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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Getting Paid: Is Time Running Out on the Hourly Rate?

0516-hourly-ClockYears ago, I was visiting a friend and fellow lawyer who practiced in Wisconsin at the time. “Isn’t law great? he asked. “What other business can you think of where you get to decide how much money you want to make, and then convert that to an hourly rate which everybody then agrees to pay?” Good question. Okay, maybe it wasn’t quite that simple, but it is hard to deny that lawyers were able to build and—for a very long time—sustain a system based heavily on a predetermined hourly rate.

Those days might be ending. Cost pressures are mounting at every level of practice—some resulting from technological innovation, others from changing client demands, and others yet from new business and work-flow models in an age of instantaneous global communications and data-sharing. Though all of these factors are real and distinct, they are all ultimately the product of technological upheaval—the ever-accelerating movement toward the inevitable automation and outsourcing of many legal tasks chronicled by prolific British lawyer, author and commentator Richard Susskind.1 And pretty clearly, these changes come at a price to the profession.

The growing polarization of income in America has also had an impact on lawyers’ pocketbooks. At the top of the wealth pyramid, the ongoing explosion in accumulated personal and corporate wealth—which always demands close tending by professionals in finance and law—has presumably (but not provably) accounted for much of the past decade’s incredible revenue growth at the very biggest law firms. Conversely, the stagnating or declining real wages of 80-percent-plus of the population have diminished the affordability of basic legal services for middle- and lower-income clients.

Corporate Counsel Pushes Back

But while it’s easy to see why cost pressures are mounting in the broad lower section of the economic pyramid, a different kind of cost pressure has found its way to the to the top tiers of the practice. Rising global competition, the increasing certainty that savings can be wrung from new legal technologies, and a growing awareness by high-end corporate clients of how to negotiate with, monitor and control their outside lawyers—all these things have led to a new kind of cost-sensitivity at the top of the legal ladder.

In the tonier precincts of private practice, rates of $300-$500 per hour were relatively common in 2000, and not only in the “silk stocking” firms, where they could be much higher, particularly in New York, Washington, Chicago and on the West Coast. But it didn’t take a genius to calculate that if a corporation hired a lawyer in-house full time, and paid that lawyer $100,000 per year, expecting annual work output of (say) 1800 hours, it would be paying an effective hourly rate of about $55 per hour. And many good lawyers in many high-end markets are available and willing to work for $100,000 per year… or less.

And that, at a very general level, is exactly what happened. Somewhere in the early 2000s, several years before the Great Recession of 2008, the corporate lightbulb slowly illuminated. The process appears to have started in England, where Richard Susskind was gaining wide notice with his prolific and sometimes shrill predictions of the end of the legal profession as we know it. The migration away from hourly billing is already well-entrenched in Canada, where in 2014 less than half (47 percent) of all Canadian corporations reported billable hours as the primary way they pay their bills to outside law firms—down from 55 percent one year earlier.2 Is there any doubt where this is going? American firms are behind in this trend. But not far behind.

The emerging pattern is both simple and clear. Large businesses, at varying paces, are:

  • adding lawyers in-house, including in some cases key leaders from major private practice firms;
  • incenting general counsel to reduce outside legal costs;
  • taking direct control over the number of outside lawyers working on a particular matter at a given time;
  • using the most expensive outside lawyers for only the most important work;
  • requesting bids for outside legal work on particular matters, as they had commonly done with other kinds of service providers on non-legal matters.

In other words, the American legal system is in the throes of a customer revolution. The largest purchasers of legal services have begun to focus on value in return for their legal expenditures: improved cost-effectiveness, predictability, and efficiency without any reduction of the quality of the work.3 This drawn-out corporate “aha moment” has already had a substantial impact on the legal profession here at home. Susskind predicts that in-house legal staffs will become vastly more efficient in the choices they make about deploying their internal resources relative to external resources (private law firms), and will do much more to ensure that this work is undertaken wherever possible by less costly suppliers, such as legal process outsourcers and paralegals.4 As he put it to an interviewer,

“What clients are saying is ‘we don’t mind paying law firms high fees for the difficult stuff, but on a big dispute, if you look at the document review exercise, we really don’t need expensive young people in expensive buildings in expensive cities doing this.’”5

Locally, the growing movement of prominent lawyers out of law firms and into the business sector was dramatically highlighted when Dorsey & Whitney’s managing partner left the firm at the end of 2012 to become general counsel of United HealthCare, and two years later Dorsey’s head of litigation accepted a position as general counsel at Delta Airlines. There was a time when leaving a top spot in Minnesota’s largest firm in favor of a corporate in-house position, however good, was an unlikely career move at best. That time seems to be gone.

