Big law salaries: can we have a PEP talk?

Interesting Article

Tim

Interesting article, but a bit woolly. I'm not sure what your point is. Surely it's a free market, and the basic laws of supply and demand will dictate what law firms can charge.

If clients don't like high hourly rate fees, they can use cheaper providers, smaller firms, regional firms, solos, LPOs, virtual firms, and the other alternatives that are springing up.

Or, as a client, you say "we are not prepared to pay more than this" and the more expensive firms will choose whether or not to pitch for your work.

But there's this enduring paradox in which clients continue to pay inflated fees, but then grumble privately about them.

Jason Statham -29 Sep 2011 | 12:42

Clients Reap What they Sow

BigLaw is a highly fragmented industry. It is competitive. It has substitutes, both smaller law firms and alternative legal providers.

BigLaw partners and salaries are high because clients willingly pay the fees BigLaw charges. Suppliers get to charge what they want. Customers get to pick suppliers. If GCs pick suppliers that charge a lot, they can hardly then complain about the suppliers' profits.

So the problem here is with the client, not the firms. Rees Morrison today reports on a survey that shows many UK corporates have shifted work to mid-tier firms.

Why aren't more clients making this shift?

Tim - can you write a column that provides guidance to the client (the GC) explaining steps he or she can and should take to reduce legal spend? That will be the fastest route to reducing BigLaw compensation.

Ron Friedmann -29 Sep 2011 | 15:22

The reason why firms have got away with maintaining the status quo for so long is not just because partners try to protect and justify the status quo since it has made them very rich (though they do) but primarily because clients have failed to police their own legal costs - a failing on the part of in-house lawyers.

Its only a matter of time until clients do start insisting on a different purchase model. And what is driving it is the rise of procurement officials in the commissioning of legal services.

As it happens, lawyers in commercial firms will continue to be paid more on average than financial journalists because 1. in certain circumstances one MUST use a lawyer but you are never compelled to buy an FT article and 2. there is usually a more direct commercial benefit to a client from the expertise of a lawyer than a journalist.

But I don't doubt that in the long run (more than 10 years) the rewards that commercial law firm partners have enjoyed will diminish. This will have quite a serious impact on the business model of commercial law firms. After all, the reason they need to work their associates so hard is because they pay them so much and run such small unmanaged teams relative to the volume of work. And the reason why associates put up with it all is the promise of partnership. As PEP begins to fall the partners will cease promoting associates in an attempt to protect their own incomes - which will reduce the willingness of associates to work so hard. The model in its current form can't last. Some firms will need to downsize in order to maintain profitability and others will need to accept a loss in profits and become "normal" workplaces with normal hours (otherwise no-one will work at them).

Magic Circle Associate -29 Sep 2011 | 18:52

Bureaucratic Inertia

Good to hear my own thoughts echoed by 'Magic Circle Associate' about the tightening of PEP and the reducing long term rewards of committing your career to a large law firm.

I increasingly see big law as a defunct model and is one of the main reasons why I now have no desire to waste my time working at one of these places again. Having now worked at top 20 firms through to a sole practitioner, my ability to add value and provide a good service to a client seems far easier at the smaller firms which are not burdened by huge overheads and high levels of bureaucracy, particularly as we now now live in a highly connected digital world where I can easily access top people and information and can outsource, crowdsource, coordinate and collaborate with anyone in order to deliver a client the best possible solution at the best price.

However, as others have pointed out the current model is propped up by the procurement teams and inertia at large institutions who continue to use the large established firms. My brother is an equity partner at one of the large international commercial property agencies and when I ask him why he almost exclusively uses magic circle firms for his deals his response is that there is a risk he would get into trouble if he didn't, he hasn't got time to shop around anyway and he is taken out to lunches and events so often by the lawyers that it wouldn't seem right if he didn't involve them in the work.

Jonathan Lea -30 Sep 2011 | 11:26

Demand for what?

The point above about 'supply and demand' is an interesting one. Law firms will of course say their prices are justified and of course will keep raising them if they can - they're not stupid. If your buyer is a gullible doormat, then there is no reason to change behaviour.

