In April 2020, GameStop (GME) stock sank below $3 a share. By January 2021, retail investors drove the stock to an intraday high of $483, turning it into what is now known as a meme stock.
Brick-and-mortar retail sales of electronic games declined as online gaming grew. In 2013, GME diversified by acquiring Spring Mobile, a set of AT&T retail franchises. But by 2019, they had already divested that business for $700 million. Following the sale, GME had substantial cash on the balance sheet. Many investors were pessimistic about GME’s management and its future, and short positions increased. But a smaller group saw an undervalued asset. Later in the summer, GME had more cash on hand than the company was worth, which is counter to market fundamentals. Activist investors advocated stock buybacks, and the board repurchased 34.6 million shares through Q3 2019, removing roughly one-third of the shares from the market.
The short position remained high, and a perfect storm was brewing. Michael Burry, known for his bet against the housing industry, as depicted in the film “The Big Short,” has recently launched a Substack newsletter analyzing market bubbles. He recently shared his view on the events that enabled retail investors to drive a short squeeze on GME. (Burry was one of those activist investors.) Here are some key points about the mechanics of the unprecedented short-squeeze based mainly on Burry’s account:
- GME was undervalued, and there was a significant short position.
- The Covid lockdown afforded many young investors time to research the market.
- Stimulus checks were being issued, giving disposable cash for speculative investing.
- Keith Gill, known by the handle Roaring Kitty on Twitter, triggered awareness that GME may be undervalued, and he became a leader in the GME retail movement.
- Retail investors flocked to apps like Robinhood and started buying the stock faster than hedge funds and other short interests could unwind their positions.
A $10,000 Rate Card?
Some pundits assert that AI signals the end of the billable hour, yet many clients are still willing to accept double-digit rate increases. My view is that it is still easier for traditional firms to increase their rates than to change their business model.
To that point, earlier this year, news reports cited attorneys charging $3,000 an hour.
Could there be a perfect storm brewing to drive top rates upward to the unheard-of $10,000 rate? GME became a meme stock due to seemingly irrational market behavior. Perhaps there are dynamics that could produce similar market behavior in law, too. Rates aren’t going to spike as GME did during its run-up, but here are some dynamics that could push some rates to unheard-of levels.
C-Suite Views AI As A Cost Saver
CEOs view AI as a game changer, but more as a lever to reduce headcount and to save money. This extends to the law department. In general, AI is expected to increase productivity and reduce legal spend. This pressure is then passed along to outside counsel.
Outside Counsel Guidelines (OCGs)
Clients provide OCGs to define what a firm may and may not charge. They are often managed with procurement and can unintentionally reinforce the hourly billing model. Here are some examples of restrictions from real OCGs:
- No charging for first-year associates
- Pass-through of legal research expenses, and some research itself is not allowed
- Clerical work, internal firm communication, and travel time is non-billable
Recently, I’ve heard of OCGs that say the client won’t pay for anything that can be automated with AI.
Low Overhead And Limited Technology Investment
Law firms already struggle with change and technology investment. And OCGs tend to reinforce those challenges. Clients want their firms to be efficient, embrace technology, and keep their staff trained. But right or wrong, OCGs tend to run counter to that. Smart firms recognize they must invest in technology and embrace automation to remain competitive, but how can they do so when they must treat those expenses as nonbillable overhead?
This is the perfect storm for rate increases. The most straightforward answer is to drive productivity and automation, and charge for the value of the engagement by raising hourly rates.
This is why it’s not out of the realm of possibility to see rates on high-value work skyrocket, perhaps to $10,000 an hour in a few years.
The US market for legal services is roughly $400 billion. There are diverse clients with differing legal needs, with litigation, compliance, and transactional work required across practice areas. There will be work that moves in-house, while other tasks will be automated out of existence. ALSPs and managed services will grab more market share in the coming years. AI will make many tasks more predictable, even if they are still billed by the hour.
Market share for the billable hour will shrink, but the billable hour will still thrive in the coming years, even as the market evolves.
Look for hourly rates to continue to rise for high-value work.
I want to hope the systemic issues, particularly those reinforced by OCGs, can be addressed sooner rather than later. However, it may take meme-stock headlines about billable rates before there is sufficient awareness to drive real change.
The editing of this article included the use of AI.
Ken Crutchfield has over forty years of experience in legal, tax, and other industries. Throughout his career, he has focused on growth, innovation, and business transformation. His consulting practice advises investors, legal tech startups and others. As a strategic thinker who understands markets and creating products to meet customer needs, he has worked in start-ups and large enterprises. He has served in General Management capacities in six businesses. Ken has a pulse on the trends affecting the market. Whether it was the Internet in the 1980s or Generative AI, he understands technology and how it can impact business. Crutchfield started his career as an intern with LexisNexis and has worked at Thomson Reuters, Bloomberg, Dun & Bradstreet, and Wolters Kluwer. Ken has an MBA and holds a B.S. in Electrical Engineering from The Ohio State University.
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