I was having lunch with a friend a few days ago and we started talking about the legal industry’s move to pay starting lawyers $180,000 a year. Plus benefits.  To me, salaries of this kind are the product of the criminally insane, but my friend said, “it’s only $10 an hour.”  I knew what he meant. If an associate works 2000 hours a year, a generally accepted target, the $20,000 increase is paid for by charging $10 more for each of those hours.  That is, charging a client $10 an hour more.

That doesn’t sound too bad at all.

But I asked my friend to think about that from the client’s perspective.  Let’s say the client pays a firm $2 million per year in associate time. At large firms, this is a modest to small client. If the average hourly rate for all associates is $400 (which is a low estimate), the client pays for 5,000 associate hours per year. This means that without more, the client is paying $50,000 more each year for no increase in value.

And then I asked my friend if he had ever heard of firms raising their hourly rates only $10 per hour, and he acknowledged that he had not.  Even during dark times, firms would raise rates 2-3%.  But normally, firms aim for at least 5%. To put that in perspective, a 5% increase on $400 per hour is $20 per hour. So the client is paying $100,000 per year for no increase in value.

When I asked my friend how he thought his clients would feel about that, he hung his head and said “that’s not how we think about it.”

The problem is thus defined.