Law firms and the JetBlue guy

Even if former JetBlue flight attendant Steven Slater didn’t plan his famous chute-deploying resignation in advance, he seems ready and willing to exploit the moment, perhaps to land a reality-TV hosting gig. If it does turn out that his Big Quit was staged (like that of Elyse Porterfield, the “Dry-Erase Girl” whose hoax didn’t even last 24 hours), it will be a salient reminder to all of us about things that seem too good to be true.

But what’s real, and what remains, is the widespread public support these figures received and what they represent: a daydream about the courage to quit a job that treats you with less respect than you deserve. And it underlines a serious trend in the workforce to which law firms should be paying close attention. As Daniel Gross explains in a Newsweek commentary, “the poor labour market and workers’ antagonism toward employers and customers are actually connected”:

“The economy has been growing for a year, and corporate profits have surged — Standard & Poor estimates that income of the S&P 500 rose nearly 52 percent in the second quarter of 2010 over the same period in 2009. Much of that impressive growth has been driven by the remarkable gains in efficiency and productivity that corporate America has notched since the recession took hold. Last year, productivity — the ability to produce more with less — soared 3.5 percent, up from 1 percent growth in 2008 and 1.6 percent in 2007.

“Yes, companies have embraced the Gospel of Cost Cutting with missionary zeal — printing on both sides of the page, eliminating bottled water, turning off the lights. But most of the gains came straight out of payroll. Companies slashed salaries and curtailed benefits, all while asking shellshocked veterans to pick up the slack for downsized colleagues. Even as business picked up, companies have been extremely slow to hire; the private sector has added just 630,000 jobs so far this year. And when it comes to wages and benefits, corporate America’s bean counters could make Scrooge blush. Many of the firms that slashed pay or cut 401(k) matches haven’t restored them even though their balance sheets and profits are now healthy. …

“The last couple of years have been a golden era for employers — they’ve found that they can hire whom they want at lower wages, and that it’s easier to retain folks without having to boost salaries. But at some point, companies that want to grow will have to break down and hire new people, or turn part-timers into full-timers, or put contractors on the payroll. Many employers are treating existing and potential employees as if they’re desperate for work. And plenty of Americans are. But desperate times can lead to desperate measures. Push your workforce too hard without adequate reward, and someone just might tell you to take this job and shove it.”

I was reminded of this observation when reading the latest financial report from a large law firm: “Profits rose, revenue dipped at Baker & McKenzie in fiscal 2010.” I’ve seen a couple dozen of these stories in the mainstream legal press over the past few months, breathlessly announcing what amounts to the same thing over and over: firms are bringing in less money, but partners are reaping higher profits. That happy result comes from the important middle step that the headlines don’t include: “Revenues down, costs slashed in a surge of panic, profits up.”

We all remember the bloodletting committed by large law firms in the wake of the financial crisis, as staffers and junior lawyers found themselves out on the street. The firms that threw their most vulnerable over the side then are the same firms reporting rising profits now. It was ever thus — that’s how businesses work, chopping assets (including people) to ensure continued or improved profits for shareholders. But when you chop and chop, making abundantly clear that employees will always be let go at the first sign of profit trouble, then you also risk the full-scale alienation of your talent pool.

Tens of thousands of 2008-10 law schools grads are still deeply in debt and struggling to find law jobs to stay afloat, even to the point of moving to India to work for an LPO. Many law firm partners, I think, have forgotten just how frustrating and humiliating it can be to have no job and no prospect of finding one — and they never had to look for work in an economy like this, where unemployment shows every sign of becoming chronic. And to rub salt in the wound, the law firms that cast off their young lawyers love to blame the victim, castigating new grads for their “sense of entitlement” and “lack of work ethic.” This can’t continue without inflicting real damage.

There are plenty of archaic traditions in the legal profession that have no place in the 21st century. But one tradition that deserves its place of pride is the responsibility to help usher in the next generation of practitioners. The recognition that today’s juniors are tomorrow’s leaders was sufficiently widespread that firms took care of their people as a matter of course. As stewardship in the legal profession has faded, first gradually and then dramatically, lawyers’ trust in the firm and the partnership has faded with it. This isn’t just something we should feel bad about. This is a collective decision to exploit legal talent at the worst possible time.

Throughout this coming decade, we are going to see the continuous rise of lawyers engaged in legal services but employed by non-lawyer entities. Legal process outsourcers, e-discovery providers, document assembly companies, legal project management experts, legal knowledge professionals, and many other entities outside the law firm world will be hiring experienced lawyers to populate their offices. Law firms that took care of their people in the tough times will have nothing to fear; those that didn’t will be astonished and appalled at how easily their lawyers and legal professionals will be poached. Steven Slater’s real-life jump, no matter how contrived it might have been, reflects employees’ economy-wide readiness to jump from jobs that treat them as fungible, exploitable, and expendable. If that’s how you’ve treated your people, you can look forward to the day when they return the favour.

Law firms on demand

What if you could take a law firm, carve away all the parts of it you don’t like, and keep all the parts you did? What if, from the client perspective, you could get rid of high and rising prices, time-based bills, gratuitous overhead costs and unfamiliarity with your business? What if, from the lawyer perspective, you could do away with brutal billing targets, inflexible work schedules and long commutes into the downtown core? But what if in both cases, you could keep the high quality of talent and the brand-name assurance that comes with a respected legal services provider — what would that be like?

