Thursday, April 30, 2009

The Upheaval in the Market for New Lawyers at the Big Law Firms: Temporary or Permanent?

Moving to the front from April 15; many readers will be interested in Professor Henderson's observations in the comment section, which were just posted today.

One need only look at this extraordinary list of leading law firms pushing back the start dates of their new associates to realize that the market model of the elite law firms is now in crisis.  The question is what the future holds.  A permanent contraction in the most lucrative sector of the private legal market is going to have effects on law schools, especially those just outside the most elite ranks, but also those within those ranks, which can expect declines in alumni support and a higher number of their graduates taking less lucrative jobs.   I'm hoping Bill Henderson (Indiana) will weigh in on these developments, but I'm also interested in hearing from others.  What does the future hold?  Is there a silver lining to these developments (will, e.g., public sector jobs become more attractive to the best new law graduates as private sector jobs and salaries decline?).  Comments are open; signed comments only.  Post only once, comments may take awhile to appear.

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I think that the law market has perhaps contracted for corporate folks permanently. Companies were already moving a substantial amount of valuation work inside, and relying on the banks only for fairness opinions. Don't see why they wouldn't start doing the same for the legal aspect of M&A. For litigation, as long as there are prosecutions and administrative investigations, there will be a demand. There might be a contraction in "elective" litigation.

As for effect on law schools, the real question is not whether there's a contraction at all, but whether there is a smaller contraction compared to the finance or consulting industries (I expect there will be). A legal career might still be a more risk-averse, if less lucrative, path to take. That said, the cost of good law schools is ridiculous and could use a reality check. But that might lead to a decrease in faculty salaries, which could create a dearth of new law professors.

Posted by: jaebersole | Apr 17, 2009 11:21:31 AM


I have been spending a lot of time talking to lawyers these days, with a wide representations geographically and in terms of traditional "white shoe" prestige.

In a nutshell, there is a fairly general consensus that the bubble has permanently burst on the traditional BigLaw model that produces the $160K salary structure. The high leverage firms in major markets are reeling the most, primarily because there is a lot less money being spend by GC's, and they are imposing brutal cost containment strategies. The problem is two-fold: 1) how does a firm de-leverage without damaging its "brand" (law firm managers are probably too conservative on this issue, but the plentiful layoffs provide plenty of cover right now)? and 2) how will the reduced pie be allocated in such a way that the biggest rainmakers don't leave the firm? Stated enough way, "will there be enough profits to keep these rainmakers at the firm?"

And right now, the extent of the BigLaw revenue drop is still unknown (only the last quarter of 2008 was miserable, but all of 2009 could be bleak). Since Profits = Revenues - Costs, cost containment is viewed as key in a way that has never before been seen by fancy corporate law firms.

Two senior lawyers I know with large Am Law firms, both of whom have management duties, told me "there are no jobs right now -- none. Everyone in over capacity. The deferment to January 2010 will likely to until September 2010." Obviously, this would have a huge impact on the Class of 2010, not to mention 2009.

The fact of the matter is that some firms are going to find that money to shore up profits not by reducing the pay of "service partners" (that is going to happen as well), but by reducing associate pay or, at a minimum, shift the risk of lackluster performance to the associates. In other words, $140K or $160K may be the starting pay, but every extra dollar above that will be "merit-based." Other firms are likely to move to much lower starting salaries to enable billing rates that permit bona fide associate training on the client's dime -- in many respects, a sane win-win solution.

Other conversations I have had recently suggest that regional firms are going to be the real winners. They are responsive and cost-effectiveness, and GCs have zero ability to go over budget in the current environment. There is a general perception among many that national law school credentials are not required for motivated, high quality, cost-effective legal talent. At a minimum, regional firms are going to get the opportunity to do work that formerly went to DC, Chicago, NY, or West Coast powerhouses.

At the end of the day, the market is going to look a lot more heterogeneous, which is a good thing because it will reflect original thinking and innovation, rather than mindless copy-cat versions of the Cravath model. In addition, a brand name law school is not going to command the same market clout. Many, many GCs are less impressed by "brand" than by cost containment and results. Elite Big Law will survive, but the frothy Wall Street bubble that produced the extraordinary entry level market of 2002-2007 is over. Clients refuse -- REFUSE -- to have first year associates billed to their matters when those associates leave after two years. Numerous law firm partners have told me about natural experiments in which associate from regional law school A, who everyone underestimated, outperformed entitled and complacent associates from national law school B. The firms are now systematically studying these observations using the techniques of industrial psychology. It is very interesting stuff.

