As always, I’ll also post the article here.

The legal profession is on the verge of an extremely serious problem. If you want to see what it looks like, check out what Chicago-based firm Mayer Brown has just done. According to the Chicago Tribune, the firm has offered its new associates a deal: take a $100,000 pay cut (to $60,000) and go work in-house for one of the firm’s large clients like Kraft or United Airlines. The job is guaranteed for one year and not a day more — after that, if the company doesn’t keep the associate, she’s on her own.

It tells you something about new lawyers’ state of mind that most of the associates grabbed this opportunity. As John Wallbillich at the Wired GC observes, there’s little downside for the associate: either he’s hired, or he’s let go with valuable experience under his belt, or he develops an arm’s-length relationship with the client under his own shingle. And from the client’s perspective, hey, free lawyers are always nice to have. The article indicates other firms might be reluctant to follow Mayer Brown’s lead, in case the seconded associate bombs and the firm is blamed — which I find pretty amusing, since these firms don’t seem to mind if the associate bombs while pumping out billable hours on the client’s dime. But whatever, the client seems happy enough, too.

So that brings us to the question: what’s in this for the firm? I mean, Mayer Brown is basically paying associates $60,000 not to work for them. This, at the same time that dozens of large firms are paying associates not to work for them either, but rather to report to law clinics and public-interest legal employers, or to travel or do “something meaningful.” And still other firms are paying future associates still in law school to defer their employment with the firm, maybe for good.  These current and future lawyers evidently hold so little value that their employers will pay someone to take them off their hands. Associates are starting to look like the equivalent of subprime mortgages for law firms — toxic assets they want moved off their books.

Law firms paying associates not to work for them isn’t just a symptom of the recession, though — it’s worse than that. In normal marketplaces, employees are paid roughly in accordance with the value they produce through the application of their skills and knowledge to their assigned tasks. In smaller law firms, this holds true: a partner won’t take on a new lawyer unless there’s work that needs doing and the lawyer can accomplish it with enough competence to keep the clients satisfied and the fees coming in.

But the large-firm leverage model skewed that system. An associate could be assigned endless cycles of rote work with little value, billing out the hours logged until the associate paid off his annual cost to the firm and became an engine of  pure profit. This worked because institutional clients didn’t know or care enough to question exactly what the associate was doing and why he required so much time and money to do it. The associate’s value to the firm lost any connection to his actual skills and qualifications.

That system, as you may have noticed, is coming to a grinding halt. For a variety of reasons covered here before — closer scrutiny by more sophisticated and motivated clients, new technology and processes capable of handling rote work cheaply, low-cost alternatives to associates in low-cost jurisdictions — large firms won’t be able to employ armies of associates on work that a bright law student could do. In many cases, they’ll have to restrict the number of new lawyers in their employ to those who can handle sufficiently sophisticated work that a client is willing to pay for. The diamond — or the cylinder — will come to replace the pyramid, and law firms will be leaner, more effective and more rational organizations for it.

But first, the profession is going to go through a crisis, one triggered by a growing buildup of law school graduates who can’t find work. Year after year, we’ll produce more new lawyers than the market will hire — the large firms won’t be taking on nearly as many, while legal talent demand overall will narrow to lawyers with proven skills and/or experience. And these masses of unemployed law graduates are going to make us face an ugly truth we’ve been avoiding for years: we’re doing a terrible job of training our future lawyers.

Whether they ought to or not, most law schools don’t train their students in the skills they need to contribute value as lawyers — new associates often end up with rote work because in many cases, they’re not equipped to do much else. The bar admission process offers too little training and comes too late in the game to provide much help. Articling terms, where they exist, offer mixed results in terms of producing competent lawyers. We know all this, but we haven’t been sufficiently moved to do anything about it, because new lawyers always seemed to muddle through somehow.

But the emerging economics of the new legal marketplace won’t allow us to disguise unskilled law graduates as billing drones or on-the-job training projects anymore. Unless they can hit the ground running as reasonable contributors of client value, these graduates will be very hard-pressed to find work as a lawyer.  Hanging out their own shingle will be a risky option, given their paucity of skills, but one that many of them simply may have to take.