It’s an intriguing question, but not because of whether it would be feasible — it already is. Firms following this model are blossoming across North America and Europe. They offer corporate clients the services of lawyers with pedigreed credentials (large-firm and law-department experience) who will work from the client’s office or from home, for limited periods of time, at much lower rates than traditional law firms charge. The selling point for clients is the services of an excellent lawyer on the client’s terms, at a competitive price that excludes traditional firm overhead costs and revenue expectations; for lawyers, the challenge of high-end work on a short-term, flexible or even itinerant basis.

Maybe the best-known of this new breed of firms is Axiom Legal, which is closing in on the 300-lawyer mark, but there’s a growing collection of similar operations like Virtual Law Partners, FSB Corporate Counsel, Paragon Legal, Cognition LLP, Virtual Law [UK], The Rimon Law Group, and Keystone Law. They’re often called “virtual firms,” but that’s a little confusing, in light of the growing number of small cloud-based law practices. I prefer VLP’s self-description, a “distributed” law firm, or Keystone’s, “dispersed.” Concerns about these firms usually focus on the scope of their expertise, their value for money, and their KM and quality-control systems, all reasonable worries.  There doesn’t seem to be much question, however, that these firms are sustainable and are already legitimate players in the marketplace.

No, what’s really intriguing about these firms is the fact that they developed at all — that the traditional law firm has become sufficiently unpalatable to the people who retain it (and to some of the people who work inside it) that something new and different can flourish. Dispersed law firms directly challenge the traditional law firm model, presenting themselves as at least a complementary service to what traditional firms offer, and at most, a full-fledged alternative provider. These new firms question the fundamental nature of traditional firms, arguing that the physical concentration of legal talent in a high-priced centralized location with a rigid hierarchy and pyramidic revenue structure is outdated and self-serving. Flexible, project-based, techno-savvy, client-focused law firms are the way of the future, they contend: they’re more efficient, more accessible, and more rational. Continue Reading

Targeting the variable fee

For as long as most lawyers can remember, the billable hour has defined, powered, and shaped their law firms. It determines how lawyers work, how they sell their work, how much they earn, and how they assess and reward their employees. It breeds inefficient, overworked lawyers and frustrated, resentful clients; but it has also proved almost impossible to kill. I’ve come to believe that we haven’t been able to kill it because we’ve been hunting for the wrong beast. We’ve been calling our target the billable hour, whereas we ought to have been describing it, more accurately, as the variable fee.

The fundamental client objection to lawyers’ fees is uncertainty: the client rarely knows the final price before the work is done. Neither, in most cases, does the lawyer — either because the price is truly unpredictable or, far more likely, because the lawyer has neither the means nor the incentives nor the inclination to figure it out beforehand. The fundamental variability of legal fees powers a business model that has proven enormously profitable for lawyers: because the fee varies according to the amount of time and effort devoted to the task, the lawyer has every incentive to maximize that time and effort. Uncertainty creates risk — 100% to the client — and reward — 100% to the lawyer.

The radical change facing law firms today is the end of variable fees as law firms’ financial engine and their replacement with non-variable fees — or, in the parlance of the day, fixed fees. Evidence continues to emerge not only that fixed fees are the immediate future of how lawyers’ services are sold, but also that they’re long-term future of how lawyers’ entire businesses operate.

Fees that vary according to the lawyer production process, rising in tandem with time and effort expended, naturally give rise to inefficient workflow, reinvented wheels, maximized activity and over-accomplished tasks. Conversely, fees that are fixed in advance by the purchaser naturally give rise to proportional efforts, recycled know-how, streamlined processes and hyper-efficient workflow. The first type of law firm business model is starting a steep decline; the second is in sharp ascendancy. In the result, we’re going to witness a sea change in the culture and operations of many law firms. It’s not destiny or professional genetics that makes law firms houses of horror for both the lawyers who sweat to docket the hours and the clients who grimly pay for them — it’s the fever grip of the variable fee. The rise of the fixed-fee-driven law firm is going to demonstrate just how different and better a law firm can be.

Two examples: first, an excellent article at LegalBizDev by Steve Barrett, former CMO of Drinker Biddle, with a title that says it all: “Alternative fees demand improved project management.” It argues that any firm thinking about adopting a fixed-fee approach to sales must be prepared to overhaul its internal systems and business culture. Fixed-fee firms can’t survive massive writeoffs by lawyers who made clients promises about price that they couldn’t keep, or succeed without tracking the progress of past fixed-fee approaches and instituting technological tools to analyze them. And no firm can even contemplate fixed fees without a very clear understanding of the most important aspect of their business: what it has cost them in the past to deliver their services:

Many firms mentioned that a good understanding of cost patterns has never been developed in their firms.  One said (paraphrasing) “We should know how much an ‘XYZ financing transaction’ typically costs, since we do hundreds of them every year.”  Another (again, paraphrasing) said “I can’t believe we don’t know the cost of a typical deposition, since we must do thousands a year.”

As clients ratchet up the pressure on their lawyers to deliver results on a fixed-fee basis, firms will be obliged — forced is probably a better word — to implement these systems and gather and use this data. Just as the variable-fee model discouraged the adoption of these processes and approaches, fixed-fee models will require it.

Second example: firms’ use of associates. Pamela Woldow and James Cotterman of Altman Weil warned law firms in a recent seminar on associate compensation that they need to cut associate salaries much more deeply and accept the fact that clients will never again pay for new associates billed out by the hour. Clients would much rather rely on their own contract lawyers or on offshore professionals than on inexperienced associates; but the opportunity to train associates with this work —  and, much more, the ability to generate revenue off these associates’ billed hours — is key to law firms’ success. The solution to this impasse: fixed fees.

