Results, not résumés

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Professor William Henderson, who teaches at the University of Indiana Faculty of Law and blogs at Empirical Legal Studies, has written a watershed treatise on how large law firms recruit and use associates. The ELS blog summarizes it, the ABA Journal reports on it, and Bruce MacEwen and Gerry Riskin have already flagged it as an extremely significant contribution to the ongoing evolution of the traditional law firm business model. With apologies for a brevity that glosses over some important points, here’s a summary of Are We Selling Results or Résumés?: The Underexplored Linkage between Human Resource Strategies and Firm-Specific Capital, and some ideas that flow from it.

Large US law firms are deeply tied to the “Cravath system” of hiring new lawyers, generally defined as recruiting the most outstanding law students from the top law schools and giving them the best training. This was a great idea when Cravath Swaine & Moore first developed it early last century, because it was a branding strategy: Cravath deserves your business because we hire only the best of the best. But because the firm became so successful — for a variety of reasons — other firms copied its hiring strategy, and the Cravath method, once an innovation, became narrow-minded standard operating procedure.

Today, demand for corporate legal work has skyrocketed, exhausting the talent pool to which firms — because of their adherence to the Cravath method — have restricted themselves when recruiting the associates who do this work. Accordingly, with rising demand overwhelming a fixed talent supply, the cost of new lawyers has risen as high as $160,000 a year, well above the value of the services they provide.

This has numerous negative effects. Firms either pass on these cost increases to increasingly incensed clients, or absorb them in lower partnership profits, leading elite partners to decamp for more lucrative firms. Worse, top clients order firms not to place these overpaid associates on their files, meaning young lawyers are trapped in the most dead-end work from the least interesting clients, hurting morale, exacerbating attrition and damaging the firm’s future leadership development.

The most obvious solution for the firms — increase supply by hiring outside the “elite” group — is verboten, because these firms fear a loss of prestige associated with hiring “second-rate” graduates from “second-rate” schools. (Firms have already conceded ground by digging deeper into the graduating classes of elite schools for new recruits). A recruit’s “pedigree” now holds entirely disproportionate importance in law firms’ hiring decisions, and no major firm seems prepared to risk breaking ranks to try something different.

Henderson proposes something different, a new approach premised on a groundbreaking productivity study at Bell Laboratories in the early 1990s. In a nutshell, the study found that knowledge workers’ productivity was not tied to traditional measures of excellence such as IQ and self-confidence, but to a series of work strategies such as taking initiative, sharing knowledge, and managing work commitments, most of which are trainable.

Accordingly, Henderson suggests a new type of law firm, one where high-quality legal services are provided, at fixed costs, by lawyers recruited from outside the traditional elite circles who cost less, but who are trained in productivity-maximizing skills. These firms offer services whose cost is relatively predictable and generate their profits by keeping costs as low as possible, mostly by building powerful internal business process and knowledge management systems and investing in “firm-specific capital.”

That’s a six-paragraph précis of a 25-page paper, so I urge you to read the whole thing yourself — there’s lots more there, including a preview of an important upcoming paper that discusses the peculiar nature of the talent migration now taking place within the largest US law firms. But beyond agreeing wholeheartedly with Prof. Henderson’s assessment and conclusions, I had a few other thoughts to offer.

1. The new model could be further improved with automation and outsourcing. Faced with a customer base that wants to buy vast volumes of their product or service but demands a lower price, companies generally reduce their production costs, often by automating whatever parts of the process can be done by machines or finding acceptably qualified labour in lower-cost parts of the country or the world. But law firms have balked at similar measures, either (as Henderson suggests) hiring and training less overpriced recruits, or automating the most basic services that associates are currently paid to perform and outsourcing work to lower-paid personnel elsewhere in the country or overseas.

Really, imagine if the automobile industry handled labour and process issues like large law firms. Instead of investing in R&D to produce assembly-line robots and relocating assembly plants to lower-cost jurisdictions worldwide, auto manufacturers would continue to hire from the same pool of workers Henry Ford once drew upon, paying them higher and higher wages and continuing to have them manually assemble the vehicles. Cars would cost upwards of $75,000 apiece and would be about as technologically advanced as a 1955 Crown Victoria. That’s not terribly far off where the law firm system is now.

2. The meaningless of law school pedigree and performance is being reinforced. Prof. Henderson’s paper notes the Kansas City (MO) law firm that compared its top lawyers against its traditional law school hiring criteria and found almost no correlation. But the happiest people reading this paper must be at Northwestern University Faculty of Law, which as I and others noted a while back, is re-engineering itself to provide almost exactly the kind of skills training to its students that the Bell Labs study recommended.

