Leaning Tower of Biglaw
The Leaning Tower of Biglaw
Jonathan Glater’s article in the New York Times this morning is just further evidence that the pyramid scheme of major law firms is starting to show its age. Yesterday, the New York Lawyer (subscription) took more direct aim at the weak foundation of the Biglaw business model:
Over the last couple decades, high leverage–the practice of having each equity partner supported by three or more associates or income partners–was accepted as a basic tenet of profitability. A firm billed out these junior lawyers at significantly more than it paid them, often getting billings that were triple the lawyer’s salary. It seemed like a sure-fire way to make money. But high turnover and rocketing salaries ate into profit margins. Now, the whole pyramid model is looking fragile.
And it shouldn’t come as a shock that the pressure weighing down on the business model is coming from partners desperate to hang on to every penny of profit. It is clients that ultimately control the purse strings.
More detail after the jump.
Clients are putting incredible pressure on firms to control costs:
Susan Hackett, general counsel of the Association of Corporate Counsel, is another. “I don’t have a problem with the $1,000-an-hour lawyer, but the $350-an-hour junior associate isn’t worth it,” she says.
But whenever the economy slows, there are calls to change the nature of Biglaw billing. Will this current crisis produce lasting changes? According to the New York Law Journal, Milbank doesn’t think so:
The model still has its believers. Leverage is “very good in very good economic times and not good in bad economies,” says Mel Immergut, chairman of Milbank, Tweed, Hadley & McCloy. When the economy comes back, he expects firms such as Milbank that do “high-end, complex work” will benefit.
I believe we can distill that statement to the very simple business idea that firms can fire associates when demand is low, and hire more associates when demand picks up. Nobody is really worried about the “supply” of willing attorneys.
Nor should they be. There simply aren’t a lot of six figure jobs available to people right out of school.
You don’t need slave labor to build a pyramid, you just need a labor force with no better option.
Work Like an Egyptian [New York Law Journal] (subscription)
Billable Hours Giving Ground at Law Firms [New York Times]
http://abovethelaw.com/2009/01/the_leaning_tower_of_biglaw.php
.
.
.
Work Like an Egyptian
New York Lawyer
January 29, 2009
Reprints & Permissions
By Susan Beck
The American Lawyer
Subscribe to The American Lawyer
In May, The American Lawyer published a small chart showing the five most “leveraged” firms in the Am Law 100, based on the ratio of all lawyers to equity partners. At the time, the list seemed mildly interesting, but not of great importance.
Today, as we cower amid the debris of a shattered financial world, the list looks eerily prescient. The five firms on the list are Cadwalader, Wickersham & Taft (8.49 lawyers per equity partner), White & Case (6.63), Orrick Herrington & Sutcliffe (6.26), Thelen (6.13), and Bingham McCutchen (5.95). The first three have announced layoffs, and Thelen is dissolving.
Over the last couple decades, high leverage—the practice of having each equity partner supported by three or more associates or income partners—was accepted as a basic tenet of profitability. A firm billed out these junior lawyers at significantly more than it paid them, often getting billings that were triple the lawyer’s salary. It seemed like a sure-fire way to make money. But high turnover and rocketing salaries ate into profit margins. Now, the whole pyramid model is looking fragile.
One problem facing highly leveraged firms is that they tend to focus on dwindling practices. Structured finance is the prime example. Firms assigned armies of associates to these deals, which often followed a cookie-cutter format. At one time, investment banks didn’t blanch at paying nearly $300 an hour for a first-year, but that gravy train has left the station and may not come back.
REDUCING COSTS
For the work that does remain, like litigation and more mainstream corporate deals, clients will increasingly seek to reduce costs. More work will likely be assigned to contract lawyers, attorneys in India, or a computer.
Benjamin Heineman Jr., the former general counsel of General Electric Co., now senior counsel at Wilmer Cutler Pickering Hale and Dorr, is one observer who believes that the golden days of leverage are over. “The guts of this debate is productivity. More lawyers per partner doesn’t improve productivity,” he says.
Susan Hackett, general counsel of the Association of Corporate Counsel, is another. “I don’t have a problem with the $1,000-an-hour lawyer, but the $350-an-hour junior associate isn’t worth it,” she says.
Sometimes the problem isn’t too many associates but too many nonequity partners, as was the case at Thelen.
But not all the firms among the top five are suffering: Bingham expects to see revenue grow 6.5 percent in 2008, according to firm chairman Jay Zimmerman.
The model still has its believers. Leverage is “very good in very good economic times and not good in bad economies,” says Mel Immergut, chairman of Milbank, Tweed, Hadley & McCloy. When the economy comes back, he expects firms such as Milbank that do “high-end, complex work” will benefit.
THE SOLUTION?
If leverage is the problem, what’s the solution? Trimming salaried ranks is one option, and layoffs are probably the only way to do that, as attrition rates are near zero.
Another option is to cut salaries for those doing routine work. McDermott Will & Emery, for example, recently created a separate track of staff lawyers who are paid much less than their regular associates. The program has been a success, and the firm plans to double its size. (It declined to reveal how many staff lawyers it has.) Jeffrey Stone, who heads the firm’s trial department, says these lawyers offer clients better value than contract lawyers because there is less turnover and the firm can control quality. “I think there’s some sizzle to this idea,” he says.
http://www.nylawyer.com/display.php/file=/news/09/01/012909a
.
.
.
top 10 by leverage: