Magic circle defies downturn as top billers bump up hourly rates

Hourly partner rates at the UK’s largest firms have hit £750 on average this year despite the economic crisis, research carried out for The Lawyer has found.

The Hourly Rates Survey 2008, carried out by Legal Budgets, ;shows ;that although the fees boom of recent years came to an end for most of the legal ­market, average rates at the magic circle continue to rise.

Partners in the top four now charge an average of £600-£750, a headline increase of 6 per cent from 2007’s rate of £625-£700.

Some ;star ;partners ­command even higher sums. It is understood that partners working on high-profile insolvencies can charge up to £900 an hour.
In contrast, the research shows that other City, national and US firms all saw rates remain static at last year’s level.

Top-end rates at non-magic circle City firms remain at £495 compared with £550 at US and £375 at regional firms. None of the figures in the survey include discounts, which most firms are willing to negotiate on a client-by-client basis.

The report also found that law firms are offering significant discounts for bills paid upfront amid growing fears about the economic climate.

Legal ;Budgets’ ;Jim ­Diamond says: “People are ­getting discounted rates on the basis that they pay and pay promptly. Cash is king.”

CMS Cameron McKenna finance director Krishna Vishnubhotla confirms that the practice had become increasingly common since the collapse of Lehman Brothers.

“The longer you leave debt, the less chance your debtor will exist. It is fear. The one way you can beat that is by collecting debt from your clients pretty smartly,” he adds.

A senior partner at a top 10 firm says the effects of the economic slump are being felt across the market, adding: “There was a trend of rates going up over the last few years. That has slowed down.”

Between 2003 and 2007, hourly rates rocketed for UK firms. Magic circle partners billed between £375 and £450 in 2003 compared with £625-£700 in 2007.

At the same time, national firms also saw partner rates soar from £185-£250 to £300-£375, a rise of almost 50 per cent. Growth for City firms was more sedate, with fees rising from £325-£375 to £375-£495.

Diamond says that, although tariff rates have not yet begun to fall, law firms are reducing bills by ­offering discounts and­ alternative fee arrangements.
He says fixed-fee and capped-fee arrangements are increasingly being used, adding: “Although the top tariff hourly rates hit the £750 mark in 2008, paid rates and paid fees are being slashed.”

Law firms offer a 10-20 per cent discount for regular clients and up to 30 per cent for global clients, but the majority of firms still favour billing by the hour.

The general counsel of a FTSE-listed ;company explains: “We haven’t seen rates soften, but we have seen firms very willing to discuss discounts and ­different types of billing.

“It brings the whole ­question as to whether hourly rates are the most appropriate billing measure in the first place.”

But David Curtin, European legal chief at US bank Northern Trust, says he does not think the billable hour will go into decline yet.

“That’s something people have been predicting for 20 years,” he says. “But most law firms are in the mindset where they find it difficult to figure out how else to do it.”

The survey also shed light on the fact that the range of rates for magic circle ­partners had doubled, with a ;­difference ;of ;£150 between top and bottom tariffs ­compared with £75 in 2007.

Diamond says this could be explained by more aggressive negotiating by
in-house lawyers with tighter budgets, but also the fact that some practice areas have seen an explosion of work from the credit crunch.

A senior in-house lawyer concedes: “For quality work, you’re still going to want to pay the appropriate rate.”

Restructuring, tax and regulatory lawyers can also command unusually high fees for complex work, and until recently M&A ­specialists were some of the top billers in the City.

The cost per hour for advice from non-partner lawyers at City firms fell compared with last year, the only figure in the survey to do so.

Headline rates for five year-PQE ;associates dropped by 6 per cent, from £315 to £295, while newly qualified rates fell by 13 per cent, from £225 to £195.

In the magic circle and regional firms, the non-partner tariffs remain static. Magic circle lawyers with five years’ PQE command up to £280, compared with £195 at national firms.

Tony Williams of legal consultancy Jomati predicts that hourly rates across
the board will not fall ­dramatically over the next year.

He says: “It’s the active rates rather than the headline rates which would be under a bit more pressure.

“[Law firms] will be taking a much more pragmatic line on discounting.”
Vishnubhotla agrees. “The cost of doing business will have gone up, but firms’ margin expectations have remained the same,” he says. “What firms are beginning to do is try to be more ­efficient in the way they do their client work. For ­example, instead of using very senior partners to do the work, they’re using ­junior staff who can do it more cheaply.

“They’re coming up with deals that make it more cost-efficient for clients.”
None of the magic circle firms contacted would ­comment on the survey.