Woldow pointed out that corporate clients are more amenable to using first- and second-years on their matters in fixed-fee arrangements. “So if you really want to use and train your first- and second-years, then up the alternative fee arrangements,” she said.

Endless battalions of associates only make sense in a variable-fee system. When the amount of money you make is tied directly to the number of people working on a file and the amount of time they take to do it, you have every incentive to increase both. In a fixed-fee system, profitability flows in precisely the opposite direction: fewer people hired, fewer hours spent. Law firms that abandon variable-fee structures will shortly find themselves completely rethinking how many associates they hire, how much they pay them, and what tasks those associates are assigned. Under a fixed-fee system, a firm that genuinely wants to train its associates can afford to do so, not least because there’ll be fewer of them — the demand for associates will plummet, along with their cost.

As variable fees give way to fixed fees, we’re seeing a corresponding shift of burdens from the client to the lawyer: the risk of financial shortfall, the maintenance and analysis of relevant data, the obligation to control costs, the necessity of working smarter, the requirement to properly define productivity, and the responsibility to prioritize value. These changes are poised to transform lawyers’ incentives, processes, systems, and attitudes — for the better. Forget the billable hour: the future of law practice is tied to whether lawyers’ fees remain variable — or, put differently, to whether the client or the lawyer decides how much the client will pay. If I were you, I’d bet on the side that’s holding the money.

Breaking the big firm

My strongest, greatest fear by far, if it’s not too soon to look to the “other side” of this financial system meltdown and general economic interregnum, is not that things in law-land will look overly different when we emerge, but that they won’t look different enough.

That observation comes from Bruce MacEwen of Adam Smith Esq., and I share his concern that false confidence will lead too many large firms to believe that everything’s going to be basically okay. For large firms, everything is emphatically not okay.  The past couple of weeks have delivered a series of examples that demonstrate one thing: the ways in which large law firms have operated over the past few decades are coming to an abrupt end.

First, consider this this Legalweek report that two major international firms, Mayer Brown and Reed Smith, are jumping onto the fixed-fees bandwagon. Mayer Brown is readying itself to offer fixed fees for all its transactional work, as well as to make more frequent use of abort agreements and success fees. Reed Smith, meanwhile, plans to use fixed or capped fees in its financial industry group, in its corporate and real estate practices, and for transactional work.

What brought about this sudden departure from the easy-and-profitable billable-hour system? The firms’ leaders cite client relationships first and foremost, which is nice to hear. But perhaps equally instructive are two other articles linked from that Legalweek story: 55 job cuts at Mayer Brown in March, Reed Smith hiring a restructuring consultant in July. Few firms undertake changes of this potential magnitude unless the outside pressures exerted on them have made things very uncomfortable. (It’s worth noting, as Jim Hassett’s webcast does, that these are not the first AmLaw 100 firms to  climb onboard this train.)

Even more revealing are the contents of a leaked strategy memo from O’Melveny & Myers that appeared on Above The Law. The firm plans to “adopt a single rate card by FY2012, with volume and ‘investment’ discounts and appropriate alternative fee arrangements … becoming the leader in providing high-end legal services on a fixed fee basis, reducing costs to clients and achieving superior economic performance through practice management oriented toward cost effective client service.” Especially noteworthy are plans to reduce associate leverage to as low as 2-1, a ratio that’s positively Canadian.

Fixed fees, if done right (a big if), are demonstrably better both for the client and the lawyer. The question is whether large firms constructed on billable-hour pyramids can really adapt their culture and systems to make such a monumental change. Many big firms still think the key to flat fees is to take the last ten bills issued for this kind of work, average them out, add 10% for contingency, and present the final figure with a flourish. Fixed-fee veterans in smaller firms are skeptical, to say the least. Here’s Valorem’s Patrick J. Lamb on these big firms’ moves:

The essential element of alternative fees that actually work is that they shift risk to law firms, meaning the value changes from leverage and body count to experience and fewer bodies.  More brain power, less body count.  So a goal of reducing leverage “in some practices” to “as low as” 2 to 1 will make anyone experienced with alternative fees laugh out loud.  O’Melveny might as well take out a full page advertisement saying it really won’t be changing a damn thing.

I’m prepared to give O’Melveny’s initiative the benefit of the doubt, actually — every journey has to start somewhere, and I want to encourage every green shoot of innovation I see. But man, is this a long journey — changing a law firm’s fee and billing structure is like re-engineering your DNA, and the best will in the world won’t make it any less difficult. And for every large firm that is finally acknowledging that the horse they’ve ridden for years has died, ten more are still clinging on to the saddle.

The O’Melveny memo states at one point: “In the very recent past, our business model, as a whole, has yielded disappointing financial and practice growth results. … [O]ur litigation clients are looking for rate and fee reductions, and we expect that mindset will continue into the next good economy and beyond.”  That understates the size of the challenge. It’s not just litigation clients — a lawyer at a large firm confirms to me that the pressure for lower and/or more predictable costs is intense and is coming from across the client spectrum. This is the new reality, and large firms will struggle to make the sort of fundamental changes needed to adapt.

Let’s look at another key element of law firm success: personnel. The results of a survey published in The American Lawyer are interesting, if not surprising: associates in large firms are measurably more unhappy than their counterparts in smaller firms. Not only that, but graduates of the “elite law schools,” from which so many big firms insist on drawing most of their recruits, are the unhappiest of all when compared to their colleagues from “less elite” schools. (It doesn’t help that, as Ron Fox points out, law schools of every rank tend to funnel their graduates towards large firms and away from opportunities to serve ordinary consumers in smaller practices.)

