What goes up, but never goes down? The answer to the old riddle is “age”, but it could just as well be “Big Law’s hourly rates”.
If you have ever received a Big Law bill, you will have experienced the bewilderment of valuing someone’s time at CAD$900 per hour. Or CAD$850. Or even CAD$590. Last year, CounselLink reported that American Big Law’s median billable rates were US$706 for M&A files and US$608 for general corporate and tax work (https://counsellink.com/trends/). This situation
is about the same here in Canada.
Big Law’s black magic has always been pulling rabbits out of hats – for its own amusement, and not the audience’s. But aside from sticker shock, where does that money go exactly? One might assume that it goes to covering Big Law’s higher cost base. That is what we always thought. A few years ago, we would have guessed that perhaps 40-50% of a billable hour would go to cover Big Law’s expensive tastes (e.g. high lease payments, fancy offices, a large support staff, etc.).
But boy, were we wrong. As mentioned in our first Big Law post, we created an economic model for a typical Big Law firm under a set of very fair assumptions.
The model completely upended our expectations, with the following breakdown of each dollar of Big Law revenue:
Wow. Big Law is an 80% margin business. For every hour that a Big Law Chad or Karen works on your file at $850, they are directly or indirectly pocketing $680. Big Law actually pulls two rabbits from the hat every time it bills a client.
After the twin crises of Low Oil Prices and Covid-19, is this a reasonable estimation of a professional’s value?
While some folks will always overpay for things, we think the situation is about to change. Deeply and quickly. Companies are fighting to preserve liquidity, while pivoting to survive in a long-term low revenue environment.
With that burden, would companies even want to feed someone else’s 80%-margin business?
Would a general counsel even politically risk that call when her fellow VPs are slashing budgets?
Is it even decent for Big Law to make that ask? Should Big Law instead downgrade its exaggerated self-worth – if not for years to come, then permanently?
While the need for change is clear, we suspect from experience that Big Law’s self-interest will almost always trump its desire to really change in the hope that the good times will return again.
If they do, perhaps there is a third rabbit in that hat?