BigLaw and Bigger Bills: An Open Letter to Silicon Valley GCs
Silicon Valley is known for its brash reinventionism. Every day, someone is revolutionizing something – what we drive, how we communicate, middle-out compression algorithms. We’ve created an entire culture around the self-starter, the re-thinker, the mad scientist and the visionary. We pride ourselves on making things better, smaller, cheaper, faster. We don’t just think outside the box, we live there. But for all this self-congratulatory irreverence, Silicon Valley persists in living in the dark ages when it comes to protecting its legal assets.
At some point, most companies in the Valley hire a “BigLaw” firm, i.e., one of the top 100 or so U.S. law firms as ranked by American Lawyer. With their battle-tested partners and massive armies of junior attorneys, these firms can be crucial partners in guarding the corporate castle. However, contrary to the taglines of most of these firms and, arguably, the rules of professional responsibility, BigLaw’s primary concern is profit. A recent article in The American Lawyer explains:
[O]f all the metrics, it's profits per partner (PPP) that's emerged as the most closely followed and the most controversial. PPP seems to pique partners' competitive instincts like no other figure. For many, the only thing that matters more than their own firm's PPP is that of their competitor across the street. It has become so deeply ingrained into the psyche of Big Law that it has acquired an almost totemic significance.
In the eyes of many, PPP has become a proxy for a firm's standing within the market. There is a widespread assumption that the higher a firm's PPP, the better the quality of its lawyers, client base and work.
But is this assumption warranted? Is a firm with higher PPP necessarily better? Basic math would tell us no. Increasing PPP is a simple formula: by definition, one must either increase profits or decrease the number of partners. However, neither of these has anything to do with better legal practice or a better quality of attorneys.
The truth is, rather than serving as the calling card of a top firm, PPP and BigLaw’s singular focus on it are actually incentivizing massive attrition, which costs top law firms hundreds of millions of dollars a year. Because law is a business with a single income stream, there is nowhere to make up these increased costs except increasing fees. As a consequence, BigLaw’s clients are forced to bear a gross excess of financial weight for management blunders that they would never tolerate in their own ranks.
Associate Attrition
Associate attrition from BigLaw is astronomical. A January 2013 article in Fortune magazine estimated that attrition rates at large law firms are approximately 20% per year. In his book The Lawyer Bubble: A Profession in Crisis, legal industry analyst Steven Harper reports that up to 80% of law firm associates quit by their fifth year.
Each departed attorney represents a big loss to his firm: Harper calculates that recruitment and training of each new associate costs approximately $250,000 to $300,000. Furthermore, the opportunity cost of lost future income from these associates is substantial: former managing partner of Sonnenschein Nath & Rosenthal LLP, Edwin B. Reeser, estimates that “[a] firm with 300 associates that loses 60 of them in any given year loses $15 million to $18 million of otherwise net distributable income, perhaps as much as 10 percent of the amount of total net income to the firm.” Excluding the less-easily-measured costs of lost productivity, this adds up to as much as $600,000 in lost income and sunken costs per departed attorney in a single year. For a firm with 1,000 attorneys, that’s $120 million a year.
A more subtle cost of associate attrition is its contribution to a more senior, more expensive leverage model. With the most aggressive attrition occurring before year-five of an associate’s career, the ranks of mid-level associates are seriously thin: a 2015 annual survey co-authored by Citi Private Bank and Hildebrandt Consulting on the business of law firm management confirms that mid-level associates are in short supply. Those attorneys that make it past the fifth year pass mostly into the limbo of income partnership. In May 2009, The American Lawyer reported that BigLaw firms had increased the number of income partners threefold since 1999, while growing the ranks of equity partners by less than a third.
Between the large incoming classes of junior associates, the depleted ranks of mid-level associates, and the income partner bubble, the leverage mix of many BigLaw firms resembles an hourglass. There are two problems with this: first, the hourglass model is actually more expensive: “for many firms, lagging productivity among more senior lawyers, combined with higher fixed salaries, has resulted in a more senior, less profitable leverage model.” The second problem is that an hourglass leverage model leads to a mismatch between resources and services. There is only so much work to go around – some that is appropriate for new attorneys just starting out, some that requires the more experienced minds of mid-level associates, and some that requires the sophisticated strategic thinking that only a senior attorney can provide. However, without enough mid-level associates to do the mid-level work, the only qualified resources on hand are senior attorneys. So, work that would otherwise have been done by attorneys charging $350-$600 per hour is now being done by attorneys charging $650-$900 per hour.
So, if associate attrition costs so much, why don’t BigLaw firms do something about it? The answer is that over-focus on PPP prevents firms from making the structural changes that would be necessary to correct the problem.
Ever Increasing Billable Hours Quotas
Recall that part of the PPP equation requires increasing profits. Firms do this in a number of ways, one of the most common being increasing billable hours quotas. Above and beyond the fact that quotas are often so high that it’s virtually impossible to maintain a life outside of the firm, the billable hour quota system has actually made the work of being an attorney less rewarding.
