Minnesota Lawyer this week ran a story on the potential implications from Dorsey & Whitney’s decision to cut its associates’ pay by 10 percent. The danger from associates’ point of view is that other firms might follow suit — or, even worse — go Dorsey one better and implement bigger pay cuts, thereby sparking a sort of reverse salary war.
In response to the article, we received the following anonymous comment: “It would be interesting to hear from some in house counsel to see if they are starting to see a corresponding reduction in associate bill rates to match the pay cuts.”
I doubt many big law firms are reducing their billing rates right now. I certainly have not heard of any (and let me know if you have). It is interesting if you think about it, isn’t it? Take for example a firm such as Faegre & Benson where business was slow to point at which 30 lawyers have to be laid off. The heart of the problem at the firm is obviously that it currently faces a shortage of clients with work available for which they are willing to pay the firm the rate of, say, $300 to $500 an hour. Obviously a firm such as Faegre could have reduced its hourly rate, thereby attracting more less-lucrative (but still fairly profitable) business and presumably keep those not-so-busy associates it let go. In a sentence: Why don’t Faegre (and Dorsey and other big firms whose business has slowed) just mark down their prices until business starts to pick up? Such a market-driven pricing model is routinely used in a number of industries — from airlines to energy — why not big law firms?
Smaller firms often employ such a strategy on an ad hoc basis. Business is down? Maybe we’re charging too much. Let’s look at our pricing structure. Since we are not busy right now, we’ll do some lower margin work until things pick up.
Big firms, on the other hand, almost never do anything like that individually. A Faegre or a Dorsey would likely only lower their billable rates if the other big firms did the same thing in concert. The big firms are peddling a premium brand name targeting clients willing to pay for the privilege. High-priced legal services float on the perception of value — once you start discounting, people start to think that you are worth less. If a Dorsey associate fetches $500 an hour and a Faegre gets $250, corporations wouldn’t necessarily all go with the Faegre associate because he/ she is the better value. Instead, they might think the Dorsey associate must provide the superior level of service and go with him or her.
It’s fear of this reaction that makes the big firms only move in packs when it comes to pricing. On the one hand, Faegre and Dorsey can charge what they do because they are Faegre and Dorsey. On the other hand, it’s because they charge what they do that Faegre and Dorsey are Faegre and Dorsey. It’s a little bit of irony that ensures that big firm associates will continue to fetch top dollar for their time — right up until the moment that their firm shows them the door for lack of business …
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Mark’s post reminds me of a conversation I had with general counsel of a fortune 50 company. To sum up our conversation, a corporation will not necessarily pursue value. More often than not, a corporation is pursuing peace of mind. As it was explained to me:
“If we hire the most expensive lawyer and lose, it must be because our case was bad. But if we hire an inexpensive lawyer and lose, it must be because we had a bad lawyer.”
Nobody loses their job by hiring the most expensive legal guns. And
if this is true, slashing rates could serve to shrink the client base.
The suggestion that large firms should lower their billing rate is based on the premise that firms would attract more clients by a lower billing rate, and that would be enough business to offset the losses resulting from billing less. However, it has been my experience that clients are more concerned about the lawyer’s ability to win than the hourly rate. The hourly rate seems to be ignored by most potential clients; their concern is whether the lawyer can help the client win. I believe one reason for this view is that attorneys fees usually make up a small percentage of the value of whatever the attorney is working on.
Another problem with lowering attorney rates is the perception by some clients that the attorney is worth less, and thus, less skilled.
It is an interesting phenomonon — but well documented by economists — that you can create a perception of value by charging more. I remember once being in a wine shop and asking the clerk which of two bottles of one was better. He looked at them, and pointed to his choice. I thanked him and asked him why he picked that bottle. He looked at me as if the answer was obvious, and said “Because it’s the more expensive.”
I cannot say whether big firm billing rates will drop as a result of the economy — only that, if they do, big firms are likely to act in lock step. None of them wants to be the cheap bottle of wine. That is also why big firms act in seeming concert when they raise salaries or engage in layoffs. If you do any of these things unilaterally, you risk being no longer perceived as a top tier law firm. It’s kind of like when a law school gets downgraded by the U.S. News and World Report — nothing at the school has changed, but suddenly everyone starts perceiving that it has.
I think Business Attorney hits on something when he points out that clients have had no problem with paying what may look to us like high billable rates for big transactions. With so much money sloshing around, $500/ hour fees are paid with the crumbs that fall from the deal. The problem with this recession is that there have been a lot fewer deals happening (i.e. less crumbs), and, when they do happen, the crumbs have been smaller. (I wish I could take credit for the crumbs analogy, but it actually comes from Thomas Wolfe in “Bonefire of the Vanities.”)
[...] the women in the “Nice Guys” article billed at a rate of $500 an hour. In light of the recent dissussion about billable rates on this blog, I couldn’t help by being struck by the coincidence that an attorney at a big Twin Cities [...]
You don’t lose your job by hiring the highest priced lawyer, but the matter has to deserve it. That’s usually a huge deal or bet the company case. A small or run-of-the-mill matter doesn’t deserve the difference in rates. A great percentage of the higher hourly rates is attributable to overhead, not what the lawyer takes home.
That is why lawyers have and will continue to leave high overhead firms and going to mid-sized or small firms. Lower overhead allows them to lower their rates and make just as much if not more.
Gone are the days when you had to hire the biggest firm around on a normal matter because the senior partner was friends with the CEO or GC.
And if the big firms do cut associate salaries, it doesn’t do them much good unless they stabilize or lower rates.
Excellent points. You are always going to have to go to the big firm for a multinational merger (good luck finding a solo to handle that!), but I imagine the big firms are worried that cost-conscious companies may start to shop for other services that they may once have used the big firm for (and paid big firm rates). While it might be convenient to go down the hall at a big firm that handled your M&A to use its real estate department for a routine property purchase, it might be much more cost-effective to shop around and find an equally qualified practitioner at a small or mid-sized firm who will give you a better rate.
If overhead reductions (i.e. layoffs, salary cuts) are in response to increased client cost-consciousness, then those savings would indeed have to be passed on to the client at some point. This could be done in a variety of ways — lower rates (as you point out), faster turnaround on matters (i.e. working smarter, rather than longer) or billing arrangements other than the traditional billable hour.
This does not appear to be happening yet, probably because firms hope the current environment represents an economic blip rather than a sea change in the way they do business.
The billable hour rates charged by large firms, I think, are a fraud. Is the advice of an attorney really worth $500 or $1000 an hour. Is that attorney’s insights really that amazing?
I think the wages were initially driven by the dot com boom and then by the Wall Street investment banker/analyst boom, but they were both a mirage.
Or I guess this is an alternate theory: http://legaltoast.com/2009/05/28/lawyer-economics/
[...] 15, 2009 by Mark Cohen We have had a lively discussion on our post about the Big Law pricing models (i.e. continue to charge high billable rates at a time where there is not enough business and [...]
[...] have blogged about this phenomenon before, but we continued to hear from the occasional (no-longer) doe-eyed associate who makes this [...]