In my continuing series of Law Firm 2.0, I have decided to take a crack at creating a completely new law firm model. This definitely falls under the “hard category” for change. Before I launch into actual ideas, let me start by stating my basic assumption on what is wrong with the current model.
Law firms throw money at their internal business problems instead of fixing the root issues and then pass these increased costs onto their clients.
I don’t want to get into a “lawyers make too much money” discussion. It’s not for me to judge. I don’t think lawyers are any greedier than anyone else in the business world. So while I am upset with the state of affairs of legal fees, I’m not going to say that I think there is mal intent from the industry in general.
In my opinion, there are a few core issues that need to be addressed in order of importance:
- Associate retention and hiring;
- Outdated cost structures;
- Practice area compensation parity; and
I’m sure there are others that I’m completely unaware of, as I was never on the management committee of a law firm, but these are good ones to start with. I’ll write about each one in a separate post.
Of all the costs issues, I think that associate retention and hiring has to be the biggest factor. I’ll admit that I’ve racked my brain on how to “fix” this – and I have some ideas – but I’m not so naïve to think that this is an easy fix. First, let’s take a quick look back into history.
If you remember from my first post, first-year associate salaries have risen approximately 132% over the past ten years. Is this a case of law firm partners feeling generous and handing out large paychecks and making their clients pay for it?
This is the reaction of law firms that were bleeding associates in the late 1990’s and trying to throw money at the problem. As the retention issue continues to be a major problem today, the response is still the same (also my favorite Bob Seger song). The firms attempt to buy loyalty. Couple this with a nuclear arms race of first-year salaries from the biggest of the big firms, and you’ve got yourself a real problem.
I’ve held a belief for a long time that the technology age materially and adversely affected the lives of all lawyers, but especially associates. The advent of email and cell phones increased client expectations on an exponential scale – more than other businesses that don’t deal with multiples of clients. Not only were client expectations in general greater, but the responsibility level of associates skyrocketed, as they now had ways of directly communicating with clients that they did not before. Associates who were once protected from direct client contact were suddenly on the front lines when an email was sent. Their cell phone numbers were given to their clients. This was not only incredibly stressful, but also given the inherent inefficiencies with associates this made for unbelievably long hours. I was one of these associates. Take this with the explosion of start-up company growth, the IPO bubble and the like; the late 1990’s were tough times to be an associate.
So what happened? Simple, associates started leaving. Lawyers were jumping in droves to start-up companies as business development professionals, in-house counsel and other positions. To many, the paycheck just wasn’t worth it. As more associates left, it was an ugly spiral as the remaining associates’ lives were even worse.
So with a definitive move that will be remembered by every lawyer, Gunderson Dettmer led the charge by increasing first-year salaries to $125,000. It was a bold move and one believed to attempt to stem the outflow of associates to their startup clients. From what I have heard, the idea was to show lawyers that they could stay at a law firm and make a great salary. One did not have to leave for the allure of stock options. Other firms matched the Gunderson salaries and salaries at every level followed suit. For a while, the hole in the hull was plugged. While the job still was tough, we at least were making some serious cash.
As with any change, inevitably the “what have you done for me lately” effect sets in. Lawyers match their lifestyle to their salary, housing prices continue to rise in the Silicon Valley and not too long afterwards the money isn’t on top of mind. And the new salaries had to be paid for. Billable hour requirements were increased across the board.
Also and most importantly, with the dramatically increased costs, clients’ attitudes changed. I believe that clients consciously or subconsciously believed that their lawyers were no longer their “partners,” rather they were now a very expensive service provider and given the new hourly billings rates that were in effect, they “owned” their lawyers. “Hell, if I am paying that much per hour I can call my lawyer any time of the day, any day during the week!”
This last point cannot be overstated. This “I own you” versus “you are my partner” attitude has impacted all lawyers, not just associates at firms. In my opinion, it’s a direct result of the increased billings. And what happens when associates are unhappy at work? The law firms throw more money at them, they demand more billable hours and they are “owned even more” by their clients. This is really dangerous cycle. Higher salary = worse work life.
Despite the promise of greater compensation, I see more and more senior associates and junior partners leaving law firms to go in house and make much less. The dream of being a partner at a firm just isn’t what it used to be. When speaking to folks that have left or are contemplating leaving (note: there isn’t a week that goes by that I don’t have at least a half dozen conversations with a disgruntled lawyers looking to leave), their gripes NEVER include compensation. The gripes always about quality of life, client demands, missing their children, lack of transparency in the partnership, long commutes, etc. They aren’t leaving for startup business development job, because few want to hire lawyers these days. They are going in-house and making much, much less money.
So what can a law firm do? How about in a business that charges by the hour, start paying salaries by the hour? Let lawyers determine how much they want to work and how much they want to make. Each lawyer would essentially budget hours that they want to work the following year so that law firms would be able to manage capacity. Clearly there would be an agreed upon variance and other details, but I can’t reconcile how an hourly charging business can continue with the current model.
If you read between the lines, what will eventually happen with my proposal is that associates will figure out what their revenue per dollar charged is. Efficient firms will be able to give a transparent cut to their associates and still provide generous compensation to their partners. Inefficient firms will suffer. Firms will begin to compete on revenue per hour to associates, amount of hours worked, quality and style of practice and quality of life, not meaningless first-year salary statistics that have nothing to do with the long-term contentment of their new hires. There will be other factors in future posts that I believe will also positively impact associate retention issues.
Many smaller fir
ms have essentially adopted parts of this model. I realize that many of the larger firms with fancy offices and large cost structures can’t imagine running a firm this way, but I’ll address ways to change these cost structures in my next post.
(P.S. Check out this Vault report on associate satisfaction and you’ll notice very few of the typical venture lawyer firms)