To Slay the BigLaw Minotaur

The Ideal

When I was in-house counsel at Visa, its smaller merchant clients would occasionally enter contract negotiations with the perception that they were coming from a position of comparatively poor bargaining power.  Recognizing that the relationship between Visa and its clients would continue far beyond the few days or weeks of my initial involvement, I treated the opposing team and its counsel with the same amount of respect and courtesy that I would give to all of Visa’s best clients.  As a result, any sense of imbalance quickly evaporated, taking a significant amount of deal friction with it.

To put it simply, just because I could have exerted a greater bargaining power against a counterparty with lesser bargaining power doesn’t mean that I did.

This sentiment reflects what the relationship between a client and its counsel ought to be: a long-term alliance where interests are aligned at the outset.

The Traditional Model

If you have read my initial blog post, you already know my feelings about the traditional legal services model and the billable hour under which it operates.

Spoiler alert: no están bien.

Not only is the traditional model extremely inefficient, it inherently results in a massive imbalance of bargaining power between lawyer and client.  Before a lawyer is your lawyer, each of your respective interests are typically at odds: you want fair rates and terms, and that lawyer wants, well, something else.  Couple that with the fact that you likely do not have the legal training to comprehend the labyrinthian paths a lawyer can take to persuade clients that his work is necessary and you may as well be David pitted against Goliath, minus the proverbial sling.

According to the December 2023 LAW360 Pulse Compensation Report: Law Firms ("Pulse Report"), the average associate at a large law firm (i.e., one with over 600 attorneys) is billed to clients at $696 per hour, earns $260,000 per year in total compensation and bills 1,774 hours per year.  The average large firm therefore bills to its clients $1,234,704 per year for the work done by that associate, but that associate earns only a fraction of that for themselves.  Throw in the fact that, as Yale Law modeled out, lawyers often work ~2,350 hours in order to bill ~1,774 hours, and that associate is only actually earning ~$111 per hour ($260k ÷ 2,350).  So, the average large law firm is billing its clients $696 per hour for the work of an associate making $111 per hour. 

Wow.

Moreover, according to the Pulse Report, the average large firm non-equity partner is billed out to clients at $843 per hour, makes $516,000 per year in total compensation and bills 1,738 hours per year.  Large firms are therefore billing their clients $843 per hour for the work of non-equity partners earning ~$220 per hour ($516k ÷ 2,350).  (Note that the average billable rate skyrockets to a whopping $1,295 per hour for equity partners.)

Yay, capitalism.

I can hear that law firm now, "But, sir, we don’t actually receive all of those billables."  That is true.  According to the Thomson Reuters Institute’s latest report, Law firm rates in 2023: What’s working, what isn’t, and how to move forward in 2024, some 90.3% of billables are collected.  Not only does that beg the question why law firms bill that extra 10% in the first place (see Morrison Foerster COO Pat Cavaney’s unbelievably tone-deaf response to this below), but it demonstrates the comparatively low bargaining power of clients of traditional law firms.  Plus, needlessly having to negotiate every month with your own lawyer–the one person you should be able to trust to treat you fairly–takes time.

Nevertheless, point taken.

Of course, those firms have overhead–like maintaining their ‘white-shoe’ appearances with swanky offices with monocle-evoking street addresses–that collectively account for 45-50% of gross revenues (if anyone has a more recent source, please let me know), accounting for $557,468.86 per associate ($1,234,704 x .903 ÷ 2) and $661,508.00 per non-equity partner ($1,465,134 x .903 ÷ 2).  But pray tell where does the delta of ~$297,000 per associate ($557,468.86 - $260,000) and ~$146,000 per non-equity partner ($661,508 - $516,000) go?

Into the pockets of equity partners, of course.  But for what?  Equity partners are billing their clients separately for their own time spent on matters and for ‘supervision’ of associates (at $1,295 per hour for that matter), so that can’t be it. 

Nope.

It’s because they can exert their bargaining power against a counterparty with lesser bargaining power (i.e., their client), so they do.