To understand this, consider the incentive system created by billable hours quotas: if an attorney’s job security rests on billing a certain number of hours, is he more likely to think creatively about efficient ways to solve his clients’ problems, or would he be better served by putting his nose to the grindstone and cranking out meaningless work in a predictable manner? From experience, I can tell you it’s usually the latter. As a result, BigLaw practice has become less a job of thinking and more a job of mindless doing, leaving a great number of young attorneys disillusioned. This disillusionment, combined with year after year of gruelingly long hours, is driving associates toward professions where either their work has more meaning or their hours are more manageable.
Absent or Unskilled Management
Another problematic side effect of billable hours quotas is that attorneys tend to eschew firm management and professional development tasks, which are both non-billable and time consuming. Today’s BigLaw firms are no longer training grounds for young attorneys; rather, every layer of attorneys has such high billable hours requirements that they avoid the tasks that ensure their knowledge and experience is being passed on to the next generation. The unfortunate result is that many BigLaw firms are leaving the development of their only asset – their attorneys – to chance; specifically, the chance that each new attorney will be assigned to the right mix of matters that will imbue him or her with the right mix of skills to be valuable to the firm’s clients. If this sounds like the blind leading the blind, it is.
Moreover, Fortune magazine reports that, even if they made the time to train and mentor, the senior attorneys leading most BigLaw firms have no professional management training. This lack results in a whole litany of management missteps that make BigLaw one of the most hostile professional work environments around.
Severely Limited Prospects for Advancement
Recall that, in order to raise PPP, you have to keep the number of partners low. Therefore, in a system where increasing PPP is the primary goal, it is natural that equity partnership would be more difficult to achieve. Steven Harper confirms that “[o]verall leverage for the Am Law 50 has doubled since 1985 — from 1.76 to 3.52. In other words, it’s twice as difficult to become an equity partner as it was for those who now run such places.” A 2014 National Survey conducted by the National Association of Women Lawyers reveals that, in 2012, the typical AmLaw 100 firm promoted roughly 10 lawyers into equity partnership and the typical Second Hundred firm promoted roughly 5 lawyers.However, according to that same survey, only about 1 in 5 new equity partners are promoted after a number of years in the firm; the rest are hired laterally from other firms. This means that after ten-plus years of working 50- to 80-hour weeks, an associate starting out at an average AmLaw 100 firm of 1,000 attorneys has roughly a 1 in 350 chance of making equity partner.
More than just being statistically unlikely, the path to partnership has become heavily obscured. Former BigLaw managing partner Edwin Reeser has characterized the path to partnership as “a race in a fog with no lanes, no finish lines, no judges and no spectators” because “the standards of what it takes to be successful as defined by each firm are not usually communicated clearly or applied evenly.” This lack of clarity is partly the result of poor management and partly the result of a “carnivorous” incentive system in which partners are actually rewarded – with higher PPP – for keeping associates out of the partnership ranks. Again, Reeser notes that,
[a] not-uncommon phenomenon is the partner who trains and works his proteges up to the level of finally becoming a potential success as a stand-alone partner—and therefore a competitor for the mentor. So, in this Hobbesian world, proteges are counseled out before they have a meaningful relationship directly with any client of the partner[’]s during a career in which they have been actively discouraged from developing their own independent client base. Senior partner “mentors” become sovereigns who eat their young. Why do they do it? Because more equity partners potentially take away from the profit pie…. Better to toss the juniors out and bring up another youngster until they reach the same level, repeating the cycle over and over.
So, what is an associate to do when he discovers that not only is it statistically unlikely that he will make partner and that no one will tell him exactly how it’s done, but also that many of the existing partners are actually gunning against him? Well, leave, naturally.
The Solution
Fixing the problems underlying associate attrition from BigLaw would require massive structural changes – e.g., doing away with billable hours quotas, and possibly the billable hour itself; requiring senior attorneys both to obtain professional management training, and to train those coming up the ranks beneath them; hiring fewer junior associates and shepherding each associate through to partnership. While yielding a better product in the long term, such structural changes would threaten PPP in the short term. Such changes are therefore unlikely to happen as long as BigLaw’s primary goal is to maximize profit.
But, you are part of the visionary, outside-the-box, irreverent start-up culture of Silicon Valley. Naturally, you will be thinking to yourself, there must be another way. And you’re right, there is: NewLaw. NewLaw is a term being used to describe legal service providers who are bucking these BigLaw trends and models and finding new ways to deliver less expensive, value-based legal services.
Crucial for the purposes of this discussion is that fact that many NewLaw service providers are taking advantage of BigLaw’s mismanagement by hiring and placing the very attorneys that BigLaw has educated, trained and shed in its relentless trudge toward higher PPP. For example, companies like Hire An Esquire and Alterna Legal provide web-based platforms for legal service purchasers to identify, connect with and even pay small and independent legal service providers. There is also a new category of “firm alternatives” such as Axiom and Paragon Legal that provide experienced corporate attorneys for secondments, projects and temporary assignments. My firm, Novel Legal, is a similar alternative legal service provider that contracts out experienced patent litigators and patent prosecutors to provide the full range of patent invalidity services to companies and other law firms.
These are but examples of what NewLaw has to offer. But the key takeaway for you, the client, is actually really good news: rather than paying for BigLaw’s mistakes, you now have the option to take advantage of them. And to shave some money off your legal spend while you’re at it.