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Ending the Holiday Tradition of Outside Counsel Rate-Increase Letters
Susan Hacketts annual rant on law firm rate increases stems from her experience as the voice of in-house counsel at ACC for 22 years.
Its that most wonderful time of the year: when law firms and general counsel begin their annual antler bash over firm rate increase notices. Like the stale, dry, and tasteless fruitcake Aunt Matilda packs into the mail each year that elicits a collective moan upon receipt, law firms keep sending their clients these crazy rate-increase letters around December. Its the professions bad holiday traditionbut one thats not as harmless or easily disposed of as an unappetizing fruitcake.
Some CLOs try to get out in front of the annual fight; during their budget season, theyll pen their own letters to firms to state that theyre not only unwilling to entertain rate hike conversations, but that they want further rate cuts or discountsor theyd like to freeze rates at 2008 (or 1908) levels with any firm that wishes to continue to provide them with services. Some dont pen lettersthey simply write into their retention terms that no increases in rates will be allowed unless approved by the client.
But the law firm letterslike migrating animals following some invisible call of nature, or perhaps more aptly, like lemmings over the cliffs edgego forth anyway.
Heres my question for both general counsel and law firm managing partners: hows this annual process of arguing over rate increases going for ya?
There are better ways to handle this issue. What both sides want is for firms to profit well from delivering what clients value most: predictable, controlled costs, better staffing options, and measurable results that matter.
But before we discuss how we can do that without the ritual dance over rates, let me make sure the law firm leadership reading this understands why they absolutely must hold off on sending out that letter.
5 Reasons Your Law Firm Must Not Mail that Rate-Increase Letter
1. Your timing isas it is every year when you send these lettersmiserable. Youre sending them to clients after they have finished approving their budgets for 2013. Sheesh, guys, I know this is when the conversation arises in your firms business cycle, but havent you learned anything yet about your clients business cycles? Sending this letter in December or January about 2013 rates is just asking for it.
2. Law firms no longer own or even dictate the market for legal services. Sending this letter ignores that fact and puts your firm in peril. While it may hurt you to hear me say it, law firm services are increasingly fungible (still important and complex, but fungible). They can be performed by a growing multitude of providers who are offering faster, cheaper, more technologically savvy and sustainable services that deliver better results. Your competition isnt the firm down the street thats also sending out the same tone-deaf missive to its clients: its the law department itself, which is hiring more in-house staff to replace you and your services, or the law firm someplace far away that youve never considered to be competition thats in your league, or the non-law firm service providers who are delivering services you used to provide, exactly as the client wants them: on-time, on-budget, and with better results. And for a LOT less (not a little less).
Many of you wont believe this is true, but its more than an assertion: these in-house counsel purchasing trends are irrefutable and supported by every major legal study.
3. It may be that your firm does have legitimate reasons for a rate increase, or your current services might be undervalued. If so, by all means talk to your clients about re-pricing the work. But if youre about to send that letter, I bet I know what your rate increase letter says: it includes some variation on this theme. An acceptable justification for a price or rate increase does not include any permutation of words that actually mean the following:
If these are your underlying reasons for a rate increase, youre about to get slapped.
Are you really going to argue that there just arent enough competent lawyers out there whod like a job at half of what top firms pay their associates? Or that clients who work on corporate campuses located in suburbs, where its cheaper to work, should be thrilled to house you in the penthouse suite while they sit on stackable chairs in windowless conference rooms? Are they supposed to feel bad that your associateswho often make more in base pay than much more senior in-house lawyers who hire them to do their lower-value workneed more perks to compensate them for the long hours youre requiring them to bill to their client? Do you think that youre entitled to a share of the companys profits simply because you performed the work you were contracted and paid to do?
Clients dont expect you to live poorly, and they also expect to pay you handsomely for your services, but they also dont expect to have to pay more each year just so you can inefficiently live better. You have no right to increased profitability for simply showing up.
4. If you arent the only person in the market offering your indispensable service, or if you havent improved what youre offering (better and faster results, for instance), then your requested rate increase might just be the final straw that convinces a borderline-satisfied client to take the painful and time-consuming step of replacing youespecially if other firms in the clients portfolio (whod love to take your work away) arent engaged in such tone-deaf activities. The fact that clients continue to pay their bills and retain you is not necessarily a sign of satisfaction. Does your gut not tell you thatfor many of your clientsif something better came along, your clients would take it?
5. You just dont inform clients that youre raising rates via a letterhard copy or email. I dont care about the retainer letter written notice provisions: when a client of 13 yearswho has about 10 special deals for pricing different matters with you, as well as relationships with three of your partners and 37 different timekeepersgets a letter that says as of January 1, 2013, our standard rates will go up 10 percent, he is not only unsure of what it is that that means for his teams, special deals and blended rates; hes teed off. Youve just brushed off everything hes negotiated with you over time by fiat. And if you were planning on calling a few days later to assure him his rates wont go up because hes special, hes even more mad you sent him that letter in an effort to inflate his prices to give the illusion that youre lowering them.