You can probably guess the advice that the study’s authors offer big firms as an antidote: recruit outside your usual law school boxes, and make life for your new lawyers a little less punitive. It’s advice unlikely to be accepted, says Aric Press, editor-in-chief of American Lawyer: “I fear that we will look back at the exuberant spree of the last few years as the high-water mark of nonelite law school hiring. … This leaves an opportunity for the firms wise enough to seek first-class talent no matter what brand is on a diploma.” But how many firms will risk the CYA comfort of consistently recruiting from “the best and the brightest,” let alone make substantive changes to the overall associate model?

The study’s authors note that big-firm attrition is particularly frequent among women and minorities. Underlining that concern is this account of an event celebrating Working Mother magazine’s 50 Best Firms for Women Lawyers. Many of last year’s winners didn’t make the cut this time — in part, perhaps, because despite wishful thinking to the contrary, leaner times at big firms have made it harder, not easier, for women to advance and succeed:

It’s optimistic to believe that most large law firms are rethinking the work/life balance equation during these hard times. Frankly, most firms today are focused on survival and on a need to bring in more business — they are not, it seems, focusing on the larger questions of the meaning of work and job satisfaction. From where we sit, covering women in the profession for almost a decade, we don’t see a revolution on the horizon.

So: profits are dropping fast, more firms are getting ready to change the basic business model, the young talent is alienated, and diversity has been back-burnered. But that’s not the worst of it for big law firms. Because all this time, solos, small firms and midsize operations keep picking up all the opportunities that the large firms keep dropping.

While big firms allow women to walk away, one small firm encourages its employees to bring their children to work — not to an on-site day-care, but into the office, all day long. While big firms burn through their young talent, innovative companies like DirectLaw offer new lawyers reduced pricing to start up a solo virtual law platform — with 90 days’ free tuition to Solo Practice University to boot. While big firms set up committees to consider fixed fees, small firms have long since figured it out and will even tell you, as Jay Shepherd does, how they set their prices. All the momentum in the legal services marketplace today favours small, adaptable, innovative, client-focused, value-oriented, business-savvy providers. Most large law firms answer to immobile, traditional, self-centered, profit-oriented, and business-challenged. It’s not hard to pick the winner here.

Every marketplace, even one as artificially stunted as legal services, operates according to the law of supply and demand. The demand is changing, irrevocably. The suppliers that change with it will survive; the ones who don’t, won’t. Some more large firms are waking up to this fact and doing their best to change — but I’m concerned that 2009 is simply too late to be starting the change process.

The best and the brightest?

It’s a small thing, but it’s been bothering me disproportionately, so I want to say a few words about one of my least favourite current phrases in the law:  “the best and the brightest.” It’s normally used in a talent recruitment or institutional marketing capacity to describe the very small group of the very best lawyers and law students, and I must have come across it a half-dozen times in the last week alone. An archetypal example was uttered in April by US Supreme Court Justice Antonin Scalia, in response to a question put to him by a law student who asked what she had to do to become “outrageously successful” without “connections and elite degrees.” Justice Scalia’s response eventually came around to her chances of clerking for his court:

“By and large, I’m going to be picking from the law schools that basically are the hardest to get into. They admit the best and the brightest, and they may not teach very well, but you can’t make a sow’s ear out of a silk purse. If they come in the best and the brightest, they’re probably going to leave the best and the brightest, OK?”

Justice Scalia’s criterion for identifying excellent future law clerks is depressingly common within the profession. He doesn’t actually know how to identify the best and brightest law students and new lawyers, and he’s hardly alone in that. He’s one of many people who rely upon a law school or law firm’s exclusivity, elitism, household name or other purported quality signifier as a substitute for having to actually determine “bestness and brightness” for himself. It’s a habit hardwired into tens of thousands of annual decisions about  which school a 1L should attend and which schools a law firm should recruit from, and it doesn’t do us any good.

Let’s start with the law schools. Everyone knows there are elite schools and non-elite schools, right? Even if you don’t read the noxious US News & World Report law school rankings or their equivalents in other countries, you “know” which are the “best” schools, especially if you graduated from one of them. How do you know? They have the best reputations, of course — even if you couldn’t name one aspect of the educational experience that justifies “elite” status or name three elements of substance that differentiate any one school from another. “Reputation” and “prestige,” based on countless dimly illuminated factors poked into the crannies of our minds, might hold sway, but we have no empirical evidence that an “elite” law grad is any better or brighter than a “non-elite” grad. Magazine rankings and law blog chatter serve only to confirm our existing region- and class-based prejudices about what places one school above another.

The great majority of law schools are largely indistinguishable from each other, in terms of the nature of their education, the quality of their teaching, and the (negligible) practical elements of their training. Almost every law student is smart and works hard — that’s the baseline standard of admission (along with, in most cases, tremendous pre-existing socio-economic advantages). Some schools keep class sizes intentionally small or raise tuition beyond most peoples’ reach, but while that may make them more “exclusive,” it doesn’t make them any better at teaching students the law. If there are ways of determining the “best and brightest” law students, finding out where they take their classes hasn’t proven to be one of them.

None of that keeps law firms (and Supreme Court justices) from relying on school pedigree to make interview selection and lawyer hiring decisions for them. But that raises an even more pernicious problem: let’s say you could figure out who the “best and brightest” law graduates are — how do you know which of them will turn out to be great lawyers? Law school prowess has little relevance to eventual lawyer success — the absence of correlation between LSAT scores and lawyer success has been proven. Yet those who hire new lawyers continue to rely on law school performance as a hiring factor, even though it tells us little about whether a student possesses or can quickly acquire the skills that practising lawyers need, the appetite and aptitude for client service, business management, persuasive advocacy and ethical steadfastness.

