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18 July 2008

Comments

Corey

"With all the technological improvements, why aren't legal fees going down?"

Because clients are no more paying hundreds an hour for lawyers to look stuff up on the internet than they were paying a few less hundreds "back in the day" for lawyers to look stuff up in books. Clients are paying for brand names, attorney client privilege, malpractice coverage, and deniablity.

Is that cynical? yes. True? yes. Imagine you want to force a competitor out of business. You can pay firm X five million dollars for years of highly technical patent lawsuits, or you can pay Cravath one million for an opinion letter, a threat letter that says "Cravath" on it, and a settlement offer phone call from a partner who is on the board of two fortune 500 companies. Top firms are not living or dying on the quality of any service capable of being improved via technology. Prestige is what is being sold, and that explains the bi-modality in my view.
It also explains why amlaw200 new associate salaries are not differentiated by talent/merit/prestige between the firms but profits per partner are.

Graham

Russ,

I think that Westlaw and Lexis have created what some older partners are calling the "westlaw generation" - and I don't think that it is a compliment. The accusation is that young lawyers simply search for sound bites and don't read cases any more. And obviously they are right.

If you look at a world without computers and the internet, lawyers wrote less and reasoned more. Now, unfortunately, there is a case somewhere out there (my "bosses" are "sure") that will support nearly any position. And young associates think that if they just spend enough time in front of a computer screen, they are going to find it.

But this shouldn't surprise anyone - the Supreme Court is an obvious example of legal blunderbus gone crazy. It shouldn't possibly take 40 pages to write every opinion. And neither do we need 40 page dissents to go along. Lawyers for the most part are simply people that want to shoot verbal bullets at each other, and the internet has simply given us more ammo. Its a shame.

Russ

Why are legal fees and legal salaries increasing at all? With all the technological improvements, why aren't legal fees going down? Lexis/Westlaw, the internet, computers, word processing--all these technical innovations make it far easier and faster to do legal work than ever before.

Shouldn't the technological improvements be exercising downward pressure on the costs of legal work?

As a companion question, why are lawyers working longer hours than ever before when all these technological improvements make their jobs infinitely easier than it was in 1950 or 1905?

HAL

1) I vehemently disagree that young associates are overpaid. You devote no treatment to the rising cost of tuition at the elite institutions preferred by the AMLaw 100. Total cost of a JD is about 200k at these places. How many years *should* it take to repay? How much did it cost in 1991?I think part of your analysis may be that it's overbroad to discuss the top 200 firms; I'd narrow it to the top 100 if not 50. At which point, you realize that billing rates for first-year associates are even higher, and if an associate bills a standard 2000 hours, 160k is actually pretty low given that firms stand to make 6-700k+ in revenue on that associate. Isn't that an unusually low labor share if you model production on a douglas-cobb model?

2) I believe it's "achilles heel" and not "heal", free edit, page 22 =)

3) Doesn't Wachtell do so well in part by charging success fees for M&A deals that are a % of the transaction, similar to financial advisors? I think that may fit with the model you propose. Similarly, I'd be more interested to see an exploration of areas in which cost pressures are intense -- labor and employment, for one. What might these alternative arrangements look like? Have some parties adopted them?

4) Ultimately, I feel like the inexorable economic conclusion is that there are too many lawyers and they waste too much time. Hypothetically, corporation ABC retains XYZ to handle all matters of labor and employment, for, say, a fixed price per year plus a fixed amount per dispute or executive hire. The only way for such an arrangement to be profitable is: XYZ has to spend less time (billable hours) solving these problems, hires fewer attorneys (or pays them less) and shares the savings with ABC (in the form of the fixed prices). Otherwise, it's just cost-cutting by another name. Either way, less money, fewer lawyers. Fine with me, I guess; it mostly just strengthens my conviction that the ABA should decertify every law school outside the top 50.