Bottom line: if youre unwilling to make the case for a rate increase in person, then you shouldnt do it at all, or at least be thinking about why even you are embarrassed to have this conversation. If youd like to propose increasing what your clients pay you, you should be talking about it in detail and in relation to the value of the work, not in relation to rates.
Is there a Better Path to Firm Profitability and Client Satisfaction?
Yes, but its not easy. And it requires both the client and the firm to sit down and talk to each other, hammering out a solution that aligns the interests of the firm and the client, rather than hammering on each other.
If you want some examples of how its being done by other firms and clients, take a look at the ACC Value Challenge pages, which offer open resources detailing successful practices, tools for you to use in getting the conversation started and progressing, and metrics that can help you define and target success.
It is not the responsibility of clients to re-invent their firms, but it is the clients responsibility to demand more from their firms than a rate increase letter, and reward only those firms that learn to profit from doing their work by delivering improved value.
In consultation with clients, firms need to learn how to profit from efficiency: better staffing, process, pricing, and lowered cost of service, rather than profiting solely from raising rates and hourly billing requirements. In todays world, firms make more money by either doing something so distinctive that there is no alternative service provider to be found, discovering something new and inventing it, or figuring out how to serve customers better for less money; 99.5 percent of firms will never be able to leverage the first two options, and firms that are left to the third have to understand that they wont make more money by telling clients that the firm is raising its rates for the same old inefficient service.
The value of what a law firm offers is not just the sum of the hours they spent doing itit must be based on its value to the client, rather than just its value to the individual lawyers who did the work. And rates alone are not an accurate indicator, nor should they be the lead negotiating tactic for clients trying to assess a firms continuing value. Indeed, neither high nor low rates accurately reward firms for what it is that they do best and most efficiently. That kind of pricing must be based on valuesee, e.g., my previous set of articles in Corporate Counsel on law firm pricing directors and initiatives.
If those of you in law firm leadership truly feel that you should be paid more for what you do, then talk to your clients about the distinctive value of what you offer, or the market value of what it is that they need to have done. Dont talk to them about the high cost of an hour of your time, as if every hour you spend has the same increased value to a client. And remember when you talk to them: clients arent chasing cheap service; they want value and cost control.
A Word to Clients About their Role in Perpetrating this Annual Nonsense
Clients: Why are you expending even one erg of energy responding to rate increase requestspositively or negatively? Why do you need to send missives to your outside firms reminding them that you wont entertain any hourly rate increases, if your actual goal is to get your firms to focus on lowering all-in cost while improving the efficiency of their service delivery? Youre perpetuating dysfunctional behaviors by continuing to entertain this conversation.
Please spend your time and energy this year researching, scoping, and negotiating the all-in cost or price ceilings you will set to reflect the value of each matter in your portfolio. These prices should be based on what the work is worth to you as the client (rather than to the firm); if your firms are not well-positioned to provide the work as you value it, remember that there are many possible and more plausible suppliers in today's market, all of whom deploy quality workers or lawyers. Define what you value in a more tangible way so that your firms can provide exactly what you expect them to deliver, on-time and on-budget, and in accordance with an agreed-upon scope of work, result goals, metrics, and project management plans.
If you do that, you will be on the road to a place where you dont need to care about hours or rates, even if the firms that you wish to retain continue to rely on them internallyyoull get the predictability of budget and quality services you want, without the shell game negotiations. And youll relegate the issue of the proper rates for hourly segments of a lawyers time to the more modest role it should playas an internal unit of measurement of the productivity of a lawyer by the law firm in its accounting practices.
So clients, what would you rather do with your time spent with outside counsel this holiday season? Lock antlers over rate increases with the guarantee that regardless of whether you "win" or "lose," youll have no control over the all-in cost of your services for 2013? Or think about fixing what's so obviously broken?
Throw away the fruitcake practices of the past. This holiday season, give yourself and your client the gift that keeps giving, by moving beyond the rates conversation to invest your firms in providing what you value, determining what the work is worth to you, and scoping the work and process youre willing to pay your firms to deliver: on budget and aligned with your desired results.
Merry Christmas, Happy Hanukkah, Joyous Kwanza, Peace On Earth, Happy Sledding, and a fruitful New Year to you all!
Susan Hackett is the CEO and CLO of Legal Executive Leadership, LLC, a consulting practice in the Washington D.C. metro area. She is the former senior vice president and general counsel of the Association of Corporate Counsel (ACC), where she served for more than two decades as the voice of the in-house bar and built a loyal network of thousands of in-house and outside legal executives, as well as a reputation for innovation, excellence, and success.