Now, here’s the funny part: the system has in fact come up with a way of determining which are the “best and brightest” law students  — they’re the ones who get hired by the “best and brightest” law firms! And how do we know which firms fall into that category? Well, they’re usually very old, very large, and very well-known (and big old famous organizations are all but guaranteed to prosper, right?) But the main reason these firms are considered the best is — wait for it — they recruit only from the best law schools! The Cravath system has been around for so long that the “top” law schools and the “top” law firms now perform a little pas-de-deux, each using the other tautologically to confirm its own higher sense of self (“our graduates go to the best firms”; “we recruit only from the best schools.”)

And that brings me to the final aspect of the “best and brightest” phenomenon that’s so problematic: this belief  that the “top” lawyers are to be found at the “top” firms. I am not saying, not a for a nanosecond, that large well-known firms don’t count among their  ranks some of the finest lawyers the profession has produced. Of course they do. But they don’t own the exclusive monopoly on that particular asset. I’ve met brilliant lawyers of extraordinary skill in midsize regional firms, solo practices, corporate law departments and public-sector environments. And I’ve met lawyers who work for famous law firms whose skills and talents are pedestrian. Succeeding in a BigLaw environment is undoubtedly a sign of the fact that you have the qualities to thrive in that kind of environment — but those qualities are not automatically equivalent to superior talent and execution. In our big-firm, AmLaw-obsessed legal culture, this obvious truth keeps getting lost.

All of which is to say, if you find yourself talking about “the best and the brightest” the legal profession has to offer, or you hear someone else saying it, ask a few questions: Best at what? Brightest according to whose standards? Based on precisely what criteria, and how many of those criteria are irrelevancies, assumptions, stereotypes or conventional wisdom? Let’s not buy into a myth that puts you down or puts other people up without sufficient cause. I think a powerful, sweeping assessment like “the best and the brightest” deserves and requires more scrutiny than that.

The legacy of work-life balance

I think we’ll soon be closing the book on one of the legal profession’s most-used and least-understood phrases of the last decade: “work-life balance.” It was still all the rage just a couple of years ago — new lawyers invoked it as a mantra, talent recruiters bandied it about, and many legal publications (including those I’m responsible for) frequently referenced it. But even before the economy fell off a cliff, you could see the pushback growing — and not just from cranky corner-office partners who felt the youngsters hadn’t paid their dues. The pushback came from a growing sense that “work-life balance” (WLB) was a meaningless phrase that obfuscated some real issues lawyers needed to grapple with.

Essentially, WLB was shorthand for the widespread sense that the demands of a legal career had outstripped the personal benefits it conferred — or, as my father used to say, “There’s not much point in earning a living if you can’t live the living you’re earning.” WLB was applied most frequently within the context of large law firms, where even jaded observers would admit that billable-hour targets had escaped any rational trajectory. Across all firm sizes, though, people looked at the law and saw a career where effort and satisfaction were headed in opposite directions. It was not irrational to think that this could stand some improvement.

(It’s important to recognize, by the way, that WLB was not exclusively a Millennial issue. Lawyers of all ages reported dissatisfaction with the perceived effort/reward ratio of their careers, especially in larger firms — though Gen Y was the most willing to talk about it, at length. Remember that WLB was also often used to describe the plight of older small-firm lawyers whose clients had come to demand legal services far more quickly and cheaply than before, catching the lawyer in a vise between ever more work and ever less time. Wherever legal work seemed to grow beyond the boundaries of “worth it,” we heard about WLB.)

Most lawyers seeking WLB were really seeking an answer to the question: “Does a legal career have to be all-consuming and exhausting?” As to that, I’ve written before that lawyers now work long hours thanks to a competitive economy and our own inefficiency, and that we’ll always have to run fast enough to keep up with our clients. But during the economic bubble, lawyers who asked that question often perceived that the answer was “no.” The demand for legal services sufficiently outstripped the supply of lawyers, such that lawyers could start to dictate the terms of their availability to employers and sometimes even to clients. The whole thing got wrapped up too often in buzzwords like “personal fulfillment,” “family time,” and WLB, but what it really came down to was lawyers’ rational response to market conditions. They had a chance to get more rewards for their time and effort — unfortunately, many of them chose those rewards in $160,000 annual packages.

Now, of course, the market has changed just a little. After 10,000 lawyer and staff layoffs at large US and UK firms, even the most active WLB boosters have toned down talk that might earn them the dreaded “entitlement” label. Articles and posts that reference the term “work-life balance” now do so in an environment of cold pragmatism: Ashby Jones at the WSJ Law Blog and Dawn Wagenaar at The Complete Lawyer provide good recent examples. Realist observers like Dan Hull and Scott Greenfield have gained the upper hand in the WLB discussion — check out this slam-bang debate at Legal OnRamp about “work-life balance” generational expectations.

Where proponents of “work-life balance” went off-track, to my mind, was that they argued the duty to ensure a satisfactory proportion between a lawyer’s work and the rest of her life was an institutional responsibility — that it was up to the law firm, basically. The  firms disagreed, and all they had to do was wait for the marketplace to turn their way to make that clear.

