On Monday, June 6, 2016, the law firm Cravath, Swain & Moore announced the first increase in starting salaries for associates in its law firm since 2007. Raising salaries for attorneys just graduating from law school from $160,000 to $180,000, and increasing salaries all along the associate chain by $20,000 to $35,000 per year, the firm set off a firestorm in the legal community.
Recognizing that not all “big law” firms play in the lofty realm of Cravath, but nonetheless feeling the pressure to increase salaries on a scale commensurate with Cravath in order to be able to recruit “the best and the brightest,” a significant number of law firms that had never paid Cravath-level salaries also raised associates salaries, many by between $20,000 and $30,000 per class year. By the end of June, more than 100 firms had matched the “Cravath Scale”. In many cases, these firms applied the salary increase across the board, including in a wide range of cities that had historically paid less than New York.
As market forces continue to dictate salary increases, one can only anticipate that more large law firms will answer the clarion call. And, as if market pressure and associate expectations are not enough, the widely read law blog Above the Law has taken to publishing a “law firm shaming list” intended to encourage remaining firms in the vaunted AmLaw 200 to raise salaries commensurate with the Cravath Scale.
The reality is that the majority of these firms cannot afford these raises without making significant offsetting adjustments to their business plans. These adjustments could include reducing non-lawyer staff or other expenses, laying off associates with lower utilization rates than their counterparts, raising the billable hour expectations for their associates, and calculating various means to surreptitiously raise rates charged to clients in an effort to increase revenue. In fact, Above The Law reported on July 1 that a number of these options were specifically discussed (or, perhaps more accurately, threatened) during a town hall meeting held by Morgan Lewis involving the firm’s associates and facilitated by Steven Brown, a member of the firm’s management committee. Even the in the firms with the highest profits per partner, the firms that can conceivably “afford” increasing associate compensation, steps are being taken to shift the cost of this additional compensation away from partner pockets. After all, since there is no way to monetize the value of a partnership interest as partners retire or leave to pursue other opportunities, the name of the game in the big law business is for partners to maximize income each and every year they work at their respective firms. Gratuitously “giving money away” to associates flies in the face of this axiom.
I had dinner this week with the general counsel of one of Alexius’s large clients. During the course of our meal, the size and scope of these associate salary increases entered the conversation. My friend and client scoffed at the foolishness of this increase and echoed the comments of many other consumers of legal services – “I don’t know how these firms justify these increases internally, but I do not plan to let them pay for it on my bill.”
Despite such rhetoric, at the end of the day the clients of these firms will help pay for these raises one way or another. Even if clients are able to resist outright fee increases, law firms have many ways to shift costs onto client bills. For example, should firms decide to further reduce support staff in order to save on costs, attorneys will be expected to do even more of their own word processing. Since every form of “service” attorneys provide to clients in big law firms is “billable,” clients will now be paying for attorneys to perform basic word processing tasks that were previously provided at “no cost” as part of the law firm service package. Similarly, if higher billable hour expectations are imposed on associates, clients will find themselves paying for sloppiness and re-work caused by fatigue and heightened stress and anxiety resulting from the increased workloads. In addition, it is not hard to imagine that law firms will find reasons to further trim the ranks of partner track associates in order to save costs, which will add even more pressure to the poor souls that manage to survive these cuts. Finally, it is likely that many of these firms will increase their use of non-partner track attorneys and other lawyers not being paid the higher “partner track” salaries.
Fortunately, corporate consumers of legal services have options. Rather than allowing big law firms to find a way to subsidize their “generosity” by passing along some or all of their increased costs to their clients, these consumers can regain control of their legal budgets by carefully analyzing the services they truly require from law firms and then electing to have many of the more basic tasks performed by the growing number of alternative legal service providers which have burst onto the scene. Companies like Alexius, Axiom, SRS Acquium, UnitedLex and others can step in to provide top quality legal services at prices and on terms that corporate consumers find both economically efficient and highly predictable. Even more importantly, these legal service providers can bring transparency to the pricing process by billing clients in a way that does not facilitate surreptitious fee shifting. These alternative models require the companies providing legal services to share the risk with clients if they somehow misprice their services or underestimate the time required to complete projects. Most significantly, these companies compensate their professionals fairly but realistically, enabling clients to avoid the “ego premium” now being placed on the work being performed by the “best and the brightest” neophytes in the big law environment.
The delivery of legal services is changing, and those changes are not evolving to the benefit of the big law firm model. Given this reality, one has to wonder why Cravath and others chose the summer of 2016 to implement dramatic salary and cost increases into their operating budgets. Regardless of the reason, these law firms have given clients even more compelling reasons to search for alternative suppliers for basic legal services. As a leading managed legal service provider, Alexius stands ready to answer the call.
Author: Kevin Hein, Alexius Chief Development and Strategy Officer