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Biglaw – bubble or here to stay?

Posted by Jack Bostelman on Aug 04, 2013 | 0 Comments

A hopeful law firm leader

Keith Mayfield, chairman of an AmLaw 100 firm, closes the book he's just finished on the long flight back from visiting several of his firm's offices. The book, published in April 2013, is one of the latest prognostications about the possible end of Biglaw. It's called The Lawyer Bubble, by Steven Harper, who is a retired partner of Kirkland & Ellis.

The Lawyer Bubble is too simplistic

Bubble canstockphoto5586193

As Keith gazes out the window, he thinks about the book's message:  Biglaw doesn't have a sustainable business model in today's world. That conclusion doesn't sit well with Keith. Not because he doesn't like it, but because he thinks the book dramatizes and over-simplifies the problems faced by large law firms.

In Keith's view, the book is a long read with a short message. It contains extensive discussions of statistics that are intended to support the author's arguments but too often come across as not directly relevant to the points being made or as jumping-off points for unsupported inferences. (The themes of the book are described in greater detail in the Addendum at the end of this post.)

Biglaw certainly has major challenges

Keith is not in denial about Biglaw's problems. He very much respects the insightful and well-written Growth is Dead 12‑part series of blog posts by Bruce MacEwen (Adam Smith, Esq.). In particular, Keith likes MacEwen's prediction that because Biglaw is in a new, no-growth era, firms will need move to one of three models or die. In Part 9, MacEwen describes those models as:

[1] Truly global players spanning three or more continents … who deploy a vast, but truly unified, network across virtually all economically meaningful jurisdictions. …

[2] Boutiques exquisitely focused on doing one thing exceptionally well. …

[3] “Category killer” specialists who target one broadly needed but perhaps not intrinsically high-value practice area. …

MacEwen also predicts, “The full-service, national or regional or super-regional, one-size-fits-all, not terribly specialized, generic law firm … [is] endangered and at risk of becoming marginalized.”

Keith does not believe MacEwen's three models will necessarily be the only survivors, but he does agree that the full-service, generic law firm model is at great risk.

The New Republic presents a similar pessimistic view

The theme of The Lawyer Bubble reminds Keith of the recent New Republic article by Noam Scheiber, “The Last Days of Big Law – You can't imagine the terror when the money dries up.”

The article is mostly a tell-all about Mayer Brown, describing in great detail its shift in the 1980s from a lock-step partner compensation system to an “eat-what-you-kill” system, which assigns points based on business origination, involves additional management assignment of bonus points and discloses to all partners the final points assignments. According to the article, the system has created much unhealthy internal competition and resentment. After the firm's income declined during the recession starting in 2008, the firm increased the compensation spread among partners by preserving the compensation of some key partners while reducing it for the majority. Some other big business generators left the firm.

The compensation system, the firm's increased reliance on lateral partners, its firing of service partners and its associate layoffs and internal strife during the 2008-2010 recessionary period all transformed Mayer Brown – according to the article – from a stable, old-style law firm to an unstable firm filled with internal strife that is in a “competently managed decline—charging clients the same for more work, or less for the same work; shedding bodies, or keeping the same number and paying most of them less.”

The article then generalizes from the example of that one firm to the conclusion that Biglaw is doomed. It predicts only 20 to 25 of the 150 to 250 largest firms will survive under their current business model, and that the rest “will have to reinvent themselves or disappear.”

What Keith believes will happen

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Of course, no one really knows what will happen to Biglaw. Keith is a moderate. He accepts that there have been changes from which there is no going back – significant economic pressure on fees and emphasis on efficiency. All firms must adapt to these changes.

Some firms are taking concerted action to adapt. Some will do it right. Keith believes some will also fail because they took the wrong steps.

Some other firms are stuck – either because their leadership is stuck or because the leadership can't get buy-in for change from the partnership – and will stagnate. Keith believes a few of these will also fail.

Keith is in the camp of leaders who believe there isn't time to wait around to see which firms get it right and copy them. He has led his firm to develop a strategy, which is now being executed. He hopes for the best.

What all law firms should be doing

Whatever strategy a firm is pursuing, it should be focusing on improving the actual efficiency of its delivery of legal services. Short-term fixes such as cost-cutting have already been pushed to their limit.

There's plenty of room for efficiency improvement at all firms. This is because the lawyers are the key to these changes and most lawyers are not yet convinced changes can be made. Firms need to improve efficiency whether they still bill by the hour or have moved to fixed fees or other alternative fee arrangements. Efficiency improvements should include those relating to know-how sharing.

The breakthrough to improving efficiency is to combine the following elements:

  • continued involvement of the firm's senior leaders in the initiative,
  • a focus on making changes at the practice group level, and
  • enough involvement by lawyers in the group to shape the changes and instill a sense of buy-in while avoiding over-reliance on lawyers actually to implement the changes.

That approach is described in my prior 3-part blog post “How to improve law firm efficiency?

Conclusion

Many are predicting the end of Biglaw. The market for legal services from large firms is in fact undergoing significant change. Firms must respond. That doesn't mean they're doomed. Whatever strategy they pursue, firms should be seeking to improve their efficiency through the management-led techniques described in my prior 3-part blog post “How to improve law firm efficiency?

[Photo credits: © Can Stock Photo Inc. / snake3d & sCukrov]

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Addendum – The Lawyer Bubble's themes and  proposed solutions

The Lawyer Bubble addresses the problems of two relatively independent segments of the legal profession – law schools and big law firms – and seeks to link them, though not very convincingly. The book concludes with suggestions, most of them aspirational and impractical, for addressing the problems of the two segments.