Law firms aren’t going to unilaterally change their business models for the sake of WLB. No law firm ever budged an inch on its billable quotas or offered associates more money and perks because its partners genuinely felt they should be nicer employers — appeals to conscience at partners’ meetings don’t have a roaring record of success. Firms change their working conditions as the talent market dictates. In a seller’s market like the one we’ve just had, they play nice; in a buyer’s market like this, they don’t. If almost every potential legal recruit said, “I’m not going to work at that firm — the demands are ridiculous and the benefits to my career aren’t nearly worth it,” and did so for several consecutive years, then you’d see the firm think about changing its business model. That didn’t even happen during the boom, and I doubt it’s going to happen now.

The thing is, “work-life balance” is a lawyer’s personal choice and responsibility. If money and “prestige” are that important to you, you’ll sign up to work 3,000 hours a year at a law firm, and you can reap the rewards and suffer the personal consequences accordingly. If keeping your work hours within a predictable box is important to you, you’ll be seeking out public-sector jobs or setting up a practice with just enough reasonable clients to pay the mortgage — and you’ll always have one eye on your bank statements. When we talk about “balance” in lawyers’ lives, we’re really talking about the tradeoff everyone has to make between compensation and lifestyle. If WLB stood for anything, it was for the fact that we all have the right and the obligation to make that tradeoff on the terms we want.

But here’s the caveat, and here’s where “work-life balance” proponents were right —  most lawyers in their first several years of practice don’t really have that choice. There are two institutional flaws in our system that hurt our newest colleagues. First, there’s the unspoken symbiosis between law schools and law firms — the former charge students huge amounts of money and provide little practical lawyer training, allowing the latter to hire low-skilled and heavily indebted graduates to fill virtually the only positions lucrative enough to pay off their loans. And secondly, billable-hour targets for associates at more than a few firms simply can’t be achieved without damage to one’s health or ethics, or both. These problems are neither natural nor inevitable — they result from our neglect of the system, and they annually damage our profession’s standards and morale.

In the heyday of WLB, we were at least starting to talk about these things, and the whole debate should have shined a light directly on them. What we were groping towards, under the banner of WLB, was the gnawing sense that most everyone starts their legal career behind the eight-ball for no particularly good reason. Now that the moment has passed, I worry that WLB will be relegated to the status of a mere generational quarrel during a freak economy. We need to do better than that. There are still some serious institutional problems for our profession to resolve — dealing with them openly and effectively would be the kind of legacy “work-life balance” deserves.

How to solve the legal employment crisis

The cover story in last week’s Economist got me thinking about the looming crisis in lawyer employment. “When jobs disappear” paints a bleak picture of a rising wave of unemployment worldwide that will hurt more and last longer than past employment crises. The credit crunch has forced companies to cut costs rapidly, while the massive deleveraging underway in most consumer economies means that the eventual recovery will proceed slower and will crest lower than we’ve become used to. But the key point is this:

[W]hen demand does revive, the composition of jobs will change. In a post-bubble world, indebted consumers will save more, and surplus economies, from China to Germany, will have to rely more on domestic spending. The booming industries of recent years, from construction to finance, will not bounce back. Millions of people, from Wall Street bankers to Chinese migrants, will need to find wholly different lines of work.

In its editorial leader, the magazine drives the point home further:

[M]any of yesterday’s jobs, from Spanish bricklayer to Wall Street trader, are not coming back. People will have to shift out of old occupations and into new ones.

We’ve been bingeing on reports of law firm layoffs for a few months now, and there’s every reason to think those reports will continue through 2009. But we haven’t spent as much time looking at the big picture: there is a growing population of lawyers whose jobs are gone for good, and a larger group of lawyers whose underlying business models are fast becoming obsolete.

Many of the junior associate and staff positions cut in the past several months won’t be filled again. We’ve always known that low-level associates billed out at a handsome profit by midsize and large firms would survive only as long as clients continued to tolerate the law firm business model and its rank inefficiencies. During the recession, clients just won’t be able to afford that; when the recession finally eases, they won’t be willing to afford it, hardened by the lessons meted out in the financial wilderness. Similarly, legal support staff still carry out many automatable and outsourceable tasks. By the time the recession ends, those tasks simply won’t justify a person sitting in an office or cubicle adjacent to a lawyer.

You could actually argue that there hasn’t been a “market” for many of these positions, in the sense of a financial justification or imperative, for some years now. Firms could be as inefficient in their workflow as they liked, because they could always pass the cost of that inefficiency on to the client, who would put up with it for reasons unknown. But the recession is bringing all that to an abrupt halt, and firms suddenly are having to either rectify those inefficiencies or absorb their cost. The results are plain to see on the unemployment line, which figures to get longer before it’s all over.

That’s all bad enough. But the same fate awaits other legal jobs still to disappear, including some held by senior associates, partners, and even solo and small-firm lawyers. There will still be a market demand for these positions after the recession. But the level of demand will be lower because the economy figures to putter along below its recent peak for as much as a decade, so fewer such lawyers will be needed. Moreover, the nature of what the market demands of these positions will be so different from what it is now that many lawyers will be unable to meet it.

During the recession, we’re all going to learn to do more with less. Cost-saving efficiency and “good-enough” quality will be the twin standards by which purchases of all kinds will be made, including legal services. Lawyers have never needed to be efficient and they’ve always preferred an exhaustive answer to an adequate one; they’re not going to adjust easily, and some won’t adjust at all. Clients also will need their lawyers to focus more on high-value services that demand advisory skills and judgment, and less on than repetitive tasks that require boxes to be ticked off and i’s to be dotted. That’s going to be more than a business model challenge; that’s a new way for many legal professionals to view themselves and their functions, and again, some simply won’t  have the wherewithal to meet the new expectations.

