Steven Harper, a former Kirkland partner of 30 years who now writes at The Belly of the Beast and is re-published regularly on law.com, is someone whose writing and analysis I have admired since he first appeared on the scene. (No, I don’t know him, but I wish I did, and what follows is in no way intended as a criticism of him, but rather an exploration of why we think our industry is exempt from the market laws that apply to every other industry. Regular readers of Adam Smith, Esq. should recognize that approach.)
But I write about Steven Harper because I need help understanding what he’s trying to say in his latest piece, “It’s the Model.”
He cites three articles, coincidentally published on three consecutive days in The Wall Street Journal, which report:
- That David Boies dislikes hourly billing: “Hourly rate billing is bad for the client and I believe bad for the firm. It sets up a conflict between what’s good for the lawyer and what’s good for the client.”
- That clients using reverse auctions to price legal services pay cut costs.
- And that McDermott Will has been sued for malpractice by a client I’m sure they rue taking on, J-M Manufacturing, for allegedly failing to adequately supervise contract attorneys from a third-party vendor.
From this Steven asks:
Amid corporate belt-tightening that targeted outside legal costs, average equity partner profits for the Am Law 100 actually rose during the last two years. They’re now back to pre-Great Recession levels of $1.4 million a year and it’s a safe bet that next year’s profits will be even higher. If I were a client, I’d ask, “How did that happen?”
“It’s the successful model at work,” most firm leaders would say without reflection or hesitation. “Growing equity partner earnings are essential to retain and attract top talent. Firms have become more efficient, so it’s a win-win for clients and partners.”
My question is: What, precisely, is wrong with that?
Strong earnings growth in this environment is, believe it or not, the rule, not the exception. If you’re surprised, you haven’t been paying attention to the S&P 500, whose annual earnings growth this year is projected at 12% (with 485 of the 500 reporting) and 18.1% if you exclude the extremely troubled Bank of America. Not surprisingly, chief investment strategists at over a dozen banks are forecasting an average 17% gain in the S&P 500 for the year.
Not only is there no necessary linear relationship between revenue and profitability, I have a problem with Steven’s hypothetical client asking, “How did that happen?”
My answer to this nosy client: None of your business!
Since when do we need to genuflect to our clients’ views on how we manage our firms? To put it in street argot, “What’s it to ya?”
Worse, the question the client is posing is fundamentally irrational.
If I’m trying to choose between an Accord and a Camry–or between a BMW 540i and an Audi A6–do I worry about which company is more profitable? Would we have the impertinence to criticize a valued client of ours for being “too profitable” or “too well managed” during challenging times?
So long as your firm isn’t goosing its profitability with smoke and mirrors, good luck and God bless.
Now, are we blameless here?
Not exactly. We’re the ones who have propelled The American Lawyer‘s annually reported PPP numbers into the capstone of their franchise, and while I’m skeptical that there’s really much of a story behind the allegation that law firms are telling Citi Private Bank one thing and AmLaw another,* we do tend to obsess about this particular arms’ race in ways that aren’t flattering to us nor do they tend to endear us to our clients.
But this is surely a venial and not a mortal offense on our parts. We should have the courage to tell our clients to, politely, mind their own business. We’re challenged enough minding ours.
*Why is there less here than meets the eye? It’s the denominator. Rare is the firm today that doesn’t have at least two classes of partners, and sometimes many more, some of which will qualify as “equity” in Citi’s eyes but not AmLaw’s and perhaps vice versa. If some firms game the system a bit on the margins, I would direct you to the Law of Unintended Consequences ensuring that whatever cutoff Citi and/or AmLaw prescribe, creative folks will be able to find a way around it. I am shocked, shocked, that it could happen. On the other hand, I suspect it’s not in the perceived self-interest of either Citi or AmLaw to scrutinize things too too carefully. They both have good things going.
For now.
Update 23 August 8:15 pm:
I asked Steven if he’d like to respond and here’s how he did (reproduced here verbatim).
You ask, “What, precisely, is wrong with that?” – namely, increasing equity partner profits during times of outside legal budget cutbacks. Maybe nothing. But another possibility appears in the following portion of my article:
“Clients should consider the untoward implications of austerity measures that don’t dent equity partners’ pocketbooks. Increased efficiency? Operating with fewer secretaries and putting locks on supply room cabinets don’t account for the extraordinary profits wave that big law continues to ride.
“Here’s another explanation. The prevailing model requires increases in billable hours — big law’s distorted definition of productivity (see “The Misery Index” http://thebellyofthebeast.wordpress.com/2011/04/06/the-misery-index/) — to offset fee reductions that clients demand. Concerned about attorney fatigue that compromises morale and work product? Too bad; the model ignores it.”
I’d offer a similar analysis of your proposed response to the nosy client who asks how equity partner profits climbed back to pre-Great Recession levels during a period of intense client pressure to cut fees: “What’s it to ya?”
Actually, the answer should be, a lot. Buying legal services isn’t analogous to buying a car. It may be a bit like relying on a professional bus driver — in that I’d want to know if he’d been awake for eighteen straight hours before he picked up my family and took them somewhere. (The Department of Transportation has rules to assure me that he hasn’t.) Most clients don’t think that a possible impact of their economizing efforts might be a reduction in the quality of legal services they’re receiving. If those chickens later come home to roost, the costs can be unexpectedly high.
Update #2, 25 August 2011:
Another loyal reader writes:
I think you are both
right. It is none of their business how much money we make or don’t
make. It is their business whether we are too tired or stressed out or
busy to do a good job on their matter (though lawyers have been working a ton
while stressed out for a long time now, this isn’t that new).
Sophisticated clients will usually investigate a little as to how their matter
is going to be handled and staffed etc. before their proceed. Not so
sophisticated clients don’t investigate and don’t necessarily care. This
is how it has always been. There’s nothing really to be done about
it. Over time clients generally will gravitate towards firms and lawyers
that they believe do a good job and are attentive to their needs (provide good
prompt service).
Maybe this is what much of it all comes down to, isn’t it? Sophisticated clients know how the system works, others, well, not so much.
And I do not take the “there’s nothing really to be done about it” as fatalistic or defeatist in the least: It’s simply a realistic reflection of the fact that anyone at BigLaw (who’s lasted more than a couple of years, anyway) is a certified Type A and will be “working a ton” whether or not they’re stressed out.