Michael F. Martin

Mr. biglaw partner:

The "superstar" distribution of salaries among musicians and athletes could have the characteristics you describe without being bimodal. For example, they could be poisson distributions.

The bimodality is not definitive proof of instability; but it's not good!

biglaw partner

Luckily, this is just a blog comment, so that rule that "only those who have done the reading are entitled to participate in the discussion" doesn't apply. I'll try to read the paper later, but, in the meantime, here goes.

I would think that the most likely development for first-year associate salaries in the foreseeable future (10 to 20 years) would be a continued spreading of the top hump of the distribution, as second-tier firms make less of an effort to match the very top tier. To some extent, this has already happened: a chart that included first-year bonuses would reflect a considerable difference between first years at, say, Simpson Thacher and DLA Piper.

Other than that, I don't see how the charts or the analysis indicates that the "wheels are falling off." Any time there is a wave of salary increases, corporate GC's complain about first year associate pay at biglaw. There isn't any real evidence that I know of to believe that they are generally refusing to have matters staffed by junior lawyers. Also, the chart of ratios between first year pay and equity partner pay is interesting, but it doesn't prove that the current situation is unstable. It's common for the junior people in a field to have similar incomes while there is substantial divergence at the top. Take a look, for example, at the pay of baseball players or musicians. Or professors, I think.

Michael F. Martin

If you integrate that bimodal distribution up into a cumulative distribution, then you get something that looks a bit like a Friedman-Savage double-inflection utility curve, no?

If I remember right, Friedman and Savage thought this kind of function suggested class differences.

I'm not sure I agree with their interpretation. The double-inflection utility curve could be a cross-section of a two-dimensional surface showing concavity and convexity over different periods of time.

Corey

Congrats on the Stanford placement for your Elastic Tournament article! One note on it: I took a career detour but I am in the "millenial" lawyer peer group (as my comments above will also prove.) Your article's description of "us" sounds like it was written by and for boomers. In reality, we end up working as hard or harder than the boomers did, just without the blinders on. (Nothing like watching your dad lose his 30-year job and pension in an "economic" layoff to give a little perspective.)

The walk to school in the snow gets longer every time the story gets told. I have a hard time buying that these partners worked so much harder for so much less when I start historical pricing houses and lifestyles several decades back.

I wouldn't attribute any difference between boomers and millenials to work ethic, but rather to the gradual failure of the Horatio Alger myth as a motivator, when read against an increasing postmodern skepticism and alienation. I know how to motivate my peers to work hard, but I have yet to find a partnership or a client quite that progressive.

Anyway, a side point on an article that will undoubtedly create much interest.

Corey

I think the associate to partner pay chart is neat, but like many things in the legal market, it tends to over-emphasize the dramatic results at the topmost tier.

In any other universe, a business that can make 3 or 4 times salary in revenue on a first or second year employee is doing wonders. The fact that Wachtell and Cravath can skim $2M per partner off the mergers and bankruptcies of the world's leading brands doesn't mean that all firms have to run on that model. The fact that Wachtell and Cravath can motivate law grads to bill 2500 hours on the same salary everyone else gets is just a function of elitism and gullibility, and has nothing to do with the question of whether paying a new lawyer $160K to bill 1800 hours at $300/hr ($540K) makes sense or is sustainable.

Here is the positive spin:

Billing rates have gone up with salary increases. The salary/revenue ratio for an associate working X hours is the same at $160K as it was at the $125K level. Of course the associate and the firm are splitting a bigger pot so both make more.
Maybe some clients grumble about paying new law school grads $300 an hour, but that second mode on the chart is pretty narrow. Going down to the first mode isn't an option for most GCs, who fear having to go to their boards with a lost big case/deal after choosing "second rate" attorneys.

And here is the negative view:

Of course the wheels are falling off. Of course you are right that the firms are asking for more work and making fewer partners. Attrition is up, layoffs are no longer unheard of, work is getting outsourced to contract attorney sweatshops. Morale is down, inspiration is down. People with ideals are marginalized for the sake of the bottom line. Everything and everyone is fungible. Loyalty (from both sides) is incommensurable thus suspect. Associates have been quietly and unawares converted from professionals to wage slaves.

