Showing posts with label billing. Show all posts
Showing posts with label billing. Show all posts

Wednesday, February 11, 2015

The BigLaw Gap Widens: Winners and Losers

As I have previously noted, one of the most controversial topics of debate and discussion among both lawyers and non-lawyers alike (for various reasons) is law firm profitability, and how many lawyers are perceived as overcharging their clients to engage in legal work.

An interesting article was published on Above the Law which discusses the current state of affairs in the American legal marketplace, among "AmLaw100" law firms.  It is aptly titled "The Imminent Capitulation of Many Big Firms."  This article comes on the heels of recent articles discussing how DLA Piper apparently shortchanged its associates on annual bonuses.

For readers not immersed in the terminology, the American Lawyer magazine publishes lists each year showing America's largest 100 law firms, based on gross revenue, as well as lists of the same firms broken out by average annual profits per partner.

Headcount of total lawyers is one easy to measure variable, so a local New York City-only law firm that has 500 lawyers and boasts $1B can be ranked "higher" on some lists than a law firm with 1,000 lawyers located all across the globe that reaps $500M in annual revenue.  Both firms would probably still be on these lists, but the lower grossing law firm would be ranked "lower."

A few "elite" firms, such as Wachtell, Lipton, Rosen and Katz have only 260 lawyers, including 79 equity partners, making $5M each.  Another such elite firm is Sullivan & Cromwell, which has 800 lawyers, with each of its equity partners making $3.5M each year.

These interesting metrics show that these top 10 "elite" law firms based on profits are pulling away from the rest of the pack, leading to a very, very short list of highly paid lawyers.

However, the rest of the large law firms are struggling to compete effectively for the day to day routine legal work of the large corporate clients.  The American lawyer calls these firms the "Giant Alternatives."  These firms are enormous but not hugely profitable: although they house almost 20 percent of the Am Law 100’s lawyers, they generate less than 14 percent of the revenue.

A big law firm in this vein is DLA Piper, which has approximately 4,200 lawyers practicing in more than 30 countries.  It has total revenue of $2.48B, but profits per partner placing it 54th on the list, with $1.3M in average profits per equity partner.  The world's largest law firm based on both revenue and headcount is Baker McKenzie, which has 4,200 lawyers in 78 offices, reaping over $2B per year.  However, its profits per partner place it 63rd on the profitability list.

So the world seems to agree:  The super-rich firms will become even more superbly rich, and the merely rich firms will lose ground. Where does that leave many big firms?  In a world of hurt.
Why is that?  Look at it from the perspective of a corporate client facing any Intellectual Property legal issue.  If that issue involves facing down Boies Schiller or Ted Olson in the U.S. Supreme Court, the client will need to hire the best lawyer available, whether she charges $1,500 or $1,800 an hour.

However, the vast majority of clients' day to day legal activities in the Intellectual Property arena are relatively routine, such as sending and responding to cease and desist letters, monitoring trademark filings, handling copyright licensing arrangements, etc.

These specialized but routine activities do not warrant paying $1,000 an hour for a partner whose firm maintain dozens of glitzy offices all around the globe.  These clients can look to small, boutique firms with the same experience and specialization but much lower overhead and billing rates to substantially undercut the Giant Alternatives.

And that is just one of the reasons why Giant Alternatives and their ilk are in for a world of hurt ahead.

Tuesday, August 5, 2014

Observations on IP Lawyer Billing Rates

No law-related topic generates more controversy and debate than lawyers charging money for their services.

Needless to say, private practice law firms are not charities, they are businesses. And like all successful enterprises, there is a particular business model at work.

Simply put, private practice lawyers must find a way to charge clients for their activities to generate profits. Putting aside "flat fee" arrangements or contingency fees, the standard billable model is based on how a lawyer's daily diary reflects time spent handling various matters.

Therefore, the only real debate is whether particular lawyers tend to charge their clients excessively, as compared to their professional peers.

To evaluate the legal marketplace for specialty services such as intellectual property and brand protection litigation or counseling, it is often helpful and illuminating to assess reliable information about what various IP law firms are currently charging their clients.

Such information can help a prospective client compare lawyers, and will help give a client insight into whether she is satisfied with the value that she is receiving from her particular lawyer and his law firm. 

Further, it can be helpful to understand how much of a lawyer's legal fees are eaten up by overhead costs, and how much is pure profit.

Here are same basic benchmarks for consideration.

Overhead Expenses:  As with all service professionals, a large chunk of fees collected by a lawyer is consumed by overhead expenses such as office rent and administrative support personnel's salaries. Some examples are:
It is worth noting that even a law firm that is not located on Park Avenue in Manhattan can incur more than 10x the rent of a smaller law office in New York City, and 125x(!) the overhead rent of a small law firm in Raleigh, North Carolina.

Further, let us consider the administrative salaries of support personnel such as experienced paralegals in various markets:
Therefore, an IP lawyer located in a posh office on Park Avenue in New York City assisted by a paralegal is likely to incur $1M a year more in overhead than his small firm counterpart located elsewhere in the United States.

Consequently, taking into account the effect of office geography alone, it is clear why a large law firm with its primary office in Manhattan feels it appropriate to charge its clients $1,000 an hour or more.

One study noted that even those lawyers working at law firms located in other major metropolitan areas such as Boston, Chicago, Los Angeles, San Francisco or D.C. add $161 per hour for rent alone.

Profits:  Even taking the expenses of high rent and high support staff salaries into account, the very "top" large law firms are still minting money. The very pinnacle of the legal marketplace, that is, the largest and most prestigious law firms in America, consistently charge their clients hourly rates over $1000 for their top IP lawyers.

So, if you are a sophisticated client rationally considering your various alternatives for premium quality IP legal services, you have at least two issues to think about:

1.  Am I staffing a "bet the company" case, where millions of dollars in legal fees simply do not matter, because I will risk my company's most precious assets if the case is lost? Also, do I fear that a loss in court might be blamed in part on me, because I didn't hire someone like Ted Olson of Gibson Dunn who charges $1800 an hour?  If so, hire Ted Olson. If not, don't.

2.  Is this the type of case that REQUIRES a lawyer located on Park Avenue or in Silicon Valley? If not, why should I make the lawyers' landlords or his partners any richer? Can I hire a smaller law firm with the exact same expertise, but without the fancy marble columns in the lobby, to staff this matter?

The best analogy that I have heard repeated when I was a "BigLaw" partner is that law firms are like cars.

You might want to rent a fancy Rolls Royce once in your life (for example, on your daughter's wedding day) and the price doesn't really matter that much for a short-term luxury splurge.

But on a daily basis, you choose to buy and drive a reliable, solid, comfortable car. Why? Because reliability gets you to work and home safely without the unnecessary bells and whistles.  And the same logic should apply to hiring an IP law firm for 95% of cases and matters.