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Why Aren't Corporations Drawing the Line on New Associate Costs?

Ever since large law firm salaries for new associates jumped to $160,000 back in January, we've heard commentary from a variety of constituencies, ranging from (see this post) law firm recruiters, warning that increased billables will place more pressure on associates, to lawyers, arguing that increased salaries demand concommitant salary raises for the judiciary, to (see this post) law firm economists, suggesting that associate salaries are proportionately lower than ever when viewed in the context of their relationship to profits per partner, to law firm marketers who view increased rates as opening opportunities for less expensive, midsized firms. But in all this cacaphony, we've not heard from the ones who will ultimately foot the bill for these rate hikes:  the law firms' clients.

Now, Susan Hackett, general counsel of the Association of Corporate Counsel, tries to rally her silent constituents with this provocative article that implores Where Will In House Counsel Draw the Lines on Assoicate Costs?  At the outset, for corporate clients who may be in denial that associate pay hikes mean higher rates, Hackett does the math:

Be conservative and say that an average sophisticated law firm pays an extra one-third of an employee's compensation in benefits. So that's the newly announced first-year salary level of $160,000, plus another $50,000 or so, taking us to $210,000. Then there's overhead, including a portion of the law firm's high-market rent, top-notch administrative support, computer, library and other office technologies, and that fancy art-filled lobby (so crucial to not only impressing clients, but to attracting those top first-year associates). So let's add another $100,000 for overhead, round it off, and say that now our highly recruited first-year associate costs the firm $300,000 a year.  That doesn't take into account the cost of the wining/dining/cocktail-cruising summer associate program and the cost of the firm's high-power recruitment team that brought the first-years into the fold. And it doesn't factor in the cost of attrition: For every ten of those first-years, less than half (usually more like a quarter or a third) will make it to partnership and profitability before they're either pushed out or run screaming from the building. So let's say -- again, conservatively -- that the $300,000 cost of a fully loaded first-year associate, when combined with the very real costs of attrition and recruiting, brings us to a nice "blended" cost of about $400,000 a year. Add to that the fact that most big firms operate on a lockstep salary system for associates, so a raise for the first-rung associates necessitates a corresponding raise for every other successive class. So your first-years aren't the only ones getting more expensive: The entire associate portfolio just went up in cost.

And Hackett makes no bones about who pays for increased costs. She asks:

Do you think that when the decision is made to up first-year salaries that the partnership votes to take less money to pay for it? Or do you think that the associates will be expected to "earn their keep"? (The latter is a nicer way of saying that clients will be billed for the overworked first-year associates' time and efforts.)  If you assume that every one of those associates will bill 2,000 hours that can actually be invoiced to a client (as opposed to a certain amount of time -- probably 500 hours in the first year out of 2,500 -- that will be counted somewhere but written off as uncollectible for whatever reason: incompetence, client objections, learning curve, pro bono, firm events, you name it), that means that their 2,000 hours will have to be billed at an average of $200 an hour in order to reach the break-even point. And most corporate counsel with large firm legal costs will tell you that they are being charged much more than that per hour for the privilege of these associates' time.

Hackett tries to persuade in-house counsel that they have options. She reminds companies that they can hire lower-cost partners outside of major metropolitan areas who "bill[s] $250 an hour, and who can do the same work in half the time of that $200 associate or his $800 partner. And the Internet makes lawyers from around the world as accessible as those next door." Finally, she urges corporate counsel to take charge of their budgets. They must demand to know how expensive first-year associates bring value and expertise to the clients, and they must vote with their feet if firms can't adequately respond. Will Hackett's arguments convince in-house counsel and corporate clients? Or do in-house counsel believe that hiring a large firm is a matter of security -- just like no one ever got fired for hiring IBM, is it likewise true that no one ever gets blamed for hiring a Cravath or a Simpson Thatcher or a Skadden? What's your view?

Posted by Carolyn Elefant on March 19, 2007 at 05:29 PM | Permalink | Comments (1)


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