By: Bill Myers

February 27, 2004, Chicago Daily Law Bulletin

Informal relationships with clients and casual networks in the market may have as much influence on law firms' billing as market forces, a new study has found. Brian Uzzi, an associate professor at Northwestern's Kellogg School of Management, and Ryon Lancaster, a Ph.D. candidate at Kellogg, conducted interviews with lawyers at large firms in major markets and also reviewed surveys of law firm billing and internal structures of large firms in major markets.

They found that a firm's "embeddedness" influences the prices a firm charges for its services. Embeddedness is the informal, semi-social networks a firm establishes with clients and in the market, sometimes called "social capital."

The two academics have recorded their findings in an article to be published in an upcoming issue of the American Sociological Review.

Uzzi and Lancaster analyzed three forms of embeddedness and found that:

- Firms whose lawyers have entrenched, long-term relationships with their clients, called "embedded ties," tend to charge those clients less per hour than they charge clients with whom they do not have an embedded relationship. The more entrenched the relationship, the less they were likely to charge.

- Firms whose lawyers sit on the boards of nonclient companies charge higher rates than firms who do not have such "board interlocks."

- The "relational status" of a law firm -- the degree to which clients feel that associating with a firm confers higher status on the clients -- allows law firms to charge more per hour than firms with lower relational status.

These factors operate separately from market forces, Uzzi and Lancaster wrote.

Embeddedness has the most impact on the rates at which partners bill for their time, Uzzi and Lancaster wrote. Associates' billing, while also influenced by embeddedness, tends to be more market driven, Uzzi said in a phone interview.

Uzzi and Lancaster wrote that a firm's embedded ties with its clients actually have an inverse relationship with its billing. Even as a law firm's costs rise, the price it offers to clients with whom the firm has embedded ties continues to drop, Uzzi and Lancaster wrote.

"It's somewhat counterintuitive because people think it's going to benefit the law firms," Uzzi said.

Uzzi and Lancaster wrote that the inverse relationship between embedded ties and billing may exist because the relationship between a firm and its long-term clients becomes more informal and semi-social, which "injects into the business exchange expectations of trust and shared norms of compliance."

The academics also found that when a firm's lawyers obtain board memberships on nonclient firms, it tends to increase a law firm's billing because it gives a firm's lawyers access to private information on what's happening in the legal market.

"As board members, lawyers can acquire private information about other law firms' offerings or the criteria that clients use to judge legal services in the course of their board reviewing the bids of other law firms -- information that is otherwise unavailable in law's confidential bid system," Uzzi and Lancaster wrote.

The biggest impact on billing, however, was a firm's relational status, Uzzi and Lancaster wrote. This phenomenon works independently of the actual quality of a law firm's work because clients feel that a high-status law firm carries more credibility than lower-status firms. The authors quoted one lawyer who described a client's thinking as follows: "I can use a medium-size firm in Kentucky, and they're fine. But I think I'd like to be able to tell my directors I got ... a high-status firm.'

High status even mitigates the damage from bad work, the lawyer added.

"There's less to justify before the deal and after the fact if something goes wrong," Uzzi and Lancaster quoted the lawyer as saying.

In all of the embedded relationships Uzzi and Lancaster reviewed -- embedded ties, board interlocks and relational status -- the key element in determining price was the access to private information, the kind of "soft" data which is not available to the market at large, they wrote.

"The social capital does create benefits because it's this private information that's flowing through it. The market is not able to capture that information, but the social capital can," Uzzi said.

In earlier work, Uzzi and Lancaster argued that firms are abandoning the partnership model of business -- which is built on more informal, semi-social networks -- in favor of corporate models, where the lawyers' relationships with clients and with each other are more strictly business.

Uzzi said Tuesday that he saw that trend continuing, but he said there was probably no way to end the influence of embeddedness on law firm billing because there will always be some level of partnership in the legal profession -- and because embeddedness has the most impact on partners' billing rates.

However, Uzzi did acknowledge that, given his findings that associates' billing rates were less influenced by embeddedness, it could be that embeddedness' influence on billing will decline as law firms become more like corporations.

"The embeddedness is likely to be part of the core partnership of the firm, which the corporatist model is never going to fully supplant," he said.