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For Lawyers, The Times They Are A-Changin’
By DAVID H. MARION, For The Bulletin
I have been practicing law for 45 years. I have seen ups and downs in the legal business. But usually periods of lawyer-layoffs have been temporary and were followed by boom times as the economic cycle turned around. And even during recessions, certain practice areas like litigation and bankruptcy picked up to compensate for downturns in such areas as mergers and acquisitions or corporate transactions.
Not this time! A combination of factors has made the impacts more severe, and a return to the good old days far less likely.
The Legal Profession in the Summer of 2009
Law firms always try to put the best face on their circumstances and prospects, and to minimize the negatives. Therefore, you can imagine how much they are hurting when they are now openly admitting that:
• They are laying off lawyers and staff by the hundreds at all levels;
• They are forcing equity (full or percentage) partners to become non-equity (salaried) partners;
• They are pushing non-producing partners out of their firms;
• They are cutting salaries and distributions to existing associates and partners and reducing starting salaries for new hires;
• They are forcing staff to take unpaid days off or leaves of absence;
• They are curtailing interviewing and hiring at the law schools; • They are deferring or postponing the start dates for already hired law school graduates by 6 months, one year or indefinitely;
• They are abandoning -- temporarily or permanently – decades-long programs of employing law students as summer associates;
• They are slashing their budgets for marketing, business development, travel and entertainment, and refusing to reimburse lawyers for professional dues, continuing education and other expenses that used to be routinely reimbursed;
• They are offering their clients discounted rates, flat rates and alternative billing arrangements that would not previously have even been considered;
• Partners are now doing associates’ work in a desperate attempt to keep busy, or appear busy, and associates are doing paralegals’ work for the same reasons.
All this should convince you that these are not happy days for most lawyers. But why can’t we expect things to turn around once the economy revives?
Well, things may get better – and may get worse before they get better, but “better” will not in my opinion mean a return to the halcyon days of the eighties, nineties and first half of this decade.
Why Won’t the Legal Profession Bounce Right Back?
I see three primary reasons for what most lawyers would regard as a pessimistic outlook for the profession:
1. The practice model for handling legal work – and litigation in particular – is unsustainable.
2. The existing basis for charging for most legal services – billing by the hour – makes no business sense; and
3. The client/customers have finally recognized reasons 1 and 2!
The Curse of Hourly Billing
The huge growth in size and revenues of law firms over the past 20 years has been based on hourly billing at constantly increasing rates and “leverage” (that is, each partner working on a matter being supported by teams of multiple associate lawyers and paralegals billing at lower hourly rates).
Hourly billing seems so ingrained in the legal profession that it is hard to believe that, as late as the 1960’s and ’70’s, it was relatively rare. I started with a large firm in the mid-’60’s. Generally, we would wait until a matter was completed and then propose a fee to the client that seemed appropriate based on the time spent, the steps involved, the difficulty and risks, the importance to the client and the result achieved. Invariably our proposed fee was accepted and paid by the client, because it seemed reasonable to both the client and the lawyers.
Hourly billing took hold when civil litigation became the mainstay and chief generator of business and profits for many of the larger firms. Usually, such litigation was handled for the plaintiffs by sole practitioners or small firms, frequently on a contingent fee basis of 25 to 40 percent of the recovery. The large firms usually represented the defendants and billed by the hour, plus expenses.
Coincident with the rise of litigation as the key profit center for many firms, complex class actions – especially in the areas of antitrust and securities law – began to mushroom, along with intellectual property law disputes. Meanwhile, the courts kept expanding the scope of permissible “discovery” – that is, the exchange of information among the litigants prior to trial.
This led to firms employing large teams of lawyers in these complex cases. Typically, the litigation would be captained by the senior partner who generated the business, with junior partners taking and defending witness depositions, and associates and paralegals drafting and responding to interrogatories, requests for production of documents and requests for admissions. Lawyers call this “leveraging.” It is highly profitable for the “rainmaking” partners since they would get credit and compensation for the time –based billings of the entire team. It has been profitable for the firms too, especially because the discovery process is time-consuming, keeps lawyers busy at all levels and generates large billings month after month.
The problems with this model are obvious. For litigation clients, hourly billing by teams of lawyers makes budgeting and predicting the expenses of the matter almost impossible. Complex litigation is inherently unpredictable. You don’t know what the other side will do, what the judge will do, what motions and disputes will arise, how long discovery will last, how far it will reach and what it will turn up.
