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?
- Firm Leaders: are you feeling pretty good about the odds that your most valued assetsyour clients and your top relationship partnersare 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 wont be billed at higher rates (or maybe even that youll 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 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:
- The firm would like to make more money (and cant squeeze out any more hours than theyre already billing).
- Weve raised our rates every year at this time and its always worked before: weve even raised rates at an exponentially higher pace than inflation for providing exactly the same services each year for the last several decadesso we assume our clients will continue to pay these increases from habit and training.
- The firms 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 theyll 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 cant 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, 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.