Tim Bratton, always worth a read, has an excellent blog on the costs of Big Law firms and what he describes as the irrational assumption that law firms need to make their partners millionaires. He also casts doubt on the, currently fashionable, assumption that hourly billing is the main problem. This was the most important passage in Tim’s blog:
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.
There’s a couple of things worth saying about what might be driving the dramatic increase in lawyer remuneration over the last decade. One is, dearly as we love them all, it’s partly the legal journalists fault. I don’t remember who first started publishing PEP tables and winkling out salary information but this drives salary inflation. League tables – the bane of everyone’s life – affect behaviour: want to be the highest billing fee earner, most profitable firm? Not everyone does, but enough to drive up salaries, profits, costs.
Nor is this as vacuous as it sounds. Firms and clients want the best lawyers. In a world of more transparency, the best lawyers know what they’re worth and where they can get it. This too drives up costs (and creates inefficiencies if Mark Brandon is right that a large proportion of lateral hires fail). The reasons why clients want this are interesting. It’s all about (I think) a theory of (what I think of as) marginal quality. Clients want the best, especially where the stakes are high and they can afford it. Gillian Hadfield argues in the Price of Law that this, coupled with uncertainty about what precisely constitutes quality, means that the impact of marginal indicators of quality can be quite significant. Price, status, experience: the firms with the best resources accumulate these and build up reputations which the clients then re willing to pay through the nose for because the risk that they get second best (even if second best is still very good) may mean that they do not get everything that they could do out of the case in hand. Like it or not, prices is part of the signal of quality in these markets.
The second reasons is obvious and does not need to be laboured but the partners set their own remuneration and have become adept at managing their firms so that even during the downturn, PEP has not been as badly hit as it might have been. They have pyramidic structures which drive costs up to feed their need for profit. They have associates whom they can overwork with the promise of partnership. That promise gets a lot of extra effort out of associates: the economists of the legal profession think of it as deferred salary. The partners take it, manage expectations and make a lucky proportion of those who want it up.
I’m not sure what can be done about this to enable GCs to genuinely to push cost down. A move away from hourly billing is, I think, part of the solution but mainly because of a secondary effect: it forces everyone to think more hard-headedly about “value” and “quality”. It’s assumed that General Counsel know about the quality of those whom they instruct, but I’ve asked a few and (on that highly suspect sample) my feeling is that they don’t, not really. After all, there are two reasons why they instruct outside firms. One is a resource issue: unpredictable and big jobs require outside firms. The other is lack of expertise. If they do not have the expertise, then they only have a limited grasp of quality. Unless they are confident they can judge quality then they will not be confident they can drive price down. If the CEO says we need this deal doing and make sure it doesn’t go wrong – do firms pick on price or quality? What does that do to cost? And this lack of confidence on quality, if I am right about that, is interesting when one considers the often stated view of inhouse lawyers (and I should say I find this view plausible) that outside lawyers are so driven by the need to bill and turnover cases that the quality can, sometimes, be rather suspect.
This suggests there might be better ways of organising BigLaw lawyers. There might be structural things that could be done (some firms refer to some GCs as tame on the basis of their prior employment with their firm) and of course our old friend the ABS might yet reveal something. Were a model to emerge which did not incentivise the profit of its owner managers quite as strongly then things might get interesting, but I am not holding my breath. And the Lawyer et al could stop publishing legal tables, but somehow methinks they never will. Nor am I sure they should.
The final point is, much as we may envy or admire the millionaire lawyers, we have to ask the question is it, in an economic sense, dysfunctional. In the market for talent, who are the competitor occupations for leading lawyers in City firms? I’m not sure I like my intuition of the answer; but put them alongside their clients: the COEs, the Banks and so on, their level of income does not look extraordinary. Whether we need our very best brains to be lured into these kinds of occupation by six zeros is, of course, a rather different question but I am not sure we can let anything other than the market decide it.
A (barely) more comforting way of thinking about this is to say, BigLaw pay is part of a more fundamental problem: elite occupations incomes have rocketed away from ordinary workers. This is not a problem specific to lawyers, but it might well be down to the Tim Bratton’s of this world to challenge the rationality of it in our little section of the economy.