Redwood Analytics

Bankruptcy lawyers have been quite busy this past year, and firms  have enjoyed exceptionally high billing rates for many pieces of work.  This isn't surprising; in the wake of last year's economic crisis, many companies have sought protection from creditors, and the best bankruptcy lawyers have been in high demand.  Taken against the backdrop of the past few years, the rates these lawyers are charging---sometimes exceeding $1,000 per hour---are not terribly shocking.  However, it is notable that these rates are being passed through quite easily when one considers that the "story of the year" is alternative fee arrangements, that clients are prioritizing lower legal costs, and that firm profits are expected to drop due to flat rates and lower utilization.  Given the quoted partner rates in the above link, the prognosis of falling profits and rising alternative billings doesn't seem to apply to the bankruptcy practice.

With all the talk about "value billing," "risk sharing" and the like, we sometimes forget that the primary driver of pricing is still supply and demand.  Given the recession and the continuing credit crunch, demand for services in sectors such as M&A and corporate work is lower, and negotiating leverage is unquestionably with clients.  Firms have downsized and begun to acquiesce to client demands for "risk sharing" by engaging in pricing arrangements outside of the hourly model; in many cases they are also suffering lower levels of productivity.  Until a right-sizing of supply and demand is achieved, increased profitability will be achieved mostly through efficiency gains and dealing with excess capacity.

This doesn't really apply to bankruptcy, where business is brisk and demand is robust.  Having recently read Andrew Ross Sorkin's fine account of last fall's crisis, "Too Big to Fail," it does not sound like Lehman Brothers asked Harvey Miller and Weil Gotshal for their best creative pricing before asking the firm to represent them.  (Published accounts say that billings by Weil on Lehman matters have now exceeded $120 million.)  When one looks at bankruptcy practices, the conventional wisdom around pricing is turned on its head.  Firms are charging high rates, and billing in whatever way they are most comfortable.  Risk sharing probably hasn't been brought up in too many negotiations between law firms and clients seeking bankruptcy representation. 

Make no mistake, we don't believe that alternative billing is a flash in the pan, but the entire movement needs to be viewed against the backdrop of who has leverage.  We believe the current movement away from hourly billing is a good thing that will ultimately benefit both law firms and clients, but regardless of the success of it, effective rates will increase when demand exceeds supply, and will remain flat or go down when supply is higher than demand.  Basic economic rules still apply.