The price of legal services in the City are not high just because there is demand - but rather because of excessive price rises that the buyers have not even started to seriously resist until now. In this regard the cliche of supply and demand is not workable here. Demand is not shaping price as clients are not aware of what they are buying nor do they seriously examine its value. They 'believe in' the brand of the firm and hand over the money. One might say this scenario is more akin to a wide-scale confidence trick where people hand over money to what appear to be very upright people, e.g. a charismatic snake oil salesman, or Bible thumping gospel preacher, in the belief it does them some good.

When clients really do become discerning shoppers, rather than unquestioning saps who put the money in collection bowl without asking what this 'donation' is really for, then we may approach a real market, which is transparent, price competitive, and actually does respond to supply and demand.

Anti-Con -30 Sep 2011 | 12:49

And whose fault do you think it is?

PEP at City law firms is a proxy for the spinelessness of general counsel. It functions as a highly accurate indicator of clients' inability to get a grip on costs, partly because they are covering their own backsides, partly because they are spending other peoples' money. The only mystery is why in-housers discuss the matter of high law firm profitability as if they are not directly responsible for it, pretending instead that it has been somehow imposed on them. It’s the natural result of the collective buying decisions of clients and they could change it tomorrow if they had the nerve.

Hmmm -30 Sep 2011 | 12:59

Really?

I don't really think you can compare the FT to a big law firm.

Can I call up the FT for some detailed advice on my particular circumstances? Can I rely on the financial advice prepared by the FT journos? Sue you if it turns out not to be correct?

You might make an argument for the FT vs Practical Law Company and I think you might find that the salaries for FT journos and lawyers at PLC might be similar.

Hmmm -30 Sep 2011 | 16:28

The point about legal services and the FT being different is correct and one I made too. But the majority of the work at large commercial law firms which earns money for the money is not meaningfully high level legal advice.

Imagine a large commercial law firm... which doesn't do any due diligence, which doesn't do any document review work, which doesn't do any drafting of ancillary or highly standardised documents, which doesn't even do drafting of the first cut of negotiated documents. How much work is now left? How many junior solicitors and trainees does such a firm need? Sure, they'll see be transactional work for associates, advice given by partners. But a lot fewer hours are being billed and hence lower PEP. That's basically the situation emerging for large firms over the next decade.

It is inevitable that for the work streams which I describe above that clients will look for cheaper alternatives to the large law firms - think LPOs, information services companies and networks of small firms accessed through central companies.

The only things that won't go to a cheaper provider are things that can't be done cheaper. So that pretty much leaves complex legal advice and high end litigation. What proportion of partners in the top 25 UK firms are providers of complex legal advice as opposed to client-handlers and managers?!?

Magic Circle Associate -30 Sep 2011 | 17:13

This is a bit silly...

Comparing law firms to newspapers is a bit silly. Once you start making the comparison with other professional services there are plenty with similar remuneration structures - accountants, management consultants, advertising agencies, actuaries, even surgeons. Why those at the top of these professions do very nicely is an interesting question, but merits a bit more thought than provided in this article.

Marc Daniels -30 Sep 2011 | 18:48

You can't compare...

...journalists to lawyers. Or nurses to lawyers. Next you'll start questioning the social value of City lawyers. That way lies chaos.

TIC -01 Oct 2011 | 17:58

Advertising...

Surely a significant part of the FT's revenues come from the sale of advertising space?

For a better comparison shouldn't the price to the reader of an annual subscription to the FT take into account what is effectively a subsidy.

Also, this doesn't seem to really consider the distinction between reward for work and for business ownership... how much is ultimately distributed to the ultimate owners of the FT?

Charles -01 Oct 2011 | 20:04

because you wont put your neck on the line...

The reason why lawyers are paid handsomely is because the clients who instruct us don’t want to put their necks on the line and make the final decision. They want to shift the risk and hence pay a lawyer to make the decision. When it comes to the crunch, clients don’t want the buck to stop with them. You are paying for a safety net and that net is expensive. When the proverbial hits the fan, it is the lawyer in the firing line.

