Bigger law firms, even bigger bills
If you wonder how youngish lawyers can afford four kids in private school ($18,000 per head per annum, plus incidentals), the answer is pretty clear: corporate legal bills have been skyrocketing. 10 years ago, the a run-of-the-mill investment banking deal fee was several hundred thousand dollars larger than the legal bill on the transaction. Today, the legals might exceed the i-bankers’ fees for a transaction below $25 or $50 million in size. What happened?
As lawyers age and gain experience, the tradition is that their services will become more expensive as well. Every 52 weeks. A 5th year associate is more knowledgeable, and therefore, more valuable, than a 4th year version. Fair enough. But in the past few months I’ve started to hear and see associates with less than 8 years experience billing at rates that, in 2003, were reserved for 15 year partners. Is Google making us smarter that much faster?
What was a $30,000 bill on a transaction in 2000/01 now comes in between $50,000 and $80,000. The $80,000 deal fees might break $200k. (Note: we are trying to keep our plain vanilla deal bills in the $30k range). Some law firms firms, such as Goodman & Carr LLP (see post “Goodman and Carr – the backstory“, March 15-07), couldn’t get their clients to go along with the new billing reality and closed up shop. But most others have clearly thrived.
Now I wouldn’t begrudge a 28 year partner billing out at $850/hour. What’s conflicting is that after 25 years the same lawyer was worth ~$550/hour. How does one explain that the last three years of grey hair have boosted rates by almost 50%? As the law firms have merged and grown from 400 lawyers to 700, it’s as though there has been a reverse synergy.
Further down the bill, the photocopying is still as expensive as ever. Fortunately for us clients, with the invention of email and Adobe Acrobat, faxing charges are down. But my favourite part? The paralegal that bills out at $275/hour. I’d pay $850/hr for a fantastic laywer, but $275 for a paralegal?
I’m not sure what the job entails, and I don’t doubt it was crucial to our deal, but I do know that Toronto’s Herzing Institute diploma program can teach you to be a Paralegal in just one year. Humber College has started Ontario’s only Bachelor of Applied Arts degree program in Ontario. Their advertising couldn’t be more clear:
“Paralegals enjoy one of the highest employment rates and some of the highest average earnings of any technical, professional or skilled occupation.”
Now one of the most talented golf pros in North America bills his PGA clients at $165/hour. A physiotherapist will charge $50/hour (with equipment). A dermatologist with a bad patch in her schedule might treat four patients in an hour and be able to bill OHIP just $18 per session.
To think that all of these people would have been better off as Paralegals; how embarrassed their parents must be.
To combat rising bills, the large consumers of legal services have started to negotiate discounts. If you were the Chief Legal Counsel for a bank, your budget just won’t allow you to pay double for a basic loan deal over the space of four years. Canada’s largest corporations and institutions are starting to require their key law firms to cut each and every invoice by 20%-30% if they want to stay on the list of preferred suppliers for next year.
Now it might make sense for a bookstore to cut the list price of a popular hardcover book by 30%, but when the legal community does it I get a sinking feeling: are not discounts a tactic acknowledgement that fees are out-or-control? That the 30% rise in a partners’ rate over the past four years isn’t reflected in 30% more smarts?
Worse, when smaller corporate clients don’t have the power or awareness to negotiate similar rate cuts, the larger law firms are actually pushing the farm team of future important clients into waiting arms of the so-called smaller shops. Places where a $50,000 deal still costs around $50,000.
I’m delighted to pay my legal bills, we cherish our côtière of law firms and we choose the best (and most cost-effective) people we can find for the deal at hand. But as the large urban firms have grown to serve the $20,000,000 assignments for restructuring Air Canada, or the $8,000,000/year for cleaning-up Hollinger, they are leaving much of their client base, and relationships, behind.
And once the wave of foreign takeovers (Inco, Alcan, Dofasco….) and private equity deals (BCE, Alliance Atlantis, CanWest) is over, who will be able to afford these new rates? If the fees of the future can’t support the current superstructure, the layoffs will neither be pretty nor fair when the deal market lands with a thud.
(disclosure – I have many great friends in the legal profession, including two uncles; I love you all, but $275/hr for a paralegal??)