The appalling increase in starting salaries for first-year associates at major big-city firms – now up to $160,000 – makes in-house general counsel want to shout out the window like the frustrated anchorman in the movie Network: “I’m mad as hell, and I’m not going to take it anymore!”
Well, it’s time to stop complaining and do something about it. If general counsel don’t, the ripple effect will cost them dearly.
An increasing number of firms in all the major legal markets, from Dallas to Los Angeles to Chicago and New York, have increased first-year associate salaries from an already high $135,000 to $160,000. The immediate effect was to then raise second-year associates from $145,000 to $170,000. Those pay hikes will ripple throughout the ranks since most firms give corresponding increases all the way up the associate chain.
How will these firms pay for the increases? They won’t just absorb them. Take them out of partner profits? Doubtful. The answer, of course, is to raise the associates’ billing rates. Thus, the salary increases get passed on to clients with no added value to show for it. At DuPont, the hidden cost of cumulative rate increases by our firms and suppliers could run as high as $4 million to $5 million per year.
It strikes me as outrageous that some of these firms use value to corporate clients as an excuse for their overbilling. One firm (not on DuPont’s preferred provider list) justified the salary increase by claiming that it had “a long-standing commitment to providing our clients with high-quality service from top-tier lawyers.” My first reaction to that comment is that if it takes a $10,000 increase to attract or retain first-year associates, the firm must have little else going for it. What about the firm’s culture, client base and work environment? Do these intangibles mean nothing?
Also, what do “first-year associates” have to do with “high-quality service from top-tier lawyers?” That’s an oxymoron. I’ve been in-house at DuPont for 30 years, and I can’t remember a time when so little attention was paid to clients’ needs by firms when it comes to costs.
I’m pleased to find one influential firm managing partner who sees these pay hikes for what they are, vis a vis their impact on clients. James Sandman, managing partner of Arnold & Porter and president of the Bar Association of the District of Columbia, wrote in his bar letter, “From the President,” from The Washington Lawyer of March 2007: “And what of the clients? It’s disingenuous to suggest that they won’t end up being charged for higher associate salaries. Although the cost of a salary increase may not be passed along in immediate rate hikes, it will be eventually. There is no increased value to accompany the higher rates, particularly not for inexperienced lawyers.”
Sandman argued that “first-year associate rates – which in some big firms were more than $265 an hour before the latest salary increases – may be reaching a point of such disconnection from intrinsic value that the client market will reject them.”
I say now is the time to reject them. There are many ways to mitigate the impact of the increases. Here are some you can use:
Restrict the use of associates. While this seems a bit extreme to me, a number of corporate legal departments are doing it. According to a recent survey by legal consultants Altman Weil Inc., five out of 38 law departments it surveyed said the recent increases led them to restrict law firms’ use of first- and second-year associates.
Require minimum associate experience. While it may not reduce costs, it may ensure competency. A 2006 study sponsored by the Association of Corporate Counsel found that the costs of inexperienced associates have become an issue for an increasing number of in-house counsel. Almost a quarter of these law departments now require a minimum level of experience for associates working on their matters.
Use temporary legal staff. As I have discovered personally, temporary legal staffing agencies can supply well-trained lawyers at a fraction of the billing rates of these overpaid new associates, and these “temps” are grateful for the work, regardless of how repetitive and routine it might be.
Use more paralegals. Your firms should never displace experienced paralegals with newly minted lawyers. In-house counsel should partner with their company’s primary firms, to help them focus on assigning work to the most appropriate level of personnel. A client should pay attorneys for doing attorney-level work, not work that could be performed by a paralegal.
Use alternative fee arrangements (AFAs). My legal department has successfully used AFAs with our primary firms in one form or another. It’s called “value-based billing.” In this arrangement, fees are directly related to the value of services rendered, rather than time spent providing legal services. We don’t want to buy time; we want to buy results. It works, because it provides the firms’ performance bonuses to incentivize better results, and the fee structure brings certainty to billing while forcing the firm to determine the right mix, experience and number of attorneys staffing the company’s case or project.
Law departments should use the occasion of these salary hikes to take a more disciplined approach to law firm rate increases. By refusing to give in to the herd instinct on junior associate salaries, general counsel can win the billing battle. The unilateral adoption of fee increases by firms must become a thing of the past. That does not mean that firms, if they bill their clients on the basis of hourly rates, must forever live with present rates. Increases in those rates should, however, reflect something other than a reflexive price increase to offset a firm’s outrageous salary spending or inability to control its own costs. These are not “cost of living adjustments:” The firms must present a compelling business case for increases.
The managers of major corporate legal departments can spend untold hours, month after month, caught up in ex post facto deliberations with their primary firms and service providers over billing rate increases. Even in the best of financial times, such protracted discussions become a burdensome addition to already overloaded in-house schedules. And in periods of economic uncertainty, such unexpected hikes make controlling budgets more problematic.
The process might confine any requests for rate increases to the months of December and the following January. Beyond Feb. 1, no fee hikes would be accepted until the next cycle, which allows for some degree of billing certainty.
In addition, DuPont Legal Function has created a rate increase template to be used by the primary law firms and service providers during the open period, by which rate increase requests would be fully explained and justified in detail. Each request can then be compared to historical data collected from the firm regarding patterns of past billing and rate increase requests. Once a tedious, manual process, the analysis is now facilitated by a sophisticated electronic billing system that allows in-house counsel to regain control of a complex data-driven process; to build an extensive database to monitor performance via invoices; and to track cost-efficiencies as well as the numbers and levels of timekeepers performing each billed task.
The billing rate review process has many benefits, but one thing stands out: It helps slow down the widespread use of overpaid, inexperienced associates on corporate legal matters.
We need all the weapons we can get in our industry’s fight against the costly ripple effect.
This article originally appeared in Corporate Counsel magazine, a publication of ALM.
THOMAS SAGER is chief litigation counselat E.I. du Pont deNemours and Co. Thisarticle originally appearedin Corporate Counsel,an ALM publication.