A huge disconnect will quickly become evident: our professional admission system still imagines that purchasers of legal services are willing to effectively subsidize the new lawyer training process. The purchasers will say otherwise, and this reality will bear itself out in rising new lawyer unemployment rates. This will force us to accept that new lawyers must be ready, upon entry to the bar, to provide at least a minimal level of useful legal services to clients — a base of competence from which they can grow as professionals. And that realization will lead, faster than we think, to a wholesale restructuring of the legal education and lawyer training system.

When this change will happen, how long it will take, what form and directions it will assume, which institutions will survive and which won’t — I have no idea. I dislike making predictions as a general rule, but this seems to me less a prediction and more the inevitable result of clear trends now well underway. When law firms pay their lawyers to work for someone else, something has gone seriously wrong. We’re looking at the canary in the coal mine.

First is this National Law Journal article about how law firms are responding to the recession (short answer: myopically). Among other things, firms are laying off staff and paralegals in droves, perhaps in part because underutilized associates are keeping for themselves the work they normally delegate to these para-professionals:

“It’s a desperate move to keep their billables up,” said [Chere Estrin of paralegal training company Estrin LegalEd], noting that paralegals have told her that some associates are doing their own document reviews, deposition summaries and other research. “It’s gotten worse lately, and it’s not good for anyone.”

Not good for the paralegals, vulnerable employees placed at greater risk of layoffs in an economic storm. Not good for the associates, whose legal skills atrophy as they rediscover how many words they can type per minute. And not, by the way, so good for clients who wind up paying associate-level prices for staff-level work. Pretty good for the firm’s bottom line, though.

Difficult as it might seem to trump that story, this one manages it: “Down in the Data Mines,” an aptly titled article in December’s ABA Journal. It’s a first-person account of a contract lawyer labouring in a New York City basement doing document review for a large law firm (HT to Ron Friedmann). Here’s the most telling, and appalling, excerpt:

If I review 100 documents per hour (a very fast pace), I get paid the same hourly rate as if I review 30. More­over, each project consists of a finite number of documents; so the faster I work, the sooner I am out of a job and need to start hustling for the next project. “Don’t work us out of a job,” a veteran contract attorney once derided me in private after I reviewed too many documents on the first day of a new project. And the firm is usually OK with this attitude; in my experience, speed and accuracy have always taken backstage to billable hours.

We’ve pretty well established that the billable hour is harmful to the lawyer-client relationship, and these two articles provide evidence for that. But what we don’t talk about as often is that the billable hour is far more damaging — poisonous, actually — to the relationship between a law firm and its employees.

We need to start by emphasizing the two related but distinct ways in which “the billable hour” is used in the legal profession. In the lawyer-client relationship, it represents a method (or a regime) by which lawyers’ services are billed to the client — a construct for the terms of purchase and sale, nothing more. And there are situations where the billable hour is completely legitimate as a fee methodology. We most often cite examples like a complicated merger or a difficult divorce. But the billable hour would be appropriate in any transaction between a lawyer and client who know each other, trust each other, and have established transparency around the means by which the cost and value of the service is calculated.

The problem, of course, is that that kind of relationship is rare between lawyers and clients. More commonly, clients don’t trust lawyers to name a just fee for the work they did, and lawyers don’t trust clients not to take advantage of cost estimates and time parameters. In those situations (far more common in larger firms than in smaller or sole practices), the billable hour is rife with the potential for abuse by the lawyer, who holds the upper hand in an opaque, awkward relationship. But it’s important to recognize that the billable hour is essentiallya surrogate for trust between lawyer and client, one that could (and hopefully will) someday be replaced when the relationship becomes more mature, transparent, and equal. The billable hour is not really the fundamental problem — a relationship short on experience and bereft of trust is.

A lawyer and client look forward to the day when their relationship is sufficiently strong that the billable hour becomes irrelevant — it falls away from the relationship like a baby tooth replaced by an adult one. But there’s no similar hope for the other manifestation of the billable hour: a measure of lawyers’ productivity, compensation and advancement in most law firms. Every lawyer, from the rawest associate to the oldest partner, is scrutinized annually on the basis of the number of hours he or she has billed to clients. You never outgrow it and you never escape it – it’s a permanent, pernicious blot on the law firm landscape.

