Last month, The Wall Street Journal caused something of a stir with a report on the spike in hourly rates charged by the nation’s largest law firms. Quoting data from Wells Fargo, the WSJ said rates at big firms had grown 9 percent in the first half of the year and were topping $2,500 an hour for the most sought-after partners.
In-house law departments were “pushing back” and “railing against” hourly rates they called “the product of law-firm excess,” the article said. “Mind-boggling,” “unprecedented,” “I about fell out of my chair,” were just a few of the publishable responses to the article I found in a cursory search of social media.
In truth, large law firms would not charge these rates if clients were unwilling to pay them. “Clients are part of the problem,” one general counsel told the WSJ. And pearl-clutching about the billable hour and ever-higher rates is a long-standing legal business tradition. Anyone paying attention to law firm rate cards 20 years ago vividly remembers the hand-wringing when large firms crossed the $1,000-an-hour Rubicon.
That said, it’s hard not to see the recent and dramatic rise in Big Law rates—and clients’ growing frustration with them—as a business development gift for midsize firm leaders. The question is whether midsize firms are ready to capitalize on the opportunity.
Balancing Quality and Value
It’s worth remembering, of course, that asking is not the same as getting. Rates may be headline-grabbing, but clients ask for discounts or partners often preemptively trim their bills before invoices are sent. In fact, a report last year by Thomson-Reuters and the True Value Partnering Institute found a 10 percent gap on average between the rate firms and clients agree upon and the amount firms actually collect.
And certain Big Law practices are hyper-specialized and, as such, attract highly paid, top-tier talent. For example, many of the litigators with elite U.S. Supreme Court practices are at Am Law 100 firms where they can charge premium rates and earn premium salaries. The largest firms also have the scale to throw a small army of lawyers at bet-the-company cases or global mega-mergers.
Still, outside those unique circumstances, midsize firms have a compelling story to tell. Most midsize firms can boast the kind of high-quality lawyering that in-house teams expect of a larger firm. And on pricing, they can offer significantly more flexibility than their Big Law counterparts, venturing beyond ad hoc partner discounts to offer a wider menu of alternative billing arrangements. This may include fixed fees, capped fees, collared fees, blended hourly rates, and success bonuses, among others.
Some companies have noticed. Heineken’s general counsel, Ernst van de Weert, told the WSJ he has been moving work away from larger firms because “you can get the same kind of quality for half the rate.” Van de Weert suggests that general counsel may not realize they have significant options outside the Big Law universe. “You have more choices than you realize,” he told the newspaper.
Filling Gaps for Clients
And clients do appear to be on the hunt for new blood. In a recent survey of U.S. and U.K. law firms conducted by legal technology provider Big Hand, 96 percent of firms said they are experiencing client attrition. The search for cost savings is a key driver: 33 percent of clients said they located less expensive legal services elsewhere, and 34 percent are reducing the number of firms they have on their panels, the survey said.
Earlier this year, in their annual survey on the state of the U.S. legal market, Georgetown University’s Center on Ethics and the Legal Profession and the Thomson-Reuters Institute noted that GCs were expecting an increase in law firm rates and intended to bring more work in-house. However, “they recognize that, despite a desire to do more work in-house, they will not be able to undertake a large-scale shift away from their outside law firms,” the report said. The Big Hand survey found that one-third of clients were bringing more work in-house but it “is taking longer for clients to build the depth and breadth of skills…required to manage the increased or specialized workload.”
Midsize firms can help fill this gap and do so in a cost-effective way. In their report, Thomson and Georgetown constructed a hypothetical corporate law department and posited what would happen to rates if that department shifted work away from the Am Law 100 and Am Law Second Hundred to midsize firms. Under the scenario, midsize firms saw their share of the work climb from 30 percent to 50 percent. This allowed the law department to cut its spending per hour by 3.3 percent, “an appreciable difference” considering the number of hours most companies rack up each year, the report said increasingly involved in buying and vetting legal services.
Please note, the hypothetical posed by Thomson and Georgetown included a healthy rate increase for the midsize firms. That’s as it should be. Midsize firms should be able to enhance profitability even as they offer competitive rates and more closely align with the needs of their clients. Providing value should not mean participating in a race to the bottom.
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