General counsel positions are now in serious demand. Corporations want and will pay for the best. A 2015 Bloomberg article on general counsel pay suggests that in 2015, the best-paid 100 general counsel averaged total cash compensation of $2,095,191.6

While the billable-hours drought has eased with the economic recovery, companies increasingly are demanding better deals on rates, says Adam Epstein, a San Francisco-based board consultant for small-cap corporations. “The law firm brands don’t matter as much anymore,” he explains. “I tell clients that they need to go out and find the attorney who knows how to do their kind of financing, regardless of where that attorney practices.” Chances are that attorney has recently switched firms, anyway.

–“Howrey’s Bankruptcy and Big Law Firms’ Small Future,” Paul M. Barrett, Bloomberg BusinessWeek, 5/2/2013

The growth in hiring in the corporate counsel sector is well documented in the American Bar Foundation’s After the JD study, which followed the career trajectories of the class that passed the bar in 2000. As of 2003, a total of 8.4 percent of the thousands of surveyed lawyers reported that they worked in private business. By 2012, that figure had nearly quadrupled to 27.7 percent. Conversely, the 68 percent of respondents who reported they were engaged in private practice in 2003 had shrunk to 44 percent by 2012.7 The significance of this emigration away from the private practice sector cannot be ignored. The influx of young lawyers to the business sector is almost certainly a major factor in large corporations’ ability to put a lid on the hourly rate.

And we don’t have to speculate about whether this is happening, because the nation’s largest firms themselves are unequivocally reporting that it is happening. The BigLaw consulting firm Altman-Weil annually surveys the landscape in its “Law Firms in Transition” series. Its 2015 survey revealed several trends:

  • 67 percent of firms surveyed (250+ lawyers) said they were losing work to corporate law departments that are in-sourcing legal work.
  • Three-quarters of large firms responded that they believe the pace of change in this regard is increasing.
  • 61 percent of firms of 50 or more say that overcapacity is diluting profitability; this figure jumps to 74 percent in firms of 250 or more.8

A new wave of consulting firms is influencing these trends. They operate on the self-evident proposition that the relationship between law departments and outside law firms amounts to a de facto partnership, one that offers leverage opportunities to the businesses paying for these services.9
Consultants serving corporate law
departments have the look and feel of a growth industry.

To be sure, the hourly rate is far from dead. In many U.S. law firms it remains the coin of the realm. But a recent study by the Georgetown Law Center posits that as of 2015, over 20 percent of U.S. legal services were billed on a basis other than the hourly rate.10 But nothing in the current literature on the subject suggests that the diminishing role of hourly rates in legal service billing is a temporary aberration, a fad, or a fluke.

Oddly, the billable hour may have a more promising future at the other end of the practice scale, if only because work of the sort performed by solos and small firms lends itself more readily to the simplicity of the traditional method. While I don’t suggest that the future size of hourly rates are rosy, I do posit the probability that widespread change in billing methodology (i.e. what we are seeing at the
BigLaw end of the scale), will happen more slowly at the solo and small-practice end of the practice scale for reasons of convenience, tradition, and inertia.

But despite all this, hourly rates at the very highest reaches of BigLaw continue (at least nominally) to march into the stratosphere. At the end of 2014 there were four New York firms in which the average partner’s stated hourly rate exceeded $1,000, according to the National Law Journal’s Billing Survey.11

Using legal research as an example—because it is a constant source of complaints—the law department should investigate on the front end how legal research is done rather than just complain on the back end that the legal research costs too much. Supported by actual time recording, research service (e.g., Westlaw usage), and knowledge management data, mapping the legal research workflow will bring to light who is doing the legal research and what tools they are using. The map should be the starting point for a structured dialogue about the firm’s approach to legal research on the client’s matters. Together, the two sides should be able to fashion a measurably better approach. “Measurably” because metrics should be embedded in the process as part of the improvement.

