Background
The UK Office for National Statistics (ONS) produces a quarterly Services Producer Price Index (SPPI). This contains useful data on pricing of legal services and broader inflation impacting businesses.
This briefing is based upon the July 2024 release and is of relevance to law firm partners and management involved in the pricing of legal services to understand the general pricing trends for UK B2B law firms.
Key Messages from April's Briefing
In the 2024 Q1 ONS release we saw an accelerating of the post-covid trend of increased legal services price inflation, with 2023 legal prices standing 7.4% higher than 2022, but with mixed fortunes for law firms beneath that headline.
From 2019 through 2023, legal services prices were 24% higher, notably more than the 14% B2B clients would have experienced across all services purchased in their businesses over the same period. I suggested at the time that client's would likely notice that gap, and there may be signs of fatigue in accepting yet another rate rise in 2024 legal fees.
Looking at quarterly trends, there was some evidence of cooling inflation across aggregate services, but the picture for legal services was less clear owing to a spike in Q3 inflation.
What's Changed?
The ONS dataset is subject to revision, with recent quarters more susceptible than earlier ones.
One of those revisions from April to July is the 2023 annual inflation in aggregate services, which means that the 14% increase form 2019 to 2023 referenced above, and previously is now 16% - an increase of 2 percentage points.
Whilst this closes the gap with the 24% of legal services inflation over the same period (which remains unchanged from April), the observation that the gap is both perceptible and meaningful to clients still stands.
Chart 1: Post-Covid legal price inflation is higher than aggregate services inflation (updated from April)
Revised chart showing the difference in legal services inflation (24%) and aggregate services inflation (16%) from 2019 - 2023
Pricing Outlook
In April, we saw Aggregate Services (orange) inflation on a clear downward trend and this continues in July's figures for Q2, indicating inflation of around 3%.
For law firms, this trend is relevant in two ways, showing:
the inflation the firm can expect to experience within it's own non-payroll cost base, and
the general inflation B2B clients are experiencing, against which the law firm's proposed fee increases can be assessed
This stands in contrast to the Legal Services (blue) inflation which, whilst lumpy over the past few quarters, does now look to be running towards 8% year on year.
Chart 2: Aggregate Services inflation is cooling, but Legal Services inflation marches on
Chart showing the quarter on prior year quarter change for legal services and aggregate services inflation
Whilst in April, I cautioned against firm's expecting an easy ride pushing rate rises through this year, given the risk of client fatigue on successive rises, at the end Q2 it would appear that caution was misguided - firm's do indeed appear to be pushing substantive rate rises through again in the current April 24 to May 25 financial year that UK rate cards will typically run to.
Beneath these headline figures, the fortunes of different firms do appear to vary:
Big Law / High Pricing Maturity Firms - look to be consistently clocking in year on year rises with a well oiled machine honed over the past few years
Challengers - proactively nipping at the heels of Big Law, picking up higher value clients for the challenger firm, where those clients are seeking better value than Big Law rate rises being pushed through
Catch Up Firms - those that were perhaps later to the party (per April's briefing) now looking to rebase the standard rate and fixed fee schedules. Likely to be selective in their approach, targeting material clients or workstreams to re-price, rather than across the board fee increases
Next Steps
With a general disclaimer that your mileage may vary...
The latest data suggests partners can perhaps be more bullish on rate increases going into the second half of the calendar year.
Rate discussions can be difficult over the summer holiday period, so practically getting ducks in a row for conversations in September is likely sensible, with rate increases kicking in from October (optimistic) or January (realistic).
Whilst Big Law firms are likely driving the overall headline inflation shown above, they are increasingly exposed to mid-market challenger firms, and ALSPs, pitching for the clients that Big Law have priced themselves out of.
On the defence, and with the significant increase in rates over the past few years, firms would be well advised to review their existing client base for those clients likely to leave for a better deal on price, and address accordingly with either attracting new clients, or pricing defensively to retain.
On the offence, there are increasingly opportunities for firm's to 'move upmarket' - pitching for work they would historically have assumed was out of reach. This can be a smart, targeted way to achieve meaningful average realised rate increases, in contrast to the more general approach of adding x% to standard headline rates.
Methodology
Legal Services Price inflation data is taken from Table 3(g) of the latest Services Producer Price Index (SPPI) for Legal Services. The Aggregate Services data is taken from Table 1.
The underlying methodology is described in the ONS User Guidance and Methodology.
In summary, it’s comprised of ~500 prices drawn from a stratified random sample from the Inter-Departmental Business Register. This represents law firm submissions of realised rates on actual hours worked, weighted for the seniority of fee earner delivering the service.
The majority (>60%) of legal services in the dataset are classified as Business and Commercial.
This dataset is relevant to B2B legal services providers, but less so for (a) B2C providers and (b) providers to small businesses below VAT and PAYE registration thresholds, as these groups are not represented in the dataset.
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