Law Practice Management
Will ‘Economic Edifice’ of BigLaw Crumble in the Recession?
Posted Jul 30, 2009 7:37 AM CST
By Debra Cassens Weiss
In the boom times, big law firms reaped big fees and relentlessly expanded, pushing the average take home pay for partners to a million dollars or more.
These firms had fallen prey “to the same strain of hubris that infected their clients,” legal journalist Douglas McCollam writes in an opinion column for the Wall Street Journal. Big law firms “embarked on empire building” as they opened new offices and merged with smaller rivals, “confident that the future belonged not so much to the best and the brightest as to the biggest.”
But now law firms are suffering along with their clients. Almost 3,000 partners and associates have been laid off (other reports would put that figure at more than 4,000), and average partner compensation has fallen, declining almost 24 percent at Cravath, Swaine & Moore and 17 percent at Davis Polk & Wardwell, McCollam writes. He goes on to wonder whether the decline of BigLaw also means the demise of the billable hour and the big law firm model.
“At bottom, what’s in question is the whole economic edifice of the modern American law firm,” McCollam says. “Like the pharaohs of old, big firms are enamored of constructing pyramids with an ever-widening base of associates and nonequity partners toiling on behalf of a narrowing band of equity partners at the top. Increasing a firm’s ‘leverage’—as expressed through the billable hour, one of the most pernicious creations in the annals of commerce—has been the key metric driving profitability at big law firms over the last generation.
“Numerous studies have documented the deleterious impact this model has had upon the legal profession and clients. To date, nothing has been able to kill it. It would be ironic indeed if the economic downturn that has cost lawyers so much ended up being the very thing that saved the legal profession from its own excess.”
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Comments
sue
Jul 30, 2009 8:52 AM CST
BigLaw will never die. It’s just a downturn.
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JR
Jul 30, 2009 10:21 AM CST
sue, people said the same thing about the Big 3 car companies. The billable hour makes no sense, as it puts premium on time, not creativity and should go the way of the dinosaur.
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B. McLeod
Jul 30, 2009 10:21 AM CST
Indeed, for the downturn to totally knock BigLaw in the head is likely too much to hope for.
However, thousands spewed forth from the bowels of BigLaw during the downturn will never again traverse its inhospitable bourne. Many clients also have availed themselves of the occasion, to take their leave. Although the maleficent institution of BigLaw may churn on and on, at least, it has been weakened, and some fortunate attorneys and clients have thrown off its oppressive yoke.
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DB
Jul 30, 2009 10:49 AM CST
There is an important distinction between the billable hour and leverage. Billable hours are an otherwise neutral valuation of services. Leverage is an abuse of that valuation. Law firms become extemely large so they can maximize leverage, i.e, more effectivley abuse the billable hour. But remember that retainers and other forms of service valuations can also be abused. There is nothing wrong with the billable hour- lawyers just need to stop its abuse. If they don’t do so voluntarily, then the market will do it for them.
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James
Jul 30, 2009 1:04 PM CST
Um… the big three car companies are still here. GM in particular has the technology to be a viable player now that’s it’s shed it’s toxic union obligations. Too bad this didn’t happen during a Republican President’s terms… the United Auto Workers would have gotten their just deserts instead of an unearned ownership interest.
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Rob
Jul 31, 2009 3:50 AM CST
James - funny, it could have happened during a Republican administration except that the Bush admin. gave loans to all three in order to avoid addressing the situation. Also, apostrophes don’t quite work the way you think they do.
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Bill A. Bullhour
Jul 31, 2009 7:04 AM CST
The reports of my demise have been greatly exaggerated.
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Schadenfreude
Jul 31, 2009 7:06 AM CST
@ James:
LOL!!
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Bill Cobb
Jul 31, 2009 7:22 AM CST
When the value billing task force of the Law Practice Management Section of the ABA was formed to write it first of three books “Beyond the Billable Hour” (1989) we say the ineffeciency and abuse of hourly billing. Big firms and the alumni of big firms in corporate counsel refused to take the risk of moving away from the billable hour. Now the tipping point has been reached. Leverage is good as long as it is used properly and efficiently. Lawyers in small firms and a few lawyers in large firms with the trust of their clients have moved off the billable hour. All it takes is guts, debriefings to improve efficiency, and building maps of the process to make value billing work. Try it, it works and stop trying to transfer the risk to the client.