Bob the lawyer -03 Oct 2011 | 17:08

Time to Change

Lawyers' salaries in City firms began to inch upwards when they could see that those instructiing them at the banks (many ex-lawyers) were earning eye-wateringly high bonuses and thought we deserve that too. This is a capitalist world and yes, in-house counsel can do more to force prices down but the biggest buyers of legal services remain banks and they can hardly complain about the legal fees whilst walking home with six-figure bonuses so back we go to wondering how bankers justify paying themselves so much.

time -04 Oct 2011 | 08:19

You actually can compare FT with BigLaw

Some readers have expressed the view that you cannot compare FT with Big Law. Leaving aside the discussion on the business model and long-term prospects of Big Law, which is indeed a serious topic, I think you can actually compare FT with Big Law. Just that the author of the article picks only those pieces of information which make headlines. A lawyer does not sell his 300 pounds one hour advice to hundreds of thousands of subscribers (it would be so much easier...). And if you take a look at the FT Group and Pearson financials, the profits and margins are not too different from Big Law (just a different business model).

Cristian -04 Oct 2011 | 15:17

If you tailor-made every FT to each costumer you could probably charge £300 a copy...

Eduardo -04 Oct 2011 | 17:38

for £300 I'm all yours Tim

Tim, if you and each of the FT's 800,000 or so subscribers paid £300 each you could have the services of many of the big firms exclusively for the whole year, and still have change for your bus fare home.

chris -05 Oct 2011 | 13:58

High salaries?

They are hopelessly low and rarely merit based. The salary fund is spread between an overstaffed bunch of also rans and not concentrated in the talented. Partner drawings are insanely high. The same otherwise.

Magic Circle associate -05 Oct 2011 | 21:05

Gosh. The response to this post both on Legal Week, my own blog and on Twitter has far outweighed the response rate to anything I've written before. So, thanks for that everyone who contributed. Let me try and deal with some of the comments together.

There's a theme in them that the client is to blame for high PEP levels. That clients, particularly GCs, have let Big Law get away with it for too long and this is a self-created supply and demand problem. Well, that was kind of my point which is why I referred to the "habitual lazy behaviour" of clients. To draw a not particularly good analogy, it's like the overpaid footballer argument. If a Premier League player can get paid £200k a week, then why shouldn't he, more fool the fans for paying to go watch if they regard the footballer's salary as immoral. So I'm trying I suppose to challenge the client-led behaviour which has contributed to the PEP scenarios we see today.

Ron Friedman has challenged me to provide guidance to other in-house lawyers on how to reduce legal spend. I'm not going to take up this challenge because those alternative routes to reduce expenditure are well documented already. Capped fees, fixed fees, annual retainers, all-you-can-eat-deals, volume discounts, multi-tier providers and so on and so forth. There's no point in blogging about this stuff in this context because its already out there and known. The PEP issue wasn't really on the debate radar.

I take on board the criticism about comparing news articles (information) and legal advice (value add). Perhaps it is a bit of a facile comparison. My point wasn't that I want all of the legal advice I want all year for £300 please. My point was, why there is there such a huge huge price differential between the two different products/services. Legal advice provides value-add, yes. But for that difference, it has to be a heck of a lot of value. So forgive the apples and pears comparison, but I hope you see my point.

As for whether in-housers are paying for a safety net, I don't think that's a fair point and I doubt any firm would like to go on the record and say that. Quality in-house/out-house lawyering is about collaboration and team work. It's not about sending work out so in-house can benefit from the PI policy. It just irks me when my team get something 80 per cent there on something we may not necessarily be sector experts in, and it then costs me several thousand pounds to get it a further 10 or 15 per cent. I don't want a safety net, I want an extension of my team for the stuff we cannot do for one reason or another, and my guess is that's the same for most in-house lawyers.

One commenter said that PEP is bank driven - a theme that's come up on Twitter too. I get that. What lawyer wants to be working on a deal where the banker is working the same hours and getting paid a barrel load more? That's human nature. But it's a brave lawyer who wants to use the banks as the benchmark of optimal commercial behaviour at this point in time.

So in summary? Yes, high rates are to some degree the fault of the client, I accept that. But its interesting how keen people (who I assume are out-house) have been to point that out to me, without offering a solution. It's easy to tell me my theory doesn't stack up. Well show me one that does, beyond arguing "supply and demand", because if that's the best you've got then you're dead in the long run. Only Magic Circle Associate digs into the issue from a private practice perspective, and a big hat tip to him/her for doing so.

