The Lawyer is reporting hourly rates at the Magic Circle* firms have dropped by a third.
According to the survey, over the past year, partner rates at those firms have dropped from £680 an hour to £450 ($1,100.31 down to $728.15 in greenbacks), after years of unending increases.
It’s encouraging to see firms’ costcutting is finally filtering through to client savings.
The reductions are actually coming from two converging forces: competition, as top-tier firms seek out work they previously scorned; and client pressure, as clients both demand lower prices and are less-discriminating/more-open-minded in the firms with whom they choose to do business.
After the jump, a very basic primer on economics and one of our biggest pet peeves finally gets addressed.
Freshfields Bruckhaus Deringer London corporate head Mark Rawlinson said: “There’s a trend towards continued discounting – the supply side currently exceeds the demand.”
Leave it to the M&A lawyer to put it in macro-economics 101 terms. But discounting only happens when the goods (or in this case, services) are highly substitutable. Think Exxon/Texaco – as the price of gas at one goes up, so does consumption of the other. Yes, some people feel passionately about one or the other, but on the whole, there really isn’t much brand loyalty. Eventually, you will go to whichever gas station has a price low enough to justify the inconvenience of driving out of your way. Or pizzerias.
Simmons & Simmons managing partner Mark Dawkins said: “In a recession, the leading firms wake up to the fact that they need to keep their previous market share and keep their high number of lawyers busy. They start lowballing or doing some pretty cut-throat pricing.”
What that really means is that despite top firms’ claims that they offer some unique value-add, if they’re competing on price, they’re conceding that argument (i.e., admitting there is little friction to using an alternate provider). We don’t know about Slaughters (the Wachtell of the UK- see the fourth item and ignore Onions’s comment), but from what we’ve heard, Wachtell hasn’t been lowering prices at all. Admittedly, they don’t do as much hourly work as other firms, but they have held the line on rates – if you want Wachtell, you pay Wachtell rates. If you want a discount, call Joe Flom.
But what ought to be the biggest affront to the firms is that they’re not just undercutting each other in a race to the bottom. They’re simply facing competition from firms that they wouldn’t even acknowledge as their peers.
The recession has narrowed the gap between the magic circle and the rest of the market, where price cuts have been less pronounced.
Partner rates at London firms fell by 15 per cent during the last year to £375, while the average hourly charge for a partner at a national firm is now £325.
Diamond [the lawyer who conducted the survey] said: “Gone are the days when a mid-rank firm can justify its rates on the basis that the magic circle’s are 50 per cent more.”
We find that last line a bit implausible. Most mid-sized firms haven’t constructed their rate structure by starting with the bloated top tier firms’ rates (which themselves are spun out of whole cloth and jacked up every year by as much as the firms believe the clients can withstand) and applying a discount. It’s generally been a more-sensible approach based on costs and value added.
What is telling is that mid-sized firms are becoming increasingly attractive alternatives.
But all that price movement has been at the top end – partner rates. Nothing has changed at the low end – junior associates – which is where clients think they’re being gouged!
The survey also found that although partner rates have declined, firms have not offered similar reductions for newly-qualified (NQ) and associate lawyers.
Magic circle NQ rates have remained steady at around £250 an hour for the last three years, while the figure for NQs at US firms in London actually increased during the same period from £220 to £225 an hour.
A senior in-house lawyer at a FTSE-listed company said he was often forced to challenge firms on the cost of junior lawyers, adding: “It’s ridiculous to be paying NQs a third of what you’re paying a good corporate partner.”
The screams you hear from law departments generally aren’t for the partner who spent 10 hours on a matter at $900 per. The screams are for the first years who spent 40 hours drafting a memo at $400 per. Especially when nine out of 10 clients would have preferred just talking to the partner and the first year ended up wandering down six unnecessary rabbit holes.
It’s particularly infuriating because junior associates are so frequently given menial tasks that encourage hours padding and are almost impossible to properly assess. How long does it really take to screw up a summary of change of control provisions?
* Allen & Overy, Clifford Chance, Freshfields, Linklaters, and Slaughter & May – three of the top seven on the Top 10 Firms by Layoffs list, by the way.
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