Post-Recession Law Firms: A New Caste System Emerges

Editor's note from The Legal Intelligencer: This is the first in a weekly series examining how law firms adapted during the last two years and where they are headed as the economy recovers

Last year, Eckert Seamans Cherin & Mellott CEO Timothy P. Ryan seemed well ahead of the curve when clients started pushing back on paying for the inexperience of first- and second-year associates on their matters, and law firms, in turn, started hiring fewer, if any, young attorneys.

Ryan had made the decision more than five years ago to stop hiring first-year associates and instead just recruit third- and fourth-year lawyers from other law firms once they were already trained. The economics of paying the younger attorneys $130,000 a year or more just didn't make sense to him. But true to his caveat last year, Ryan now says he is focused on hiring first-year associates in the next three years after salaries have dropped in certain markets, because even if he can't yet charge their time to clients, the firm isn't taking on as much of a cost. The other factor is that there are more talented first-years out there because the larger firms are hiring significantly fewer first-years.

In Pennsylvania, salaries have decreased at the bulk of large firms, including some of the Am Law 200 firms like Reed Smith, Drinker Biddle & Reath, Blank Rome, Pepper Hamilton, Ballard Spahr and Buchanan Ingersoll & Rooney. But firms like Duane Morris and Dechert have held tight to the $145,000 salary for new lawyers. While associate hiring may be more economical for some firms, the bulk seem to be reducing hiring.

Ryan said the coastal firms with an emphasis on financial markets have decided to maintain salaries while those at the bottom half of the Am Law 200 have largely reduced salaries.

WORKING HARDER, GETTING LESS

Surveys have shown that across the country's largest firms, associate salaries have held steady around $145,000 or $160,000 and most firms are hiring significantly fewer summer and first-year associates. Perhaps the biggest trend to come out of the promised paradigm shifts of the "Great Recession" is the concept of doing more with less.

Law firms are substantially smaller, but even as demand for legal work starts to creep up, the level of hiring isn't expected to match.

"Everywhere I go people are basically doing more with less and it's OK," Altman Weil's Tom Clay said, adding later, "Now that lawyers found out they can do just fine, I don't think you will see staffing levels return soon."

That has started to speed up, albeit not at great levels, the push for greater efficiency through the way matters are staffed and processed, he said.

In taking the old "finders, minders and grinders" analogy of law firm hierarchy, New York-based consultant Jerome Kowalski said even the finders, or business producers, who were given carte blanche to spend hours of unbilled time bringing clients in the door are expected to be billing time. The minders, who were the client relationship partners and spent a good chunk of their time making sure the clients were happy, are also now expected to bill more hours, he said.

This has created a hoarding phenomenon in which attorneys are keeping work rather than passing it down to service partners or associates, making it more and more difficult for less senior attorneys to find hours to bill, Kowalski said.

"So what we are seeing in terms of a changed model is really an inverted pyramid with the premium placed on lawyers who are well trained and know how to get stuff done and know how to get it done efficiently," he said, stating earlier, "Across the board, everyone at every level, they've never worked harder and had less to show for it."

And with clients paying less for the same work through either alternative fee arrangements or a straight rate discount, firms could potentially bring in lower profits if they don't properly staff and manage matters. Clay said firms are just now beginning to think about how to implement process management. On the whole, he said, profits are expected to hold steady this year and next, so partners won't suddenly be finding themselves below the poverty line. But one way the profits might hold is through shrinking the number of equity partners taking a piece of the pie.

A certain subset of partners are finding themselves in a precarious position. The service partner -- one without a book of business of his own who works on the matters brought in by rainmakers -- can no longer get by on just being a great lawyer.

"We're seeing partners who aren't adding the value they should being counseled out of firms," Clay said. "The service partner that doesn't bring anything else to the table, they're in jeopardy, they just are."

In some ways, law firms are going back to the old days of the "up or out" model of attorneys either making partner or being asked to leave. For years firms have used the non-equity partner tier as a dumping ground for associates not yet ready for partnership rather than a breeding ground for associates firms thought really had the potential to be a partner in the near future.

One solution is the increased use of contract or staff attorneys to handle the work the service partner or senior associate might have done. These attorneys are paid less, don't have as high of a billable hour requirement and have no expectation of making partner. Clay said firms, and attorneys, are increasingly open to the idea of using this tier.

And that is where a new caste system has developed.

THE ASSOCIATE CASTE SYSTEM

The leverage model of several associates supporting one partner has virtually disappeared, Kowalski said. In its place a three-tiered "caste system" of attorneys has developed.

An Am Law 100 law firm in 2007 may have hired 150 summer associates and given offers for full-time employment to the bulk of them. Now, those same firms are hiring fewer than 20 summer associates and the offer rates are often lower.

For that select group, the $160,000 salary is still up for grabs.

"They're the showcase pieces," Kowalski said, adding those are the well-schooled, top-of-their-class attorneys firms can tell clients they were able to hire.

"Then there's a vast underbelly of people who are being hired at these same large firms at substantially reduced" salaries, he said.

These are the staff lawyers who are not on partner track and, Kowalski said, at the high end are being paid around $90,000 and, at the low end, around $65,000. They do the same work the $160,000 associates are doing, but with less expectations from the firm, he said.

The third group of associates are the contract or temporary lawyers who work per diem on a set project with no benefits and no promise of work beyond the one project.

"I compare [them to] those guys who hang around in front of Home Depot waiting for some contractor to show up with a truck," Kowalski said.

When demand starts to pick up for legal services, the latter two groups of associates can fill in for the work traditionally done by more expensive partner-track associates, making the need for traditional associates significantly reduced for the foreseeable future.

"It's very probable that we won't be hiring the traditional lawyers that were produced from law schools," Clay said, adding that new graduates can't do much that couldn't be done through cheaper options like document review attorneys and legal process outsourcing.

"The things they used to cut their teeth on are rapidly deteriorating or going away," he said.

Clay has been advising law school deans on how to produce graduates with different competency levels.

Associate training programs, like the ones instituted by Drinker Biddle & Reath and Reed Smith, aren't likely to catch on, Clay said. Although the programs, which put first-year attorneys in training classes rather than bill their time to clients in an effort to make them more sellable, were touted as a great solution to client push back on the use of young lawyers, they haven't been replicated in many other firms. Clay said studies have shown that while associates in training programs may become more valuable more quickly, the programs decrease the profitability of the attorney "dramatically" over the course of his associate life.

The switch many firms made during the recession to competency-based advancement models rather than lockstep promotion of attorneys based on a year's more experience has a better chance of sticking, Clay said. He added, however, that only the larger firms have the staff and resources to implement such programs.

So are law firms vastly different than they once were? Changing service and leverage models are new but tougher standards for partnership entry are a return to old practices. No longer is being a good or even great attorney enough. The ones who will advance are those with business savvy and an understanding of process management, most experts say. Entering and succeeding in a law firm is getting harder.

By Gina Passarella, The Legal Intelligence

Source: Law.com