Do we have a deal? An easily-missed recent entry in the legal press noted that DLA Piper had decided to award the latest round in starting salary increases to entering associates in only one practice area–patent litigation. The article noted that patent litigators often have science and engineering degrees and that clients are willing to pay premium billing rates for these services. DLA’s co-managing partner for the US, J. Terence O’Malley, said the move was in response to "listening to the marketplace."
Partner compensation at law firms usually differs depending on seniority, origination, productivity and whatever else goes into the formula, and individual compensation arrangements, at least for a trial period, are often negotiated with lateral hires, including associates. According to an Altman Weil Survey, however, nearly 2/3rds of firms with more than 100 lawyers have some sort of lock-step feature by class for associate compensation, and that proportion must approach 100% when it comes to first-year associate entering salaries.
DLA’s small step is remarkable in several respects. Given the traditional associate compensation structure, hiring entering associates at varying salaries, particularly in this competitive recruiting environment, is a real departure. This proposal must have provoked lengthy discussion at DLA about whether, regardless of its usefulness in snagging more patent types, the move would also turn off high-quality associates not interested in patent litigation. Isn’t DLA saying that some associates are more valuable to them than (most) others?
But if there is premium billing to be had, why not pay premium compensation? There is something to be said for sharing the wealth with the associates who are doing that work. It’s just that that is not how law firms have reasoned in the past. Call it a "professionalism ethic," or maybe something else, but there has been a widely-recognized premise that at least all young lawyers in any given firm are created, and paid, equal.
Further, for a law firm to have gone through the process of officially determining that some corporate legal services–in this case, bet-the-ranch patent cases– are more valuable in the marketplace than others, and that they are going to pursue those, is notable, the critical word being "officially." Firms have long been able to bulk up bills in areas where they own the field, using an implicit what-the-market-can-bear standard. What is the client’s alternative?
But this announcement publicly acknowledges parsing the demand for legal services in a way that law firms have traditionally not owned up to–we intend to take advantage of the demand for a specific type of particularly profitable work.
The correlation drawn in the article between premium billing and the associates’ salaries makes it look like DLA’s analysis was based on the old-line cost-of-production concept–since we will charge a higher hourly rate for this work, we can afford to pay these associates more as well and still retain our profitability margins. But in fact, these facts can also support a newer type of value pricing– we can pay these associates more because this work is worth more to the client, regardless of how much time it takes to perform.
This announcement may also be part of a shifting in the wind away from the convergence rage. There has been much made of the convergence trend among corporations, no doubt the brain-child of a legal consultant hoping to reap the law firm M&A bonanza that the announcement of such a trend has in fact put in motion. But this bit of DLA’s market analysis, if true, may put the lie to the contention that firms should do it all. IP boutiques have in part managed to ratchet up hourly rates because of the uniform nature of their hotly-demanded business. In short, they are the antithesis of the general service law firm and they are profiting from that status. Large law firms, burdened with years of the convergence message, currently sport a blended, averaged or standard-per-class billing rate that applies to both more and less profitable work.
According to last year’s survey, 28 of the AMLaw 100 law firms shrank in size. All but two of those also improved their RPL. For example, Akin Gump shed 25-30 lawyers as they found asbestos defense work to be increasingly commoditized and price-sensitive. That move raised RPL nearly 5% for 2005. Managing Partner R. Bruce McLean noted that "In the 1990s we tried to build a national firm, and we grew from 450 lawyers to 1,000 lawyers." The firm now has 794 lawyers. "Since 2000 we have tried to focus on doing what we do well, so we can compete at the top of the market in those practices." In other words, they are no longer trying to be all things to all clients.
DLA’s move looks to be in response to clients who, at least in this particular patent litigation area, want the best in the business, wherever that is, and further, whatever that costs.
Where this type of reasoning could take law firms is wide open: carefully drawn billing rates (and salaries) that differ among practice groups, and possibly even among types of work within practice groups, as well as over time, all based on the latest market analysis.
Regardless of whether DLA’s analysis is right, the important step taken may be in their acknowledging publicly, however quietly, that engaging in this process, "listening to the marketplace" and then attuning your firm’s economics to what you hear, is a respectable way to run a law firm.