Howard Schultz recently announced he is stepping down from his role as CEO and Chair of Starbucks to focus on the company’s plans to build high-end coffee shops that charge as much as $12 per cup of coffee. That makes me think of the top end of the lawyer’s hourly billable rate. The $2,000 hour is rare, but it exists in the legal industry.
What is less rare is the $1,000 hourly rate. And in a handful of recent client feedback interviews, general counsel reveal the degree to which the $1,000 hour is a real pain point. That degree is very, very high.
Why is quite simple: It is getting harder and harder for clients to continue to use the same arguments in defense of spending $1,000 for an hour of legal work. The core defense has always been that the quality of that legal work has that value for two reasons, experience and efficiency. Those handful of $2,000-per-hour lawyers are so scarce they are truly unique. They could probably charge $5,000 an hour and wouldn’t work any less or have less demand for their time.
But for the rest of the world, fees may have hit a ceiling.
Twenty-five years ago, when I started in this industry, a $250 hour was at the high end. Inflation adjusted, that $250 should be worth about $430 in today’s dollars, or a current mid-level associate at a firm of decent size. That means the price of legal services at the high end is inflating at 2.5 times the cost of everything else.
A recent industry stat also is a sign that law firm rates are peaking. In the 2017 Hildebrandt/Citi Private Bank Client Advisory, revenue was up 3.7% mostly on 3.2% rate increases. That’s scary because law firms can’t continue to grow their businesses by increasing rates when clients won’t pay above a certain amount. Annual rate increases are not a sustainable business plan and are certainly not a strategy!
This is where I (like many clients) throw up my hands and say, “C’mon!” Law firms have to focus on value and they have to listen to their clients. In determining value, lawyers bank on experience (a function of time working in a substantive industry or practice) and efficiency (gained from experience). But they don’t talk enough about quality. There are many ways to define quality. Most often for clients, it is determined by whether the work product helps them accomplish their business goals.
What makes a cup of coffee worth $12 or a lawyer worth $2,000 per hour? Schultz says a “premium” product, while a lawyer says “experience.” But without quality, all the experience in the world will not convince a client to overpay for legal services.