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David Maister - Professional Business, Professional Life

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A Discussion About Fees, American Lawyer

by David Maister 2002

from American Lawyer, 2002

Is it time for large law firms to raise their hourly rates? Why or why not?

It’s always important for law firms to be looking for ways to earn and deserve higher fees (it’s clearly the most powerful way to improve profitability), but it isn’t as simple as just raising rates. The questions are these: In what ways have we changed the way we practice to be more valuable to our clients? Would THEY agree that we are now more valuable to them than we were two or three years ago? If the answer to these questions is “no,” then raising rates would be crazy.

Bear in mind that in a capitalist economy, prices are a reflection of relative scarcity (i.e., the balance of supply and demand.) It’s all very well that you can do wonderfully valuable things for clients, but if 20 other firms can credibly achieve the same thing, the price you will command won’t be high. The key to raising rates successfully is to work with clients in ways they both value and do not commonly find among law firms.

Is it time for large law firms to increase their equity partners’ capital contributions and/or take on debt? Why or why not?

Law firms don’t need a lot of capital, except to fund working capital, and this is best done through partner capital contributions. I can’t imagine why any firm would want to increase its debt. Success in law firms is not about financial engineering; it is about creating gains in efficiency, value, innovation, teamwork and people development. Remember, chasing money is not what makes you money.

Is this an opportune time for large law firms to seek mergers and/or go hunting for big-name laterals? Why or why not?

Most mergers fail to deliver any positive impact on profits per partner, and are huge diversions of management attention from the things you do need to do to win, e.g., manage the law firm and the people within it. On the other hand, a firm should always be on the lookout for selective laterals who can help get the firm into new areas and disciplines. However, just looking for big names isn’t sufficient. A lateral only helps if he or she is able to help the firm build a practice area, and that takes someone who is prepared to act as a team player, invest in the future and coach others. Too many big-name laterals are, in fact, lone wolves who just want to get paid more for their book of business and have no interest in sharing or institutionalizing their skills.

Is it time for large law firms to roll back or freeze associate salaries? Why or why not?

The underlying people crisis (or war for talent) is still there. There remains a shortage of young knowledge workers, and as soon as this recession goes away (12 months), we’ll be back in the same mode we were 18 months ago, bemoaning the lack of talent available to fill the demand. As noted above, prices (including salaries) are determined by relative scarcity, and demand is now off, so associate salaries are down. But the supply hasn’t changed, and when demand comes back, we’ll be right back where we started. (And associates will be paying close attention to how firms handled themselves in the down market.)

Is it time for large law firms to reduce the size of their equity partnerships? Why or why not? And if so, how best can this be achieved?

It’s certainly time for firms to ensure that all partners with equity are making a contribution commensurate with that reward, but the first step should be to try to help people contribute (through guidance, coaching, support, practice group management, etc.). A firm would be much healthier if it could get a high percentage of its people to the point where they earn and deserve equity. A knee-jerk policy of “you’re either a superstar or we’re going to take your equity away; you figure it out!” is not exactly a sophisticated approach to management, yet it’s increasingly common. Law firms should be great at helping people succeed, not just demanding that they succeed. Yet few firms pass this test.