Thanks for the debate. Believe it or not, I'm a big believer in the value of out-house. I'd just prefer it to be slightly better value than it is, and reduced PEP seems one way (amongst many, as Ron alludes) of getting to that goal.

I'll leave the last word to a lawyer who was kind enough to leave a very wise comment on my own blog (http://legalbrat.blogspot.com). I think he nails the cause pretty well.

"The heart of the problem lies in BigLaw's business model. High salaries are just a symptom. Partners, the owners of the business, do not have a realisable capital stake in the business, unlike "normal" business. There's no exit route to realise capital. So the incentive is therefore to extract as much income as possible via profit shares. Once the partner leaves the firm, that's it. And this model drives high salaries all the way throughout the organisation. Maybe the advent of 'Alternative Business Structures' may start to change this. If partners of BigLaw see an opportunity to create realisable capital value in their firm investment, and see a distinction in their roles ad shareholder v. Worker, this could lead to downward pressures on salaries...... Or not! Let's see."

Tim Bratton -06 Oct 2011 | 13:01

apples and oranges

Your FT subscription may cost you £300 a year, but if you wanted information thrown at you by a law firm, as analytical and specific as it may be, you'd be happy to know that at least most Magic Circle firms provide such information in digestible "client briefings" (or even longer, more details incarnations) absolutely for free. The premium for professional services is for the individual time one person takes out of his day to help you with your problem and to tailor the responses to your issues. We are trained to put ourselves in the client's shoes and solve a problem, not to bark legal prophecy and spew academic or journalistic nuggets.

CC Associate -06 Oct 2011 | 14:01

CC associate is right - City law firms do excel at putting themselves in clients' shoes and in no way spouting academic fence-sitting drivel or cut 'n' paste law. That's why clients are so happy.

Hmmm -06 Oct 2011 | 15:54

Confusing Cause and Effect

Tim, thanks for your response. I think we may have to agree to disagree.

I am hard-pressed to think of any other commercial transactions where buyers think about the profitability of their supplier (other than when too-low profits trigger a concern re supplier stability).

If we put our consumer hats on, do we think about Apple profits when we buy an "i" device, Exxon profits when we put petrol in our tanks, Four Seasons or choose-your-low-end-chain hotel profits when we book a room, or what our doctor earns (at least for those of us in the USA)? Consumers buy based on perceived value.

You are right that "alternative routes to reduce expenditure are well documented already." Documented yes - implemented no. Both from the literature and private interactions, I have many examples of in-house counsel who have little to no interest in either managing how their outside counsel work and bill or changing which law firms they use to reduce cost.

A focus on PEP reminds of my 2008 blog post, "A Modest Proposal to Regulate Large Law Firms". In it, I satirically suggested that BigLaw had so much market power that they needed to be regulated. If they have too much market power (and I do not believe so), then let's regulate. If they do not, then the burden on customers is to make wiser decisions. Let them exercise the alternatives.

Jaw-boning suppliers is not nearly as effective as taking away the business. High PEP either reflects the value law firms provide or buyers who make unwise choices. I think the evidence is clear it is the latter.

(Note that I had to write a 2nd post on my modest proposal to clarify it was satire, which I think says more about how lawyers think than my writing style. See http://www.prismlegal.com/wordpress/index.php?m=200806#post-815)

Ron Friedmann -09 Oct 2011 | 17:06

A case for difficulty

This may be a minority view, but I wanted to contest the assertions that all work done in big law firms with the exception of some high end advice could be done elsewhere (implicitly by less qualified people) more cheaply. This is based on the false premise that "ancillary and standardised" work can be separated from the high end structuring advice.

