A Note on Reducing Law Firm Associate Compensation

A recent op-ed in the New York Times stated the obvious point, at least for readers of this blog, that some of the mechanics of the legal profession are in dire need of updating.  The author specifically identifies associate compensation as a leading target for significant revision. The author is right, of course, on several points.  Associates at large firms enjoy generous starting compensation packages that by comparison to entry level legal jobs in the public sector, or in small firms, or frankly to entry level jobs anywhere, appear disproportionately large.  Implicit in the piece is the burden these high fixed costs present to law firms who have experienced a fairly sudden and substantial decrease in demand for legal services.

Not expressed in the article, but known to observers of the legal profession, are two additional challenges:  newly graduated lawyers are by and large not prepared to practice law; and they don't stay long enough to generate sufficient profits to pay for their own learning curve.  So large law firms are paying substantial wages to green recruits, trained to think and act like a lawyer, but not yet ready to lawyer, and then incurring additional expenses for on-the-job training. Some of this learning curve has been subsidized by clients, many of whom are finally asserting that their high legal fees should buy senior lawyers with deep experience rather than a host of trainees inefficiently learning while doing.

The author suggests a drop in associate compensation is needed, from $160,000 in major cities to perhaps $100,000. This suggestion will no doubt rally the snarky set who frequent the legal tabloids:

“YOU feel sorry for THEM? ...the spoiled Ivy grads - who lost their silver spoon overpaid jobs that they never deserved in the first place, because they only billed 1600 hours and half of that was padded time anyway . . . wah wah wah!”

The simple fact of the matter is, when demand for labor declines then labor rates decline.  It's no more nor less justified or "right" than in recent years when demand for labor was high and labor rates for the most desirable new lawyers increased.

But is it enough?  I don't believe reducing associate compensation, or laying off staff members, is even close to approaching the solution.  And I'm not even referring to the crying need to reduce partner compensation, or even to cull the partner rolls -- even though doing so would be in keeping with the declining demand-declining labor rate equilibirum impacting associates.  No, to "solve" the challenges facing the legal profession requires a re-think, as the New York Times writer suggests.  But rather than limit the conversation to compensation and overhead and billing rates, it's time to take a good hard look at how law is practiced.

In any industry, the inexorable encroachment of technology or innovation provide new entrants with advantages that can disintermediate or displace incumbents.  Refer to any grammar school text book for a recap of how Eli Whitney's cotton gin transformed the postwar Southern agricultural industry.  Undoubtedly there were a few cotton pickers whose jobs and wages were disrupted.  Henry Ford's assembly line turned the automobile from a quaint toy for the wealthy into a necessary tool for modern life, shrinking the continent and making suburban life practical... and wreaking havoc on the proverbial buggy whip manufacturer.  The story continues, from the invention of the computer to the Internet to eBay to Amazon's "one-click" business method to global positioning satellites to asset securitization and so on.  In the march of human progress when we find a better, cheaper, more effective alternative, we shed a tear for a nostalgic moment and then we move on.

It's time that the typical law firm of today take a good hard l0ok at modern business practices such as governance structures which improve rather than impair organizational effectiveness; supply chain management techniques to eliminate redundant and unprofitable workflow steps; the application of technology to automate repetitive tasks; the use of alternative fee structures to promote efficiency and reward successful outcomes rather than time.

Some of these topics have been promoted before. Very few law firm leaders haven't heard the drumbeat of alternative fees, for example.  But what has been lacking is specific, actionable, quantifiable information to demonstrate how these business practices will improve the practice of law for both the suppliers -- the law firms -- and the consumers -- the clients.

No more, I say.  Let's move from theory to practice.  We will address these topics in more detail in this blog in the coming weeks.  Stay tuned.

For another perspective, read Ron Friedmann's reaction to the NYT article here.