I was talking the other day with a partner in a large national firm. For a variety of reasons, including the nature of his practice area, his annual billings have been declining for a couple of years now, and he’s been contacted about it by some of the senior people in the firm. He’s been tempted, from time to time, to respond to their concerns by saying: “Have you ever noticed that every year, you raise my billing rates, and every year, I bill fewer hours?”
That neatly encapsulates what I think is a real and dangerous trend at a lot of the bigger law firms: week by week, rate increase by rate increase, they’re pricing themselves out of the market. The profit imperative is so strong at these firms, and the level of economic sophistication often so low, that rate increases are ordered up regardless of whether the clients want them, can afford them, or are screaming bloody murder about them. To the extent a firm thinks about its clients when raising rates, it often wagers that they have relatively limited options — they need to get the work done and they want it done by lawyers they trust — and that they aren’t prepared to make a radical and onerous move like switching firms (especially since almost all big firms operate the same and bill the same anyway). That gamble has paid off handsomely over the years, and so the firms have had little incentive to change their approach.
What’s happening now, however, is that the clients and their lawyers are teaming up and doing an end run around the firms. There’s been a barrage of reports over the past few months about lawyers abandoning big firms to set up smaller boutique practices, taking clients with them, and thriving in the result. It’s a four-step process: client tells lawyer it can’t afford her rates anymore. Lawyer tells client she doesn’t control her rates and doesn’t want to lose the client. Light bulbs appear simultaneously over their heads. And a few months later, a new small firm is born, with at least one A-list client on its roster.
I’ve seen and heard variations of this account many times in the last several months. Sometimes the motivation is financial, the chance to keep good clients and retain more profit. Sometimes, especially for women who set up their own shops, it’s to escape the inflexible culture of large firms that insist lawyers devote their prime family-starting years to business. And sometimes it’s the natural desire of talented and ambitious lawyers to start a new chapter in their lives — the difference being that this new chapter can now start with an old client. All the lawyers I’ve spoken with and heard about who’ve taken this plunge couldn’t be happier — and they couldn’t be busier, either, not only with the old clients they brought along but with new clients drawn to the prospect of great lawyers at affordable prices.
This American Lawyer article describes the genesis and market advantages of these new boutiques:
It’s all about value. The recession has increased clients’ price sensitivity, creating an opening for smaller firms with lower, more flexible costs. Boutiques cater to cost-conscious clients by lowering overhead expenses, slashing rates and offering alternative fee arrangements, while providing the same legal services that their founders offered at their old firms. …
Mark Suzumoto, name partner at Van Etten Suzumoto, says his rate has dropped 30 percent to 40 percent since leaving McGuireWoods. Durie has lowered her rate 20 percent. At bankruptcy boutique Harrington Dragich, James Harrington says he gives clients a “meaningful discount” on what he charged at Foley. …”The biggest positive of our firm is that we’re delivering the same expertise at a lower cost,” says Harrington.
These lawyers can reduce their rates not just because they’ve been freed from the large firm’s profit yoke, but because they’re also throwing off much of the overhead costs — expensive leases, summer student programs, extensive administration, and general infrastructure — that large firms have accumulated over time. The benefits this infrastructure delivers to the big firm can be argued, but the benefits it delivers to clients are usually negligible at best. As far as the client’s concerned, the primary and sometimes only benefit of hiring the firm is that it gets to work with a lawyer it likes and trusts. So if the client can get that lawyer at a lower cost and with less hassle, it will. It’s also no coincidence that in many of these new firms, lawyers are selling their services on a flexible- or flat-fee basis. That’s the new reality of the lawyer-client relationship, and these boutiques are among the first to get it.
I’m not sure if large firms in this situation realize how much danger they’re courting. Two of the profession’s oldest truisms are that clients hire lawyers rather than firms, and that a firm’s only real assets walk out the door every night with the intention to return the next day. Firms that raise their fees to the point that both clients and lawyers leave seem to be forgetting or ignoring these rules. Or, maybe more likely, they know these rules and they recognize the risks, but their cultural machinery is simply too rigid and complex to allow them to respond effectively. So many aspects of the traditional law firm model are breaking down, from annual rate increases to unilateral pricing to pyramidic associate leverage to open-ended hourly billing, that it’s hard to know what to address first.
But a joint exodus of good lawyers and good clients — not to another firm, but to a brand new settlement altogether — can’t be interpreted as anything but a disturbing sign. A firm can survive a couple of these kinds of losses, but much more than that, and the internal crisis of confidence can spiral out of control very quickly. If your firm hasn’t yet noticed the link between higher rates and lower billings, take a good look right now.