Moreover, hourly billing rewards inefficiency rather than efficiency. It creates incentives for delaying resolution, doing more rather than less and doing it more slowly. (If you were replacing your roof or repaving your driveway, would you hire someone by the hour? I think not.) Billing by the hour also provides temptation for cheating (although in my experience as billing partner for many client accounts, any inflation of the hours charged is generally far exceeded by time that does not get recorded or is understated).
Although hourly billing has been highly profitable for many law firms, it has made the lives of many lawyers – especially younger lawyers – miserable. This is because they are judged and compensated based in large part on how many hours they have billed. If you are an honest young lawyer re-paying tuition loans and trying to establish a home and family while building your career, and you need to work 2,500 to 3,000 hours a year to get a decent raise or bonus, how much time is left for your spouse, children or the happy and meaningful things in life?
Why have Businesses Tolerated the Status Quo?
If the litigation model is so expensive and burdensome, and hourly billing is distasteful both to clients and lawyers, why have both persisted for so long? One reason is that when corporations are sued, their officers and in-house counsel often become angry or defensive or both. They regard the suit as baseless or a hold-up, so they’d rather pay defense costs than pay off the plaintiffs’ lawyers. They may also want to demonstrate by fighting the lawsuit that they did nothing wrong. (Eventually, with time and personnel changes, the risks and expense of going through trial and appeals, and the diversion of time of executive personnel from the needs of the business, persuade the corporation to compromise and settle the suit. But huge litigation expenses have already been incurred.)
A second reason may be that the clients’ general counsels usually began their careers in large law firms where hourly billing was second nature to them. They feel they can understand and monitor hourly bills based on this experience. They may also fear embarrassment if an alternative fee arrangement were to lead them to pay a premium over the hourly rate, or to pay a flat fixed fee even if the case is disposed of quickly.
Thus, about 15 years ago, I and many other law firm partners began receiving similar letters from our clients saying they wanted to “partner” with their outside counsel and were looking for new and creative alternative billing arrangements. I was then assuming the leadership of my firm, and I had always railed against hourly billing, so I took these letters very seriously. I carefully studied the different types of legal work we were getting from each client and, with help from my partners, I came up with a variety of proposals such as partial contingent fees, half-rates for time with a premium if the matter was resolved quickly and successfully, flat rates for the matter or for phases of litigation such as initial pleadings, motions, discovery and trial, etc.
With few exceptions, after presenting these proposals and discussing them with in-house counsel, I either heard nothing or was asked simply to provide a discount from our regular rates, usually in the neighborhood of 10%. (Whether this was meaningful is questionable, since we, like most other firms, upwardly “adjusted” our rates annually.)
ChangesTo Be Expected In The Legal Environment
But now, as Bob Dylan sang, “The times they are a-changin’”. The severity of the current recession and its effects on law firms are unprecedented in modern times, may not end soon, and may persist for the legal profession beyond the time of recovery for the economy in general. It is now a buyers’ market for legal services, and corporate in-house counsel are realizing that they have the upper hand and they need no longer tolerate the way law firms handle and bill for legal engagements.
Hourly rates therefore can be expected to be pushed downward, and the traditional annual increases will be strenuously resisted. This in turn will make the alternative fee arrangements more attractive to law firms as well as their clients, who will thereby achieve greater predictability in their business planning and discipline in their budgeting for legal services. All of this will force law firms to become leaner and more efficient if they are to survive. It may also shrink the size and number of law schools if fewer of their graduates can find jobs.
The growing acceptability and attraction of alternative dispute resolution (arbitration and, even better, mediation) should simultaneously force changes both in the way lawyers practice and in the way courts determine and administer the law and resolve disputes. It is too slow, too expensive and too unpredictable to litigate in the courts today. The rules of courts, their procedures and the management by judges of the business of their courts, must be reformed and streamlined to meet the needs of 21st Century life and business.
Law firms and the courts must both change the way they do business. Although I said earlier that most lawyers would regard these forecasts as pessimistic, I do not. Every business must adapt and change with the times, and I am optimistic that – for the great and important profession practiced by lawyers, as well as their clients’ best interests – changes in the coming years will improve all our lives.
David H. Marion is a former Chancellor of the Philadelphia Bar Association, past President of The Lawyers Club of Philadelphia and a former Chairman of Montgomery, McCracken, Walker & Rhoads, LLP, where he continues to practice business litigation in the trial and appellate courts.
Not this time! A combination of factors has made the impacts more severe, and a return to the good old days far less likely.
The Legal Profession in the Summer of 2009
Law firms always try to put the best face on their circumstances and prospects, and to minimize the negatives. Therefore, you can imagine how much they are hurting when they are now openly admitting that:
• They are laying off lawyers and staff by the hundreds at all levels;
• They are forcing equity (full or percentage) partners to become non-equity (salaried) partners;
• They are pushing non-producing partners out of their firms;
• They are cutting salaries and distributions to existing associates and partners and reducing starting salaries for new hires;
• They are forcing staff to take unpaid days off or leaves of absence;
• They are curtailing interviewing and hiring at the law schools; • They are deferring or postponing the start dates for already hired law school graduates by 6 months, one year or indefinitely;
• They are abandoning -- temporarily or permanently – decades-long programs of employing law students as summer associates;
• They are slashing their budgets for marketing, business development, travel and entertainment, and refusing to reimburse lawyers for professional dues, continuing education and other expenses that used to be routinely reimbursed;
• They are offering their clients discounted rates, flat rates and alternative billing arrangements that would not previously have even been considered;
• Partners are now doing associates’ work in a desperate attempt to keep busy, or appear busy, and associates are doing paralegals’ work for the same reasons.
All this should convince you that these are not happy days for most lawyers. But why can’t we expect things to turn around once the economy revives?
Well, things may get better – and may get worse before they get better, but “better” will not in my opinion mean a return to the halcyon days of the eighties, nineties and first half of this decade.
Why Won’t the Legal Profession Bounce Right Back?
I see three primary reasons for what most lawyers would regard as a pessimistic outlook for the profession:
1. The practice model for handling legal work – and litigation in particular – is unsustainable.
2. The existing basis for charging for most legal services – billing by the hour – makes no business sense; and
3. The client/customers have finally recognized reasons 1 and 2!
The Curse of Hourly Billing
The huge growth in size and revenues of law firms over the past 20 years has been based on hourly billing at constantly increasing rates and “leverage” (that is, each partner working on a matter being supported by teams of multiple associate lawyers and paralegals billing at lower hourly rates).
Hourly billing seems so ingrained in the legal profession that it is hard to believe that, as late as the 1960’s and ’70’s, it was relatively rare. I started with a large firm in the mid-’60’s. Generally, we would wait until a matter was completed and then propose a fee to the client that seemed appropriate based on the time spent, the steps involved, the difficulty and risks, the importance to the client and the result achieved. Invariably our proposed fee was accepted and paid by the client, because it seemed reasonable to both the client and the lawyers.
Hourly billing took hold when civil litigation became the mainstay and chief generator of business and profits for many of the larger firms. Usually, such litigation was handled for the plaintiffs by sole practitioners or small firms, frequently on a contingent fee basis of 25 to 40 percent of the recovery. The large firms usually represented the defendants and billed by the hour, plus expenses.
Coincident with the rise of litigation as the key profit center for many firms, complex class actions – especially in the areas of antitrust and securities law – began to mushroom, along with intellectual property law disputes. Meanwhile, the courts kept expanding the scope of permissible “discovery” – that is, the exchange of information among the litigants prior to trial.
This led to firms employing large teams of lawyers in these complex cases. Typically, the litigation would be captained by the senior partner who generated the business, with junior partners taking and defending witness depositions, and associates and paralegals drafting and responding to interrogatories, requests for production of documents and requests for admissions. Lawyers call this “leveraging.” It is highly profitable for the “rainmaking” partners since they would get credit and compensation for the time –based billings of the entire team. It has been profitable for the firms too, especially because the discovery process is time-consuming, keeps lawyers busy at all levels and generates large billings month after month.
The problems with this model are obvious. For litigation clients, hourly billing by teams of lawyers makes budgeting and predicting the expenses of the matter almost impossible. Complex litigation is inherently unpredictable. You don’t know what the other side will do, what the judge will do, what motions and disputes will arise, how long discovery will last, how far it will reach and what it will turn up.
Moreover, hourly billing rewards inefficiency rather than efficiency. It creates incentives for delaying resolution, doing more rather than less and doing it more slowly. (If you were replacing your roof or repaving your driveway, would you hire someone by the hour? I think not.) Billing by the hour also provides temptation for cheating (although in my experience as billing partner for many client accounts, any inflation of the hours charged is generally far exceeded by time that does not get recorded or is understated).
Although hourly billing has been highly profitable for many law firms, it has made the lives of many lawyers – especially younger lawyers – miserable. This is because they are judged and compensated based in large part on how many hours they have billed. If you are an honest young lawyer re-paying tuition loans and trying to establish a home and family while building your career, and you need to work 2,500 to 3,000 hours a year to get a decent raise or bonus, how much time is left for your spouse, children or the happy and meaningful things in life?
Why have Businesses Tolerated the Status Quo?
If the litigation model is so expensive and burdensome, and hourly billing is distasteful both to clients and lawyers, why have both persisted for so long? One reason is that when corporations are sued, their officers and in-house counsel often become angry or defensive or both. They regard the suit as baseless or a hold-up, so they’d rather pay defense costs than pay off the plaintiffs’ lawyers. They may also want to demonstrate by fighting the lawsuit that they did nothing wrong. (Eventually, with time and personnel changes, the risks and expense of going through trial and appeals, and the diversion of time of executive personnel from the needs of the business, persuade the corporation to compromise and settle the suit. But huge litigation expenses have already been incurred.)
A second reason may be that the clients’ general counsels usually began their careers in large law firms where hourly billing was second nature to them. They feel they can understand and monitor hourly bills based on this experience. They may also fear embarrassment if an alternative fee arrangement were to lead them to pay a premium over the hourly rate, or to pay a flat fixed fee even if the case is disposed of quickly.
Thus, about 15 years ago, I and many other law firm partners began receiving similar letters from our clients saying they wanted to “partner” with their outside counsel and were looking for new and creative alternative billing arrangements. I was then assuming the leadership of my firm, and I had always railed against hourly billing, so I took these letters very seriously. I carefully studied the different types of legal work we were getting from each client and, with help from my partners, I came up with a variety of proposals such as partial contingent fees, half-rates for time with a premium if the matter was resolved quickly and successfully, flat rates for the matter or for phases of litigation such as initial pleadings, motions, discovery and trial, etc.
With few exceptions, after presenting these proposals and discussing them with in-house counsel, I either heard nothing or was asked simply to provide a discount from our regular rates, usually in the neighborhood of 10%. (Whether this was meaningful is questionable, since we, like most other firms, upwardly “adjusted” our rates annually.)
ChangesTo Be Expected In The Legal Environment
But now, as Bob Dylan sang, “The times they are a-changin’”. The severity of the current recession and its effects on law firms are unprecedented in modern times, may not end soon, and may persist for the legal profession beyond the time of recovery for the economy in general. It is now a buyers’ market for legal services, and corporate in-house counsel are realizing that they have the upper hand and they need no longer tolerate the way law firms handle and bill for legal engagements.
Hourly rates therefore can be expected to be pushed downward, and the traditional annual increases will be strenuously resisted. This in turn will make the alternative fee arrangements more attractive to law firms as well as their clients, who will thereby achieve greater predictability in their business planning and discipline in their budgeting for legal services. All of this will force law firms to become leaner and more efficient if they are to survive. It may also shrink the size and number of law schools if fewer of their graduates can find jobs.
The growing acceptability and attraction of alternative dispute resolution (arbitration and, even better, mediation) should simultaneously force changes both in the way lawyers practice and in the way courts determine and administer the law and resolve disputes. It is too slow, too expensive and too unpredictable to litigate in the courts today. The rules of courts, their procedures and the management by judges of the business of their courts, must be reformed and streamlined to meet the needs of 21st Century life and business.
Law firms and the courts must both change the way they do business. Although I said earlier that most lawyers would regard these forecasts as pessimistic, I do not. Every business must adapt and change with the times, and I am optimistic that – for the great and important profession practiced by lawyers, as well as their clients’ best interests – changes in the coming years will improve all our lives.
David H. Marion is a former Chancellor of the Philadelphia Bar Association, past President of The Lawyers Club of Philadelphia and a former Chairman of Montgomery, McCracken, Walker & Rhoads, LLP, where he continues to practice business litigation in the trial and appellate courts.
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