So schools are slowly adapting their curricula to provide students with the kind of new lawyer training the bar wants, at the same time that the bar is gradually developing a clearer picture of exactly what skills it does need. If both the profession and the academy start working their respective way to the same conclusion — the importance of teaching skills that maximize knowledge-workplace productivity — progress is going to happen twice as fast as we now expect.

3. The inevitable stratification of law firm services is coming into clearer focus. Henderson recognizes, as do all observers of the legal scene, that there are legal services and there are legal services — some of them are basic, day-to-day things that nonetheless require a careful eye and accurate execution, and others are unique, critical, and merit use of the term “bet the company.” The first type, the bulk of law firm services today, could form the foundation of the new type of law firm Henderson suggests precisely because the tasks tend to be predictable, measurable and process-heavy. The second type, which requires the utmost effort and skill that lawyers can put forward, is rarer, but far more valuable. These two types of services are diverging, and could someday end up offered at two different types of firms.

Jeff Carr, GC of Houston-based FMC Technologies and a pioneer in establishing the value of legal services, framed the point extraordinarily well in a recent note at Legal OnRamp (members only):

I believe that legal services can be divided into 4 categories – advocacy, counseling/advice, content and process. Law firms make their money from the last 2 but through a built-in inefficiency. We’re already breaking down the process piece and using other providers that can more cost effectively deliver process than law firms that pay new associates $160K/year…. Lawyers will, in the world of the future I see, be focused on advocacy and counseling – things they actually are good at. As opposed to content and process – things that they are horribly inefficient at, but the entire economic structure of the industry is based upon.

We’re edging closer to that future every day. Prof. Henderson’s paper, and the discussion it’s inspiring, are an important step along that road.

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3 Responses to “Results, not résumés”

  1. William Henderson

    Jordan,

    This is an astonishingly concise and accurate summary of my Results or Résumés paper. It is great to have a professional journalist boiling down my ideas! You also add some important insights on the likely direction of change.

    Note that I just posted a second blog entry on this topic, entitled, “Part II: How law firms misapply the “Cravath system.” It quotes the words of Robert Swaine and Paul Cravath to make the very point your make in the above entry.

    Thanks for taking the time to review my work. Bill H.

  2. Mike Rhinehart

    Yes, great summary, Jordan; and a very well written article, Professor Henderson (as always).

    My question is: will this new model of firm ever be able to sustain itself through the number of years it would take to turn profit while maintaining its staff?

    Sure, the idea is all well and good – great legal services at a discount rate – but there will always be a competing maxim that has been ingrained in the minds of many Americans. The thought process goes along the lines of the following: “the more I’m paying, the better product I am receiving.”

    As skewed as this line of thinking is, it is a perception that many have adopted. I certainly don’t have any statistics to which I could point, though I’m sure Professor Henderson may, but perhaps this is an additional factor as to why firms such as Cravath have thrived.

    Further, the training that would be required to achieve the level of skill necessary to run this model firm would certainly be draining on the finances of those in charge. Perhaps the new model firm that Professor Henderson proposes would not be able to attract enough business to keep itself afloat and cover the overhead fees inherent in the model.

    I do agree, however, that the “Cravath” model firm is damaging to both the legal community and those dependent on its services.

  3. Jordan Furlong

    {there will always be a competing maxim that has been ingrained in the minds of many Americans. The thought process goes along the lines of the following: “the more I’m paying, the better product I am receiving.”}

    Mike, it’s a real phenomenon, to be sure, and it’s easy to see how it applies to clients’ thinking: if you’re paying top dollar for something, it’s got to be good — especially when you either (a) don’t fully understand the value of what you’re buying or (b) know that the underlying product or service is basically the same everywhere, but you want the CYA comfort of the expensive brand name. No one ever got fired for buying IBM, etc.

    I can only suggest, in terms of a solution, that nothing clears the marketplace of “voluntary strategic overpayment” quite like a recession, one of which we’re now pretty clearly leaning into. I suspect that very soon, a lot of legal buyers simply won’t be in a position to use expensive rates as a de facto insurance policy, and that much of the basic work for which clients now pay firms a lot of money is going to get seriously compressed and condensed, whether anyone likes it or not.

    I won’t speak for Prof. Henderson, but in his paper, he does agree that this sort of firm almost certainly wouldn’t be profitable from the start, nor for awhile after that. He suggests that an existing law firm set one up as an affiliate with the express idea that it’s a loss-leading R&D project for future profits, or — even better — that if outside investment in firms were permitted, an innovative firm like this would be very attractive to investors looking for high-risk, high-reward, long-term payoffs. Most law firm partners, though, addicted to end-of-year draws and short-term thinking, are a long way from there.

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