In a banking practice for example, all the ancillary documents are tailored to accommodate the often complex nature of the financing, and they must all change to reflect any adjustments made as negotiations progress. And the same process applies to ancillary documents being negotiated in multiple jurisdictions across different time zones. You change one aspect of the hedging, for example, and that can have a knock-on effect for all security documents, corporate approvals etc. and often a change that needs careful consideration rather than simple amendments. If one necessary change is missed or if the drafting is ambiguous, the law firm is liable. And all this usually has to be completed within a couple of weeks at most. It's simply not credible to hive off the "drudge work" from the interesting stuff. So good discussion in theory but once you get into the detail it is almost always more efficient for a transaction to be run by a closely co-ordinated team.

ps. try taking out a loan facility or bond for syndication/issuance without the support of legal opinions and see how far you get. Clients care about this stuff...

London Lawyer -10 Oct 2011 | 10:37

Why just lawyers?

You could have written exactly the same article but substituting for "lawyers" the word "accountants" or any other professional service (actuary, architects, etc).

The argument comparing professional services to a FT subscription falls under the weight of its own inadequacy.

Solicitor -10 Oct 2011 | 12:36

Legal Services Business a Free Market?

Contrary to many of the assumption by the commenters, the legal services industry is far from a see market. To the contrary, most legal markets in most countries in the world are legal monopolies where lawyers (barristers, etc.) have the sole legal right to supply legal advice. If anyone encroaches upon the legal monopoly, they can be sanctioned by the state. Thus, it is not only unchallenged assumptions about what is 'normal' to pay a lawyers, but also a structural monopoly that keeps prices high. Oh, and this also helps to explain why the quality legal information supplied by Financial Times is, comparatively, much cheaper -- journalism is not legally monopolized so bloggers and free content providers pull from one side, while at the same time, if legal journalists charge too high, regulators will basically take them out for providing legal advice (i.e. competing with lawyers).

Robert -02 May 2012 | 12:57

Fees are toppy, ridiculously protected industry (esp in the US)

Know this thread has taken a breather for a few months, but I wanted to add a little suggestion. I think one of the reasons why fees are so high and matters are still mostly charged on a billable hour basis is because law firms (or in-house counsel) don't have the expertise to price their work any differently. And they don't go in for trial and error because they're naturally risk averse and would worry that fees might come in lower and profit margins would decrease (bearing in mind that salaries are a fixed cost set at cartel-like market rates; also, basic comp is such a high proportion of total comp that firms don't have much room to play with staff costs v productivity). I would be curious to see what would happen if a firm made a genuine attempt to bring in more non-lawyers at management levels. You can almost hear the partners clucking.

Secondly, strange as it might seem, things in the City are a hell of a lot better than in the US where clients need to fight not only the firms, but also the outrageously overpriced law schools that put most junior associates into horrific amounts of debt justified by inflated future salaries. Any quick change to the salary model will leave half a generation of lawyers barely able to pay back their fees for a course that doesn't even teach them the law they'll actually need once they're at their firm and earning USD 160,000. To drive up against two very conservative sets of institutions is beyond most clients and won't happen without a more coherent, collective effort.

Thirdly, one of the reasons why law firms "get away" with such hefty fees might be because clients often don't even appear to know where the value-add is. If everything on a deal goes fine, then noone cares about how good or bad the documents are. If they mess up, then it may be due to circumstances at the time (all-nighters, late changes, ambitious structure etc), so noone is quite sure if a firm has done a good job other than in relation to its "client service," which is different from the legal expertise that carries the price premium. Price and brand therefore substitute for real value. i.e. if it's more expensive and firm's name is well-recognised, then the service must be better and the advice more robust.

Also agree with previous comments that clients pay a premium for firms to effectively act as their indemnity insurance.

US associate -03 May 2012 | 05:50

Okay, but...

Free markets dictate price, not 'greedy' lawyers. Do you think Goldman Sachs makes their investing decisions by reading FT? No, they have (much smarter) people analyzing where to invest their billions. Likewise with law. The companies that pay 300/hr do it because there is value in what the lawyer / firm offers. Plus, they do it willingly despite less expensive alternatives. Btw, Legalzoom is the low cost option in law. It is about as useful as a copy of FT.

Dave -05 May 2012 | 13:48

Big law salaries

If Big lawyers didn't make the PEP figures cited, there wouldn't be so much of a market for 'How to Spend It', as published by...errr, the FT! Unless (as I've always suspected) it's a complete work of fiction.

Hugh Blaza -08 May 2012 | 17:15