Michael: Moe Greene will sell us his share of the hotel and the casino so that it can be completely owned by the family.
Fredo: Hey, Mike, are you sure about that? I mean, Moe loves the business. He never said anything to me about sellin’.
Michael: I’ll make him an offer he can’t refuse.
- The Godfather (1972)
Anyone looking at the outrageous rise in fees and partner compensation in the legal industry, and particularly at large firms, over the past decade, can’t help but see what looks like a huge, but quite perplexing “rollercoaster” trend in the data. Perplexing because instead of a general upward trajectory interrupted by occasional corrective dips, as normal market gravity would dictate, this rollercoaster just keeps going up – a run of substantial hourly rate and compensation increases, seemingly unabated by any of the downward pressures impacting the broader economy (the 2000-2001 recession; the drops in various sectors since the onset of housing’s slide in late 2006).
Why? Well, as the recent implosion of the big firm business model proves, it wasn’t brilliant management. It’s also pretty obvious law isn’t recession proof. That leaves us with these probable causes – madness, greed or, most likely, a combination of the two. An envy-fueled mania driving thousands of crazed paper-crunchers high on the delusion they should be paid like venture capitalists or hedge fund partners to reward themselves imperially, raising “Profits Per Partner” in massive increments year after year using a mix of borrowed money and merciless fee increases… Ratcheting a string of cars up the side of that rollercoaster, unaware or unconcerned they were trifling with an economic peak, a point where the lead cars would soon cross the top, tip to the other side and drag the whole line down behind them.* Ignorance and opportunism working together in lockstep efficiency – the young not knowing any better, the old exploiting the moment. Really, what incentive did an aging equity partner have to put on the brakes? Why not milk the machine for a final run of monster paydays before retirement? Leave the kids to sort out the mess when the economy catches up with the model and everything goes to shit.
Let’s be charitable for a second – give the old bastards the benefit of the doubt. Assume the managers of the big firms driving the industry-wide run of increased fees and debt used to to fund partners’ compensation over the past decade were as deluded as everyone else who didn’t see the crash coming. That somehow, despite the intense analytical skills and skeptical eye required to succeed in their profession, they actually believed the jerry-rigged gains and rosy forecasts were credible and merely increased their rates and borrowing accordingly.
Because it really doesn’t matter. Whatever the cause, the fees firms think they deserve are tacked to yesterday’s fictions – economic projections and paper gains now eviscerated. Those rates have a long way to drop. And no, remaining flat is not dropping. Or at least it shouldn’t be. Not if the buyers of legal services start negotiating as they ought to. If you run with the rollercoaster analogy above, we’re only about two thirds of the way down the “corrective” or “down” side of this economic arc. That means there’s a lot of value out there for purchasers to wring out of the law firms that service them.*
Yet the questions I keep seeing in articles about the legal industry are, “When will the storm pass?” “When is the legal market going to revert back to where it was before?” In an article in last week’s Philadelphia Inquirer a well known legal consulting firm noted that despite the downturn and despite client demands for an alternative, the outdated and universally loathed billable hour system – the prime cause of bill padding, client dissatisfaction and just about every inefficiency in the delivery of legal services – remains the entrenched industry standard. And as recently as December, 2008, in the midst of the bank collapse hysteria, ninety eight percent of firms interviewed said they were raising rates in 2009.
So I’ve got to ask Corporate America, Where are your balls? We’re in a deflationary spiral, with the cost of everything falling like a stone and you’re accepting rate increases from your lawyers? In case you haven’t read any news about the field lately, the large firm sector isn’t teetering on its heels. It’s hanging on the ropes for life, barely able to stagger through a mandatory eight count. You realize this is the craziest buyer’s market in history, don’t you? That you’re not holding most of the cards in negotiating fees, but all of them? You understand just how much money you’ll save over the long term by exploiting this once-in-a-lifetime opportunity, right?
It isn’t a hard concept to grasp. Consider the Fed’s inability to create a market in “toxic” mortgage backed assets. You know how the real problem isn’t a lack of buyers, but a lack of sellers? That the banks would rather hold on to the paper and pray it appreciates over the long term than dump it at a steep discount and take the loss?
Well, that’s easy for banks to do. They have cash flow just sitting still, government lending windows, increasing reserves and they can raise money from investors if they need to. Save stretching their already strained lines of credit at terrible rates, law firms have none of these options. It’s not like you don’t know their business. Everybody knows how professional services outfits work. They run on limited, finite margins, with partners creaming off all non-allocated revenue for themselves. If their workforce’s hands aren’t moving on billable tasks, they run out of cash and collapse, in fairly short order. You, Corporate America, are their sole source of liquidity. Their lender of last resort, only hope of a bailout.