And you don’t have to take my word for it. As MoFo’s Cavaney said just last month, “If you don’t push rates, you’re not going to get them. If you push rates, you’ll give back a little in the form of an added discount, but you still come out ahead.”

(He actually said that, like out loud.)

And let’s not dismiss the shocker that upwards of 50% or more of law firm clients’ legal expenses is going straight to firm overhead.

I don’t know about you, but if I were a traditional law firm’s client I’d be pretty darn pissed.

An Alternative Model

What if instead of the traditional law firm model, where there is such an extreme difference between what clients are paying and what the lawyers who actually do the work are being paid, there were a collective of independent lawyers working towards a shared mission of fairness, transparency and efficiency in the provision of legal services?

Consider the example of a contract that takes an hour for an average associate to prepare and 30 minutes for an average non-equity partner to review.  Using the above numbers, under the traditional model, that contract would cost the client ~$1,009 at a large law firm ($696 x .903 for the associate’s hour plus $843 x .903 x .50 for the partner’s half hour).  In this example, the law firm associate actually only earns $111 for the hour spent drafting the contract, and the non-equity partner earns about ~$110 (50% of $220) for her 30 minutes of work.

Now, imagine a structure where both the associate and non-equity partner were each self-employed and working together under a co-counsel-type arrangement.  That same contract could be drafted and reviewed for far less than the average large law firm charges under the traditional model, and each lawyer would earn considerably more.

For example, that same associate-level lawyer could charge $300 for that hour worked and that same non-equity partner could charge $300 for her 30-minute review ($600/hour) and the client would only pay $600 for that contract, ~41% less than the amount paid under the traditional model.

As a matter of fact, I recently launched EnigmaTech Legal with this model and a fee analysis of one company’s legal invoices revealed a 60% savings on what it was being charged by their existing outside counsel.  No están bien, indeed.

But wait, there’s more!

Under the proposed model, that same associate could work half of the 2,350 hours expected at the large firm (i.e., 1,175), and earn ~$352k per year ($300 x 1,175), $92,000 per year more than what he would make at the firm.  Additionally, the non-equity partner could work half of the hours expected at the firm while earning $189,000 more per year.

Imagine what that would do for mental health and work-life balance.

Obviously, the new model requires a demand for the legal services provided thereunder, the curation of which is how equity partners have long dubiously justified their exorbitant pay.  But, I imagine that saving 40-60% of the ~$1.5 million of average outside legal spend would be quite attractive to clients once word gets out.

Of course, since lawyers under the proposed model would no longer be paid for other lawyers' work, the losers of the proposed model are the equity partners, who have long exerted their collective bargaining power at the expense of their own associates, their own non-equity partners and even their own clients. I guess they'll have to figure out how to live on only $1,295 per hour for the work they actually do. So sad.

Indeed, the model is exactly for those of us who want to be fairly compensated for the work that we do, on our own terms.

As I acknowledge in my initial blog post, there are times when paying an arm and a leg for the services of a traditional law firm makes sense, but for the vast majority of clients retaining a traditional law firm is utterly wasteful.

Stepping into the Labyrinth

As noted above, I recently launched EnigmaTech Legal, a fractional counsel service dedicated to fairness, transparency and efficiency in the provision of legal services, which got me thinking about taking that mission further to create a network of independent lawyers/single-lawyer firms collectively functioning like a law firm–a firm of firms of sorts–towards that same end.

I have since formed the non-profit, Aethra Corp., to serve as the beacon of that network.  Aethra Corp. is named after the mother of Theseus of Greek mythology, who went on to defeat the mighty Minotaur of the Labyrinth.  (I found the name fitting.)

Next on my agenda is to create a set of rules, guidelines and practices that support the mission (e.g., remote work, limited or zero markup of fees and expenses, use and sharing of forms for efficiency) that myself and other member lawyers can uphold.

All else equal, member lawyers should see substantial earnings gains (particularly in hourly earnings) and vastly improved work-life balance, and their clients will benefit from significantly lower rates, over time drawing both lawyers and clients away from the old, wasteful traditional law firm model to something much better.

Please reach out to me via LinkedIn or email at info@enigmatechlegal.com to learn more.

And stay tuned!

-Damian