IT’S THE MODEL

[Thanks, readers. My big law novel -- The Partnership -- has been on the Amazon e-book "Legal Thrillers Best-Seller List" for more than a month. Last weekend, it was #7. Also available for iPadNook, and in paperback.]

Returning from vacation means tackling a pile of accumulated newspapers in a single sitting. That sounds like a chore, but it allows the mind to connect news items that otherwise might seem completely unrelated.

Consider these three from the Wall Street Journal on August 1, 2, and 3.

In “With Oracle and Dodgers Waiting, Boies Not Ready to Retire,” the Journal  interviewed David Boies — 70-year-old former Cravath partner who started his own firm. He represented Al Gore in the 2000 election fight, plaintiffs challenging California’s law banning gay marriage, the NFL in its litigation with players, and a long string of high-profile litigants. Boies explains why more than half of his firm’s cases have a potential success fee:

“Hourly rate billing is bad for the client and I believe bad for the firm. It sets up a conflict between what’s good for the lawyer and what’s good for the client.”

Enter the client with the will to resist the hourly billing regime. On August 2, the WSJ‘s “Pricing Tactic Spooks Lawyers” describes clients countering high big law fees with on line reverse auctions that pit firms against each other in bidding for business. The result: cost reduction.

But economizing can be dangerous. An article in the next day’s WSJ should make every big firm attorney squirm. “Objection! Lawsuit Slams Temp Lawyers” reports that J-M Manufacturing is suing its former law firm, McDermott, Will & Emery LLP, claiming that the firm didn’t supervise adequately the work of contract attorneys from a third-party vendor. McDermott denies wrongdoing:

“J-M…keeps changing its story. Now [it]…claims that McDermott failed to supervise the contract lawyers that J-M retained….”

According to the article, J-M alleges that it paid McDermott attorneys rates as high as $925 an hour, compared to $61 an hour to the firm supplying the temps. In other words and regardless of who retained them, using contract lawyers helped shave J-M’s outside legal bills.

Here’s the common thread. In the first article, Boies just says what everyone knows: the billable hour regime is a nightmare. The second reflects ongoing client efforts to reduce resulting legal costs. The third identifies a potential peril for law firms that attempt to oblige: a malpractice suit — the ultimate conflict with a client.

I don’t know if McDermott did anything wrong, but clients should realize that putting the squeeze on outside lawyers is tricky. For example, cutting fees is one thing; expecting large firm equity partners to do the obvious — reduce their own stunning income levels to help the cause — is something else, and it isn’t happening.

Amid corporate belt-tightening that targeted outside legal costs, average equity partner profits for the Am Law 100 actually rose during the last two years. They’re now back to pre-Great Recession levels of $1.4 million a year and it’s a safe bet that next year’s profits will be even higher. If I were a client, I’d ask, “How did that happen?”

“It’s the successful model at work,” most firm leaders would say without reflection or hesitation. “Growing equity partner earnings are essential to retain and attract top talent. Firms have become more efficient, so it’s a win-win for clients and partners.”

Clients should consider the untoward implications of austerity measures that don’t dent equity partners’ pocketbooks. Increased efficiency? Operating with fewer secretaries and putting locks on supply room cabinets don’t account for the extraordinary profits wave that big law continues to ride.

Here’s another explanation. The prevailing model requires increases in billable hours — big law’s distorted definition of productivity – to offset fee reductions that clients demand. Concerned about attorney fatigue that compromises morale and work product? Too bad; the model ignores it.

Clients can and should seek lower big law fees, but they should be careful what they wish for, scrutinize what they get, and wonder why equity partners’ eye-popping profits keep growing along the way. The prevailing model rewards big law equity partners handsomely, but that doesn’t necessarily mean it’s working for their clients or anyone else.

 

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4 thoughts on “IT’S THE MODEL

  1. One of the major reasons why clients don’t rein in law firms effectively is that they lack a sophisticated strategic sourcing program. In-house counsel are often experts in the very legal services being handled by outside counsel. As a result, they should build knowledge management databases and optimized processes that take advantage of their unique knowledge of their corporate employer, require outside counsel to follow these models, and use metrics to track and determine the firm that provides the best mix of quality and price. Given that most in-house counsel come out of the traditional billable hour model and have no strategic sourcing training whatsoever, it’s not surprising that the traditional approach still reigns. I have a blog post about this issue here: http://www.whichdraft.com/howto/?p=191

  2. Welcome back Steve, you were sorely missed.

    While you were away (or perhaps while everybody wasn’t looking), the old models also got chipped away at the bottom by Internet-based provider of legal services and at the upper end by legal project outsourcing companies. Neither model is owned by lawyers, so they aren’t making any BigLaw partners wealthy. Indeed, as both new competitors grab market share from law firms, law firm profitability will ineluctably erode. And the neat thing is that neither of these types of providers of legal services is licensed or regulated. See, http://kowalskiandassociatesblog.com/2011/08/11/are-law-firms-going-to-be-replaced-by-internet-based-providers-of-legal-services/

    Great news about The Partnership. Can’t say I am in the least bit surprised. An absolutely great read.

    Jerry Kowalski

  3. Steve,
    Accurate observations, all. Clients will have to do more than “wonder why equity partners’ eye-popping profits keep growing along the way.” So far, IMO, clients appear to have opted not to use their market power in any meaningful way to effect change in this counter-productive model. Major corporations have the juice to say, “There’s a new Law Sheriff in town, and he insists on the same cost certainty the company enjoys in every other purchasing category. There will be no more hourly billing. If you can’t give us fixed pricing, we’ll find someone who will.” And then actually do it. How many high-profile, top-tier firms would you have to fire before everybody else got the idea?

  4. “scrutinize what they get”

    I’ll say. From the other side, it seems to me there are an awful lot of clients who just want to pay less (or to be fair, are pressed by their bosses to pay less), and are getting less quality legal services for it. I suppose some would say that that is a risk they are willing to or have to take. And in some areas, it may be difficult for the ordinary non-specialist in-house buyer to know whether they are getting good advice or not – until something goes wrong.

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