Time to end the holiday tradition of outside counsel rate-increase letters

Susan Hackett

Corporate Counsel

12-12-2012

Susan Hackett's annual "rant" on law firm rate increases stems from her experience as the voice of in-house counsel at ACC for 22 years.

It's 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.

It's the profession's bad holiday tradition—but one that's 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, they'll pen their own letters to firms to state that they're not only unwilling to entertain rate hike conversations, but that they want further rate cuts or discounts—or they'd like to freeze rates at 2008 (or 1908) levels with any firm that wishes to continue to provide them with services.

Some don't pen letters—they just write into their retention terms that no increases in rates will be allowed unless approved by the client.

But the law firm letters—like migrating animals following some invisible call of nature, or perhaps more aptly, like lemmings over the cliff's edge—go forth anyway.

Here's my question for both general counsel and law firm managing partners: how's this annual process of arguing over rate increases going for ya?

• Firm leaders: Are you feeling pretty good about the odds that your most valued assets—your clients and your top relationship partners—are going to find this an overall productive and happy set of conversations that will leave everyone feeling better about the firm?

• In-house counsel: Even if you "win" and your firms agree that you won't be billed at higher rates (or maybe even that you'll even receive lower rates), would you care to bet on whether the all-in cost of services provided by your firms this year will go up or down?

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.

Five reasons your law firm must

not mail that rate-increase letter

1. Your timing is—as it is every year when you send these letters—miserable. You're 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 haven't 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 isn't the firm down the street that's also sending out the same tone-deaf missive to its clients: it's 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 you've never considered to be competition that's 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 won't believe this is true, but it's 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 you're 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:

• The firm would like to make more money (and can't squeeze out any more hours than they're already billing).

• We've raised our rates every year at this time and it's always worked before: we've even raised rates at an exponentially higher pace than inflation for providing exactly the same services each year for the last several decades—so we assume our clients will continue to pay these increases from habit and "training."

• The firm's cost of service is going up: the firm had no choice but to raise associate salaries again, pride obligates us to follow the Cravath bonuses, our best partners expect that every year their PEP must rise or they'll leave and take all our business with them; further, the landlord of our luxury office space located in the most expensive real estate market in the country is increasing our rent again; and we have so few secretaries and support staff left now, we really can't afford to fire any more to cut costs.

• Your company has had a great year and is very profitable, so a) the company can afford to pay more, or b) we deserve a share of the returns.

If these are your underlying reasons for a rate increase, you're about to get slapped.

Are you really going to argue that there just aren't enough competent lawyers out there who'd like a job at half of what top firms pay their associates? Or that clients who work on corporate campuses located in suburbs, where it's 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 associates—who often make more in base pay than much more senior in-house lawyers who hire them to do their lower-value work—need more perks to compensate them for the long hours you're requiring them to bill to their client? Do you think that you're entitled to a share of the company's profits simply because you performed the work you were contracted and paid to do?

Clients don't expect you to live poorly, and they also expect to pay you handsomely for your services, but they also don't 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 aren't the only person in the market offering your indispensable service, or if you haven't improved what you're offering (better and faster results, for instance), then your requested rate increase might just be the final straw that persuades a borderline-satisfied client to take the painful and time-consuming step of replacing you—especially if other firms in the client's portfolio (who'd love to take your work away) aren't 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 that—for many of your clients—if something better came along, your clients would take it?

5. You just don't inform clients that you're raising rates via a letter—hard copy or email. I don't care about the retainer letter "written notice" provisions: when a client of 13 years—who has about 10 special deals for pricing different matters with you, as well as relationships with three of your partners and 37 different timekeepers—gets a letter that says "as of Jan. 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; he's teed off. You've just brushed off everything he's negotiated with you over time by fiat.

And if you were planning on calling a few days later to assure him his rates won't go up because he's special, he's even more mad you sent him that letter in an effort to inflate his prices to give the illusion that you're lowering them.

Bottom line: if you're unwilling to make the case for a rate increase in person, then you shouldn't do it at all, or at least be thinking about why even you are embarrassed to have this conversation. If you'd like to propose increasing what your clients pay you, you should talk 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 it's 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 it's being done by other firms and clients, take a look at the ACC Value Challenge pages (http://www.acc.com/valuechallenge), 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 client's 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 today's 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 won't 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 it—it 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 firm's 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 value.

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. Don't 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 aren't 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 requests—positively or negatively? Why do you need to send missives to your outside firms reminding them that you won't 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? You're 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 don't need to care about hours or rates, even if the firms that you wish to retain continue to rely on them internally—you'll get the predictability of budget and quality services you want, without the shell game negotiations. And you'll relegate the issue of the proper rates for hourly segments of a lawyer's time to the more modest role it should play—as 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," you'll 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 you're 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!

This article first appeared in Corporate Counsel, a Daily Report affiliate. Susan Hackett is the CEO and CLO of Legal Executive Leadership, 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, 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.