So there are two separate problems that need imminent addressing:

1. A legal employment crisis. Before it’s all over, tens of thousands of lawyers and legal support professionals will have lost their jobs and will have little prospect of finding replacement positions (the Economist reports that the chances of an unemployed American worker finding another job soon are the lowest since records started being kept 50 years ago). Younger lawyers are deep in debt and short on experience; older lawyers have families to support in the teeth of an economic meltdown and are too highly specialized to be easily retrainable and transferable to other professions or industries. What will they do?

And more importantly for the profession, who will help them do it? Governments are preparing aid and retraining packages for workers in manufacturing and other hobbled industries; who’s doing the same thing for lawyers whose careers have been cut down by the financial crisis and the recession it spawned? Whose job is it to do that? Law societies and state bars exist to govern the profession, not to care for its members. Bar associations look out for lawyers, but they are strapped for resources, and not every lawyer is a member. Law schools lose interest in their students shortly after graduation. Who will help meet the unemployed lawyer crisis?

2. A legal training crisis. As heart-wrenching as the fate of jobless lawyers is, an arguably bigger problem is arising profession-wide: the adjustment to a new type of legal career. Technology, globalization, and extra-professional competition have already damaged or even eviscerated many types of legal careers. It doesn’t take long to count all the residential real estate lawyers in jurisdictions where title insurance has taken hold, or the thriving general practices anywhere (but especially in small towns). Estates and family lawyers were already feeling competitors’ breath on the back of their neck. But when the recession really takes hold, few legal positions will be safe: who, for instance, will be able to afford to go to trial? Pro se representation is now a growth industry.

The types of work for which lawyers will be in demand and from which they can make a living are changing, and no one really knows into what. But our law school, bar admission, and continuing education systems continue to grind along churning out lawyers suited for 20th-century practice. Practitioners have complained for years that law schools don’t prepare their students for practice; but the irony is that even if every law school changed overnight to become full-scale career preparation institutes, it still wouldn’t help that much. That’s because no one can say what market demands and consequent skills will be required of lawyers in the year 2015, 2025 or 2035. It’s a serious problem for education generally (the linked video is incredibly insightful), but no less an issue for the legal profession for that.

So we have an immediate problem — a growing crowd of lawyers whose jobs aren’t coming back and whose interests have no obvious advocate — and a mounting crisis — a fundamental change in the nature of legal services for which our profession seems largely unprepared. Are there any roads leading out of this morass? I think there’s at least one: opening up the deep and largely untapped potential of the latent legal market.

Several commentators have pointed out the unrealized market of millions of people who, as Richard Susskind memorably expresses it, need a fence at the top of a cliff, not an ambulance at the bottom. Preventive legal services — customized legal checkups and health regimens that anticipate and reduce the occurrence and impact of legal problems — is the way of the future for many lawyers. Whether online or in person, for corporations or individuals, bespoke or varying slightly from a standard construction, these kinds of services promise the dual benefit of using lawyers’ most valuable skills as well as helping achieve the larger social good of a more legally informed and prepared population. A legal problem may be solved in months or weeks; good legal health requires a lifetime of wise legal advice.

If you’re a person, organization or corporation looking to catch the next wave, here it is: open up an institute dedicated to retraining current lawyers and training prospective ones to provide preventive legal services to latent legal markets (here’s a great model). It’s not enough simply to teach lawyers to carry out their current practices more efficiently and effectively; we need to start training them in the ways of an entirely different type of legal business from that which now holds sway in the profession. We need lawyers who can not only see and analyze legal problems that have occurred, but who can anticipate and reduce the risk of problems that could or will occur if left untreated. We need fewer antibiotics and surgeries in the law; we need more flu shots, vaccines and diet-and-exercise regimens.

A legal profession centered around the prevention of problems first and the resolution of problems second would be a better, happier, healthier and more socially beneficial profession than the one we have now.  We’re facing both a drop in the demand for traditional legal services and the rise of a jobless lawyer population ready and willing to try something different. There may be no better time to give this approach a legitimate shot.

The other shoe

If you like your comedy dark, track the law firm layoff news. There’s the partner at Pillsbury LLP who, seated on a crowded but quiet commuter train into NewYork City, conducted a loud cellphone conversation with a colleague at the office that revealed planned associate layoffs at the firm, right down to naming the names of pending victims. There’s McDermott Will & Emery in Chicago deciding to eliminate free coffee in the lobby of one floor of the firm’s offices, a move purportedly meant to express congruence with larger cuts but that came across to many observers as, you know, kind of chintzy. There’s the saga of a laid-off associate in the engaging Above The Law serial “Notes from the Breadline,”  with updates like this:

The next morning I e-mail the partner to tell him that I’d like to talk to the client, explain my departure, and say goodbye. A few hours later, I have heard nothing in response, so I call him. “Oh, don’t worry about it,” the partner says breezily. “I talked to them already.” I ask him what he said. “I told them that you decided to ‘move along,’ if you know what I mean,” he answers. No, I think, I don’t know what you mean.

But whether firms choose to take the callous route, or seem to be trying to soften the blow (cf. Latham & Watkins’ severance, Simpson Thacher’s pro bono plan)  the practical and human reality behind the thousands of layoff notices at big law firms is just plain ugly. I won’t bother trying to update the latest round of notices — suffice to say some of the biggest names in the US and UK legal profession are shedding anywhere from 10% to 20% of their associate workforce and an equivalent or greater number of staff. But when you look behind the rain of numbers, something interesting starts to emerge: the sense that these are just the warm-ups, not the main event.

