We return for another look at this topic; yesterday, we looked at inflation as a rationale for rate increases. Today, we probe the other: the cost of securing good, new laywers.
To frame the issue, let’s return to an expert:
The increase is partly due to inflation and supply and demand, said Joseph Altonji of the management consulting firm Hildebrandt International.
“It’s the demand for a really good lawyer, and it costs to hire really good people,” he said. “Since these costs are going up, the firms have to pass that cost on.”
This is a bit remarkable since it exposes one client-relations problem about raising rates that has been out there for years. Nearly every time law firms raise starting salaries for new associates, a spokes-partner says something like “this is our way to attract the best lawyers to our firm; we do not pass these costs along to clients.” The law firm community nods, and the GC community collectively says, “huh?”
As I have looked at the relationship of starting salaries and rates before, I won’t repeat myself here. And as tempting as it is, we’ll leave the annual bonus drumbeat to others (but I guess it shows current rates are highly profitable).
Suffice it to say that any notion of scarcity is rather specious; there are plenty of smart law grads out there. You can even look outside the Top Ten schools! And we know that new lawyers know virtually nothing about the practice of law; most new associates spend the first few years learning on the job (or is it on someone else’s dime?). If only a few make partner, did you really need to pay so much (and charge so much) for new associates?
What really is scarce is not talent. What is scarce at the larger firms is this: equity partner slots. And the equity partners set the rates.
And here we have the real reason for billing rate increases. Equity partners want to make more. And if their share of the pie is either fixed (no more partners) or shrinking (a few more, if they must), you can only be more profitable (per-capita) by raising hours or raising rates. Most of these firms are at or above the threshold of humanly-achievable billable hour targets. So it’s really about raising rates; profits-per-partner is a bragging-rights metric that is simple, comparable and widely published.
So I submit my brief as to the proximate cause of increased billing rates. No to inflation and cost of human capital. Yes to partners making more money (or at least staying level for a while longer…?).
But enough of this game; who is really responsible and what can be done about it? Check back tomorrow…