Spiralling hourly rates fail to trickle down to associates’ pay packets

UK partners have hiked their hourly rates by an average of 60 per cent over the past four years, with partners in national firms almost doubling their charge-out rates over the same period.

According to the 2007 Hourly Rate Survey, conducted by Legal Budgets in conjunction with The Lawyer, in 2003 magic circle partners commanded an average hourly fee of at least £375, with some charging as much as £450. In 2007 the figure had risen to £625, an increase of 67 per cent. For specialist tax or regulatory advice some magic circle partners now charge as much as £700 an hour.

Among other City firms the rise has been less marked, with fees for partners jumping by 23 per cent, from £325 to £400, although at the top end some partners charge as much as £495.

At national firms, such as DLA Piper, Eversheds, Hammonds and Pinsent Masons with offices in Birmingham, Leeds and Manchester, the four-year rise has been far more pronounced. In 2003 partners at these firms charged an average of at least £185 an hour, while in 2007 the hourly figure has rocketed to £350. This represents a rise of 89 per cent.

Again partners providing specialist advice can charge an even higher fee, as much as £375 an hour.

According to Legal Budgets’ Jim Diamond, the reason for the dramatic hike at national firms is that those with regional offices now set their regional rates with reference to their brands as opposed to pegging them to the work of a particular lawyer or office.

“Individual lawyers are less important than the brand of the organisation,” he said. “If you look at a firm such as Eversheds, when it merged it had rates throughout the country that were different, but it now has a nationwide rate per hour.”

The general counsel of a major European investment bank agreed, pointing out that the gap between fees charged by City firms and regional offices has been closing steadily.

“The quality of work in the regions has improved over the years,” he said. “This, coupled with a rise in magic circle rates, has encouraged groups to look elsewhere for legal services. The increased attention means that regionals have been able to hike up their rates.”

While national firms have almost doubled their rates over the past four years, their most expensive partners still charge considerably less than their magic circle counterparts: £375 compared with £700.

That said, Tony Williams of management consultancy Jomati agreed with Diamond that the distinction between the City and the regions is less marked than in the past.

“This is a reflection that the old divide between London and the regions is far less relevant,” he said. “For example, Addleshaw Goddard and DLA Piper are increasingly operating as one firm, with clients across the country.”

In terms of reasons for the fee hikes, most firms claim the rises have been applied to counter the massive cost of rising salaries.

Clifford Chance global managing partner David Childs, who said the percentage increase in the firm’s rates had actually been far lower than 67 per cent, added: “A lot of costs have been rising quite quickly. There’s been a huge increase in lawyer salaries and the increase in charge-out rates has been to try to recover that cost increase.”

A partner at a top 20 firm agrees. “The extra cash is going on salary, there’s no doubt about that,” he said. “Firms have been able to do this because they can.

“We’ve been in a boom period for the past few years and if a firm’s trying to undercut for a client then you just walk away because you have plenty of other work.”

At face value, however, the suggestion that fees have risen to fund salaries is inaccurate given that salaries have grown at a far slower rate than fees over the four years.

In magic circle firms, in addition to the hefty rise in partner charge-out fees, for lawyers with five years’ PQE and newly qualified (NQ) associates, rates have risen by 53 per cent and 34 per cent respectively.

Over the same timeframe average salaries for NQs have risen by 29 per cent, up from an average of £50,000 in 2003 to £64,375 in 2007.

The picture is similar in the national firms. As well as the partner rate rises, five-year PQE rates rose by 66 per cent to £225 and NQ rates rose by 85 per cent to £185.

Average NQ salaries over the period have risen by 28 per cent, from £47,875 to £61,250.

This would suggest that fee increases are going straight into the bottom line and straight into equity partners’ pockets. However, the hike in charge-out rates are not reflected in turnover or average profit per equity partner (PEP) growth either.

Over the four-year period average turnover in the magic circle has grown by 33 per cent, from £786.25m to £1.04bn, while average PEP has grown by 53 per cent to £1.05bn.

At the national firms average turnover grew by 50 per cent to £280.5m, with PEP growing by 52 per cent to £522.75m.

So why is there such a disparity in firms’ financials and what is happening to the increased fee income if it is not paying salaries or translating into profit growth?A source at Lovells said: “Increased rates and increased PEP do not automatically correlate. PEP can also be influenced by other factors, such as cost control, business efficiencies and management of points in a partnership.

“Increased rates are a reflection of high levels of client demand for the best advisers and also intense competition for the best people at partner and other levels.”

However, Williams offered another explanation. He said: “Firms are playing a game of increasing rates while knowing they won’t actually recover that in every case. Although headline rates have gone up, for a lot of clients rates haven’t actually gone up that much. Clients are looking for discounts.”

This is particularly true in the regions. As one partner at a top 20 firm said: “I’m sceptical about the increase in regional firms. How much is their headline and how much are they actually recovering?”The London office of a regional firm will be on a much higher rate than the Newcastle office.”

But the general counsel of a major catering company pointed out that it is not that easy for clients to negotiate discounts with their external advisers.

“There aren’t that many firms willing to give discounts nowadays,” he said. “Magic circle firms won’t bend over backwards to get work. They just say, ‘these are our rates’.”

Hourly Rates

2003 range (£) 2007 range (£)
Magic circle partner hourly rate
375-450 623-700
City firm partner hourly rate
325-375 400-495
National firm partner hourly rate
185-250 350-375
Magic circe 5 year-PQE hourly rate
245-280 375-400
City firm 5 year-PQE hourly rate
215-225 285-315
National firm 5 year-PQE hourly rate
135-195 225-275
Magic circle newly qualified hourly rate
175-185 235-250
City firm NQ hourly rate
150-155 185-225
National firm NQ hourly rate
100-140 185-210

Source: The Lawyer/Legal Budgets

Where does the money go?

Per cent rise
Average magic circle turnover  £786.25m  £1.04bn
Average magic circle PEP  £688,250  £1.06bn
Average magic circle NQ salary  £50,000 £64,375 29
Average national firm turnover   £187.5m £280.5m 
Average national firm PEP £343.5m  £522.75m
Average national firm NQ salary £47,875 £61,250
Source: The Lawyer