Why clients don’t care that firms are making record profits
Reed Smith will undoubtedly hit $1 billion in revenue in 2011, according totoday’s Am Law Daily. The legal publication has been reporting big numbers all week, but why isn’t there an uproar over this news, like we have seen as a result of the big banks and CEO bonuses?
Big league New York firms are reporting record profits, with at least one firmaveraging $4 million in profits per partner. It would be easy to imagine a client uprising, maybe even a revolt, against the dictatorial way in which law firm partners manage to squeeze record-setting income out of their clients. But, in my opinion it will never, ever happen
Sure, clients like to wail on panels about the financial pressure they are under to control costs, and visionary law firms are making serious inroads into alternative fee models and providing extraordinary value. However, those are such rare instances that they are practically unique, such as one firm’s creation of the Chief Value Officer or the creation of Valorem Law Group. Sure theAssociation of Corporate Counsel has created a serious initiative to define value and rate firms on the topic, but the impact of that initiative is tough to calculate.
If large law was a financial institution, such an institution that may or may not have received government bail outs or gamed a system through political influence to their economic advantage, then there would be a popular outcry both from politicians as well as consumers. But consumers already look askance at lawyers, are intimidated and the main-stream media has no incentive to write headlines about the injustices of lawyer compensation mostly because there is no injustice; clients are willing to pay whatever their firms charge.
Almost every week, my firm conducts in-person interviews of law firm clients and in every conversation the clients say two things: they hire the lawyer, and when it really matters, they are more than willing to pay. Even when it’s less important, they believe that it is important to pay $500, $600, even $1,000 per hour for their preferred trusted advisors.
There are many reasons why:
• Clients hire the lawyers to solve problems; in hiring the right/best lawyers, they make the clients look good;
• Clients may have millions invested in the relationship, and they are disinclined to make a change and start over;
• Clients never know when their company might merge or they might need to find a post in-house career, so there is an incentive to keep good relationships with the firms they work with;
• For the most part, despite the pain of legal fees, clients take pride in the firms they hire, and believe that they have made an excellent choice and that they are getting reasonable value for their spend;
• We live in a free market economy, and the market dictates the price. Just as it does for the goods and services the clients sell; and
• Clients like profits! Their businesses need to be profitable and they want their firms to be successful, even if the cost of doing business every year is high
Legal fees are a bargain compared to banking fees. Investment bank make beyond what law firms generate, and if the CFO is signing off on the “value” of outside legal fees, they aren’t going to expose themselves to a question of value for legal professionals when their bankers generate significantly more.
And, ultimately, there is no victim. It’s been relatively easy to vilify the bonuses of banks because they has been perceived as injustices against the consumer, the taxpayer, the victims of the financial meltdown. Since lawyers are already vilified, it’s hard for individuals and the media to get all the excited about lawyers making tons of money.
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