– “A Strategic Approach to Purchasing Legal Services, Pt. I,” Casey Flaherty, Thomson Reuters Legal Current 1/20/201

But what’s true for a handful of exclusive New York firms is not true for most large firms. The same survey reveals that firms in the rest of the country, including Twin Cities firms, have not seen hourly rates continue their upward march. The 2014 NLJ survey reports average partner hourly rates at the four largest Minnesota firms in the $400-$450 per hour range, with their highest-priced partner’s billing rate weighing in at less than $600 per hour. In those same firms, average hourly rates for associates are reported in the low $300 range. These rates are not very different than I generally understood them to be around the year 2000. And the rates published by the NLJ are not adjusted for any discounts offered by the surveyed firms, which are neither requested nor reported by the NLJ; as we will see in the section on BigLaw, discounting is becoming a more and more meaningful factor.

Nor is it a long leap to suggest that hourly rates have not moved significantly for well over a decade because the demand for high-end business legal services has almost certainly waned. Despite the startling dynamics of BigLaw, which we’ll explore next, reduced demand in the private practice sector is self-evident as firms of all sizes shrink, merge, consolidate or reposition, and as the demand for new associates continues to languish. The abrupt flattening of the growth curve described in the earlier section on lawyer jobs only supports the conclusion that the halcyon days of ever-increasing hourly rates are most likely behind us, and that we are still in the process of learning what the future is going to look like.

Technology: The End of Business as Usual?

For solos and small firm practitioners, the steady influx of new legal technologies and practices has been at best a double-edged sword. While lawyers who are willing to master and use such innovations as automated document assembly and law office management software can save a great deal of time and sweat, it appears that most solos/smalls have yet to adopt them. Given the cost factor, the growing pressure on them to scare up clients and billable hours, and the inevitable element of technophobia surrounding anything new, it isn’t hard to understand their reticence.

But the broader tech market marches on. Starting in the early 2000s, a new enterprise called LegalZoom began selling low-cost, customizable forms covering such bread-and-butter legal tasks as estate planning and simple business incorporations. The essential premise of such endeavors—and there are many more online, limited-scope services now—thus poses a greater threat to the traditional, face-to-face practices of small-town and general practice lawyers everywhere than to large firms and mega-firms.

At the BigLaw end of the spectrum, e-discovery technology is already starting to disrupt the livelihoods of those in the associate ranks who have traditionally document review and discovery work. Susskind refers to the basic tasks typically performed by associates as the “bottom of the pyramid,” and goes on to warn that the future of large firms depends heavily on what they do with this work:

“It all depends on what you do with the bottom of the pyramid…. I think legal businesses can still be profitable, but they need to think more imaginatively about how they resource the bottom of the pyramid, and how they make money from the bottom of the pyramid…. [I]t seems to be inevitable that the bottom of the pyramid will be subject to a great change, and many law firms will suffer [if they don’t strategically shift].”12

The outsourcing of legal work once done by a firm’s own attorneys appears to be here to stay as well: The consulting firm Altman-Weil’s 2015 Law Firms in Transition survey indicates that only 10 percent of respondents think that trend is temporary, while 52 percent believe it is permanent. Back in 2009, that second number stood at 11.5 percent. In his 2013 book Tomorrow’s Lawyers, Richard Susskind lists no fewer than 15 ways of sourcing legal work in the digital age.13

Meanwhile, high-end research and development efforts at places like Stanford’s Codex (“the Stanford Center for Legal Informatics”) are exploring how artificial intelligence (AI) and machine learning might be applied to legal judgments of a higher order—the sorts of tasks that have traditionally been the realm of the most expert (and expensive) law partners. There is already experimentation underway in the use of data-intensive statistical analysis to determine the best venues for particular kinds of litigation, for example. And an article in the April 2016 ABA Journal contains an intriguing account of one legal entrepreneur’s efforts to teach machines to sift through massive, unstructured streams of corporate data to ferret out warning signs of legally dubious practices before they lead to litigation later on.14

It remains entirely unclear where such efforts will take us, but it’s worth noting that last year the world’s biggest law firm, Dentons, launched an independent subsidiary called NextLaw Labs to explore the applications of supercomputing and AI to legal work.

