Leader | Spring 2017
Ah, despite the changing fashions, technology and economic realities of the day, in law you can always rely on that curious mix of mutual hypocrisy, miscommunication, mistrust and conflicting agendas between clients and law firms to endure.
The latest flashpoint is Deutsche Bank’s current panel review, which has pressed tendering law firms to write off time for trainees and newly-qualified lawyers handling its matters. Though it appears that not all have consented, for many this is the thin end of the wedge and a worrying sign that this US trend is making its way over here.
On this debate, neither of the opposing sides is that convincing, ignoring some awkward truths about how and why the buy/sell thing works as it does in corporate law.
Firstly, the argument that clients do not want to pay to ‘train’ junior lawyers is in itself fatuous, since the expanding ranks of in-house teams are stuffed nearly exclusively from law firm alumni and in-house teams themselves make such a marginal contribution to developing the profession. Likewise, the familiar general counsel gripes about time-based models, either through hourly billing or utilisation, would be more credible if in-house legal teams had not proved next-to-useless for 20 years now at supporting or encouraging value-driven billing.
If this all sounds too pro-law firm, their position is no better. Corporate clients get charged a lot of money because the UK legal profession is part of a global arms race in profitability that has bid up the wages of junior lawyers and the expected compensation of equity partners to levels that the law firm model struggles to sustain.
The influence of US law firms in London in transmitting wage inflation is particularly ironic, as it is US pay scales – lacking the shock absorber of a two-year training period – that explain why US corporates have for years been writing off junior lawyer time in significant numbers. Importing such pay models into London has only aggravated the situation. Likewise, a huge part of the fees charged to clients derives from the inflationary impact of the partner transfer market.
In reality these issues could be relatively easily managed through market forces if the underlying issue was also being dealt with: mispriced resources.
Both the compensation and billing structure of law firms from trainee to equity partner-level are too compressed, leading to perverse pricing decisions. As we have argued before – trainees and junior lawyers should be paid a little less and correspondingly charged out at lower rates.
Mid-level associates – the backbone of a high-quality law firm – should be paid more and charged out a little higher. Partners are paid enough but should generally be charged out at higher rates. The reason why clients always want partner time is obvious: it is subsidised in terms of cost to the law firm. Client expectations of free training and discounted secondees only aggravate the pricing inefficiency and sees bluechip clients that can get the freebies effectively subsidised by the smaller clients that cannot.
As the chances of these issues being addressed by either side is pretty much zero you can expect both camps to continue to try to game each other. Law firms will also try to square the circle with increasing uses of technology and paraprofessionals, which at least tangentially addresses the core pricing issues.
Such tensions will only reinforce the already perceptible shift by advisers away from their once obsessive focus on handling transactional work for major banks towards funds, sponsors, growth companies and contentious work in general. Some things, it seems, do change, even in law.