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Susan Hackett
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 simply 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.
5 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.
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Knowledge Insider
This is the first article I've read by Susan, and it wasn't so much the fee increase that was so blatant, perhaps because I spent over a decade watching the chaos ensue in every case I ever worked on, it was astounding. Imagine...you have in-house counsel, in-house IT, outside counsel, outside litigation support, eDiscovery Vendors, Hosting Vendors, potentially auditors, opposing counsel...let's not forget their IT, and their vendors- it's a freaking Circus and everyone has a favorite vendor, everyone thinks they understand technology, and everyone wants to give their "friend" i.e. their favorite vendor the work- then you have me, the expert, who knows what technology will work, can't work, won't scale, is to small for the case, won't work for native review, vendors that can't process lotus notes, have limited capacity and yet I can't get a decision made because the partners defer to their IT or associates, the client (in-house counsel) defers to the partner, the vendors go around me, the IT staff assures them, they have the partners ear,,,, and hundreds of hours get wasted in this process- in every firm- on every case- without fail!! AND THAT'S WHERE THE MILLIONS AND MILLIONS OF DOLLARS IN EXCESS HOURS COME FROM- and there is not a single HONEST vendor, consultant, or litigation support staff member who had an honest bone in their body that would tell you otherwise. The only way to avoid this is with direct PARTNER ENGAGEMENT; where the claim hits the partners desk, and he calls in a consultant and I mean an expert, not Deloitte, not Navigant, not Huron, consultants who've been on the other side, the partner empowers them, or he works directly with the vendors and makes the selection him or herself and once they're hired then litigation support manages the technology. In 13 years this happened twice. Once at Debevoise for Tyco and once at Cadwalader for Enron. Both cases the Partners worked directly with me; involved IT when necessary, but it was clear throughout the process they were making the decision and they were evaluating the outside providers. It's a simple process, that actually makes the partner feel superbly about updating his client more frequently!
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The Lawyer WIth Perspective
Ah yes, another article bashing outside counsel about fees. How tiresome. At least, Ms. Hackett acknowledges that clients have a role in how fees increase .
A few questions:
Why do lawyers seem to be the only profession that does this? And don't tell me that it is because we are the only overpriced service provider (See consultants) or the only ones that increase rates.
What is it to Ms. Hackett that some clients, in fact the overwhelming majority of them pay the increased rates, other than to see her name in print? If X company pays them, isn't it up to them? Or does Ms. Hackett think she knows better for everyone? Maybe she should ask why so few clients don't do something about it. Now that would be an original article. Maybe they feel that their outside lawyers's work justify their fees.
Why do people like Ms. Hackett bring up the fungible point only when fees are discussed, but not at 5pm on a Friday before a long weekend when there is a time crunch to get stuff done or one of their executives has messed something up and they need help sorting it out?
Lastly, it is not particularly brave to take this stance, hence my amusement at her self-righteousness. (Note: This is a business issue, NOT a moral issue.)
I used to find the dynamic amusing, but now I find the cycle tiresome. Writers like Ms. Hackett write these articles. Some of the in-house lawyers chime in with how right she is. Some outside law firms agree so they can get the work from in-house lawyers like Ms. Hackett used to be. (Whether they follow through with all of this is separate dynamic.) "This will now begin to change !" is the battlecry
The outside lawyers bill at the hourly rate, and most clients pay it, which starts the cycle again. Sound familiar?
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The Last Honest Lawyer
Susan:
Rebel against the fruitcake! It's about time. Excellent article and guidance to clients. While all of this makes perfect sense in theory, in practice it is a full-time job for at least one person or team. So clients, take Susan's advice and hire and spend your money on a dedicated Chief Legal Officer (or consultant) whose sole job is to implement and control efficient win-win legal services for your company. The ROI will allow for days of wine and roses rather than more stale fruitcake.
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David
Your article gave law firms more credit than they deserve. I have been general counsel for more than 20 years and I can count on one hand the number of letters I have received from law firms, even after asking for such letters, actually informing me that rates were going to be increased. My experience is that law firms raise their rates without even the courtesy of a letter or a call informing me that they intend to raise my rates.
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