One of the oldest rules of economics is that people value that for which they are compensated. Compensate a lawyer on the basis of year-end client reviews, and that lawyer will move mountains to ensure satisfied clients. Compensate her on the basis of revenues actually brought in (rather than hours billed), and she’ll be a collections fiend, billing regularly and following up to make sure there’s no outstanding work lingering in the pipeline. But compensate a lawyer for the number of hours he invoices to clients, and that lawyer will lowball everything else — efficiency, timeliness, value, communication, even ethics — in order to maximize the amount of time he can take to address a client’s request. That’s the kind of lawyer our law firms have bred and unleashed on the marketplace for half a century.

Look at contract lawyers working slowly and inefficiently to bloat billable hour totals. Look at associates typing their own documents to sustain billable hour totals. Look at partners hoarding work from their associates in order to maintain billable hour totals. Fundamentally, instinctively even, lawyers know that how many hours they’ve managed to bill does not reflect how good they are at what they do. But under irresistible pressure, they twist their instincts and corrupt sensible business practices in order to conform to their employers’ business models and value systems. Organizations filled with people going about their business in ways that satisfy neither themselves nor the people they serve are going to be deeply unhappy places, and that’s what many law firms are.

Law firms have managed a feat you would have thought impossible: taken smart, dedicated, hard-working young men and women who are passionate, even geeky about the law, introduced them into one of the world’s finest and noblest professions, and within just a few years, made them hate it.

Here’s a question every law firm should have to answer: if you never billed another client by the hour, how would you compensate your lawyers? The fact is that few law firms would have the first clue what to do. They’d have to sit down and figure out how much value that lawyer delivered to clients and to the firm, a difficult exercise that requires a lot of research and judgment calls. They’d have to set multi-faceted performance expectations at the start of each year, mentor and follow up with the lawyer regularly to ensure those expectations are being met, and deliver an assessment at year’s end, all in the context of a employment relationship where each side respects the other more than they do now. Difficult, and a lot more work — but not impossible, and absolutely delivering a more accurate result.

Law firms assess and compensate lawyers by the hour for much the same reasons they charge clients by the hour: it’s convenient, and they can get away with it. The convenience will never go away — the billable hour is as lazy and facile a method of assessing employee value as you could ask for — but the tolerance level is finally starting to fade. We’ve seen a rising client revolt against the weakness of billable-hour pricing; I think we might be on the cusp of a rising lawyer revolt against the weakness of billable-hour compensation. Talk of a generational divide in law firms has faded with the onset of the recession, but it’s still there, and one of the ways it manifests itself is in very different ways of actualizing a person’s value. I don’t think Millennials are keen to be assessed and paid according to hours posted. I don’t think they’re going to buy that at all.

Billable selling and billable compensating are inextricably linked, and I doubt we’ll see one disappear entirely while the other thrives unaffected. Law firms, take note: every tiny step away from a billable-hour system for charging clients is also a tiny step towards the inevitable day when you’ll have to buckle down and actually figure out what your lawyers are worth to you and to your clients. You probably won’t enjoy that; but you’ll be a lot better off once you’ve done it.

Law firms know very well that the associates they hire fresh out of law school (or even after a year of articling) are sufficiently unskilled that they don’t merit the salaries they make or the rates they bill. Equally, firms traditionally haven’t cared about this, because (a) the tasks churned out by most new lawyers in firms require more stamina than skill, (b) most partners learned their craft by osmosis rather than training and are quite content to continue that approach, and (c) firms could always afford to throw money at associates because the cost could always be passed on to clients.

These days, of course, the current that keeps (c) lit up is flickering, as clients balk at associates’ bills and some order firms not to assign first- or second-years to their files. So firms are squeezed between incoming associates’ expectations of high and rising salaries and clients’ refusals to foot the bill therefor. That means the cost of associates is showing up not in bigger client bills but in partners’ smaller profits — and hey, suddenly, firms are decrying the cost-value imbalance of their newest lawyers. Funny how that works.

