Why are the attorney hourly rates so high for certain law firms and lawyers?

ImageAs of this year, the average salary of a first year NYU Law graduate is $160,000.  This number will be similar to other law school graduates from the other top ten law schools.   When employed by a law firm, that graduate must earn 3 times his salary in order to be profitable for the firm.  That multiple covers overhead, law firm profit, and fixed costs.

Now, because of the pressure to earn that multiple, that attorney now must work for no less than 2,500 billable hours per year.  Of course, the more hours that first year associate works, the more profitable will be that associate.  And his chances to become partner will be increased as well.  It is not unusual for a first year associate to pull 80 hours a week for the year.

How does that roll out into hourly rates?  By taking $480,000 divided by 2,500 of the minimum billable hours results in an hourly fee of $192 for a first year associate.  Metropolitan law firms charge a premium since the urban operational costs are high.  So the first year hourly rate will be close to $200 or $300 per hour.

Each lawyer in law firm, whether a partner or a first year associate, must account for his time, generally by multiples of 6 minutes.   From emails to courtroom appearances , from phone calls to legal memoranda, from office visits to travel, the lawyer must bill for the time relegated to the client.

Now I mentioned billable time. What I mean is that whenever I call a former colleague of mine, now a managing partner of D.C. law firm, I keep track of my minutes not to exceed 15 minutes, since I know that my time is not billable. He, in turn, has to work longer in the day to accrue his average daily billable hours.  Since I am acutely aware of his work process, I try to keep my personal calls to a minimum.

We are addressing the description of attorneys affiliated with major firms.  Hourly pricing can vary dramatically by geographic locations and educational background.  Unfortunately, clients don’t have the luxury to pick any attorney when filing for IPOs, as the client must select nothing less than the top ten New York law firms normally identified by the investment bank.   And the partner’s hourly rates easily exceed $1,000 per hour for IPOs or M&A.   But these costs are predictable and mandatory.

As a CxO, I have had the experience in employing a wide variety of law firms.  This experience is crucial in establishing future monthly budgets when there are predictable potential transactions requiring outside counsel.  In fact, when drafting financial spreadsheets, I also include the potential legal costs for different matters. Since these costs are not immaterial, I always suggest adding a line item approximating legal costs to the annual budget and business plan.

I myself have seen too many plans not taking into account for legal costs.  And to avoid paying for them, many entrepreneurs attempt to avoid hiring counsel or reduce costs by renegotiating fees at their peril or drafting the paperwork themselves.  What will happen more of ten than not is the production of poor quality work on documents, whether they be contracts or corporate minutes, exposing them to long term liabilities or legal issues.  These are the type of issues that an investment firm wishes to avoid — losing its investment on long term, avoidable litigation. When smart money does its due diligence, they hire outside counsel to read through the company’s contracts, press releases, corporate books, etc.  The investment or VC firm expects a report and, if the documents don’t pass the smell test, they walk away.

As I described earlier, the law


firm has little or no flexibility to reduce the hourly rate because of the embedded variable labor costs.  The best recommendation is to anticipate these costs as part of the business plan projections and not ignore them.  There is no point of being “pennies wise, and pounds foolish.”

Major investment or VC firms generally hire brand name law firms for their work.  Regardless of the public opinion that any lawyer can produce the same work, the perception is more important here than the reality.  And if the company is represented by a recognizable law firm, then the perception by the investment community is that company’s legal work is being well managed.  I don’t want to delve into qualitative issues here comparing law firms. And there is no requisite rule that a company must seek expensive representation, but I do believe it might have a material impact during the due diligence by a VC or investment firm.


About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
This entry was posted in Capital and Management, Entrepreneurship, legal, Management and Capital, Strategy and tagged . Bookmark the permalink.

2 Responses to Why are the attorney hourly rates so high for certain law firms and lawyers?

  1. idol lash says:

    Oh my goodness! an amazing post dude. Appreciate it Even so I will be experiencing problem with ur rss . Don’t know why Can not enroll in it. Could there be any person finding identical rss issue? Everyone who knows kindly respond. Thnkx

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s