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horace
Jul 31, 2009 7:23 AM CST
Valuing professional services is inherently difficult. The billable hour is a benchmark, and an important one. Measuring “value” of the services is difficult and fraught with the likelihood of dispute. Clients typically resist paying fees in excess of the billable hours, and today seek discounts. Even in more halcyon times, they think lawyers should be their downside partners and should not participate in the clients’ economic prosperity, with rare exceptions. It has always been thus, but the fee pressures are greater today than they were before.
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smh
Jul 31, 2009 8:15 AM CST
Stain of Hubris. Sounds like the title of an upcoming best seller (Tom Wolfe, are you listening? Mmovie Deal too?)
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Jorge Angell
Jul 31, 2009 8:52 AM CST
BigBusiness will always need BigLaw. There is no way a small firm can handle big M&A work.
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Roy Richie
Jul 31, 2009 8:57 AM CST
In my experience, the principal culprits in the continued existence of Big Law are the General Counsels of Fortune 500 public companies. At the beginning of each fiscal year, they are allocated a certain amount of funds to do the Company’s legal business. These funds are typically reserved, per accounting rules, and the trick is that any savings they achieve during the year do not get added back to quarterly or annual revenue or income. Therefore, the finance people in the Company (and the CEO/COO) do not care deeply how much money is spent or saved from this legal reserve (because once reserved, these funds cannot enhance the financial performance of the Company), and the General Counsel is free (so long as he or she does not go back and request additional funds) to spend the money as he or she sees fit. There is simply no incentive beyond or above the General Counsel to save money, and again, typically, the General Counsel has too many political considerations to make achieving savings the first priority. Also, General Counsels don’t get paid to save money; they get paid to solve problems, problems that no other officer in the Company completely understands and problems that are capable of description that can be real scary. As long as they meet their budgets, stay within the reserve, and solve the problems, their stock goes up. It is also true that the least risky position is to hire the biggest firm available, so that if a mistake is made or the wrong result is achieved, they can report genuinely and honestly that it was the law firm’s fault, and not theirs. That is the critical path to success (i.e. keeping their jobs, income and bonuses). Some may call this a lack of courage and creativity, but the name callers are not General Counsels, and clearly do not understand how to do the job. But Big Law will not end or change until this paradigm is changed.
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Mike in Portland
Jul 31, 2009 9:15 AM CST
More BIG LAW firms will fail because: 1) they achieve no economies of scale; 2) they (incorrectly) don’t believe in elasticity of demand for legal services; 3) (unlike in the past) they provide miserable environments for their associates and 4) they fail to realize that because of 1, 2, and 3, great, small regional law firms that have managed to lure away the best BIG LAW associates will gain a larger share of big corporations’ work because they can provide the same level of quality at a better price. I say this as a former General Counsel of a large company, a long-time shareholder in a failed BIG LAW firm and a proud participant in an excellent regional law firm with associates every bit as good (and better treated) than in my old BIG LAW firm. I do not wish this fate on my BIG LAW colleagues—but they ignore the warning signs and global trends at their peril.
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Kalifornia Arnold
Jul 31, 2009 9:19 AM CST
We can only hope.
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B. McLeod
Jul 31, 2009 9:34 AM CST
I think the best GCs entertain competitive proposals for major cases, and as part of the process, require the candidates to include and explain proposed staffing and case budget. Given that the biggest firm and the solo practitioner are both likely, today, to have exactly the same research access, having more staff is not an advantage unless something about the case actually requires more staff. About the only thing that ever really does is unusually large discovery volume (and several companies have started to control and outsource some of this separately). Hence, why pay for a team of twenty lawyers plus support staff, plus the overhead of the thousands of additional lawyers in the firm, when all the case really needs is two lawyers and a paralegal?
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Biggest Law
Jul 31, 2009 10:27 AM CST
Roy Richie is exactly right. This is why the biggest companies will always use Big Law.
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DC cog
Jul 31, 2009 11:28 AM CST
Mike in Portland: You make a good case for why smaller regional law firms are a good fit for both the attorneys and the clients. The only thing that the regional firms lack in comparison to BIG LAW is the outsize paycheck. But I don’t think a $700k/yr salary really creates that much more happiness in life than a $300k/yr salary. The problem for attorneys in this economy, however, is that there are not even that many spots in regional firms for those attorneys looking for a better life and willing to do with lesser pay. If I’m wrong, let me know. Working at a mid-size firm in Portland sounds like heaven to this BIG LAW slug!!!
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Idiotboy
Jul 31, 2009 12:20 PM CST
If I read one more article about the demise of the billable hour, I think I’ll puke.
The bitching has nothing to do with the billable hour itself - people are really complaining about how much legal services cost. If we - BigLaw - could move to “flat rates” and still make the same amount of money, it would happen only two ways (i) we’d increase leverage to reduce our costs or (ii) the average transaction would have to carry larger premiums (i.e., the 50% of clients who help us be efficient would subsidize the other 50% who contribute mightily to ineffciency).