At this moment, given the dearth of business activity, panic and glut of labor in the legal field, purchasers can start demanding massive fee discounts and the larger leveraged firms won’t even be able to bluff through the negotiation. Buyers in many areas could argue for 33% discounts and their lawyers would have no choice but to eventually take the business. Sure, they’ll scream about how the service will be compromised, or about how operating costs won’t allow them to hold to the discount for long, but that’ll just be a bargaining posture, to drag a 33% discount up to 20-25%, which still leaves the buyer with a sweet deal.
And any games of chicken will be short. Threaten to bid out your business and you’ll get a call back within twenty four hours. Given the uniquely cannibalistic nature of the industry, firms know if they don’t take the deal, three more desperate competitors will. And the white shoe outfits trading on brand name know that if a lesser firm, or boutiques, get the business, they risk blowing a huge market advantage – keeping clients convinced they deliver a level of service far above what can be found at smaller or cheaper competitors. That risks depressing the market value of their services permanently.**
So the only question is, why, Corporate America, haven’t you thrown the knockout punch? Jammed a Tyson upper cut into the glass jaw of the big firm business model, a structure that, while providing necessary services, has also been parasitically siphoning profit from you for decades with its preposterous rates, overstaffing of projects, overbilling and endless ancillary expenses? It’s time to put it on the canvas. And all it takes is a wave of Fortune 100 anchor clients pushing for nasty alternative or discount fee arrangements while threatening to bid their work out to start a rapidly accelerating industry wide race to a new basement in rates. Once you get to that point, you basically control the future trajectory of fees, almost like health insurers controlling and flattening the income of doctors. Remember also, as the big firm fees go, so go the rest of the industry’s.
I don’t know why this hasn’t happened yet, but as a shareholder of a few companies, I’m curious. I wonder if it’s because the general counsels of a lot of large corporations come out of the firms they hire as outside counsel, and these people don’t know much about the legal services market beyond their old firm and its competitors. Maybe it’s because those GCs want to keep their old firms happy in case they need an “of counsel” position somewhere if their corporate employer goes under or downsizes them. Perhaps companies simply didn’t care in the past, figuring a few million in excessive legal fees per year was chump change in an overheated economy.
Well, today every nickel counts. If you’re in upper level management, it might be time to push stronger cost-cutting directives on your general counsels. Ask them why they aren’t driving the company’s legal expenses down by at least a third. Why isn’t the company using this opportunity to set a new, drastically decreased baseline for fees? It’s their duty to management, to shareholders, to extract the meanest bargain possible. And it’s not like there’s any excuse. This is elementary business, Management 101. When you’re gifted the exceedingly rare power to radically reduce a cost for the long term, you push it as far down as you possibly can.**** The leverage will never be better and if there’s any hesitance about kicking an industry while it’s on its knees, remember two things. One, you can always blame it on your company’s decreased revenues. That’s an all but impenetrable explanation. Two, you’re dealing with the legal industry here. Those firms would do the same to you without blinking. And bill you for the time spent planning and executing the hit.
____________________
* For years, lawyers have used what Milton Friedman described as a “license-leveraging scheme” to dictate prices to buyers. It’s about time buyers shift the power dynamic in the relationship back to where it ought to be.
** Yes, the large firm sector that drives the cost of legal services pulled back a bit in the recession of 2000-2001, but as soon as housing started the next bubble it made up for lost time with gusto, increasing fees all over again.
*** The difference between a $250 and $400 associate in the same market is mere branding premium. At a certain point, the law’s the law, the facts are the facts. In litigation, most of the work at that level’s fungible doc review, research, depositions and cut and paste briefs. The higher level $500 and up lawyers do the actual arguing.
**** To associates and junior partners who might take issue with someone advocating what sounds like violence to their already savaged industry, think again. These recommendations would actually help associates and young partners. Firm have already cut to the bone in terms of head count. They need hands around to do the work senior partners won’t or can’t. Future cuts can only come out of upper level partners’ compensation.
Absolutely wonderful. Every time I see how much we’re paying our lawyers I want to stab someone (preferably the lawyers), I simply do not see what they do that makes them worth that much. Nor do I see how they managed to convince anyone that they were, ever.
Let’s fix lawyer compensation and stop harping on about executive compensation!
