A primer on agency pricing and the bid process
Jun 21st, 2008 | By posselist | Category: Contract Attorney Primers
We get lots of questions about contract rates and agency bid rates vis-à-vis the state of the D.C. market. Many D.C. Posse List members have seen a reduction in the average hourly rate which has been pretty much fixed at $35 these last few years. Given the recent history at Howrey in D.C., will rates change?
We have written in the past about the global labor arbitrage phenomenon and its affect on the service labor market (attorneys included) around the world. This is not something confined to our market as corporations and clients seek the cheapest venue possible to cut costs, and the cheapest pricing strategy. As we have stated in the past, ours is an industry that has flourished in the last 7 years as law firms have adopted the cost-saving manufacturing principle of “just-in-time” production, applied to a service industry: hire attorneys “just when you need them” but only on a part-time basis. However, many law firms have turned this not only into a cost savings procedure, but a profit center as well. In our opinion the law ceased to be a “profession” years ago and is simply a commodity like everything else. Produce it/use it cheaper and you succeed.
We aren’t sure what will happen but right now in D.C. there is lots of supply (contract attorneys), agencies with no work, and desperate agency sales people. Not a good mix. For a long time D.C. and NYC contract attorneys have lived on 2nd requests. But they have fallen off due to the 2006 regulation changes and DOJ policy changes. Right now, the DOJ is pretty much waving them through. And as we said in an email a few weeks back, there is also quite a bit of “pre-HSR filing chat” between companies and the DOJ/FTC. All of this shortens the doc review process.
We’ve also seen litigation doc reviews leave D.C. to cheaper markets. We’ve recently seen a number of agencies with projects set to go cancel the last minute as the doc review got pulled because the corporate client and/or law firm moved it to a lower cost center.
So there is a squeeze by law firms and their corporate clients on agencies and the contract attorney.
But how are these projects priced? Here is a primer on pricing which I’ve punched out to the entire master Posse List since I think it affects everybody:
As an example, Mayer Brown recently submitted a RFP (request for proposal) to several DC agencies. These were bids for space, computers and people. Some agency bids were under $50/hour, as low as $47-to-$48 an hour. Given the seemingly “fixed” rate of $35, what will the lower pricing do to hourly rates?
Most agencies work on markup percentages. As of four years ago, these were as high as 100 percent (i.e. you get $25 an hour, the agency bills the firm $50). Now it is seen as a 50 percent mark-up ($35 to you, $52.50 bill rate to the law firm).
What an agency looks at is gross margin percentage. They take revenue and minus out cost of sale (actual pay, payroll taxes, etc.) and get gross margin. Most agencies want at least a 25 percent gross margin percentage before they pay overhead. Recently, the cost of production space, computers, cookies, coffee, etc., etc. has upped cost of sale and has cut the margin to a range of 20-22%. As a comparison, a law firm that runs on less that 35% gross margin off their billable hour would have partners leaving in droves. (Next week I’ll explain some of the pricing calculations law firms go through).
After you pay overhead from your gross margin you want a return on sales to be double digits to be a viable business. So doing the math on some recent RFPs, a $48 bill rate and a $ 35 pay rate is a 37% markup. That (without space, etc. factored in) is roughly an 18.5% gross margin. If an agency is truly including space, etc. for free (which some RFPs state) then that margin is often cut to 15%. Given many agencies factor/sell their invoices or loan against it for a further lop off, by some calculations the return on sales is even less.
Why would an agency do this? By pumping up your revenue you can increase the amount of money you can get from bank credit facilities or your factor financing in bad markets. Squeezing the profits hurts the books long term but if you are a private company (many agencies are) you don’t care because an outside investor or buyer might overlook that thinking and can “fix” the problem.
Comments to this post are encouraged.
I would like to know how the law firms bill for the contract attorneys. If the agencies aren’t making the big bucks, surely the law firms must be writing up contract attorneys by several multiples?
Also, firms that make a “direct hire” from an agency…how do they pay the agencies and do they mark up the contract attorneys (aka staff attorneys) at a higher rate?
Thanks for this. I have often wondered about “the math” behind hourly rates. It seems that the decreased demand for second review work should stimulate agencies to train CAs to do more than just document review.
Great post! This would appear to explain why AGENCIES (not necessarily the law firms) are trying to hold down the hours on projects so that the bulk of the work is done in the 1st 40 hours of each week. I’m presuming that the law firms are not paying the agencies 150% for “overtime,” but would love to see more informed comment on this latter point–the agencies having a disincentive to allow their temps to make any money. This behavior seems to have changed dramatically over the last few years. Exactly who is the “principal” for these “agencies?”
