Rising Legal Costs Don’t Mean Rising Quality
By Stewart Weltman
We all hear about it: more and more clients—particularly the general counsel of the largest companies—complaining about their outside legal costs. Yet, rarely a day passes without some large firm proudly announcing that it increased its “profits per partner” over the past year.
You would think that, in today’s climate, these law firms would not want their clients to see that they are actually making more money off their clients and that once the clients did see this, they would be on the phone asking for a reduction in their bills.
But we all know that this does not happen. In the perverse world that the practice now finds itself in, bragging about profits per partner appears to be the marketing badge of honor for every firm. It attracts lateral rainmakers who want to make more money—carpetbaggers of the legal profession. Moreover, the very same clients who bemoan paying too much for legal services wrongly transplant an important business paradigm—that the most profitable businesses are the best-run businesses—into their hiring decisions when it comes to law firms.
Don’t get me wrong. I have no problem with anyone—including lawyers—making large amounts of money, but only if they take the risks that any entrepreneur takes. For example, a lawyer who is willing to take on the risks of a result-oriented compensation package (i.e., contingency) should be entitled to the rewards if the lawyer produces results.
This, however, is not what the largest, most profitable firms do. They generate profits through greater hourly billings. There is nothing entrepreneurial about what they do. They are not getting paid based upon the results they obtain. They get paid based upon the number of hours they bill to a matter, regardless of outcome. Thus, most large law firms’ profits are built upon marketing: getting clients to believe that they need to pay for these hours to obtain the best legal services.
Any client of a large, big-name firm who believes that the deal it has cut is special and that these ever-increasing profits have been generated off the backs of other, less sophisticated clients deserves to continue overpaying. One need only look to articles written by legal consulting firms about how law firms need to adopt the business practices of their accounting and management consulting counterparts and use business analysis techniques that determine which clients and which practice areas provide better “realization rates.” The fact that law firms and their legal consultants are now considering management consulting firms as their counterparts should make everyone pause for a moment and wonder, how did we get here?
Most important, however, the articles about better realization rates are not about how to better serve clients; they are about which clients better serve law firms. So, if you are a client of a law firm that announces ever-increasing profits per partner, by definition you are paying enough to provide the firm with its desired “realization rates,” or ever-increasing profits. If you do not believe it, then quit complaining.
So, why do companies, as in the movie Groundhog Day, continue making the same mistake and pay too much for legal services? I see three primary reasons why a company or its in-house counsel would hire a large firm today: name recognition, for the difference it may make in court; better quality; and “CYB”—if something does go wrong, the person who did the hiring can deflect criticism by saying, “Hey, I hired the biggest and best law firm out there.”
The first and second items, which may have been valid 25 years ago, are just no longer important. Name recognition does very little these days in front of most judges and juries. Believe me—I co-tried a case with a nationally famous lawyer shortly after he had had significant exposure in the media, and it made no difference to the jury. What matters to the judge and jury is the quality and qualities of the lawyers who appear before them on a given case. The best lawyers may not even mention their firm’s name when they appear in court, smartly preferring to establish that it is the lawyer, and not the firm, appearing before the court.
Moreover, at least when it comes to litigation matters, I believe law firm quality is slipping, and litigation boutiques are popping up to provide better and less expensive service. This is not to say that you cannot find very fine litigators in the big firms, but precisely because these firms are driven by the holy grail of profits per partner, the partners who are most valued are the ones who make rain, and many skilled litigators and trial lawyers are being shown the door. Furthermore, the training of young litigators in the large firms is, quite frankly, almost nil. There is no time to train them. They must bill hours to pay for their ever-increasing salaries and to keep the profits flowing.
With greater frequency, you see “litigators”—even senior partners in big firms—who have never tried a case. They are what I like to call “paper lawyers.” They try to win cases on the papers, and if they fail, they recommend settlement to the client. There is nothing wrong with trying to win on the papers. But, take it from someone who knows, if your litigator knows how to try a case, your papers are going to be stronger. When a company hires a law firm to represent it in litigation, its only criterion should be the quality and qualities of the individual lawyers that it hires for the matter. The firm name should be irrelevant.
There is another myth that clients must get over to obtain lower costs while ensuring that they receive top representation. When it comes to litigation matters, bigger is not better. A litigation team that is larger than five lawyers is generally a litigation team that is too large—regardless of the amount in dispute. I know from having worked on mega-cases throughout the better part of my almost 30 years of practice, and the best teams have always been within that five-lawyer range. One associate and I ran rings around a team of 10 lawyers from one of the country’s top five law firms in a $100 million matter for one of my clients. Why? Because we were agile, quick, and coordinated. The other firm’s larger team was not.
The fact is that every client would do well if its most senior lawyer on a matter worked night and day on important cases. There is a reason—or, at least, there should be—why senior lawyers' rates are as high as they are. They are more experienced and more efficient. If more senior lawyers did this and used the assistance of a few carefully chosen subordinates, instead of acting as lords over hordes of inexperienced associates, their clients would pay less and get more. Moreover, the associates who have the chance to work closely with the partner would also get a real education on how to handle a matter. In short, a win-win for everyone. The client pays less; the client gets the best possible result; and younger lawyers obtain valuable experience, as opposed to merely logging hours. This is the team a client should hire, not a firm name and whomever the firm assigns to your case. Clients deserve no less than an experienced, efficient team, and they can demand this because they are paying the bills.
Which brings me to the last reason why big firms seem to get hired more often than their more nimble, smaller counterparts, “CYB.” In-house counsel sometimes hire a big firm, regardless of who is assigned to the matter, because if something goes wrong, they will be able to say in their defense that they hired XYZ mega-firm, so what else could they have done? In turn, large firms have been exacting a premium price for this protection, in higher rates, unnecessarily large staffing, or both. If clients expect lower litigation costs, general counsel and those to whom they are accountable must shed themselves of the “CYB” approach to hiring.
Although most in-house counsel might demur and claim that they are not hiring based upon “CYB” when they hire the “big name” firm, they still implicitly recognize the personal security of hiring a big firm when making many hiring decisions. Just ask any general counsel in private.
But relying upon a firm’s name is no assurance of quality. Litigation teams should be small, and they are only as good as the members who make up the team. Quality has never been uniform across every large firm, and it has only worsened in recent times—with lawyers moving between firms at an increased rate and intra-firm training on the wane as a result of pressures to make young associates bill more and more hours to pay for their ever-increasing salaries. Moreover, more small litigation departments or litigation boutiques now produce a better quality product than their large-firm counterparts and can ensure a more uniform quality because they are smaller.
Thus, those in the “C suite” and in-house counsel must realize that if they want lower litigation costs, they are going to have to allow their in-house counsel the latitude to hire on quality and not name.
The trade-offs are very simple: Either clients can start hiring lawyers based upon the individual lawyers who will handle their cases to obtain lower costs and better service, or they can continue to repeat the same mistakes.