Individual partners at local firms might explain how a national firm’s higher billing rates “just wouldn’t work” in their practice area, how their local clients had become accustomed to somewhat kinder and gentler fees, and how the national firms were fighting an uphill (and to them hopefully doomed) battle.
Conversely, national firms maintained that the work they did locally was national-quality work deserving of national-level rates; it just happened to be in Portland or Seattle and not Chicago or Minneapolis. Clients were smart enough to understand that.
I actually take a different view entirely.
One can play the rate-card game with at least three sets of rules. The first set of rules is the simple labor-market arbitrage model, where, indeed, work that could be performed in Chicago or Minneapolis can also be done in Portland or Seattle by lawyers every iota as qualified, but with lower overhead costs and compensation expectations. Simple management hygiene demands you use the most efficient resource allocation model you have handy. So: Local rates for “national” work.
The second set of rules starts from the assumption that Client X’s problem (a merger, say, or a class-action defense), although it happens to arise in the Pacific Northwest, is a sophisticated problem deserving the same impeccable caliber of service that same client would expect in New York or Washington.
So this is a land of “practice caliber drives rates, not geography.” I agree that certain practices—white collar executive defense, for example—really do demand top-drawer practitioners and timezones matter not. But I also suspect there are fewer of these practice areas, and fewer matters of moment arising within them, than national firms would like you to believe.
Finally, the third set of rules might be called the “import-export” market rules. Increasingly, client issues are not city, state, or region-centric: They’re driven by business dynamics and not the happenstance of where HQ is. We know several firms, and more may be on the way, whose network footprint of offices is driven by the perceived need of clients to have matters handled in many different places at once more or less simultaneously.
This it seems to me calls for intra-firm collaboration of the highest order, where (say on a complicated supply chain issue) the local specialist in land use in Seattle can interact with the offshore production experts in Hong Kong who can interact with the FCPA gurus in Washington who can interact with the labor union law experts in Chicago who can… This argues for an entire matrix of local rates—but now what’s “local” means Seattle, Washington, Hong Kong, Chicago, etc.
The existential question
Bringing us to what you may have all been waiting for wondering about.
Can, and should, historically local firms compete with the new arrivals (and how) or should they just assume the jig is up and prepare themselves to combine or be acquired?
Having practiced in the Pacific Northwest for a while with firms spanning 1 to 200 lawyers, I see a subtlety in your description of “local” pricing, and your implication that what is “local” to the lawyer may be different from what is “local” to the client. In your first example, a national firm may bring work in from large clients in NYC or SF, and then have the work done by lawyers in secondary cities at costs and rates substantially lower than the costs and rates in NYC and SF. (I’m using “costs” to mean the firm’s costs and “rates” to mean the charge to the client.) Another model is the national firm that charges the local rate for whatever office the work comes in to, regardless of where the work is done. You allude to this in your practice caliber model: superstars in Seattle should command the same rates as superstars in New York. (I think that’s harder to pull off than it sounds.) Move down from superstars to workhorses: if the New York client is attuned to paying $700 for midlevel partners then the client may not care that it’s paying $700 for midlevel partners in Seattle and Portland, as long as the quality of work is the same as that of the midlevel partner in NYC. The hitch, I think, for the Seattle or Portland office is that $700 for a midlevel partner is well above the market rates here, so a lawyer in Seattle who charges $700/hour for national clients either must charge a lower rate for the local clients and risk running afoul of most-favored-nation fee agreements with the national clients, or must give up the lawyer’s local book of business to Seattle-based competitors who charge at Seattle rates. It’s a fascinating business problem: how to set a rate for a lawyer at a high-rate firm in a low-rate city.
Ahh, the evergreen Plan A vs. Plan B discussion for (midsize?) regional firms. As you say Plan A is very difficult. And there are some prerequisites to even be in a position to really execute on a long-term basis. In fact, I think it means behaving like a successful boutique would:
– Your partnership needs to be extremely cohesive. And not just economically, but from an interpersonal perspective as well. Cowboy camps of lone rangers who get along begrudingly using strong forms of eat what you kill aren’t going to make it. Those guys will be picked off one by one. Slightly stronger loose confederations of silos with similar compensation schemes run by/for the benefit of a powerful few will likely splinter as well.
– You better be in touch with what makes millenials tick. This is going to be a differentiating point in recruitment in the next ten years for all firms, but really a key point for firms choosing A. Not the talking points that get the headlines, but the reality of work environment, the day to day expectations, the compensation and the career tracks. These are not your father’s lawyers, and there are no “one size fits all” answers to these questions.
– Hand in hand with the second point, firms choosing A are going to need real, transparent and executable succession plans for key relationships and the leadership of the firm. The development of the bench at several levels needs to be taken very seriously. If the younger cohort feels disenfranchised and that there is no future for them, they’ll leave for the bigger money from national competitors in droves.
Needless to say, the managing partner of a firm choosing A is going to need to be pretty dynamic and at the same time completely self-honest about whether his or her partnership is truly capable of these things. Chances are, if the firm isn’t already doing these things, its chances of survival on its own in this type of environment (over the long haul, say 5-10 years) are probably slim.
Dear “Skeptic:”
First of all, thanks for your thoughtful comments.
I agree that
We and I suspect you have seen enough of the “Cowboy/Lone Ranger” firms as well as those challenged by succession planning (of senior firm leadership as well as key clients) to know that the handwriting is on the wall for a large percentage of these midsize regional firms. We may pine for the good old days but if you look into the background of any of the founders of these firms (I have), they were not risk-averse, steady-as-she-goes types in the remotest.