PL: That or compensate good lawyers who actually work to resolve issues quickly, rather than pay for finite little bits of fungible administrative work of questionable necessity delivered at ridiculous rates. What a “corporatized” law firm delivers with twelve hands in 50 hours a boutique can often deliver with four hands in 20. The big outfits should stick to highly complex, monstrous break-the-bank stuff and massive deals and leave everything else to the cheaper service platforms.
Not meaning to nitpick, but Im pretty sure that quote was from The Godfather Part 1
PL: Why do I perpetually fuck that up? I did it with the last Godfather reference as well. Nice call. Thanks.
Of course there is a significant level of fungibility in the legal profession. Mid-size or “Boutique” firms (just a nice way of packaging the reality that “my firm only has 80 lawyers, not 800″) can provide nearly identical results and performance for the majority of the actual needs of a corporate client. Is a lawyer who was #10 in their class really that much different that the lawyer who was #2 in their class? Hogwash. The difference between the top 15% in law school is ridiculous minutae. It’s only after law school that you learn if they have any talent.
$600 an hour? That’s crap. Your average top-third of intelligence in the legal field can produce the same work for $300 an hour outside the power firms, and be happy to get three bills per hour.
I see it myself. Some schmuck doing the same work, in the same case, for the other side at DOUBLE MY RATE! Their client is a fool. The lawyer never collects all the fee, so its all a fiction. I charge less per hour but have almost a 100% collection rate. I’d rather charge less and get paid for everything that I do, than rip a client off by the hour, and have them stiff me for 40% of the bill….
PL: The industry makes up for the low realization by overstaffing every task, having every non-essential item reviewed by three people and every essential one reviewed by a committee, etc… And then there’s the padding, which studies have shown accounts for anywhere from 10-30% of bills.
This seems like the perfect time for small groups of lawyer to band together and form mini-Walmart firms. Low prices, quality product, range of services, etc. Kinda like a boutique firm, but with a more diverse practice (or a legal services clinic that actually gets paid). Basically to handle stuff you can’t do on LegalZoom and aren’t willing to pay Law, Inc. for. Considering part of the monolith that was Law, Inc. was due to large corporations and we have started to become a more small business focused economy (until the president kills them off that is), seems like they’d be prime targets for smaller firms.
Or am I just destined to go to the courthouse every morning and scavenge for clients like a buzzard looking for roadkill?
PL: No, that business model will work well. But in the words of Bill Lumberg, I’m going to have to go ahead and disagree with you on the small business orientation thing. Small businesses are getting crushed right now. The better course would be for more lawyers to break away from firms and form boutiques to service niche areas of the broad platform big firms try to provide. No reason an M&A or similarly sophisticated and high billing group from a big firm can’t shear off the platform, take the best clients with them and provide the same services from a smaller platform where the lawyers would split the pie twelve ways instead of subsidizing the rest of the partnership. The guys who do the deal work can do the big deals when times are good and the workout type shit when times are bad. I’ve never understood why a bunch of them don’t band together together, get a crack staff behind them and start small, premium firms where partners get paid like investment bankers.
Attys bill how many hours in a day? 6,8,10,16? I don’t want to be billed for 4 hours if I am getting hours beyond a normal 8 hour day, probably not even beyond a 6 hour day. The military struggles with the immense drop off in capability of its soldiers and personnel when they don’t get enough rest (relaxation) and in addition to rest they need sleep. The military conducts pharmaceutical tests and all sorts of crazy experiments to try and get a longer day out of soldiers. How do law firms manage to get insane amounts of hours out of associates? They don’t, you work 12+ hours and maybe can bill 6 or so of those hours so you end up working 6 to 6.5 days a week to try and get solid amount of bill time.
Medicine pulls a similar trick, they use nurses and physician assistants. A PA will bill out at the same price as a doctor (most senior partner etc.), and then there may be some reduction for work that a nurse does. If a doctor swoops in for a few moments after a nurse has done a lot of the work, and then he leaves and lets the nurse finish the work, the billing gets to be that of a doctor (they call them providers in that industry). Law firms make a lot of use of paralegals, with experience a paralegal is as skilled in many matters (if not more) than an attorney. Paralegals have a wide range of skill, but to so attys, I had to head that accusation off before someone tried to point it out.
The legal system has its problems reiterate everywhere, you can’t buy discounted legal services (I call them regular unleaded, or even unleaded plus), you have to always buy super premium. Some attys in Boston are offering simple divorce and bankruptcy assistance for a flat fee. I like the idea of buying cheaper, and possible less accurate, legal advice when the alternative is that you are entirely priced out of the market. The legal profession is designed to encourage price escalation because it is so risk adverse, given the chance to triple money a lawyer can’t take a 50/50 chance because they can’t have risk. They can get in a lot of trouble for malpractice. I can’t argue in my defense that the client could only afford 5hrs of my time so I missed things that I would have found in 10-15hrs of my time. The alternative is that the prospective clt completely messes up the entire matter beyond any hope and I avoid any accusation of malpractice.
