Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, we look at why partners rush in to bill time when the economy takes a hit. Sign up to receive this column in your inbox on Thursday mornings.
A lot about the Big Law marketplace seems to run contrary to basic business principles.
Law firms do not benefit from economies of scale. The market consistently rewards the highest-priced service providers. And despite many firms seeing uninterrupted profit growth for nearly a decade, more than 40% of partners have said their underlying business model is “fundamentally broken.”
These little idiosyncrasies are fun to write about. Here’s a Big Law curiosity I didn’t expect to add to the list: When demand falls, prices can rise. Heresy! That sentence would get you kicked out of Econ 101, where even undergrads know better than to contradict the law of supply and demand.
It turns out that at least some partners are getting more involved in client matters, driving up the price. Many partners have been scrambling to help clients tackle a wave of issues related to the Covid-19 pandemic, while others have used a slow down in their practice areas to pick up work often left to associates.
“It is not an irrational behavior. And it is not new, either,” said Toby Brown, chief practice management officer at Perkins Coie. “But a smart partner, once they think about it, will realize those associates are of high value to them. That’s not a long-term strategy. They will start to pivot back.”
Demand for lawyers’ billable hours fell nearly 6% from a year ago, according to data from Thomson Reuters, one of the largest drops in the post-recession era. Meanwhile, the average rate lawyers billed for their work spiked 5.2%—an all-time high growth rate.
Partners, and their higher billing rates, accounted for a greater share of work than usual in the second quarter. Average daily demand for associates fell 9.4% compared to a year ago, while that metric for partners only slid 4.4%.
Partners rush in for a number of reasons, Brown said.
Many spent the spring and early summer answering urgent calls from clients demanding their advice on coronavirus issues. And the second quarter is often when beginning-of-the-year rate increases start to show up on clients’ bills. Meanwhile, associate hours may have been dislodged due to their adjustment to working from home and their children being home from school.
You could argue this means that “prices” didn’t really go up. The “product mix” just changed. Clients needed higher-level service from law firms, and law firms charged a higher price for it.
But there is also an incentive in down times for partners to start handling associate-level work. That’s at least in part due to their personal production having a measurable impact on their compensation. Brown said it is some partners’ “knee-jerk” reaction to a downturn.
It will be interesting to see what happens to rates in the third quarter. If associate time stays depressed relative to partners’ hours, clients may complain that a higher-cost substitution is occurring. If the rates return to normal levels, the narrative may be that businesses are adjusted to the current business environment and don’t need as much high-level advice.
Silvia Hodges Silverstein, CEO of legal procurement trade association Buying Legal Council, said the rate increases seemed “tone-deaf” at a time when businesses are laying people off. She said it appeared there was a “work-grab” being done by partners in some practice areas, which she said also occurred when demand fell during the 2008-2009 recession.
“Legal procurement professionals are on the lookout for value,” Silverstein said. “That means that the staffing should be right. Associate work should be done by associates, not by partners.”
Worth Your Time
On In-House Diversity: Black general counsels comprise 5% of the Fortune 1000, a milestone set in 2017 by the Black General Counsel 2025 Initiative. The next goal is to reach 10% by 2025, Ruiqi Chen reports.
On Pandemic Insurance Fights: A video by Bloomberg Law’s Andrew Satter explains the uphill battle for companies seeking insurance coverage under business interruption policies. It includes one of my favorite quotes from Bloomberg Law’s Evan Weinberger: “The cases will still be going just because that’s what we do in the United States. We sue, and the cases last forever.”
On Wistfulness: I will just let Elizabeth Olson’s words tell the story: “The last law school graduating class before the coronavirus pandemic notched a near record high employment rate, a new report found, but it warned that the virus is likely to squelch similar outcomes in the coming years.” Squelched.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.