Thursday, 29 September 2011

Big Law Salaries - can we have a pep talk?


I am fortunate enough to work in an organisation full of experts.  About several hundred of them all told.  They know rather a lot about what makes the financial world tick.  In fact they often predict how it will tick and why.  And sometimes their thoughts move markets.  It is a privilege to work amongst them.

You can buy this expertise quite readily.  It costs about £300 to buy an FT.com subscription and read as much of this expertise as you like for a whole, entire year.  Hundreds and thousands of articles, most of them analytical, detailed and bathed in expert commentary.  FT plug over.

Contrast this with the organisation I used to work in, contrast it with any Big Law firm.  They too are full of experts.  They know quite a lot about how the law works.  They too can sometimes predict how it will tick and their thoughts can help their clients move markets, even if they cannot do it themselves. 

You cannot however buy that expertise very readily.  £300 will get you about an hour's time of someone who has about 4 or 5 years experience and they probably won't have time to tell you what you need to know in that short hour.  One hour.

Which would you rather buy with your £300?  What sounds like better value?  Even putting aside my subjective bias to my current employer, it is a bit of a proverbial no-brainer isn't it?  More economic and financial analysis than you can possibly read and which will provide you with a year-long competitive advantage, or an hour on the phone with a lawyer.

Why is there such a discrepancy in the price and value of journalism compared to professional services?  I propose that it is in no small way down to custom and practice.  Down to habitual lazy behaviour and assumptions which are not challenged by the clients that instruct law firms.  If you need any evidence of this behaviour, I recommend this excellent piece on Law.com by Mark Harris, the CEO of Axiom, which states that between 1998 and 2008 law firm pricing increased by 70 per cent, in contrast to a rise in non-legal business costs of 20 per cent over the same period.

One such un-challenged assumption is this – that the level of compensation payable in Big Law Firms is reasonable.  That in Big Law Firms, it is reasonable for PEP to be (give or take) no less than half a million pounds, that it is reasonable for newly qualified solicitors to be paid salaries in the region of £60,000 according to Roll on Friday’s data.  These assumptions seem reasonable at face value, but it is these assumptions which allow (or even require) law firms to charge in one hour what the FT charges a subscriber in one year.  Contrastingly, there is no assumption in news organisations that a large proportion of the experts within the workforce must earn high six or even seven figure salaries (or drawings to be technically correct), which is reflected in the price of the product.

In-house lawyers don't much like the hourly rate model.  There are of course plenty of alternatives to it these days but most of those alternatives are still priced on a "time spent" basis with the spectre of the hourly rate lurking in the background.  Law firm business models require a certain amount of money to be generated by a certain amount of time spent in order to fund the high compensation packages referred to.

I wonder if in-house lawyers are wasting our time focussing on the hourly rate model.  I wonder if instead we should be spending our time focussing on the reasonableness of the assumptions which exist in the marketplace about what private practice lawyers "should" earn.  But we don't, because market norms exist which make it abnormal to challenge such assumptions.

If news did not exist today as a service and were "invented" tomorrow, I'm confident it wouldn't be priced on the basis it is today.  What CEO of NewsCo (geddit?) would assemble a few hundred experts and ask them to write for a year in order to assemble a product that would sell for about one or two pounds a pop?   But because we are used to news being relatively cheap, it is accepted that it is cheap, despite the immense value created by thoughtful commentary and analysis of news.

It's time to drive down law firm rates.  But not just by reference to the hourly rate.  By reference to the irrational assumption that it is acceptable for clients to help their lawyers become millionaires.

Let me add an important rider.  I appreciate that Big Law lawyers are intelligent, work extremely hard and often at unsociable hours.  I accept that there is a price to pay to be able to call on that expertise at any hour, any day of the week.  And anyone working at that level of intensity has a right to expect a high level of compensation, otherwise why bother frankly.  So I'm not calling for the high end of the legal profession to adopt some kind of Marxist ideology.  But I am challenging the assumptions that exist in the legal marketplace about the "normal" levels of compensation payable.

A footnote for any aggrieved solicitors reading this who don't work in Big Law.  This post is about Big Law.  It is not intended as a criticism of the thousands of UK solicitors who ply their trade on the high street or elsewhere for more modest compensation.  And if you are an aggrieved solicitor reading this and working in Big Law, then feel free to pull my arguments apart in the comments section below.

7 comments:

  1. I think one fundamental problem with your post Tim is that you equate advice with information. Big law and others pour out information in the form of free newsletters. But the giving of advice is very different otherwise, presumably you would not be in need of it. You could simply get hold of lots of newsletters and have someone sort them by subject and then search through them whenever you had a problem touching on that area and hope the article and your own understanding of the law would be sufficient not to need specfic advice.

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  2. An interesting read. However, I think the comparison between legal advice and journalism fails, for the following reason. The FT (or similar) may sell for only £1-£2, but is sold on mass, generating a fairly large revenue stream. Contrast with legal advice, where the advice is being provided to (and thus purchased by) just one client. Journalists do not write for an individual, solicitors do.

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  3. Great post Tim - I'd not really looked at pricing from that angle before. The closest I've come is talking to in-house lawyers where their procurement teams are starting to look at law firm profit margins, and use this a tool to shape negotiations. Let's be honest if you are a global business, with a big legal spend, but making single digit margins, paying a law firm top dollar to support their big fat margins certainly is the start of an interesting conversation. Now of course these businesses may have different operating models (as Azmon points out) but ultimately increased competition IS going to drive these margins down in many, many cases.

    For me the key is to connect the service to value delivered. Lots talked about this, but it can be difficult to do. If the firm can deliver value, and the client appreciates this, then the focus on margins and PEP can become secondary.

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  4. The heart of the problem lies in BigLaw's business model. High salaries are just a symptom. Partners, the owners of the business, do not have a realisable capital stake in the business, unlike "normal" business. There's no exit route to realise capital. So the incentive is therefore to extract as much income as possible via profit shares. Once the partner leaves the firm, that's it. And this model drives high salaries all the way throughout the organisation. Maybe the advent of 'Alternative Business Structures' may start to change this. If partners of BigLaw see an opportunity to create realisable capital value in their firm investment, and see a distinction in their roles ad shareholder v. Worker, this could lead to downward pressures on salaries...... Or not! Let's see.
    Laurence

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  5. Tim, your post raises questions that I have personally grappled with for three decades serving as general counsel and outside counsel. While there are many reasons why fees are high and unpredictable, the idea of caps, fixed rates, and other alternative fee arrangements are a sensitive issue for Big Law. Unfortunately, most law firms see the move away from hourly billing as a major threat, rather than a major opportunity to be more effective and efficient than the competition. I agree that it's time for an honest and hard analysis of law firm rates and the corresponding value to the client. GCs and outside counsel are at a crossroads, which presents a unique opportunity for other models of delivering legal services.

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  7. You can basically acquire a lot of news letters and possess someone sort these by subject matter and then read through all of them if you were built with a difficulty touching on which region and also desire the article along with your personal understanding of what the law states could be sufficient to not need particular advice. Thanks for sharing this informative post.


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