Law schools

The book asserts that easy-money Federal student loan policies and disingenuous law school marketing about the job market for lawyers continue to fuel the over-supply of lawyers at a time when the market for law jobs is contracting. The book makes the following points:

  • Because law schools are interested solely in increasing enrollment at high tuition rates, they
    • mislead prospective students about the percentage of graduates who succeed in pursuing law careers, and
    • compete fiercely on the basis of U.S. News & World Report's rankings, which are known by the schools to be flawed in every ranking category.
  • The American Bar Association, which accredits law schools, has abdicated its responsibility to require law schools to provide better disclosure about employment results of graduates. (An ABA task force very recently released a working paper conceding the criticisms of the type leveled in The Lawyer Bubble. It is unclear what action, if any, the ABA will take in response.)
  • Because of readily available Federally guaranteed student loans, law schools have no incentive to reign in tuition or reduce J.D. programs to two years from three.
  • Student loans are non‑dischargeable in bankruptcy.
  • The combined effect of the above is that new lawyers emerge from law school with limited job prospects and deeply burdened by debt they must carry for the rest of their lives.

The suggested tie between law schools and big law firms is that this substantial debt steers many lawyers to jobs in big law firms (even though, according to the book, only 15% of all lawyers are employed at big law firms), where they are paid well but work under harsh conditions that make them extremely unhappy.

Big law firms

The book expresses the view that the focus by big law firms on the business of law have moved them away from partnership ideals and fundamentally changed the lawyer experience for much the worse. In support of this theme, the book asserts:

  • Equity partners expect continued income increases, even though they are making more than they ever imagined when they entered law school.
  • These partners move laterally when they don't get the increases they expect.
  • In order to pay big rainmakers enough to make them stay, or to lure them away, the income spreads between equity partners is increasing.
  • Even in the face of historically unprecedented client pressure to reduce and control fees, the push to increase partner income and the reluctance to abandon the billable hour model cause firms to have greater associate-partner leverage ratios and to push lawyers to work ever-longer hours, especially associates.
  • The increasing reliance on lateral partners, the short-term emphasis on profits per partner and the widening spreads in partner compensation all combine to destabilize firms, making firms more vulnerable to failure when hit with adverse economic or other pressures.
  • Without actually asserting there will be many more failures of big law firms, the book invites readers to draw that inference by chronicling the failures of Finley Kumble (1988), Heller Ehrman (2008), Thelan (2008), Howrey (2011) and Dewey (2012) and suggesting (incorrectly in Keith's view) that the causes of those failures apply generally to many other big law firms.

The book's proposed solutions

The book suggests several ideas for addressing the law school and law firm contributions to the “bubble.”

  • Ideas to fix the law school problem are:
    • Law faculty should speak openly and frankly about the law school “scam.”
    • All student loans should be made eligible for discharge in bankruptcy, and the federal government should be allowed to recover losses from a law school if the student loan was the principal contributor to an alumnus's later bankruptcy.
    • The third year of law school should either be eliminated or revised to focus on clinical programs.
    • Training programs for recent graduates should be created to assist them in serving underserved populations while the graduates are unemployed.
    • Law schools should reduce enrollments, shrinking to reduce the supply of new lawyers.
    • Law schools should improve the transparency of information about post-graduate employment.
    • Undergraduate colleges and the law school admissions process should provide an honest picture of life as a lawyer to pre-law undergraduates and applicants.
  • Ideas to fix the law firm segment, which the book admits are largely aspirational, are:
    • The number of billable hours worked by lawyers should be limited by creating a Working Culture Index that penalizes a firm (through lower fee caps imposed by clients) for hours its lawyers bill above 2,000 annually – the more hours a lawyer bills above 2,000 and the more lawyers who bill above that level, the greater the penalty.
    • Courts should be challenged to reconsider the lodestar method (hours worked times billing rate), which was adopted by the Supreme Court in 1983 as a useful starting point in fee awards and affirmed by the Court in 2010 as the only permissible basis for awarding attorneys' fees in civil rights cases, except in extraordinary circumstances.
    • Firms should stay smaller– more like 300 lawyers than 2,000.
    • Associate leverage should be reduced.
    • Recruit as new lawyers only those who the firm thinks can become partners, reducing attrition rates.
    • Associates should be provided with more pro bono matters to give them “meaningful” work.
    • Associate compensation should be changed so as not to reward billing hours exceeding 2,000 annually.
    • Honest reviews should be given to associates when it becomes clear they will not advance to the next level.
    • The non-equity partner tier should be eliminated.
    • Senior partners should more readily admit new equity partners, rather than pulling up the ladder.
    • The compensation spread between equity partners should be reduced by adopting lockstep compensation.
    • Mandatory retirement should be implemented for partners.
    • Exit platforms should be developed for aging partners.

The book concludes its solutions by urging those thinking about law school to consider the facts and whether the life of a lawyer is a true fit. It illustrates this good advice with two alarmist stories about lawyer suicides at large law firms.

About the Author

Jack Bostelman

Jack Bostelman is the president and principal consultant of KM/JD Consulting LLC. Before founding KM/JD Consulting, Jack practiced law in New York for 30 years as a partner of pre-eminent AmLaw 20 firm Sullivan & Cromwell.

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Before founding KM/JD Consulting LLC, Jack practiced law in New York for 30 years as a partner of pre-eminent AmLaw 20 firm Sullivan & Cromwell.

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