In this respect, the best thing that ever happened to these firms is the recession, as suggested by this article in The Recorder about the latest news from the associate salary front. The recession is the new Red Menace — the all-purpose justification to lay off scads of low-level employees and thereby put the fear of God in the survivors, who are suddenly thinking less about bonuses and more about keeping their jobs. (The ABA’s recent blessing of offshore legal work has also been another effective way to keep those uppity youngsters focused on survival, not salary.)

These are real market forces at work, of course — but rather than use them as a catalyst for change, most firms exploit them to keep doing what they’ve always done, but spend less doing it.

The crazy thing is that firms feel they need these excuses and fear tactics — they know they’re acting irrationally, but the force of traditional practice and the pressure to imitate rivals is so strong that they can’t or won’t act against it. It’s like that now-famous quote by Citigroup’s Chuck Prince when the liquidity crisis was starting to break: “[A]s long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Many firms just don’t have it in them to be honest with themselves that their associate compensation systems (and related billing structures) are broken, so they look for someone or something else to take them off the hook — a tourniquet instead of surgery, intimidation rather than straight talk.

Anyway, I’m not really here to lecture these firms — I’m here to talk about how you can take advantage of this irrational and hidebound behaviour by your rivals in the talent wars. This is a market vulnerability — exploit it. Large firms continue to believe, despite their public words to the contrary, that enough money makes every associate complaint go away eventually. Prove them wrong, by actually listening to what today’s new lawyers are looking for, and chart a course accordingly.

Here are three things lawyers care about, and that I’ll bet they’d be willing to trade high salaries in order to satisfy.

1. Family does matter. It’s instructive that the two most recent rankings of law firms’ openness to lawyers with family priorities have come from Working Mother magazine and, yesterday, Yale Law School, not from the bar or the legal press. Growing numbers of lawyers are genuinely concerned with family issues. Right now, the buzz is about moms and dads who want to spend more than breakfast and bedtime with their kids; the next buzz is going to be about lawyers (of all ages) with parents who need home or institutional care. Either way, adopt a mantra that your employees are people first, professionals second.

2. Pay them what they’re worth. As The Recorder article notes, and as other analysts have pointed out, lockstep compensation makes sense only in intensely focused law firms. Abandon lockstep, as Howrey LLP did last year, and instead institute a system whereby associates are regularly assessed on their progress and achievements and can earn more than their “year” would normally entail. This requires a lot of work, especially by partners, who’d be held accountable for setting and assessing associates’ goals. But you would be shining a beam of rationality into the murky dark of compensation systems and showing your associates that they can be masters of their own destiny.

3. Training is not negotiable. As I noted a little while ago, associates’ biggest fear is being turned out on the street with no marketable skills. They know they need experience, but they’re too expensive for large firms to provide it. Here’s one way to do it: strike a deal with a local legal clinic that’s understaffed (they won’t be hard to find) and arrange secondments for your newest lawyers to work there. Law firm gets battle-tested lawyers and positive PR; associates get priceless experience; clinic gets desperately needed help; community gets better. What’s not to like? (Edward Wiest tells me via Twitter that some Boston firms, Foley Hoag among them, “loan” three or four associates to prosecutors’ offices, and that the best of the bunch jump at the opportunity.)

Let your competitors frighten their associates into submission. You can do better, and succeed, by treating them as adults, as professionals, and as colleagues equally interested and invested in the success of your enterprise.

The problem, though, is that new lawyers don’t generally leave law school primed to deliver serious value to employers, and the largest law firms don’t have a lot of economic incentive to provide them with any real training — what they want are billable drones. So let’s be clear: it’s no accident that our current system delivers this result — it’s exactly what we should expect. It’s a problem we could ignore when times were good, but not anymore.

