This blog is devoted to exploring issues that continue to challenge law firms and their clients and to sharing ideas and tips about how the profession can or is innovating to adapt to the changing world of the "New Normal".
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This is the time of year law firms get ready to send out their annual letter to clients citing their new billing rates for 2013. Despite all of the recent coverage about legal departments cutting their budgets and forcing law firms to reduce their rates, two recent surveys find that law firms still plan to raise their rates in 2013:
According to the most recent Wells Fargo Report, "One way firms may be coping with the perfect storm of slackening demand, increased expenses, and falling realization rates is by raising their fees: Billing rates were up 3.4 percent through the first nine months of the year, and two-thirds of the firms surveyed said they plan to raise billing rates between 3 and 4 percent overall next year."
Even mid-size firms plan to raise their rates: "At the same time, 21 of the 26 leaders expected to increase billing rates during 2013, even as 20 of them reported that more of their clients are requesting fee discounts."
This seems to indicate a complete disconnect between what clients are telling their law firms they want and need and how law firms are responding. Billing rate increases rarely represent new major expenditures or investments that firms have made to provide additional value to clients. More often, billing rates are decided based upon what a law firm's expenses will be, then taking into account anticipated utilization and realizations (expected collections/cash in the door) plus whatever the partners decide they want for profits. In fact in its report, Altman Weil suggests that firms do just that: "Law firms should price their services, whether using hourly or non-hourly fees, based upon the profit margin they desire."
Clients have a lot on their minds these days. Their CFOs are telling them to reduce their costs by 20%+ per year – and they mean it. Even in the "new normal" environment, firms are not really responding creatively or aggressively. They assume that if the client needs to reduce its expenses, it should come from another firm's bucket. Everyone knows the game by now, firms raise their rates in order to provide the 10-20% discounts clients are asking for.
One thing most law firms usually don't think about is the impact that their fees may have on a GCs own personal success or that of his/her legal team's success. A recent survey "The 2012 In-depth Top General Counsel Compensation Report," prepared by Equilar, looked at compensation packages of 404 general counsel in the Fortune 1000.
The review of the findings demonstrate how large a percentage of a GCs cash compensation is comprised of by his or her bonus. In many cases, the base salary is much less than half of the cash compensation. I wonder whether law firms ever really think about what goes into the bonus criteria for their clients. Most often it is how well the GC/executive contributed to the financial success of the company that year. Bonuses are tied to metrics to meeting certain targets.
For most GCs, these targets also include how well they managed their legal departments and budgets, including whether they reached the goals established by their CFOs to reduce the legal budget by 15 or 20%. When one considers how significant a proportion of a GCs bonus is to their total cash compensation – perhaps partners can begin to understand why GCs have become so focused on managing and reducing their legal spend. If 40-87% of your personal take home pay was dependent on how well the firm generally and you personally met financial and other success goals, wouldn't you scrutinize and try to manage your costs?!
It is rare that partners really think about the impact they have on clients in ways other than "we won the case, we handled a delicate and contentious negotiation, we closed a very complex and difficult deal, or we called the regulator and got them to back off." Often, these types of results are how partners describe how or why they provide value. They aren't wrong. What we know, however, is that getting a result at all costs every time is not what the client always wants or needs and more importantly, overall management of the legal department including legal costs likely will have an impact on in-house counsel's personal success and compensation.
This should bring some new light to partners who are managing client relationships, especially those who continually bemoan the fact the GCs keep cutting their budgets and pressing them to be more efficient. Can you blame now that you know how much is at stake for them?
A few thoughts to help you and your team better understand and approach the way you work with your clients: