The Importance of Law Firm Economics to Your Legal Career
One of the most important aspects of your legal career-and almost among the most mysterious to young attorneys and others working both inside and outside of law firms-is law firm economics.
The notion that a partner or associate must produce 2,000 or 2,400 hours of billable work yearly virtually assures that some clients will be overbilled.
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Of course, almost all firms have stated policies that forbid…unethical and illegal billing practices. The extent to which these policies are actually followed depends on the firm culture, on unspoken messages that leaders of the firm send to its lawyers.
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When money becomes the primary goal, a law firm may end up choosing to systematically inflate client bills and even to bill for expenses not actually incurred for those clients.
--Seth Rosner, American Bar Association Journal, May 1992
One of the most important aspects of your legal career-and almost among the most mysterious to young attorneys and others working both inside and outside of law firms-is law firm economics. The economics of your particular law firm will have profound significance in terms of what happens with your legal career. Many legal careers end up being quite successful in certain law firm economic environments where they might fail in other economic environments. Smart attorneys and law students should have a good understanding of law firm economics before joining any law firm.
The problem with law firm economics is that very little exists out there to explain it. Law firms certainly do not tell their associates how the economics of their firms work. Many law firms do not even tell their partners how the economics of law firms work. Certainly this is something that is rarely if ever be taught in law school. Different law firms are built and operated in different ways; however, to succeed in a law firm you must have a good understanding-or at least follow-many of the unspoken rules that govern law firm economics.
At the outset it is important to note that there are several different models that law firms follow. The purpose of this article is to explore the common economic model that governs large and midsized law firms at the law clerk, associate and partner level. The purpose of this article is not to explore how staffing of paralegals and legal secretaries works inside law firms-which is a separate topic entirely. I should note that this is not a pleasant article to write because much of what it says is a critique of the legal profession. Nevertheless, what is true cannot be ignored and you will have a difficult time succeeding at a high level inside a law firm unless you understand its economic model.
A. The Importance of the Billable Hour To Law Firm Economics
It is important to be ever cognizant of the fact that most large and midsized law firms are run to be profit centers and to make as much money as possible. In this regard, the way law firms make money through their arrangements with clients must be understood. There are many different sorts of billing arrangements from fixed fee, to contingency. Nevertheless, in almost all cases large to midsized law firms prefer the billable hour approach.
Historically, law firms simply billed clients by what they perceived as the "value" of the work they were doing-or quoted a fee up front. In many cases law firms would quote a fee upfront and that would be what they charged. In still other cases, at the conclusion of a case a partner in the law firm might even look at the size of the file they and their associates had worked on an tell their secretary something to the effect of: "That feels like about a $2,000 file. Send them a bill for that."
There was a point in time when the billing done by attorneys was not based on the billable hour. At some point not too long ago (within the past 40 years) a gradual transition occurred to lawyers basing the value of their time on the billable hour.
In the nineteenth and early twentieth centuries, lawyers routinely billed their clients relatively standard fees based upon their experience performing a particular service. For example, a simple will might cost $50 at the turn of the century; an uncontested divorce, $200; and, a house closing, $100.
Some clients, however, complained that such fixed rates led to price fixing and extraordinarily high hourly rates for some lawyers. For their part, lawyers responded with the Br'er Rabbit defense. "Please, oh, please," they pleaded, "don't throw us into that briar patch of hourly rates. Oh noooo!" Citing the concern over price fixing charges, the agreed to hourly rates as a standard for the industry and touted it as a consumer-protection measure.
Donald E. deKieffer, How Lawyers Screw Their Clients, p.28
Because of this sweeping change, the legal landscape has been altered quite dramatically. Today, the economic engine inside most law firms is based on the billable hour.
As an aside, I can tell you that I am not sure if this was the best move. In my position as a legal recruiter and having spent the past several years talking to countless attorneys on a daily basis, I do not think I have ever encountered a single situation where an attorney was told they were billing too much-or that they worked too much time on a single project. Conversely, I have encountered episode upon episode of the reverse occurring. Compensation and even many hiring and firing decisions inside most law firms are now based more on production than value produced for the client.
Generally-and indeed almost always-the law firm as an institution is almost never guilty of padding its bills and the time its associates work on various matters. I have never personally encountered an episode of this occurring. However, law firms do as institutions push both their partners and associates to pad their bills. Since the client is being charged on the basis of the billable hour, the client will receive an accurate bill for the hours reported by the attorneys who worked on a given matter. Whether or not this bill accurately reflects the amount of time necessary to complete a given task is another story.
