The market for legal services will never be the same. The ongoing recession decreases demand for services and general counsel spending and increases price pressures from competition and clients. The munificence of yesterday is gone. Layoffs, hiring and promotion freezes, compensation cuts, evacuating pricey office real-estate, shrinking expense accounts, and other measures, unthinkable just five years ago, are the order of the day. The “new normal” has set in.
Yet there are many domains in which law firms remain stubbornly set in their ways, refusing to or reluctantly changing. A prime one is that consumers increasingly demand a breakdown of the “value-added” and how these firms are spending their money. Demonstrating value is difficult for any professional services firm, as products are often intangible, and in the case of law firms, preventatively so (i.e., a client is protected against legal action). But tracing revenues through a firm is not. Law firms are low capital operations that have three major expense categories: occupancy, information technology, and wages. Wages are by far the largest.
Continuing to charge exorbitant fees, often in excess of $1000 per hour in a price-sensitive environment is dubious practice. Who’s making this money? To be sure, quantifying compensation is tricky business. Partners may have helped establish the firm’s reputation, brought in important accounts, manage vital client relationships, develop associates, all of which are critical but complicated to price out. The fee is still pricey, but a lawyer who knows the organization, its customers, its exposure, and its industry, might well be worth it. It’s equivalent to enlisting a surgeon with dozens of successful procedures, or a CEO with a record of successful turnarounds. There’s no substitute for experience.
On the other hand, quantifying compensation for newly minted J.D.’s, with beginning annual salary packages often exceeding $150,000, not including bonuses, is, well, problematic. Gauging an associate’s contribution is at best guesswork.
The practice of paying high starting salaries was triggered in 1967 by the venerable Cravath, Swaine, and Moore. Their logic was more money draws top talent. Not to be outdone, the elite firms followed suit, soon followed by the industry as a whole. This was the old normal; one that consumers of legal services are loath to continue.
Skepticism of traditional billing practices for associates is rooted in the fundamental reality that fresh associates don’t know much about practicing law. They are hard-working and committed, but they’re not seasoned. Unfortunately, law schools, especially the elite ones, teach students the law but not how to practice law. The vast majority of law school faculty have little practice experience themselves. A law student can graduate, pass the bar, and be licensed to practice, without ever having met a client. Consequently, teaching of how to practice law is left to the firms and that cost is passed on to the clients in the form of substantial hourly rates for new associates.
Employers of new business, architecture, and accounting graduates don’t pass these “training” costs on to clients. Those new graduates apprentice for years until proven and promoted. Only then do their organizations charge a premium. Even M.D.’s toil for years before reaching the mark that lawyers do coming out of the gates. And those new MDs know they know less than nurses who they ostensibly direct, in spite of the fact that they’ve spent years as interns under the supervision of clinicians at teaching hospitals. The point is that new associates need time to develop, and passing the costs of that time onto a client is an old normal practice that will, and in many ways is, coming back to haunt even the most vaunted firms.
What is called for is a complete revamping of the way the legal profession teaches students and new lawyers how to practice law. The process of turning a bright, eager person into a competent practicing lawyer needs to be transformed throughout the educational process. Business, architecture, accounting, and medical schools all require internships, residencies, or other forms of experiential learning. Why this fundamental curricular elements is still lacking from law schools is, in legal parlance, pursuant to why law firms continue to charge high fees for inexperienced associates.
There is now discussion of, and some concrete progress in, revising the legal program of study to include clinical courses taught by practicing attorneys on practical subjects about how to practice. Client relationships—entirely ignored in the past—are finding a place too. The prestigious Chicago-based law firm of Kirkland & Ellis has recently made a $2.5 million grant to Stanford University to expand its clinical courses.
But the heavy lifting of transforming freshly minted graduates into reliably competent practitioners will still fall on law firms. The profession needs to rethink and perhaps reverse over 40 years of ever increasing starting salaries of their associates. These new lawyers are just as much interns as their counterparts in the teaching hospitals. Starting salaries need to go back to the level appropriate to a professional apprentice.
If the law schools, the law firms, and the organized bar, aren’t willing to embrace such a transformation, the readers of journals like this one, whose companies pay for this system of professional development, will have to get more involved. If not, the burden of the “old normal” will continue to fall on the client.
Carl Leonard is the Director of the Law Firm Leadership program at GWU and former Managing Partner of Morrison Foerster
For the Washington Business Journal version, click here.
- The New Normal - October 15, 2014
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Yes, the whole approach, not just the salary structure, of law firms needs to be changed. There are many interesting experiments going on, one of the most intriguing is led by Linda Ippolito, senior partner at Sheridan, Ippolito & Associates in Toronto, and world class pianist, who is bringing the approaches of musicians and musical ensembles into alternative dispute resolution, thus creating a transformed relationship with clients and with society.