Law Firm Rates Going Up - IV (Reality)
December 15, 2006 | Filed Under Law Firm Trends, Managing
Today is the end of the road in the review of the causes of the annual law-firms-raise rates story. Some say the reasons are inflation or talent; I’d argue it isn’t either; profit-motive is a likely culprit.
Whatever; probably a combination of many things.
At the end of the day it’s America. Lawyers can charge what they want. It’s not like law is a guild, after all. (OK, but why do firms fall in line with starting salaries for new associates?)
Regardless of the cause, the GC has a role in this drama. Accepting increased costs will require the GC to defend that approach when time comes for the first budget review in 2007. So the GC will consider a number of options when informed of a rate increase. These will be covered on Monday.
At the outset, however, the reality of increased law firm rates is that it causes the GC to ask a simple question: “What am I getting for my money?”
Considering the way many firms communicate rate increases, the answer to this question would seem to be: “The same thing, costing more.”
That’s one answer. What it really means is that the client is getting less value (if the same services cost more). Giving less value in a competitive marketplace is one strategy. Not easy to see how it is sustainable.
But if a firm doesn’t want to have a client reading a rate increase letter to think “tastes horrible; more filling” then one idea is to send a case of this along…
Law Firm Rates Going Up - III (Talent)
December 14, 2006 | Filed Under Law Firm Trends, Managing
We return for another look at this topic; yesterday, we looked at inflation as a rationale for rate increases. Today, we probe the other: the cost of securing good, new laywers.
To frame the issue, let’s return to an expert:
The increase is partly due to inflation and supply and demand, said Joseph Altonji of the management consulting firm Hildebrandt International.
“It’s the demand for a really good lawyer, and it costs to hire really good people,” he said. “Since these costs are going up, the firms have to pass that cost on.”
This is a bit remarkable since it exposes one client-relations problem about raising rates that has been out there for years. Nearly every time law firms raise starting salaries for new associates, a spokes-partner says something like “this is our way to attract the best lawyers to our firm; we do not pass these costs along to clients.” The law firm community nods, and the GC community collectively says, “huh?”
As I have looked at the relationship of starting salaries and rates before, I won’t repeat myself here. And as tempting as it is, we’ll leave the annual bonus drumbeat to others (but I guess it shows current rates are highly profitable).
Suffice it to say that any notion of scarcity is rather specious; there are plenty of smart law grads out there. You can even look outside the Top Ten schools! And we know that new lawyers know virtually nothing about the practice of law; most new associates spend the first few years learning on the job (or is it on someone else’s dime?). If only a few make partner, did you really need to pay so much (and charge so much) for new associates?
What really is scarce is not talent. What is scarce at the larger firms is this: equity partner slots. And the equity partners set the rates.
And here we have the real reason for billing rate increases. Equity partners want to make more. And if their share of the pie is either fixed (no more partners) or shrinking (a few more, if they must), you can only be more profitable (per-capita) by raising hours or raising rates. Most of these firms are at or above the threshold of humanly-achievable billable hour targets. So it’s really about raising rates; profits-per-partner is a bragging-rights metric that is simple, comparable and widely published.
So I submit my brief as to the proximate cause of increased billing rates. No to inflation and cost of human capital. Yes to partners making more money (or at least staying level for a while longer…?).
But enough of this game; who is really responsible and what can be done about it? Check back tomorrow…
Law Firm Rates Going Up - II (Inflation)
December 13, 2006 | Filed Under Law Firm Trends, Managing
We return to this great perennial topic. To set the stage: law firm rates are going up. A GC cares because it means the 2007 budget locked down months ago may now be out of whack.
Two of the main reasons given for rate increases were inflation and the cost of talent. The short answers are bah and humbug.
I’ll take on inflation today, and try to thump talent tomorrow.
As to inflation, I’d be a buyer of that argument if law firms were prodigious users of energy or other price-spiking commodities. But since they sell something other than consumer durables, the simple “inflation” explanation doesn’t scan. In fact, since law firms sell something akin to knowledge you’d think they could use technology and process improvement to do what most service companies strive to do today: deliver better services at lower costs.
When a law firm raises its rates and mumbles “inflation,” that isn’t the end of the story. Clients of the law firm operate in the same economy and know how costs tend to increase. What they also know is that they cannot unilaterally pass these costs on to their customers. There may be competitors waiting to take market share and grab the price-conscious buyer. Or they may have long-term pricing arrangements in place that simply don’t allow increases.
What a solid GC then does: starts thinking about using less of what the law firms offer. What a great price-signal to send to your market in the holiday season! (Partner’s note to self: send bigger fruit cake this year.)
When a law firm (or its favorite consultants) uses a term like inflation from Econ 101 to justify the annual ritual of rate increases, it really insults the intelligence of its clients. Clients see it for what it really is: validation of the essential truth that law firms have no incentive to control costs. They may feel an ethical urge to do so. Believing in that requires no small level of trust. Or is it a leap of faith, Virginia?
No, what the upward trend of billing rates tells clients is that law firms operate on a different planet. It seems like a nice place, a happy place, but not one most other people will ever visit.
News Flash: Law Firm Rates Going Up!
December 12, 2006 | Filed Under Law Firm Trends
The National Law Journal covers this breaking news. Actually, man bites dog may be more newsworthy.
This will take a day for me to chew on and digest.
Here’s one aspect that immediately caught my (somewhat) jaundiced eye:
The increase is partly due to inflation and supply and demand, said Joseph Altonji of the management consulting firm Hildebrandt International.
“It’s the demand for a really good lawyer, and it costs to hire really good people,” he said. “Since these costs are going up, the firms have to pass that cost on.” And for sophisticated transactions, clients are willing to pay, Altonji said.
(Excuse me while I get up off the floor…)
A preview: this trend is not really about inflation, or the cost of labor. And it’s generally not about deal work, which is often priced on a different scale and has a more direct link to value.
Until tomorrow, here’s a view into a typical management committee meeting when the subject of billing rates is on the agenda:
Some SarbOx Sanity?
December 11, 2006 | Filed Under Regulation, In the News
First, the picture that’s worth a thousand words:
SEC chairman Christopher Cox is taking a first step to rationalize Sarbanes Oxley for smaller companies. The New York Times
reports that the chairman will proposed revised standards later this week. Not a total exemption for these companies, but one that might lower some of the costs of compliance.
The proposal will, for the first time, impose a “materiality standard” — that is, auditors will be advised to scrutinize only those controls that could have a reasonable risk of having a material impact on the financial statements. It is expected to encourage auditors to rely on prior years’ work as a basis for testing controls and discourage auditors from multiple testing of the same controls. And it will encourage the auditors to use a “risk assessment” to focus the audit on the areas of greatest potential concern.
Commission officials said last week that the proposal would not be an unequivocal victory for smaller companies because it would not give them what they wanted most: a blanket exemption from Section 404. Nor would it impose a sharp restriction that would limit the auditors to looking at the design of the financial controls.
It will be interesting to see how this develops and how Chairman Cox works with the new Democratic majority. SarbOx namesake Sen. Paul Sarbanes is retiring; no word on what he thinks about changes to his signature piece of legislation.
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