There is more but I will end on the note that if you end up paying $100k for an education after you paid $140k for a liberal arts education, you can understand that a lawyer owing $250k faces debt repayments of $2,500 a month or $30k a year for 10 to 20 years depending on the situation. This puts a huge premium on the lawyer making $50k above what he would be making if he hadn’t gone to law school (I didn’t include the 3 years of income which probably should add $10-15k on the conservative side making it $60k+ above previous expectations). Expensive law schools that fleece would be lawyers who get to graduate with a lot of debt and not very much satisfaction enter a field full of bosses who are good producers but awful management (who want that cream to skim off the top, and that means not promoting or developing you for fear you will one day skim the cream too).
I don’t think lawyers are overpaid, I think law firms are overpaid and inefficient. I think teachers are overpaid (yeah you heard me! A guaranteed contract has a huge option cost, on the free market that could be considered a 100% bonus, so that a sure thing job at $40k is worth $80k in a job that might be gone when the economy crumbles). I think law partners are overpaid, professional services firms haven’t invested very much of anything, since hrs are the only expense and the people that produce those are the only asset. If Walmart’s infrastructure cost as much as 50% of all the inventory they turned in a year the company would be bankrupt in a month. Since we don’t have indentured servitude, law firms should have a sliver of assets on the books, and the revenues per asset dollar should be so outrageous we think oil companies are paupers (they are in some ways but I am not getting into an argument about ROI / %profit and gross profits).
Lawyers have many extremely profitable uses, I think the practice of law itself should consume half the lawyers and the others could help integrate other roles. Too bad there are no calculus questions on the LSAT, lawyers with some forensic (legal science, but I really mean natural science) skills would be much more valuable than even the best liberal arts educated social science folks I know. That is why we have patent attys, and they make a lot of money and smaller firms prosper etc.
PL: Your point on the drop off in productivity after a certain number of hours is excellent. I find it ridiculous any client pays $300 for a kid to sit by a copier proofreading irrelevant minutiae at midnight.
Came across this and found it relevant:
http://insight.kellogg.northwestern.edu/index.php/Kellogg/article/the_price_of_a_billable_hour
I didn’t read it too closely but figured it may be of interest regading this post.
Thanks.
PL: Good article. It’s true – the more a firm deals with a client, the less the firm whacks that client with the usual overbilling, etc. The problem is, the services provided to those clients are so outrageously overpriced already, any informal haircut the lawyers provide on the invoice is just a small discount on an already absurd premium.
There is simply no reason for any firm to bill a first, second or third year litigation associate out at $300-400. He’s nowhere near worth that and it’s not the client’s obligation to subsidize his learning curve. Let the partners do that.
Bill padding ranges much higher than that. Want to take a 20 minute break? Bill it to such and such.
To continue my parade of nitpicking, but I don’t see that much difference between the person that finished 100 and the person that finished 10th or 5th or whatever. Sure, sometimes there is, sometimes there isn’t. As you said the law is the law, the facts are the facts. I’ve seen crappy lawyers that finished at the top and the bottom of their class. As you have said many times before,it is all about pedigree and branding.
As big of a scam as big law runs with their 20 people working on each project, the bigger scam is in house counsel. Nothing more than glorified legal traffic cops. Just funnel the legal work where it needs to go without doing any actual work of their own.
PL: No doubt about the in house counsel thing. Talking to those dudes about how litigation works at the street level is bizarre. Their chief interest is that everything be documented to ensure that they look like they did everything they could to get the best result, which as you know, is not the same thing as doing everything you can to ensure that the company actually win the case. You feel like you’re being set up half the time, which you are. I mean, they want to win, but more than that, they want to make sure that if they lose, it’s your fault, not theirs.
But then, the whole field is like that. How many times have you billed a client for doing research on how to avoid looking like you’ve committed malpractice in regard to an issue that could hurt the client’s case? How many times have you billed the client for writing a CYA letter to the client? Should the client have to pay for that? Is it really fair to bill someone for protecting yourself against him?
There is no case in which a lawyer does not have a conflict of interest. On a significant level, his interests shades the decisions he makes, or the way he presents options to his client. Same way defensive medicine costs the health care system, defensive lawyering costs clients.
Nothing to do with this post at all, but it resonates with me.