First of all, cutting associates by the hundreds is not something you do if you expect the economy to turn around soon — otherwise, you’re just paying termination costs to people you’re going to have to rehire in less than a year. Firms understand perfectly well the negative fallout from layoffs, so a bloodletting on this scale indicates two things. One is that there’s no work for these people and none is expected soon, which must reflect what clients are telling firms about their own near-term prospects. The other is that firms don’t expect to need so many associates when things pick up again — partly because the post-recession workload won’t be as heavy, and partly because the good old days of stocking up on associates and riding their billable hours to profit are coming to a swift end. In other words, this isn’t just reducing headcount and expenses — this looks like the start of a fundamental and possibly permanent restructuring of the law firm model.

Secondly, there’s the other shoe that hasn’t yet dropped — partner cuts. With a few exceptions, we haven’t heard the ugly word “de-equitization” spoken much over the last several months. That might be because there won’t be any — that firms are confident that the associate and staff firings will be enough to safeguard profitability and keep the ship afloat, making more drastic moves unnecessary. Or it might be because the associate and staff cuts are the easy place to start, a non-controversial way to improve the bottom line short-term and give everyone a clearer picture of exactly what the profitability situation actually is. Once that picture emerges  by early summer, and is overlaid with what the firms’ internal assessments are saying about the subsequent 12 to 18 months, then the second round of personnel explosions should start going off.

Most people would agree that many large law firms overhired, to at least some degree, on staff and associates — that’s why these cuts have come so large and so quickly. But what’s not talked about much is that many law firms are also over-partnered. The Boomer generation has swelled the ranks of law firms partnerships just as it swelled the upper ranks of every business and organization in North America. I think you’d have a hard time maintaining that all those partnerships were equally earned on merit and productivity — or that, if they were up for partnership today, all or most of those lawyers would get serious consideration. Gen-X lawyers have complained for years about how the Boomers took all the best seats at the table largely by virtue of arriving first. I think we’re starting to see the same thought occur, belatedly, to the partners themselves.

Most law firms of any size are riddled with inefficiencies, from how they bill to how they compensate to how they process tasks to how they hire. We’re beginning to see, through the steady rise of flat fees and customized pay and automation and outsourcing, each of these inefficiencies start to be squeezed out of the system. Through all of this, one  inefficiency — the composition of partnerships — has been all but sacrosanct. I think we’re a few months and a deepening recession away from seeing that final wall breached.

The evolution of lawyer regulation

The thing about change is that once it gets rolling, it’s almost impossible to control and can go in directions you neither anticipated nor like very much. That thought occurred to me while reading a report issued last week by the Legal Services Policy Institute, the think-tank division of UK legal training company The College of LawTowards a New Regulatory Structure for Corporate and Commercial Legal Services: Options for Change is just 23 pages long, half of which is a lengthy appendix. But what the report recommends looks to me like an entirely new system of lawyer regulation, one I’m not sure I’m crazy about.

A little background: if you’ve been following the course of events flowing from the Clementi Report and the 2007 Legal Services Act, you’ll know that the UK legal profession is in the midst of redefining itself. On this side of the pond, we mostly hear about the LSA’s provisions to allow alternative business structures and non-lawyer ownership of law firms. But a major element of the reforms involved splitting the Law Society’s previously dual functions of solicitor regulation and representation, on the grounds that the same body could not both govern professionals in the public interest while also advocating for the interests of those professionals.

Regulation of the legal profession in England & Wales is to be the overall province of the newly created Legal Services Board, which launched on Jan. 1 and aims to assume all the powers assigned to it under the LSA by the end of this year. The Board will oversee all the various regulatory bodies for lawyers, such as the Bar Council, the Institute of Legal Executives and the Council for Licensed Conveyancers. Until the Board becomes fully functional, the Law Society technically remains the approved frontline regulator of solicitors, through the Solicitors Regulation Authority, which was partly spun off from the Law Society for this purpose. The SRA remains officially part of the Law Society, but is independent from it. Relations between the two are not always warm, and have just taken a marked turn for the frosty.

This is kind of an interim period in the regulatory overhaul process: the Legal Services Board is active but not yet fully on stream. That’s why some people were taken by surprise last fall when, with one day’s notice to the SRA, the Law Society commissioned a report to review the lawyer regulation process. That report’s author in turn commissioned a sub-report on whether current regulation of law firms serving corporate clients is satisfactory. It’s in the context of this mishmash of reports and political jostling that the Legal Services Policy Institute report was issued and needs to be understood.

The report’s premise, as I read it, is that a single regulatory framework can no longer properly govern the extreme range of solicitors’ practices in England & Wales. More specifically, the traditional framework, geared towards sole and small-firm practice in smaller communities, simply doesn’t work for the major corporate/commercial firms of London and their clients. In areas ranging from defalcations and conflicts of interest to client sophistication and lawyer transfers from other jurisdictions, rules meant for a smaller profession serving private clients constrain and damage global firms serving massive corporate and institutional clients.

The report’s recommended solutions are radical. While nodding towards a midway approach — merely modifying the current SRA regulations for large commercial firms — the report’s clear preference is to create a brand new regulatory regime for these large firms and the lawyers who work within them. This new regulator would create and administer new qualifying criteria and would even bestow a new title for these firms’ lawyers to use (the report refers to these, in uncomfortably Orwellian terms, as “NewReg,” “NewQual” and “NewTitle”). Here’s how the Institute summarizes its case for a new regulatory regime: Continue Reading

The disappearing associate

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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