This is going to come to a head sooner rather than later, and it’s going to be the new lawyers themselves leading the charge, as this article in The Recorder about the tough lateral marketplace demonstrates: “[F]or a partner who isn’t holding a big book of business, moving may not be so easy — and for associates it may be impossible — as firms increasingly look only at the most productive partners.” [Emphasis added]

When large firms’ profitability is threatened, associates are the first ones cut loose and the last ones picked up elsewhere, and a lot of them are finding to their dismay that they’re simply not that employable. Their primary skill — a willingness to work long hours on middling-level tasks — isn’t in huge demand by large firms right now and is never of any use to smaller ones. These new lawyers are going to be squeezed hard, and they’re going to start asking hard questions: why are we left holding the bag? How is it that the law schools and the large firms, to which we had entrusted our development as lawyers, are sitting pretty, and we’re left banging on doors trying to get work?

In point of fact, it isn’t fair — and it’s no way to introduce the next generation of practitioners to our profession. A few of us have been saying for a while that the lawyer education and training system needs a massive overhaul. Expect to hear many more voices join that chorus over the next several months — those of the thousands of stranded new lawyers who are starting to pay the price of our cavalier approach to bar admission.

Baby boomers are retiring and the number of young adults behind them is on an irreversible slide. Starting in 2011, Canada’s workforce will lose two workers to retirement for every one that enters it. The ratcheting price on youth is a sign of things to come for the rest of the country as an aging population forces provinces to compete for dwindling numbers of young people.

Law firm associates’ salaries are already rising separate and apart from a talent shortage; in time, firms seeking to hire new lawyers are going to find out just what a full-blown seller’s market looks like, and they won’t enjoy it. I can see two long-term trends emerging from this.

First, those organizations and regions in danger of losing talent (i.e., most of them) will continue to look for ways to staunch the flow. Nova Scotia, according to the article, is introducing tax breaks to entice younger Nova Scotians to stay or return. The drawback to that approach is that if you’re trying to compete with Toronto or Calgary (or for that matter, London or Hong Kong) on money, you’re outgunned from the start. It will likely be a stretch just to be in the ballpark of the highest offer, and there’s only so much you can spend to keep up.

Consider instead the lawyer in the Citizen article, who’s returning home to Halifax because it’s a better community for her than Ottawa. Successful lawyer recruitment could in future be less about the firm and more about its environment. Forward-looking law firms could start getting actively involved in their own communities’ efforts to become more attractive to tomorrow’s scarce young worker. They’d join forces with other local organizations and identify potential opportunities and obstacles to young professional recruitment and retention.

Are local schools plentiful and effective? Is broadband access easily acquired and reliable? Are there parks and green space for families? Or, do poor transportation facilities and few cultural centers make for a sense of isolation? Are break-ins and petty crime more than just a nuisance? Are property taxes spiraling out of control? These are the sorts of questions that potential law firm recruits will be asking, as much as (maybe even more than) salary, benefits, hours and advancement opportunities. It stands to reason that the stronger your community base is, the more benefits you’ll have to offer — benefits that won’t cost your bottom line.

The second potential trend is that associates — or, to draw it more broadly, non-equity employees — could simply become too expensive to keep. Associates’ billable hours prop up a lot of PPPs (partnership profit pyramids, to hijack the acronym), but corporate clients in particular are losing patience with the current model and starting to push hard for cost containment. The supply of young talent is now beginning to dry up, so its price will only continue to rise just as clients apply more sophisticated analytics to their legal bills. It’s not hard to see a point where the traditional associate becomes transparently too expensive for the value provided.

What will happen then? Maybe we’ll see more firms unwilling to take on and train a junior lawyer through the first three years of his or her practice, preferring instead to hire only experienced laterals. Maybe we’ll see law firms finally take offshore legal service providers seriously. Maybe, in the most radical scenario, we’ll see firms forced to rethink and perhaps restructure their business models altogether, to cope with more exits at the top and fewer entrances at the bottom. Law firms are built the way they are in part because of the accident of late 20th-century demographics; the availability of talent in the early 21st century might just require a new model altogether.

Most firms haven’t been especially rigorous in defining the roles and supervising the development of their associates. It may well be that associates are about to become too scarce and too expensive for that to continue.