A criticism of maths teaching:
http://www.maa.org/devlin/LockhartsLament.pdf
For “math”, read “life”.
Hey presto, it’s you!
PL: That’s pretty cool, and yes, it is striking a chord. Haven’t finished yet, though. It’s 25 pages.
Sorry about the length, I still haven’t finished it myself. Lots of quotable quotes though, for instance:
In place of a natural problem context in which students can make decisions about what they
want their words to mean, and what notions they wish to codify, they are instead subjected to an
endless sequence of unmotivated and a priori “definitions.”
He could be talking about Law here, or anything. It certainly holds true for what I experience now as an engineering student.
Maybe this Paul Lockhart person could be a good person to interview on the theme of redundancy?
Or maybe I’m talking out of my ass.
PL: We’re all talking out of our ass. Beware of anyone who says he isn’t. He’s either full of shit or selling you something useless. Usually both.
Speaking as someone entirely outside the law industry, it seems pretty obvious that rate differences from one firm to another of $300 to $600 for the same work stems from a lack of transparency. Obviously, law firms don’t want information about “regular hourly rates for legal consult on [such and such]” to become available, credibly, to the rest of the world. Take away the mysticism of the law industry like that and corporations would wise up so fast it would make Big Law’s asshole seize.
So where do we find our information? You refer to rise in law fees as if we could find that kind of information on google trends, instead of having to go through a consultant who – like you’ve said – probably pushes for high fees anyway. Does such a source of information actually exist?
PL: Google “profits per partner” and see what you get. Google “leverage” and “law firms.” Google “rate increases” and “law firms.” The info is hidden because firms don;t want competitors or even other clients knowing what they charge any particular client in a given matter. But for the simple point of this piece – that whatever it is, it’s way too high for this economy, and ought to be forced down savagely – you don’t need to know any more than it’s about 1/3 above where it ought to be.
Good luck on getting that transparency. If the industry were to pull back the curtain and openly discuss its inefficiencies and branding games, the bluff would be called altogether. The mid to big firm model would implode entirely.
Lawyers sell voodoo. The premium for the service derives almost entirely from ignorance of a system that’s not as complex as the profession makes it out to be.
Here in Houston big firm litigation died about 4 years ago, at the height of the bubble. The big firms decided that since the litigation partners couldn’t charge the same rates as the transactional ones, they could increase profits per partner by dumping the litigation sections.
All the best litigators in the city left and hung their own shingles. All the litigation associates who payed any attention to the marketplace left with them.
Now all that is left at the big firms are clueless associates who couldn’t read the writing on the wall and a bunch mid-level service partners desperately clinging to the last few whales that are still at the firm.
Anyone who gives a litigation matter to a big firm these days should be on notice that they are about to give 60 desperate lawyers a life raft to pay their mortgage for a few months. The file will be pounded within an inch of its life. They will find every excuse to put as many idle lawyers as possible on the case. A $250 an hour associate will spend two weeks compiling all the documents in the case into binders, a $300 an hour sixth-year associate will spend two days reviewing the binders, a $400 an hour junior partner will spend two more days reviewing the binders, then a $700 per hour senior partner will spend the afternoon eating lunch and bill twelve hours to reviewing the binders. Then the binders will be put into a room, never to be consulted again. When it is time to do the first deposition, new binders will be made and the process will start anew.
On the other hand, the new boutiques that have sprung up, where are the former big firm work ended up, are overworked. They don’t overbill (much). They are looking to establish new client basis and have too much to do anyway. It only takes one of these firms to resolve a case for a few hundred grand that has been parked at a big firm for three years and a million in billables to enlighten a GC about the big firm litigation model. These firms are staffed with the same young lawyers who got good grades at good school, they just bill them out a 75$/hr. less and expect them to work 200 more hours a year to make up for it. In ten years, I don’t know if big firms will have litigation sections at all.
PL: Anyone reading the comments – read this twice. Any law students wondering where the market’s going, read it three times.
Thanks, dude. Excellent comment.
i read this blog for the stories. they stopped. i still check back now and again, but the commentary just hurts.
PL: Did you buy the book? There’s a whole pile of stuff in there that isn’t available here.
And have you read this? http://www.philalawyer.net/archives/summer_material.phtml Kind of explains things.
Philawyer, off topic, but I’m really screwed. The Bar exam is in two days and I am for sure not going to pass, just got burnt out studying near the end of summer. I’m $20K in the red. Any suggestions on what to do? Is the bar exam tough to pass the second time around?
PL: Calm down, dude. You’ll be fine.