And to whomever made the idiotic argument that the billable hour “shifts the risk” to the client… please. Most of the time it is the *client* who causes the inefficiency - backtracking on decisions, holding onto ridiculous negotiating positions, demanding senior staffing where junior staffing would suffice, etc. And when the firm itself is to blame for the inefficiency, the fat gets written off through write offs.
People have been bitching about the billable hour for as long as I’ve been alive, but it is still the dominant means of paying for legal services (not to mention accounting, management consulting, etc.). In a market economy with intense competition, if the billable hour weren’t intrinsically fair and efficient, it would have died out long ago.
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gea
Jul 31, 2009 12:54 PM CST
Well, Idiotboy, I really love your comment. I don’t know if it is true, but it is good to hear another side. So, what are companies and individuals really upset about, if it is not the billable hour? The easy victim for them to point out is the recently graduated attorney, who is allegedly overpaid. The second culprit is the overpaid partners and associates. Lastly, I have read that flat fees encourages honesty, whereas billiable hours encourages avarice. My observation is that a kraft hotdog sold in a calvin klein box at 12 dollars doesn’t taste any better than one sold in a paper napkin, but that people enjoy paying penthouse prices because it makes them feel special. If the penthouse companys start farming their work out to the small and mid-sized law firms, then the penthouse law firms will lower their prices. But whether we like or not, many of us like exclusivity and prefer the penthouse view to a walk in the park. I don’t think that is going to change without a change in our education and socieity’s values.
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CodePink
Jul 31, 2009 2:45 PM CST
If my multibillion dollar firm was planning a merger deal, was in BIG trouble, was trying to head off or manage a massive product recall or avoid a false advertising claim, I would go to the biggest law firm with the biggest name. Why? Because if something went wrong, at least I would be able explain to my shareholders that I hired the biggest firm, with the most sacred cow statesmen/women, powered by a battalion of worker bees who were the top 10 percent performers from the top 10 schools. Playing defense will keep BigLaw employed. When your exposure is hundreds of millions of dollars, a legal bill for $2 or 20 million is a drop in the bucket. And all the rest, who either could not make it to (or at) BigLaw, will continue to throw rocks at the Ivory Tower. You don’t have to like it. But you do have to respect it. Their track record does not lie.
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B. McLeod
Jul 31, 2009 3:45 PM CST
And yet, the salary cuts, the massive layoffs and the few (so far) total implosions. . .
No, I actually don’t have to respect it (and if I were a GC, I wouldn’t hire any of them, except for the hugest of huge transactions that really might need all that staff).
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Bubba
Aug 2, 2009 12:25 PM CST
As long as foolish people continue to rise in corporate America, “biglaw” will have a client base. Smart people don’t pay hundreds an hour for numbskulls fresh out of law school, but corporate America does. Never mind that small firms can do just about everything just as well and for a fraction of the cost. Oh well, it’s just money.
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Romesh
Aug 2, 2009 12:28 PM CST
Most of the transactional work done by the large firms is commodity work that could easily be handed in India for pennies on the dollar. Think anyone will figure this out?
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Mid law cog
Aug 3, 2009 8:01 AM CST
“But I don’t think a $700k/yr salary really creates that much more happiness in life than a $300k/yr salary. “
Well DC cog, you should really compare associate pay. I can assure you that $160,000 would make me must happier than the $68,000 I am making as a 2 year associate in the much touted mid-law.
The bottom line is that alot of so-called lifestyle mid law firms require almost as many billable hours for about 1/3 of the the pay of Biglaw. i.e. 2200 billables for $160,000 v. 2000 billbales for $65-$75,000 for a first year associate.
Would you take a 60% pay cut for only a 9% reduction in hours?
Or put another way, yes I would bill 200 extra hours a year for an extra $100,000.
Mid law has almost as many pressures, maybe more, because you have more responsibility…..and the compensation is much worse.
People who say that more money does not equal more happiness have usually already horded alot of money.
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B. McLeod
Aug 3, 2009 2:25 PM CST
Heh. True. But in the context of having hoarded some suitable amount, thereafter, more money does not equal more happiness.
Perhaps this explains why some people start at large firms, but leave after an appropriate period of hoarding. What? What’s that? It’s not “hoarding”? Oh. . . Never mind.
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Hadley V. Baxendale
Aug 4, 2009 7:49 AM CST
people who say money can’t buy happiness just don’t know where to shop.
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