The disappearing associate

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Well, that was ugly. In case you missed it, or you need a summary, here’s what happened on a day (yesterday) that the ABA Journal called Black Thursday and Above The Law readers have decided should be named (a little early) the Valentine’s Day Massacre:

This doesn’t include announcements of other cost-saving measures, like more salary freezes and Luce Forward rescinding its offers to new graduates and cancelling its 2009 summer program. If there’s one certainty you can take from this very unhappy day, is that this is just a sampling of what’s to come. (This morning, Peter Zeughauser agreed: “There will be more. Materially more. I’m aware of some big ones coming up.”) We’re at the beginning of this process, not the end.

And what process is this? Well, as previously noted here, it’s of course the marked decrease in client engagements; but it’s also the fallout from the 2008 financials finally becoming clear and the dire need for firms to keep partnership revenue and marketplace confidence as steady as possible. But I’m also coming to think it’s about something else: a serious, gut-check re-evaluation of the whole purpose of law firm associates. I count 297 lawyer firings in that list above; so far as I know, not one of them was a partner.

It’s becoming more evident that we’re not just looking at a normal recession with the usual coping tools (layoffs, salary freezes) from law firms. We’re looking at an extreme recession  (or worse) that happens to be occurring at a time of particular vulnerability for law firms and an unprecedented willingness or necessity to reconsider traditional approaches. With every brutal update, the good folks at Citi and Hildebrandt are speaking more plainly:

[T]he current economic downturn can be viewed as an opportunity to make some fundamental changes in the way law firms are structured and do their business – changes that are not only long overdue but that will also serve the profession well as it emerges from the current recession. …

Among the measures that Citi and Hildebrandt strongly urge is the abandonment of lockstep compensation for associates:

In the current economic climate, it is irrational to have half or more of a firm’s highly compensated lawyers on largely seniority-based salaries…. Firms that have not already done so should seriously consider modifying their associate compensation structures to allow a substantial portion of compensation to be tied to individual performance in support of the firm’s goals and strategy. Firms should also be willing to consider moving away from locked-step associate advancement (and compensation) toward competency-based models. The legal profession is one of the last industries still to cling to this outmoded seniority-based method.

This would not be an unprecedented measure, of course. But as sensible a move as this would be for many firms, events are overtaking it. Some firms are already in the uncomfortable position of having clients refuse to pay for work billed by first- or second-year associates, on the premise that these novice lawyers add inconsequential value to the task at hand and that the client is not going to pay the law firm’s on-the-job training costs. A few others are facing up to the reality that Indian firms can and will complete associate-level tasks for dimes on the dollar, or that new software can streamline and automate the due diligence and document review process on which so many associate hours have been billed.

What we’re looking at here is the real possibility that the law firm associate, in its current form, will not survive this crisis. As the number of associate billable hours clients are willing to pay declines, so too does the need to develop and maintain these vast grazing herds of associates within firms. Partners are going to have to start thinking seriously about what purpose associates serve when they no longer constitute the bottom two-thirds of the profitability pyramid. If you can’t sell the billable hours they’ve been churning out, what do you do with them? What, exactly, is the law firm associate for?

The standard answer, of course, is that associates are future partners in training — that’s what the recruitment brochures maintain. That might be more convincing if attrition — natural and otherwise — didn’t slice off about three-quarters of all lawyers between first year and the partnership committee. It might be more convincing  if more firms had a rational system for identifying, assessing and hiring associates, actively trained those associates from day one in the firm’s financial and culture realities, and had a strategy setting forth how many future partners are expected to come up through their own ranks as opposed to through lateral hiring.

Since all of these things are true at very few firms, and none of them are true at many, we’re left to conclude that as a general rule, associates are hired to be billing machines. If that machine stops working, then we have a serious problem.

Paul Lippe of Legal OnRamp noted in an American Lawyer piece:

[T]he recession will last through 2010. Law firms will use this period to substantially restructure, and beginning in 2011, things will start growing again. While there’s a lot of detail and nuance around the form this restructuring will take, it can be described in simple terms. A typical law firm bill in January 2011 will generate the same dollars for partner work as it does today, but it will generate half the revenue for associate work.

Paul’s article is titled in part: “The End of Leverage.” “Leverage” in law firm terms means associates. It’s not hard to see where this is taking us.

And in truth, not every law firm has been slow to figure this out. Calgary energy law boutique Thackray Burgess has 29 partners and 0 associates. The firm employs more than 20 “consultants,” independent contractors who look like associates but are paid by the hour, work however many hours per year they feel like, pay the firm a fee to cover their overheads costs and a percentage of the hourly rate they charge their clients, and keep the rest themselves. I don’t love the hourly billing aspects of this setup, but the idea of associates as independent contractors, retained for what the client requires and no more, makes perfect sense. Axiom Legal and Virtual Law Partners have also re-engineered the traditional associate position. I’m sure there are other examples, and more will come.

