Sunday, April 01, 2007

Law Firm Salaries from the Client's Perspective

Over at Legal Blog Watch, veteran law blogger Caroline Elefant recently blogged about associate salaries from the under-explored point of view of clients. It is common wisdom that any hikes in associate salaries generally get passed on to clients unless the clients push back or object. In other words, the assumption is that there generally is an inelastic demand curve for legal services--as prices go up, demand does not go down all that much.

Certainly that's not true in all cases, but it is not a bad place to start for purposes of discussion. Surely some types of legal projects--IPOs, white collar criminal defense cases and the like--are far less sensitive than others to the cost of services being provided (read: what attorneys charge). In fact, an assessment of what types of legal projects are more price-sensitive might be an extremely interesting and valuable empirical study.

But again, the generally accepted view is that the cost of associate raises gets passed on to clients. And I can say from my own anectodal experience that whenever large firm associate salaries go up, so do associate billing rates. Whether the same thing happens at mid-sized firms in regional markets might be another interesting empirical study.

But I digress. Elefant's post discusses in detail how the increase in associate salaries plays out in terms of cost to clients. Her post centers on an excellent discussion of the issue by Susan Hackett, who is general counsel of the Association of Corporate Counsel. Hackett's article on the subject can be found here. Both Elefant's post and Hackett's article are well worth reading.

My questions on the subject are as follows:
  • Will Hackett's solution--she suggests that companies push more legal work to midsized firms in regional markets--lead these smaller law firms to underprice, and thus undercut, the larger ones? She suggests that these smaller firms can do most work just as well as the really big firms, and for much less cost. Will this result in a market correction against escalating legal fees?

  • Or, will Hackett's solution just mean that the biggest firms end up with the hardest, most specialized work that other firms aren't as good at doing? If so, is that an undesirable outcome? Or might such segmentation of the market actually be preferable, in that big firms will be able to justify their very high billing rates for very difficult work?
This is a point on which my thinking is not yet congealed, and I can summon anecdotal experience from my own days in practice to support either view. Perhaps both are right to an extent. And perhaps that's the real point: perhaps we simply cannot answer these questions without meaningful data. Absent such data, maybe we are doomed to argue and talk past one another, using anecdotal evidence to support our views.

As I think about this further I will post again as appropriate--and of course, I welcome comments on the subject in the meantime.


Erik Mazzone said...

Interesting post, Greg.

Addressing only the first part of your post (whether rising associate salaries are passed along to the client), there is another variable that would be interesting to have data on: does the percentage of associate time "written off" by a firm increase after an increase in salaries/billing rates?

If so, that would tend to indicate that at least some of the cost of the increased salaries is being passed off on the associates in the form of (hidden) higher billable targets.

Phaedrus said...

I would like to hear more about the mythical partner/shareholder salaries. said...

She suggests that these smaller firms can do most work just as well as the really big firms, and for much less cost. Will this result in a market correction against escalating legal fees?

Wow - this is very interesting!