Good primer. As you point out, lawyering is every bit as much an industry as petrochemicals, so it’s not surprising that the same competitive pressures and responses that operated in John D. Rockefeller’s time operate in Mayer Brown’s as well. In any industry, some market participant is always prevailing, if only for the moment, while another is on the way out. This may be particularly true of lawyers, whose business advice may not always be matched by their business acumen.
My observation, however, is that there is no single model of the contract attorney business. There are law firm sweatshops in the suburbs paring costs, pushing volume, and hiring warm bodies to click through documents on a project-by-project basis, but there are also white shoe firms downtown building long-term relationships with contract attorneys who float from project to project. There are contract attorneys hunting for needles in electronic haystacks, and there are contract attorneys performing substantive work. There are non-lawyer supervisors of contract attorneys unable to give direction on legal issues, and there are senior associates supervising projects who should have better things to do.
You may believe that the law has long ceased to be a profession, but I suspect that Mayer Brown would demur. Many large firms continue to carry junior and middle associates at large cost for years before they can bring in new clients or produce work that makes a difference in the representation of the firm’s existing clients. They call it lawyer development. If and when the substantive work typically handled by junior and middle associates shakes off to contract attorneys, I will believe that the profession is dead and the business is truly run by accountants.
How about woking from home. It may not be easy but worth a try considerating the cost.
This is great information. Would you say that the same basic principles apply for foreign language reviews, or is that a whole different ball game? Thanks.
To believe lawyering is any less a product than air conditioning repair or iPhones is ridiculous. Despite our penchant for verbosity and our love of embellishing all we do, we provide a service no different from any other industry. What surprises me is the culture of believing we are somehow unique among the service industries. This overriding and pervasive belief is so strong that most firms can’t even wrap their heads around the truth that there are thousands of attorneys with potentially millions of man hours working for $20,000-$30,000 a year throughout the entire U.S. While these firms pay over $30/hour for often unlicensed document reviewers, there are many attorneys desperately seeking any employment who would be willing to work for much, much less.
Many firms have such arrogance that they refuse to recognize that most of us passed the Bar by studying BarBri for a few weeks because we received no education in practical matters at law school. The firms and the people who work there pat themselves on the back so often that they begin to believe that the large sums of money they bring in is somehow related to their intelligence rather than their ability to join social clubs and head up local committees on domestic violence or what have you. We all learned very little at law school, studied with BarBri because we knew very little that is tested on the Bar, and then have the audacity to think we’re different than a plumber. But luckily the industry is changing, slowly.
No to be knit picky, but I don’t fully understand your last paragraph.
1) it isn’t clear to me what you are referring to agencies “doing.” i’m not sure they are “pumping up” their revenue. in fact, it seems rather that they’re being squeezed.
2) any investor worth his salt, or a bank lending money for that matter, isn’t going to care about revenue pumping if the business is losing money, or net margins are anemic.
But, frankly, that’s where margins should be for a broker. There value has been wildly overstated for some time. How else can you justify 30+ agencies in the DC market alone?
In answer to the question about commissions for staff attorneys, in the D.C. market there is normally a $6,000 cap on an agency commission. An agency normally gets $2,000 for every 8 weeks a candidate works. That usually caps out at 24 weeks because at the 24 week point the agency hits $6,000.
[...] How? Why? Law firms are squashing the agencies to bring down costs to their clients and to improve their profitability. Taking the D.C. market as an example, we saw this earlier this year when Howrey changed its rate structure to agencies. Thanks to some cooperative law firms and agencies, we’ve seen a number of RFPs (request for proposal) and the charge rate to agencies from law firms has dropped which is why D.C. (as an example) has seen $32/33 an hour projects popping up rather than the standard $35 an hour rate. The agency eats into its margin and/or knocks down the hourly rate to contract attorneys. For our primer on agency pricing and the bid process go here: http://posselist.wordpress.com/2008/06/21/welcome-to-our-posse [...]
In this environment, I would actually like to see agencies and law firms embrace telecommuting. It could be done quite cheaply (agency would not need as much office space and supplies, coffee, cookies, etc) and with minimal disruption. I’m sure that agencies and firms will have concerns about two things: confidentiality and productivity, not necessarily in that order. This could be solved by software controls and daily productivity requirements. Both of these are present for the most part in most contract attorney work environments anyway. What would it take for this to get to the implementation stage?