By the time this recession runs its course — and no one really knows when that will be — both client expectations about the manner in which rote legal work is done, as well as the technological and offshore solutions available to do that work, will be so different from today that there’ll no be going back. The idea that a firm can employ dozens if not hundreds of inexperienced lawyers primarily to generate revenue on low-value work will eventually be seen as a relic of the 20th century. Firms will still hire and retain associates — new partners, even laterals, have to come from somewhere — but there’ll be far fewer of them, they’ll be selected, evaluated and trained far more systematically, and they’ll be engaged, billed and compensated much differently than they are today.

We should make no mistake about how profound a change this will be, nor believe that its ramifications will be limited to big law firms. To a growing degree over the last decade or two, large multi-service law firms in urban locations have been completing the job of legal education that law schools and governing bodies have been haphazardly starting. We can complain all we want about overpriced, underskilled associates in firms; the fact is that these firms and their clients have been subsidizing the bar admissions process, providing the last three years of what amounts to a seven-year law degree. When modern marketplace economics finally puts an end to this practice, who will pay new lawyers with few skills and massive law school debts while introducing them to law practice? Who will be responsible for completing lawyers’ education and training them? We’re going to need answers to those questions, and fast.

Like I said, we’re at the start of this process, not the end. The fundamental restructuring of the law firm business model that Citi and Hildebrandt are calling for is at hand, and the changes we’re seeing now stand a very good chance of being permanent. There’s a reason I used “fired” instead off “laid off” at the start of this post.

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4 Responses to “The disappearing associate”

  1. Ian Brodie

    Very interesting article Jordan,

    Speaking from an outsider’s perspective (from the management consultancy industry) – the “fundamental changes” – such as abandoning lockstep compensation – seem like tiny tweaks to be frank.

    Surely a fundamental change would be an examination of whether legally qualified staff (who are inevitably going to be relatively well rewarded under any scheme because of their huge investment in education and training and the fact they are selected from the upper echelons of the education system).

    In the consulting industry, more fundamental shifts have happened through the shifting of work to para-professionals, offshore, and to clients themselves. All made easier and faster in consulting by the lack of necessity of formal qualifications and accreditation. But surely inevitable in law also over time.

    Ian

  2. Jordan Furlong

    Couldn’t agree more, Ian. It’s an indicator of just how paleozoic are the practices surrounding workflow in law firms. Concepts taken for granted in other industries (e.g., work should devolve to the most cost-efficient available competency) run counter to the business models of many law firms. Firms’ resistance will be fierce, but I’m having a hard time seeing it pay off in the long run.

  3. Ian Brodie

    Yep – the “Tesco Law” over here in the UK has really opened up the field for basic services to be done by low cost providers. In fact it’s probably only the recession that has prevent a lot of new entrants (as financial institutions are focusing on their core business at the moment).

    These shifts can be very painful, and there is a risk over quality. But the reality is that much of the work carried out by highly qualified (and paid) specialists could be done be much less expensive methods.

    Ian

  4. Brenda Hollingsworth

    I agree something is going to give and should give in the current big firm model.

    However, despite the current financial situation, surely the premise that clients hire based on who they know, like and trust has not been completely abandoned. Of course there are those who will hire purely on cost, but those are rarely great clients anyway.

    As a large firm with institutional clients, I would be concerned about the loss of relationship building with future decision makers if junior lawyers are overly commoditized. From my big law days, I recall the really successful associates were the ones who formed relationships with the more junior decision makers at the client. Both the associate and the junior decision maker would grow together and the relationship between the firm and the institution would continue into the next generation. If the junior decision maker moved, that was just another opportunity for the associate to form a relationship with the junior decision maker’s new company.

    Presumably if you are an independant contractor, you may make that relationship but there is no guarantee that you will use it to benefit a particular law firm.

    I think the key is what you have been talking about for a while. Firms have to change how they bill. Paying $250 per hour to have a 1st year lawyer fill in some basic corporate filing is just annoying and makes the client feel stupid. Paying an annual “membership fee” to have all your corporate records carefully maintained and reviewed by a reputable law firm makes the client feel like they are taking care of their business. There is even more value added when the firm agrees to provide a certain number of “free advice” calls for the cost of the membership.

    The smart big firms, I think, will continue to build relationships between people. It’s what they sell and how they sell it that has to evolve.

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