamond reveal that the bottom end of the magic circle’s ­average headline rates have increased by 53 per cent since 2005, from £425 to £650 this year, while the top end has grown by 38 per cent, from £525 to £725.

Spiralling fees also appear to have trickled down to magic circle associates, who now charge more than magic circle partners did in 2005. In the past five years lower-end rates charged by five year-PQE associates have seen an 80 per cent hike, while the top-end ­tariff has risen by 83 per cent, from £300 to £550.

During the same period average magic circle revenue has grown by 44 per cent, from £791m to £1.14bn, while average revenue per lawyer has risen by 49 per cent, from £348,000 to £519,000. Average revenue per partner figures saw a 48 per cent increase to £2.4m.

Diamond, whose research is conducted during the course of his work as a costs lawyer and legal costs ­consultant, says he was “gobsmacked” by the ­findings. He had predicted a steady decline in hourly rates as a result of the ­credit crunch.

“What’s surprising is that clients have allowed firms to do it,” he says. “Every in-house lawyer thinks they’re an expert on cost management, but it looks like a lot are just paying lip service. Only a few are ­actually backing up what they say and managing to drive costs down.”

Brand value

Diamond believes magic ­circle fees have bounced back because of their ability to leverage their brands when it comes to high-stakes ­matters such as restructuring, tax and regulatory work, where clients are willing to pay ­premium prices.

While fees at City firms and national outfits such as DLA Piper, Eversheds or Hammonds have remained static over the past year, like the magic circle they have seen a big increase since 2005.

Although the lower end of the headline rates charged by partners at City firms have risen by only 7 per cent over the past five years, the top end has gone up by 35 per cent to £640. Associates have fared even better. The lower end of the hourly rate has risen by 33 per cent and the top end by 138 per cent, from £225 to £535.

The trend among ­national firms is even more dramatic. In 2005 it was possible to instruct a national firm ­partner for as little as £190. That figure has since risen to £325. Diamond’s survey found that some are ­charging as much as £450.

Tony Williams of legal consultancy Jomati believes this explains why so many national firms have struggled in the past two years.

“I thought they’d do well in the downturn, but what I think happened is that, in certain areas, the markets saw them as being quite expensive in comparison with local firms,” Williams says.

The rise of fixed rates and alternative fee arrangements has led some to question the relevance of measuring firms’ headline rates, given the disparity with the hourly fees they actually receive when discounts are taken into account.

Firms continue to offer sizeable discounts of up to 20 per cent, with the received rate on average hovering between 70 and 85 per cent of the headline rate.

“People might be trying to nudge the headline rate up a bit,” adds Williams, “but there’s a discrepancy between that and what they’ll actually receive - a headline rate is one thing, the received rate is another.”

Macfarlanes managing partner Simon Martin agrees. “These figures don’t ­surprise me, but the key thing is that this is an increasingly irrelevant measurement,” he argues. “We either have fixed rates on panels or fixed fee arrangements with other clients. The old days of the billable hour are gone.

“Headline figures are ­relevant to firms for ­internal budget purposes, and it also helps on general advisory work when it’s not easy to give a fixed-fee quote. But for a big piece of corporate or finance work clients will almost certainly want a fixed price or a binding estimate.”

One magic circle partner argues that headline rates remain a relevant measure for clients and that the demise of the billable hour has been predicted for years.

“We’ve been reading about the death of the hourly rate for a long time - it must have been scrawled on the walls of a cave by Neolithic man,” he says. “But the headline rate’s important because it’s a starting point for negotiations with clients.”

While many firms claim to have frozen their headline rates in the past two years, they also expect to begin pushing them up in the next year. This is being driven by a combination of rising costs, with many firms lifting pay freezes, coupled with static fees and the demands of providing ’value-added’ perks such as free secondees.

As one senior magic circle partner puts it: “The ­problem is that clients are still demanding a lot of value-adds, but hourly rates remain the same. The banks have pushed particularly hard for that, but something will have to give. Rates will certainly have to go up with inflation and firms will have to start holding their ground.”

Another senior magic ­circle figure agrees that there has been “a certain amount of hardening in relation to rates - we’re looking to get closer to the headline ­figure”.

In-house resistance

Those efforts are likely to be met with resistance from in-house counsel.

Orijit Das, general ­counsel at New York Stock Exchange-listed outsourcing company Genpact, claims that only a few firms have been bold enough to increase their rates because there has not been enough work for them.

“They’re not in a position to say, ’If you don’t like it you can go elsewhere’,” adds Das. “What they’re actually saying is, ’Throw me some work’. After the blood-­letting seen at some firms, they couldn’t really turn around and say, ’By the way, our rates have gone up’.”

Another general counsel at a FTSE-listed company agrees. “If a firm starts charging me £750 an hour then there’s no way I’d pay that, even if it’s a long-term relationship,” he says. “I’d have no problems going elsewhere.”

Big clin neg fees in the firing line
By Katy Dowell

The most staggering figure within Jim Diamond’s 2010 hourly rates survey was ­highlighted earlier this year by Lord Justice Jackson’s review of civil ­litigation costs.

This revealed that some London-based clinical ­negligence lawyers earned as much as £900 an hour for advice.

Compare that with the hourly rate paid to junior doctors, who work up to 60 hours a week for less than £20 an hour.

Claimant clinical ­negligence lawyers argue that the figure includes a success fee, which is only included when cases are won under the conditional fee arrangement regime.

Under proposals put forward by Jackson LJ, the recoverability of the success fee would be abolished and the hourly rate cut dramatically. But claimant lawyers warn this could have the unintended effect of blocking access to justice because lawyers would be more choosy about the cases they take on.

“We just wouldn’t be able to afford it,” one litigator claims. “The success fee pays for cases we lose.”

But Jackson LJ has rejected such a notion.

“No evidence has been produced during the costs review to demonstrate that success fees at the levels currently charged are ­necessary to cover the cost of ’lost’ cases,” he has stated.
The review is currently being considered by the Government and changes are likely to be made to the system Lord Woolf introduced in 1999 - but it will not happen without a fight.

The days of the £900 hourly fee look to be numbered.