“Leverage” (Part I): How the Legal Industry’s Pursuit of Leverage Pits the Client’s Interests Against Those of The Law Firm

A friend of mine – new to his job as chief financial officer – received a bill from a law firm for advice in an obscure area of federal income tax law. The law firm was nationally prominent – one of the 100 highest profit-per-partner practices in the country.

My CFO friend called the partner named in the bill:

“I’ve got your bill here. I see that you’re charging me for hours worked by associate tax lawyers Susan and Joe. I’ve worked with each. I respect them both. I’m fine with paying their charges.”

“But I see that I’m being charged for hours that you’ve worked. You and I have never met. I’ve never seen any of your work. I’ve never even heard of you until seeing your charges on this bill. Can you help me to understand how payment for your work relates to some actual benefit that my company’s received?”

The law firm billing partner:

“I’m the relationship partner on your company’s account. I supervise the work that Susan and Joe do for you … Think of me as ‘quality control’“.

My CFO friend:

“’Quality control’? Does that mean that you’re a tax lawyer yourself?

The law firm billing partner:

“No. I’m not a tax lawyer — I practice in the real estate group.”

My CFO friend had just learned that the lawyers on whom he’d been relying required “supervision” and “quality control” from another attorney.

This “supervision” and “quality control” came from a law firm partner who – as my CFO friend could see from the bill – charged at a much higher rate than the attorneys he’d been dealing with directly.

The crowning blow: The attorney providing “supervision” and “quality control” — and charging handsomely for it — was not qualified at all in the legal specialty for which my CFO friend had sought advice.

My CFO friend paid the bill in full – and then found a single partner in a boutique law firm whose practice is confined to the niche of federal income tax with which his company is concerned. He pays her $400 per hour.

My CFO friend deals solely with her. When he needs an answer, there are no time-consuming, error-prone games of “telephone” among a needless proliferation of lawyers.

And thus far his new lawyer hasn’t needed “supervision” or “quality control” from anyone else (!).

Business lawyers call this purposeful mixing of charges for work from attorneys whom the client actually needs with charges for work from attorneys whom the client doesn’t actually need — or whom the client needs only marginally – the pursuit of “leverage”.

Owners of a law firm – its equity partners – hire other lawyers as employees. These employee-attorneys’ hourly charges to client companies are meant to exceed – and exceed by a lot (often 3X) – the salaries and benefits that their law firm employers pay them.

This pursuit of leverage pits the client’s interests against those of the law firm:

  1. It’s based on the work of less experienced employee-attorneys — ranging from right out of law school to no more than 7 or 8 years after graduation (all but a tiny percentage have to leave the firm thereafter);
  2. These employee-attorneys bill at hundreds of dollars per hour — not paralegal or law clerk rates;
  3. These employee-attorneys must meet annual hourly billing quotas;
  4. These employee-attorneys require “supervision” or “quality control” by more experienced lawyers — with everyone’s meters running; and
  5. The more experienced lawyers charging alongside the less experienced ones on whom leverage is based may — or may not — be qualified experts in the legal specialty being billed for.    

As a member of the Bar I’m meant to act as a “fiduciary” for my clients. Black’s Law Dictionary defines “fiduciary” as, “a person having a duty … to act primarily for another’s benefit.”

” … To act primarily for another’s benefit ….”

Do you see anything in the above list that looks like it’s designed primarily for the client’s benefit rather than the law firm’s?

Neither do I.

“Leverage” (Part II) offers a case study. It illustrates law firm economics that drive the pursuit of leverage, negative results in work quality, and the needless inflation of charges to the client through the experience of one law firm leader.

That case study also shows that law firm leader rejected the pursuit of leverage for a business model designed primarily for the client’s benefit — and founded one of the country’s most sought-after law firms.