The late Alexander Haig committed one of the great faux pas of the twentieth century when he announced “I’m in charge here” at a news conference after President Regan was shot. He was not in charge according to the Constitution’s order of succession. The gaffe became his epitaph.
Large law firms – like Mr. Haig-were accustomed to being in charge. For decades, they controlled legal delivery, dictating to clients the terms of engagement. But times have changed and law firms are no longer in charge-clients are. Why, then, have about one hundred firms matched or eclipsed Cravath’s $180K salary for newbie associates when clients refuse to pay for their on-the-job training?
Are these law firms having a collective Al Hague moment?
Bad Timing or Antiquated Structure?
A recent BTI study found only forty percent of GC’s would recommend their primary outside firm. Deloitte’s June 2016 research study on “Future Trends for Legal Services” revealed more than half of the corporate legal departments surveyed envision outsourcing the bulk of their legal work to non-traditional law firm structured providers. And while demand for legal services continues to rise globally, it is flat for law firms for the third consecutive year.
Deloitte’s study found law firms are not meeting purchaser expectations in a number of key areas:
Integrated, multidisciplinary services other professional service providers deliver
Use of IT, especially in data management and cyber-security as well as operating from an integrated platform
Regulatory compliance/utilization of technology
Fee structure, especially fixed fees, value pricing, and transparency
Clients are voting with their feet – taking more work in-house; creating and/or collaborating with legal operations teams to integrate with core legal functions; and engaging tech savvy service providers for a host of legal products and services. And when clients do engage law firms, they are hiring fewer, exacting significant discounts, and using RFP’s, reverse auctions, and a host of other competitive filters.
It’s like upping ticket prices for a show no one wants to see. And The herd mentality of firms—following Cravath’s lead—underscores just how undifferentiated they tend to be. This illusory and counterproductive quest for heightened standing is reminiscent of law schools’ race to stockpile faculty “scholars.” And as my wife from Texas says, “How’s that working out for them?”
A Quick Rebuke From Clients
Client blowback to the associate pay hikes has been swift, predictable, and surprisingly public. The Wall Street Journal reported that Bank of America’s Global General Counsel, David Leitch sent an email to a group of firms making clear that his company would not absorb the raises. “While we respect the firms’ judgment about what best serves their long-term competitive interests, we are aware of no market-driven basis for such an increase and do not expect to bear the costs of the firms’ decisions,” he wrote in the email, reviewed by The Journal.
And Mr. Leitch is by no means the only GC to respond negatively to the associate pay increases. Susan Lees, Allstate’s General Counsel, also challenged the logic of the $180,000 newbie salaries in her own email to undisclosed firms. She noted that the salaries eclipsed paychecks of many experienced attorneys working in her department and cited market competition and the surfeit of provider options as additional reasons why the bumps made no sense. She also admonished law firms to invest in technology instead of inexperienced attorneys and encouraged them “to demonstrate prudence when considering the business decisions of firms such as Cravath…(because) to do otherwise is to ignore the realities of the marketplace….”
It is unusual for clients to rebuke law firms in this fashion. Generally, they simply direct work elsewhere. In this case, though, the criticism is a collective castigation of the traditional firm structure, priorities, and disconnect with client expectations. It’s hubris when Cravath announced the raises. But’s it’s something different when scores of firms follow suit. It’s the difference between a contrarian and a cult.
By taking this collective action, firms have invited harsh scrutiny of their model and exacerbated client pique. They have also created even greater opportunity for legal service providers operating under different structures and with more diversified expertise to increase market share. The salary hike could become BigLaw’s epitaph.
It’s hard to make sense of the timing, economics, or optics of the firms’ salary hikes. Whatever the motivation, it is not playing well with clients. That’s bad business. It’s also a reminder that firms are not responding to client expectations much less recognizing clients—not law firms – are in control here.