Update

It's been ages since our last post. In our defense, we've been working on a grander vision for NextLex. In that vein, for all of our readers (yes, all 3 of you), we've moved to www.nextlex.net -- it's quasi-wire frame until we finish the beta, but we will continue (OK, start) blogging in our new home, delivering useful articles, links, and other informational sundries.

Come check out the new digs!

What's wrong with the business of law? -- Continued

Over at law.com, Nathan Carlile writes about pay compression between senior associates and junior partners. The piece is intriguing, undoubtedly ample fodder for future posts. For the moment let me direct you to one thought:

Headaches over compression go back generations, consultants say, with smaller, less profitable firms especially hard-hit. That's because the market determines associate salaries, but profits determine partner pay. And the two don't always match up.

While it's true that partner profits have also increased -- Carlile mentions 76% growth over the past 8 years at Patton Boggs -- two points are warranted. First, 76% over 8 years is about 7% per year, just 4.4% on an inflation adjusted basis. That's the mark of a business growing in line with the economy; a stable industry, without much going on in the way of innovation, almost a commodity.

Second, as mentioned before, the value for legal services is far from clear when based on a billable hour. No doubt stellar academics and logical adroitness are essential for admission to a top 10 law school, but it can't seriously justify $250-$350 per hour of due diligence and glorified paralegal work. Without a better articulation of an attorney's value proposition, an anemically stable 4.4% will likely drop further still.

There is perhaps no better way to illustrate the problems with the business of law. If the market tells you your cost of goods (associate talent) are increasing to such an extent that profits are compressed, bandaids won't help. Perhaps a brutally honest examination of your business model might be a good place to start.

What's wrong with the business of law? Quantifying the return on investment of legal services

Expanding on my earlier post, it occurs to me that the law firm model itself is largely to blame for associate attrition. At its most basic level, the practice of law is a service business, meaning revenue growth requires delivering more units of labor. Based on a billable hour paradigm, growing partner profits means profitably outsourcing work to other attorneys, specifically junior associates. Keeping this relationship profitable means dancing between ardently developing the skill sets of junior associates and keeping them doing grunt work as long as possible.

As argued previously, better pay and a better "work-life balance" will do only so much to keep associates from bolting. There must be a fundamental shift in their roles; less paper pushing and more opportunity to deliver value to clients and take on accountability for projects. In order for such a transformation to occur, however, the view that firm profitability is dependent on leveraging associates must change. Firms and attorneys need to identify themselves--indeed to market themselves--as business partners delivering a quantifiable return for their fees.

Under the current model, legal services are essentially commoditized. Although specific complex issues and cases may be difficult to compare and quantify, law firms and attorneys are not easily differentiable from one another, particularly among the "top" 200 firms. There are degrees of talent to be sure, but the majority of legal work (i.e. an attorney's time) is fungible. Because of this, notwithstanding the value and insight they often bring to the table, lawyers sit at the bottom of the food chain in transactions, and are a necessary evil in litigation. The client says jump; the attorney says how high. When a client calls on Friday at 5pm because they "forgot" about an issue, the attorney either takes the job and works through the weekend or someone else will. (And there will be no premium rate for weekend time.)

Moreover, as transparency has moved into the law (much like patients becoming more informed than their their Doctor's), in some sense the jig is up. Legal services are something that a client outsources; not because they can't do it, but because someone has to do it, and that someone must be a member of the Bar. Much like IT spending, clients are--or soon will be--looking to gain some quantification of the value delivered.

What would such a shift mean for associates? In my mind the future is highly uncertain. Quantifying a return for legal services should incentivize efficiency, meaning increased technology utilization and fewer associates locked up doing grunt work. Because quantifying an ROI for legal services themselves implies more sophisticated methods of valuing legal talent, associate compensation should broaden to a fuller spectrum. In other words, market forces should chip away at the heavy reliance on political positioning to advance one's skill sets. This implies a thinning of the associate herd, or at least a more meritocratic environment.

Perhaps the droves of attorneys leaving their golden thrones aren't yet fully conscious of this forecast, but with an historically "riskless" career path becoming more volatile, is anyone really surprised?

Firms Stemming the Tide? More Like Polishing Brass on the Titanic

As reported in last Thursday's New York Times, law firms are yet again attempting to put a lid on the ever growing associate attrition rate. Among the methods cited: Quarles & Brady eliminating the billable hour requirement and granting more time off; Howrey's move to merit based career and pay progression; and an increasing number of firms shifting to flat fee billing.

JDBliss argues that these are all good things for associates, but I doubt both the seriousness and efficacy of this "trend". In the words of Tyler Durden, this is "polishing brass on the Titanic." Even if leverage within law firms continues to shift, crucial questions about the practice of law and the value delivered goes unanswered.

To be brief: this isn't new. Firms attempted to stem the tide by increasing first year salaries by over 50% since 2000. Interestingly, the attrition rate has gone up over the same period. Because I believe that on a risk adjusted basis, associate compensation is more or less equivalent with peers in other industries (private equity firms, banks, more entrepreneurial endeavors), attrition must be a function of something more endemic to the practice of law and the law firm model. What will keep the balance from shifting further to competing professions isn't a better work-life balance (although that might help), but a sense of meaning, a sense that one controls their own destiny, unchained by a lock step career progression and an exceedingly long "apprenticeship" period.

Howrey's merit based advancement suggests the possibility of increased responsibility earlier on and is intriguing in that regard. But how is merit to be determined, particularly where a good deal of junior associate work is writing memorandums and compiling documents for discovery requests more than delivering advice, quantifying business risks, or crafting creative settlement solutions? If value and merit of legal talent (as opposed to rainmaking prowess) is difficult to quantify at the partner level, it's undoubtedly more subjective in the lower ranks.

Some associates will find a reduced workload for the same or reduced salary enticing. It is presumably stable work, without much stress. But without a fundamental shift in the role and responsibilities of associates, I don't see this doing much, particularly with a generation looking to participate more than blindly consume.

How to Say Goodbye

From the grapevine:

"As many of you are aware, today is my last day at the firm. It is time for me to move on and I want you to know that I have accepted a position as "Trophy Husband". This decision was quite easy and took little consideration. However, I am confident this new role represents a welcome change in my life and a step up from my current situation. While I have a high degree of personal respect for PHJW as a law firm, and I have made wonderful friendships during my time here, I am longer comfortable working for a group largely populated by gossips, backstabbers and Napoleonic personalities. In fact, I dare say that I would rather be dressed up like a piñata and beaten than remain with this group any longer. I wish you continued success in your goals to turn vibrant, productive, dedicated associates into an aimless, shambling group of dry, lifeless husks.

May the smoke from any bridges I burn today be seen far and wide.

ps. Achilles absent, was Achilles still. (Homer)"