Alternative fees and associates

When a LexisNexis website for new attorneys wrote about my survey of alternative fees, it reminded me of the impact these changes are likely to have on the next generation of lawyers.  Here’s what I wrote in the survey report:

When business owners get squeezed, employees are usually the first to feel the effects.  That’s certainly been the case in the legal profession.  When The American Lawyer published an article in October 2009 entitled “Has the Recession Forever Changed Large Law Firms?” they estimated that more than 2,900 associates had been laid off by large firms since January 2008.

The dramatic personal impact of these changes can be seen in the words of one managing partner whose daughter is studying to be a lawyer, “I have a daughter who is a second-year law student, [and she’s] about ready to pluck her eyeballs out.”

But when he put on his managing partner hat:

I’ve told her that the tradition that’s been going on for many years of hiring people for the summer at outrageous amounts of money was a luxury that didn’t make any sense. The idea that you were picking the best and brightest of that group didn’t really apply, because you gave offers to everybody.  There was no screening involved, [and] you didn’t need them to do the work. It’s not like you had such a surge in demand over the summer that you had to bring people in to help you get it done. That didn’t make any sense. So you spent a hell of a lot of money for people who come in and stay a couple of years. So perhaps you’ve got to just hire them as third-year law students. How bad could it be? They come in and stay a couple years. That’s the way the accounting firms do it, just hire a bunch of people. Law firms don’t do that. We like to pretend that we need these brilliant clerks or whatever for everything we do, at the highest price that any market will pay.

The pressures on associates can be traced back to what clients want, and what they are willing to pay for:

One of the shifts we’re seeing is that clients say that they don’t want first, second or third-year associates working on their matters; they want the senior, experienced lawyers.

Our best clients are demanding: “Don’t give me the first and second-year associate who are going to pound away for hours on my matters.”  They don’t want to pay the freight, [so] we can’t be using up-and-at-’em associates who go from $160,000 to $180,000 to $200,000, [but] do the same old stuff for clients, grinding away on documents. 

I think there will be long-term changes in how matters are staffed. The concern about using multiple young lawyers on files is not something that I anticipate will go away. The use of the pyramid and the expectation that you’re going to have hordes of young people attached to every matter will change in the future as clients and firms realize that good services can be provided without quite as much staff involved.

The notion of leverage of five or six [associates] to one [partner] is a creature of hourly billing. Leverage doesn’t pay out as well if you’re not billing on an hourly basis, and if law firms move to alternative billing, you will see less leverage.

The reduced demand for associates has already begun to percolate through the recruiting process and summer interviewing:

Why do we interview in August for summer jobs?  [The only rationale is] that’s the way we did it when we were in law school. [But] wouldn’t it be better to do this interviewing in February or March, after students have another semester’s worth of grades? [Firms will] have better visibility about what our needs will be. Students have a better understanding of what they like and what they don’t like. I think in three years, we’ll be interviewing in the winter and not in the summer. But it’s times like these that force you to look at these things [differently], and I think that’s for the better in many cases.

It has been widely publicized that the changes have also had a major impact on associate compensation.  Some think the salary reductions are justified:

When you [consider] the fact that all the other professions have gone through radical change in the last 20 years and we have not, [change is reasonable].  Our first-year associates make more than most doctors in this country, [and] I would hope that there will be some radical change in the way associates are compensated.

From the hard-headed law firms’ point of view, the most troubling aspect of the change has to do with the impact on training the next generation:

What concerns me the most is training the next generation of lawyers under alternative fee arrangements and the economic circumstances we’re living in right now. It’s well known that many clients do not even allow junior lawyers to work on their matters anymore.

As we move toward alternative billing and fees that encourage law firms to be even more efficient in order to maintain profitability, there will be incentive to put our most experienced and efficient lawyers on matters that are priced most aggressively. And if that model is widely adopted, then lawyers are going to be trained only as a loss center for law firms, or [else] clients are going to have to become more amenable to allowing younger people to work on their matters.

[A key issue is] whether this generation of lawyers and clients leaves the profession in a situation where there are no sufficiently trained lawyers for the next 20-30 years.

All of us in my generation of lawyers benefited immensely from following our seniors around and watching them do things, go to court, take depositions, and so forth.  It’s an increasingly rare opportunity today to get to take a younger lawyer along when you go to court or when you take depositions or anything. That’s probably my biggest concern about where the profession is headed right now.

The LegalBizDev Survey of Alternative Fees may be purchased online for $395 per copy (with volume discounts available) or by calling (617) 217-2578.