One line in the  Recorder article jumped out at me, a criticism of the move by a legal recruiter: “I don’t know if that will sit well in terms of creating a collegial environment…. It’s saying your practice area is worth less than, say, an IP litigator.” Well, that’s kind of the point, isn’t it? Some practice areas do generate more revenue than others, and some lawyers are better at what they do than others, so adjusting your compensation system to reflect that is simply an acceptance of market and human realities. Law firms’ traditional approach to associate compensation assumes that all associates are equally valuable, which, if you stop and think about it for a moment, really is absurd.

I think what we’re seeing here is another indication that lawyers are finally making a serious effort to extract and identify the economic value of their work. Most lawyers know, deep down, that the billable hour is a contrivance designed to make billing and remuneration simple and unconfrontational. I suspect that generally, the larger the firm (and the farther the lawyer is removed from the nuts and bolts of the business), the less the lawyer is acquainted with how much his practice costs, how much his performance and experience are actually worth, and what kind of fee structure should be built around those two points. Solos don’t have the luxury of simply slapping a rate on their invoices — they need to really understand the profitability of their practices, or they’ll go out of business. It looks like that day is arriving for lawyers in larger firms too.

First of all, I had to smile at this explanatory sentence in the article: “Top firms, for the purposes of this article, compose a group of large New York-based law firms that, generally, copy one another in bonus structures.” That’s odd, because I thought top firms were the ones with lawyers who were, you know, extremely good at what they do and had the respect and loyalty of their clients. But apparently, top firms are the ones that are very big and do whatever the other very big firms do. This is the kind of muddled thinking that permeates too much legal journalism in the US and Canada both: mistaking the small fraction of huge firms retained by wealthy multinationals for the profession at large. The last time I checked the CBA database, lawyers in firms of 100 or more represented about a tenth of the legal population.

Secondly, the article talks up the coming recession, as has become widely fashionable lately and will, no doubt, soon become a refrain in presidential campaigns in the US and possible election calls in Canada. I don’t follow this topic especially closely, but it has seemed to me for a while that the booming economy we hear so much about has boomed for only a small percentage of the population, while real wages for a lot of working North Americans (including lawyers) have been stagnant or worse for awhile now. Banks may be hemorrhaging money in the wake of the subprime mortgage fiasco (and the imminent subprime credit card fiasco), but you could argue what we’re seeing is the financial sector coming down to earth and joining the rest of us. Of course, it’s the white-hot financial sector that has been driving “top firm” profits recently, so you can see how some white collars in those firms are now getting a little tight. (Gerry Riskin was on top of this months ago, at any rate.)

But thirdly and most interesting are the strategic implications of the salary hike. Bruce MacEwen has theorized, astutely, that part of the reason for the associate salary escalation is that some of the biggest firms are trying to price associates out of the reach of their competitors; Messrs. Cotterman and Henderson suggest much the same in this piece. The indisputable fact is that if firms are doling out barrels of cash to associates, most of whom are learning to be lawyers on the fly and not justifying those prices, there must be many more barrels of cash still in the vault. As I’m fond of saying, whenever someone complains again about pro sports salaries, no player ever put a gun to an owner’s head and forced him to offer a huge contract. Likewise, it’s the partners, not the associates, pushing the salary drive, and they’re not doing it because they’re generous souls — they’re doing it because they perceive a market advantage they can leverage, and they’re going after it tooth and claw.

It won’t be the recession that ends this particular strategy, of course — there’ve been recessions before, and standard law firm SOP in these situations is to freeze salaries, eliminate bonuses and lay off associates. For most firms, associates are fungible and can be collected or dismissed at will; the partnership draw is the king on this chessboard and will be protected at all costs. But clients are the ones who will really put an end to firms’ use of associates as tactics, because it’s the clients who are filling those barrels of cash. Increasingly, clients are pressing upon firms the not-really-novel idea that an associate is not a stone in a revenue pyramid, but an asset whose costs and benefits are seriously out of whack. By the time the next boom-and-bust rolls around, I strongly suspect that many firms will have to rewrite their playbooks, because associates will no longer be in the variable side of the ledger.

Update 1/10: The first pebbles of the rockslide? Venerable NY firm Cadwalader lays off 35 associates. (Tip to WSJ Blog).