Posted by: William Henderson | Apr 30, 2009 1:50:10 PM

I am lawyer at a big law firm and still have my job (patent litigation remains strong). With each passing day it becomes more clear that this economic downturn is exremely serious, and will lead to a long-lasting, if not permanent, contraction in the legal market. This contraction will manifest itself in fewer firms, fewer jobs and lower salaries. Given the dearth of legal jobs and lower salaries, some lower tier law schools will become unnecessary, while higher ranked ones will need to reduce the ridiculously high tuitions they now impose on students. With that, law professor will also have to take pay cuts sooner or later.

Posted by: Anonymous | Apr 30, 2009 3:22:13 PM

What we are seeing is cost containment, by highly risk-averse actors, in a market that exploded geometrically. Remember, it was just last year that it was being predicted that the NLJ 250 would soon hire 5,000+ graduates each year (with various people making predictions about what effects that would have on law schools).

I'm also skeptical about current predictions. My sense is that there are a lot of companies and very rich people who will pay top dollar for law firms to represent them in the litigation that will ensue (I hope) from the current (and yet to come) scandals. Litigation of this sort is highly leveraged. Regulatory enforcement may make a comeback. (Who's Obama got running antitrust?). Law firms initially will buy litigators in a spot market - which is being created by the layoffs - but I don't see why they will not want to create long-term contracts with superior litigators.

As for the predictions about cost containment by general counsel, this is hardly a new tale, and is likely to fall (as it has before) by the prospect - or demonstration effect - of one bad result.

Posted by: Robert Rosen | Apr 30, 2009 10:22:53 PM

Despite everything that is going on in the legal world, state legislatures are still trying to build new law schools. Three new law schools in New York state (SUNY Binghamton and Stony Brook, and another one in Rochester), California is opening one in Irvine despite its severe budget crisis, the Texas legislature is debating a new public law school in Dallas, there has been planning for a school in Hartford, a branch of the UBaltimore school in PG county Maryland, and there was planning for a school in Wilkes-Barre Pannsylvania. in the planning process for all these schools, there is a lot of focus on stimulating the local economies, but no one seems to ask the basic question -- do we need more lawyers than the current number of law schools are producing?

Posted by: James Garrison | May 1, 2009 6:01:25 AM

I hope someone is keeping his or her eye on profits per partner. If these amounts go up (or even stay constant) in a 2009 where associates get fired or deferred, law students receive fewer interviews and summer offers, GC have to deal with slashed budgets (per Bill Henderson), and business transactions are way down, then these people--whose consistent posture has been that they're doing business in good faith and would NEVER exploit the unfortunate economy for their own gain--have some explaining to do. If any elite firm that is deferring new hires or laying off lawyers has said that its partners have resolved to take home less in 2009 to share in the general pain, I missed the announcement.

Posted by: Anita Bernstein | May 1, 2009 8:53:58 AM

Anita - Apparently, you have not been reading the news or announcements by many law firms. My firm has announced a budget that shows a decline in profits per partner, with the equity partners carrying all the risk that the profits could be much lower than budgeted. Unfortunately, we have had some layoffs and have made some modest salary cuts, etc. We are doing business in good faith. We are working to save jobs and protect as many of our employees as possible. We are taking substantial risk as business owners. If we manage our risks and protect our business, work to protect as many of our employees as we believe reasonably possible, and we wind up doing better than expected in the end are we evil?

Posted by: Anonymous | May 8, 2009 6:42:52 AM

I think the frustration that Anita expresses is typical of law students and young associates right now--I am a 2L at Univ. of Texas and know that I have had similar thoughts. No, firms are not evil if they cut costs during a recession and stay profitable. But the tone of many of the "push back" announcements has been almost accusatory towards law students and young lawyers, like somehow we are to blame for the $160k salaries. See the email from Gardere's managing partner for an example. The announcements also commonly present the decision to push back as the result of a clear choice between firing people and pushing back start dates; however, the third choice is patently obvious to all of us, yet never discussed. All of this talk about changing the business model of practicing law is great and all, but remember that we went to law school on the old model. I go to a public law school with in-state tuition and I will leave with over $90k in student debt. In other words, we have mortgages too, just without the houses to go with them.

I think the worst outcome of all of this is that it has become entirely commonplace for law firms to treat young lawyers like commodities. If that's reality, then fine. But firms should not expect anything more from their young lawyers than the minimum required effort. Likewise, don't be surprised when associates jump ship after two years for something better.

Posted by: David | May 12, 2009 11:55:35 PM

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