The New Normal

Merging law schools, merging firms: What does it mean?

By Paul Lippe

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Paul Lippe

Last week brought the announcement that William Mitchell and Hamline law schools of St. Paul, Minnesota are merging.

Hamline is the smaller of the two, part of a smaller private university; Mitchell (full disclosure, I have had some engagement with Mitchell) is a medium-sized, long-standing, innovative stand-alone school generally considered #2 in that market. The University of Minnesota, one of the top public schools in the country, is considered #1. (St. Thomas is the other school in the Twin Cities.) All the schools are close to one another, and the Minnesota legal market is overwhelmingly concentrated in the Twin Cities, with sophisticated corporate legal departments and banks, but a low penetration of global or even national firms.

As one (non-Minnesota) dean said to me a few months ago, “there are four schools in a market that can only support two.”

By merging, Mitchell and Hamline create a clear #2 with enhanced chances of survival, and the ability to do a better job for students.

Presumably the combined school will be smaller than each school alone, and it would be hard to imagine that there wouldn’t be some reduction in faculty numbers and other costs. Credit goes to both boards, but especially Hamline’s, for stepping up to a tough decision.

Fundamentally this merger is about reducing capacity in the face of reduced demand in a regionally constrained market, and hopefully will also be a catalyst to continued improvement in value, such as Mitchell’s first-in-the-country distance learning program.

Following the announcement, I got emails from several law school deans speculating “who is next?”

With law school enrollment down by a third and no signs of a turnaround, will one third of schools merge? Let’s think through the situation from the perspective of the “weaker” law schools. Despite everything we say here at The New Normal about the value of innovation and the potential for doing a better job in law, law services and education remain highly subjective and so will remain dominantly about reputation. In the U.S. News ranking schema, it is almost impossible to move your ranking significantly, since rankings are recursively about spending and reputation.

So there are 50 or more schools, under varying structures (stand-alone, part of public universities, and part of private universities), now facing multiyear deficits and a very low probability of real increases in enrollment. But the cost of merging is not trivial, and requires funding faculty buyouts and other transition costs, and some level of institutional surrender and loss of face. In most institutions, the merger costs would probably be two to five times the loss in the current year, so the natural instinct would be to say “hold on, things will turn around,” to defer the pain.

The greatest losers from a school going out of business (versus merging) are likely to be alumni; other schools would be more than willing to pick up paying students, whereas an alum would see a material devaluation of the degree. The vulnerability of those alumni points up the danger to the weaker schools at a time when many question the value of a law degree. Any hint that a school might go out of business will further flatten new enrollment. But continuing to suppress a school’s obvious weakness rather than coming up with a plan to deal with it only reduces the chance of a successful transition. The irony/tragedy is that the less “elite” a law school is, the more it seems wedded to the values of the elite, and less willing to innovate; yet without a plan to innovate, the weaker 50 schools will all go out of business.

Until recently most law schools have been financially sound, and usually seen as adding the prestige of a university. Schools have been adding law schools, not divesting them; stand-alone schools have been merging into large systems. So it’s no surprise that there is still a lot of denial. Hopefully the Mitchell-Hamline merger will embolden many schools’ boards into making the right decision for their long-term futures.

If we look at the recent “merger” between Bingham and Morgan Lewis, we see very different factors at work. First, both firms were themselves the product of many mergers. Second, there was no sense in which Bingham was no longer financially viable, only that it couldn’t pay out as much in annual income to partners as it could previously and as those partners could (in theory) make in another structure. Bingham was not financially vulnerable in absolute terms, but only in relative terms, either relative to other firms or relative to partners’ hard-to-meet expectations. Third, both firms are highly geographically distributed, so there’s no sense in which the combination will reduce net capacity, although the combined firm will be smaller than the two firms alone were. Any Bingham lawyers who don’t want or weren’t invited to join Morgan will probably find another firm that suits them better. Finally, there was no longer even any pretense (as there was in previous firm mergers) that the combination was about benefiting clients (who are certainly not clamoring for firm mergers); the purpose of the merger was to enhance the financial situation of those partners in either firm driving it.

So the two principal differences between the school and firm mergers are (i) the school market is much more geographically circumscribed and (ii) the law school market is much more institutional, rather than about individual faculty, who as a result have less mobility (that is less true at the super-elite schools). The principal similarity is that in reputationally driven markets like firms or schools, size—despite its complications—is an inherent advantage in visibility and perceived prestige.

If we handicap the law schools, the situation is pretty obvious. The top 20-30 private schools will be fine, as will the flagship state public university law school in nearly every state. (Fine doesn’t mean doing an optimal job for students, so hopefully schools will continue to make an effort to reduce their costs and improve their value and return to their mission, even if they don’t face an existential threat). Every other school faces increasing pressure from their provosts and central administration to develop a clear plan. Many will have no obvious merger partner; others will be unwilling to make tough choices; an accelerating number will go out of business. Most schools are shrinking, which makes no sense as a strategy—the only reason is to preserve the average incoming LSAT score for U.S. News purposes.

While the paths for the schools in the top and bottom quintiles are perhaps pre-ordained, for the three fifths in the middle we can continue to hope that U.S. News will find a way to measure quality and value enhancements to the curriculum.

I had the opportunity to speak to a cross-section of the Oregon bar in Portland a few months ago, and have a similar opportunity in Denver at the Inn of Doyle on February 25. While much of the coverage of the legal profession is national in scope, much of the reality is regional. As the institutions of law, especially firms and law schools, struggle to adapt to the new normal, I am optimistic that we will see folks coming together at the regional level (Oregon or Minnesota or Colorado), where lawyers can step back a bit from the AmLaw and U.S. News rankings arms races and reconsider their underlying purpose at a time of accelerating change.

I would hope that in nearly every state, leaders of the bar will convene a statewide summit to examine the challenges facing legal institutions, including law schools, and find a way to successfully embrace chance to do a better job, not continue to deny it.

Paul Lippe is the CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering.

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