In general, I am the last person any sane lawyer would ask for technical-technological information, specifics, or advice. I was fortunate to be able to spend most of my career in a state of technological oblivion; I was even more fortunate to have people around me who could mask my tech-related shortcomings.

But the future has arrived, and lawyers are learning that if they don’t embrace technology, it will devour them. Every aspect of our profession has been not only touched but (in most cases) reconfigured by the technological changes that appear and reappear with alarming regularity. These changes may or may not ultimately improve the delivery of legal services; beyond any shadow of a doubt, however, they will reshape the process of delivering quality legal service. Lawyers push back against these changes at their peril; they are here to stay, and smart lawyers will stay tuned.

 

Next – Big Law: The World of the Megafirm 

 


ABOUT THE AUTHOR

Wood R. Foster, Jr. practiced law in Minneapolis from 1968 through 2013, most of it as a litigator with the firm now known as Siegel Brill. He served as HCBA president in 1992-1993 and as MSBA president in 1999-2000. He conceived and edited “For the Record: 150 Years of Law and Lawyers in Minnesota,” which was distributed to all lawyers and libraries in Minnesota in 1999. Wood served as a member of the Lawyers Professional Responsibility Board for eight years beginning in 2001. He was a founder, 1993 president and 30-year board member of the Advocates for Human Rights. As a retiree, he works one day each week with the “St. Paul Regulars,” a Habitat for Humanity crew.  


Notes

1 Susskind has authored three books: The End of Lawyers? Rethinking the nature of legal services (Oxford University Press 2008); Tomorrow’s Lawyers: An introduction to your future (Oxford University Press 2013); and, with his son, Daniel Susskind, The Future of the Professions: How technology will transform the work of human experts (Oxford University Press 2015). Add cite to Susskind’s list of decomposed legal tasks

2 “The Unkillable Billable Hour: How Canadian Corporations are Clinging to Legal Business Poison,” Drew Hassleback, Financial Post, 3/11/2015.

3 “Is the Billable Hour Obsolete?” Leigh McMullan Abramson, The Atlantic, 10/15/2015; http://www.theatlantic.com/business/archive/2015/10/billable-hours/410611/ 

4 Richard Susskind, The End of Lawyers?, quoted in http://www.goodreads.com/author/quotes/141201.Richard_Susskind 

5 “Richard Susskind: Moses To The Modern Law Firm,” David J. Parnell, Forbes 3/21/2014 http://www.forbes.com/sites/davidparnell/2014/03/21/richard-susskind-moses-to-the-modern-law-firm/ 

6 “Surveys find mixed demand, moderate pay for corporate counsel,” Laime Vaitkus, Bloomberg BNA 8/31/2015 https://bol.bna.com/surveys-find-mixed-demand-moderate-pay-for-corporate-counsel/

7 “10 interesting stats from the After the JD survey,” ABA News 2/10/14 http://www.americanbar.org/news/abanews/aba-news-archives/2014/02/10_interesting_stats.html

8 Altman-Weil, Law Firms in Transition 2015, pp. i-iii http://www.altmanweil.com/dir_docs/resource/1c789ef2-5cff-463a-863a-2248d23882a7_document.pdf 

9 See, e.g., “A Strategic Approach to Purchasing Legal Services,” Casey Flaherty, Thomson Reuters Legal Current 1/20/2016 http://www.legalcurrent.com/a-strategic-approach-to-purchasing-legal-services-pt-i 

10 Supra note 3.

11 “Billing Rates Across the Country,” National Law Journal 1/13/2014 http://www.nationallawjournal.com/id=1202636785489/Billing-Rates-Across-the-Country?slreturn=20151115160823 

12 Supra note 5.

13 Supra note 1. They are: in-sourcing, de-lawyering, relocating, off-shoring, outsourcing, subcontracting, co-sourcing, near-shoring, leasing, home-sourcing, open-sourcing, crowd-sourcing, computerizing, solo-sourcing, and no-sourcing.

14 “Beyond Imagination: How artificial intelligence is transforming the legal profession,” Julie Sobowale, ABA Journal 04/16 http://www.abajournal.com/magazine/article/how_artificial_intelligence_is_transforming_the_legal_profession 

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