The point of this discussion is that once you are inside a law firm it is essential that you understand the importance of the billable hour in the law firm's profitability as well as the law firm's personal evaluation of you. As will be explained below, the significance of the billable hour will be different at each point in your legal career.
B. The Economic Significance of Various Seniority Levels Inside a Law Firm
The organization of most American law firms is as follows. First, the law firm generally will have a least a few law clerks who are law students or waiting for bar results. In large law firms, most law clerks are called summer associates. Second, the law firm will have junior, midlevel and senior associates. Third, the law firm will have attorneys at a counsel level and partners. At the partner level, there may also be levels of partners such as income partners and equity partners. At each stage of your seniority with a law firm, your value to the law firm will change and the expectations the law firm has of you from an economic perspective will change.
1. The Law Clerk
Most organized law firms have law clerks. Law clerks are typically called summer associates in larger law firms; however, many large law firms employ clerks who are in school during the school year. The law clerk typically makes anything from no salary, to an hourly salary ranging from $10 to $50 an hour, to a weekly salary that can be in excess of $2,000/week in some of the larger law firms.
The law clerk's purpose from the law firm's perspective is that it allows the law firm to do recruiting while simultaneously having the opportunity to "try before they buy". Law firms will generally use law clerks for tasks which are not necessarily profitable for the law firm but helpful to the firm nevertheless. For example, a summer associate may be used for research the firm needs done on an important matter. Or, a law clerk may be used during the summer or school year for mundane tasks that the firm does not want its associates working on.
One of the largest points of the summer associate and law clerk program, though, may be somewhat unspoken. A large reason I would argue that these programs even exist is so that law firms can evaluate whether law students can play the economic game inside of a law firm.
A couple of years ago I received a telephone call from a summer associate inside a large Manhattan law firm who had just received their first review from their summer law firm. The law firm was unusually harsh on this summer associate and made several trivial comments about her attitude, "drive" and focus. In fact, the law firm said so many negative things I asked the summer associate to stop talking after 5 minutes or so. It was clear she would not get an offer to join the firm following the summer if she continued this way
"How many hours did you bill?" I asked.
"I have been billing about 35 hours per week," she said.
In my position, I learn to recognize the warning signs and had some very brief advice for this summer associate. I asked the summer associate a few brief questions about how assignments were handed out and then offered the following advice:
"Get all the work assignment you can that are not billable to firm clients. The reason you want these is because you do not want to be unethical. Then, for every nonbillable assignment you get, work like there is no tomorrow. Bill at least 70 hours a week for the next 5 weeks of your summer. Work weekends and whenever you get a chance. That is all you need to do."
At the end of the summer, out of the 18 summer associates in her class, she was one of 5 to get an offer. The firm's praise of her at the end of the summer was glowing and very, very strong.
This is, of course, a very sad commentary on the status of the American legal profession. Nevertheless, in virtually every case where I have counseled an attorney in serious trouble with their law firm I have found that a large portion of the reason they are experiencing difficulty has to do with how hard they are perceived to be working, the number of hours they are billing and-by extension-the amount of money the law firm is making off them. This is something law firms take very seriously. In only one instance out of the 100+ placements I have personally made over the past three years has one of my candidates ever been fired. When I spoke to the law firm about why the associate was being fired, one of the first things they complained about was the fact that the associate frequently left to office before 5:30 pm. I did not need to hear much more.
Many associates inside law firms often find themselves in a position where they are claiming that they do not have enough work and that partners are not assigning work to them. When questioned closely, I often find that these same associates are often perceived as not working hard enough (i.e., billing enough hours) on the assignments they receive from partners. Because partners are individually and as a group compensated based on the amount of work the associates they assign work to do, many partners would rather assign work to an associate who is going to work extremely hard on something and bill many hours-rather than an associate who will figure out a way to get the work done quickly and just as effectively.
Whether one calls this a "conspiracy" or something else, the fact needs to be understood that in many law firms associates are expected to bill the maximum amount of time they can to given projects whether it is warranted or not. This is reinforced through bonuses that are given to the hardest working associates (those who bill the most hours) and in other more subtle ways (such as not assigning work to associates who get work done as quickly as possible). As an attorney working inside a law firm, you are choosing a career where a large portion of your [perceived] value to the firm comes through how many hours you bill and not necessarily your legal skill at all points in time.
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