The Cost-Saving Power of Retention (Part 1)
A number of factors contribute to the value of professional services firms. One factor is pricing—how much does it cost to get the service a client needs? The cost infrastructure in Big Law—with high overhead, massive office space in big cities, and the like—drives high rates. At Hilgers Graben, our disruptive model has allowed us to keep rates sane and more closely tied to the cost of providing elite teams of litigation attorneys.
A second factor includes a firm’s systems. How efficiently does information get processed across a system? What kinds of disciplines, routines, and structures are in place to support a highly effective team? At Hilgers Graben, we have developed leading systems to empower our nationwide team to focus on what they do best—delivering high quality work for clients.
But the core driving force behind value is the quality of the service. Here, the quality of the people and teams matter above all.
In most industries, it is a commonsense business objective to create high-functioning, cohesive teams of talented professionals. But it is also their goal to retain the great teams that they build. The research data backs up the value of retention. Retention helps reduce costs, while improving morale, productivity, culture, and customer service, among many other powerful benefits for companies and their clients.
So what about big law firms? Big firms are generally very good at attracting high-quality talent. With high salaries in big cities, many top law school grads flock to these firms to start their careers. Attracting attorneys is one thing, but retaining them is another. Here, the retention story is a gloomy one: in recent years, associate turnover rates have reached nearly 25%. People are leaving big law firms at a rapid pace.
That turnover leads to dramatic negative effects for law firms. It will increase costs—one projection estimates that increased turnover raised recruitment costs 35%. It also has material long-term effects—if an entire class of associates leaves after 5 years, firms are losing significant institutional knowledge and investment. Associates receive training, gain knowledge of firm internal systems, and build personal relationships with other teammates. All of that goes out the door when they leave.
Replacing outgoing attorneys with new attorneys who are unfamiliar with the teams, cases, internal systems, and culture creates a lag on productivity and morale. And that assumes that departing attorneys are being replaced by new hires who are equally gifted. In this marketplace for talent, that is not a safe assumption.
There are at least three ways that turnover increases the costs to a firm’s clients.
The first way is the direct sunk cost of the turnover itself. Clients are charged billable time for the work an associate does on the client’s cases. Those rates can approach (or exceed) $1,000 / hour even for senior associates. Those associates gain knowledge of the facts of the client’s case, claims, and defenses. They also build relationships with in-house counsel, or fact custodians. They understand the nuances or preferences of the client when it comes to collecting data, interviewing witnesses, or dealing with certain employees. When an associate who has worked on a client’s case for any meaningful amount of time leaves the firm, all that case knowledge vanishes with them.
Second, that turnover increases future costs when the associate needs to be replaced on the case. A new attorney needs to “get up to speed” on that matter or case. While some clients are able to negotiate that those “ramp up” hours are not charged to them, that may not happen in all or even many cases. And, even if it happens for the first round of review of pleadings, the hidden inefficiencies throughout the case stemming from an associate’s ignorance of the nuances and preferences of the client and fact witnesses are very difficult to identify and write off.
Third, the increased turnover creates increased expenses by the firm, which the firm will pass along to clients through higher billable rates. Firms that can find ways to keep costs down internally can keep billable rates lower. When firms are turning over their entire class of associates every 5 years, there is only a one-way upward pressure on rates.
Is this constant turnover a necessary feature of firms providing sophisticated teams of attorneys delivering complex litigation and discovery services?
In our experience, the answer is a resounding “No!” Before we cover that experience in our next post, we will discuss what drives this turnover. Understanding the problem will help reveal the solution offered by the Hilgers Graben approach.