Is anyone suprised? The same process has happened to engineers and to just about every other profession over the last 30 years. As far back as high school I have been called a gen X slacker while working away my life and watching the boomer generation gradually consolidate wealth in a smaller and smaller demographic. There is a grand pessimism that has been wrought on my peer group. The unaware or cynical ones step lively for Cravath and get picked up to help perpetuate the system. The rest just find a reasonable job to pay the bills and try not to comprehend the brutality of it all.

Is that sustainable? Yes. It runs on mythology. Hard work makes good. Everyone has a shot at a Cravath partnership if one is just smart, dedicated, and plucky enough. American Dream 101. If that guy can do it so can all hundred of us!

One commentor pointed out that summer programs are pointless if everyone gets an offer. For the amlaw 100 I disagree. How many filet dinners at Partner X's Hamptons estate does it take to make a 24-year-old dump his sweetheart and sign on for 2500 billable hours? The summer program is a pitch too.

Jeff Yates

[cross posted on Voir Dire Blog]

1. Notwithstanding the tendency toward a more central salary distribution in 1991, I recall a curious lack of linearity to relative credentials and the market at that time. It seemed that while top 10% to 15% students had great opportunities, the correlation between class rank and opportunities tailed off considerably with the remaining students. In other words, there wasn’t a huge difference between being in the top third and the bottom third. This is certainly an unscientific observation and limited to one person’s experience.

2. It seems that large law firms would be better served by simply waiting around a couple of years to see how new lawyers developed and then cherry picking the best ones from firms that can’t compete with the salaries they could offer. Compare this with the ridiculous amounts of money, time, and resources devoted to summer associate programs that are arguably not even used for evaluation anymore since nearly everyone gets an offer. Perhaps this odd situation is driven by a difficulty in systematically measuring lawyering ability beyond grades or prestige of degree granting institution.

3. Bill seems to imply that the Craveth model (and its accompanying salary distribution) is not sustainable. I agree that it seems a bit nonsensical, but how is it not sustainable? A lot of inefficient, unfair, and silly systems persist for very long periods of time. What is the mechanism by which it will fail? Will clients run away from these firms to small or medium firms with specialized practices? Will the “high end” practices such as securities and white collar criminal defense splinter off into boutique firms and leave the remaining practice areas partners high and dry? What about lawyer supply systems - will undergrads quit choosing to go to law school?

4. Jim Chen has a nice follow up post on Moneylaw here, naming Bill’s post as the “post of the year.”

Vickie Pynchon

when a partner at a second tier firm in the year 2000 I repeatedly suggested we abandon our expensive summer associate program and stop hiring 1st and 2nd year lawyers , letting the amlaw 100 train them. It would be suicide I was assured. We were acquired after I left. Suicide by merger.

recent ls grad

Incidentally, the "Cravath System," at least as it's pitched to potential incoming associates these days, refers to Cravath's practice of assigning each associate to a (approximately) a pair of partners for about 18 months, and then switching him/her to another set in a different focus area (within the corporate or litigation dept.). Their system, so the story goes, is to be contrasted with other firms that pigeonhole associates as quickly as possible.

Indeed, your statistic that in the early 60s "73% of Detroit lawyers working in law firms . . . went to one of five national schools" makes me skeptical of the notion that Cravath really invented prestige-whoring at large law firms. Were these Detroit firms really looking to Cravath in making those hiring decisions.

Anyway, any explanation of the current nature of large law firms has to begin with the Securities Exchange Act of 1934 (and probably end there, too).

Archana

This is very interesting, Bill, and certainly illustrates the salary distribution I recall hearing about when I graduated in 2001. I had no idea it was such a new phenomenon. I look forward to reading the working paper...

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