When I wrote last month about the loud wheezing noises coming from the world of Big Law—that is, the 200 or so biggest, most profitable law firms in the country—the industry’s staunchest defenders protested that I had the story all wrong: Big Law may have had a tough recession, they said. But it was bouncing back with aplomb, just the way it always had. Any suggestion that it was facing an existential crisis was either naïve or deliberately alarmist.
I responded to those gripes at length here. But in the three weeks since the article came out, we’ve gotten a bit more evidence about the state of Big Law. And, suffice it to say, it’s not encouraging for the boosters.
Let’s start with a piece in today’s Wall Street Journal about the once-mighty Patton Boggs of Washington. The firm, which began the year with about 550 lawyers, cut 30 junior-ish attorneys in March, and is now set to oust more than 20 partners by the end of the summer. Cutting partners, as I noted in my piece, has been extremely rare historically. But it has become common over the past decade, as firms realize they have way more fancy lawyers than fancy legal work, and as their rainmakers have grown tired of propping up colleagues who don’t bring in business. The Journal, paraphrasing its Patton Boggs sources, affectionately describes the process as getting “rid of the deadwood.”
Not surprisingly, the firm exhibits all the telltale signs of ill-health: declining revenue (negative 6.5 percent last year); flirtations with “fixed-fee” and other cheapskate arrangements, as opposed to the traditional hourly billing model; a refocusing around stronger practice areas like lobbying and litigation. Naturally, the Patton Boggs brass has plausible-sounding explanations for all of these developments—for example, the revenue decline apparently owes itself to the difficulty of collecting on unpaid legal bills (no explanation of why it would have become much harder to collect in 2012, three years after the recession). But what it all sums to is big trouble. To take the refocusing strategy—which consultants cheerily dub the “centers of excellence” approach—no firm voluntarily scales back the breadth of services it offers unless the departments on the chopping block not only lose money now, but have no hope of becoming profitable in the future.
Still, Patton Boggs is only one firm. Even if there seem to be a lot of “only one firms” lately, it probably isn’t wise to read too much into any particular death-struggle. (Case in point: The firm is also struggling under the weight of a massive lawsuit against it by Chevron, involving allegations of fraud surrounding toxic sludge pits in Ecuador.)
Which is why, for the sake of the whole industry, this week’s second major economics-of-Big-Law story is much more disconcerting. According to The American Lawyer—an outlet no one would accuse of excessive pessimism toward Big Law—the average size of big firms’ summer classes this year is down 3.4 percent. This is far more consequential than it might initially appear. A summer-associate offer—typically made in the fall of one’s second year of law school, effective for the following summer—is the way rookie lawyers get hired. The overwhelming majority of summer associates receive permanent offers, and firms typically hire very few first-year associates who haven’t summered with them. So shrinking summer classes means less hiring, period. (The American Lawyer survey had 116 respondents, so it’s pretty comprehensive. The lovable smart alecks at Above the Law parse the various firms’ rationalizations here.)
Worse, the offers were made in the fall of 2012, a time when, according to The American Lawyer, revenue was supposedly increasing. I’ve previously explained why that revenue increase was likely a mirage (basically, firms and their clients were trying to get a lot of work done before the new year, when the fiscal cliff would take effect and raise their taxes). Now we know the firms saw it that way, too—saying, in effect, that they expected revenue to be pretty dodgy through 2014, when this year’s summer associates will start fulltime. Or, put differently, the firms were expecting revenue to be soft even five years after the recession. I don’t know about you, but five years of post-recession stagnation doesn’t sound like the standard ups and downs of a business cycle to me.
One final ominous sign tucked away at the bottom of The American Lawyer piece:
Winston managing partner Thomas Fitzgerald says the [summer] program has always been the firm's primary source for hiring new talent, but that as clients continue to balk at paying for the work of junior associates, the class size has diminished slightly.
A bit of context to help explain why this statement is so alarming: Hiring young associates has traditionally been very lucrative for big law firms. These days, the biggest firms pay first- and second-year associates—that is, lawyers one or two years out of school—between $150,000 and $200,000 per year. Then the firms turn around and bill the associates out at $250 or $300 an hour, for an average of 2,000 hours per year. Which means each junior associate nets the firm $300,000 to $400,000 annually (say, $600,000 in revenue minus a $200,000 salary).*
The problem is that this system never made any economic sense. First- and second-year associates don’t have any legal skills to speak of, at least nothing clients consider useful. The associates spend their first year or two learning how to do their jobs. In effect, clients are paying $600,000 per year for the privilege of training the firm’s own employee. Not a bad deal if you can get it.
What’s going on now, as Fitzgerald’s statement reveals, is that clients are increasingly saying, “Train your employees on your own damn nickel.” This is simply devastating to the firms’ bottom lines. If the firms have to pay for the training themselves, the associates who used to net them $400,000 per year are now going to cost them $200,000 per year—a brutal reversal of fortune (almost literally). Not only is that not good for the law students hoping to get hired in Big Law. It’s one of the key reasons more and more firms will be going the way of Patton Boggs in the coming years.
Noam Scheiber is a senior editor at The New Republic. Follow him @noamscheiber
*As a reader points out, the degree to which first- and second-year associates are profitable for firms depends on how many hours they can bill, and not everyone can bill 2,000--sometimes not even close. There are also presumably other costs associated with junior associates--internal training costs, benefits, etc. But the point stands: Even if junior associates are only modestly profitable under the current system, or a break-even proposition, firms are going to be in a lot of trouble if their clients stop paying for the associates' work. At current salaries, that means the firms will lose hundreds of thousands of dollars per lawyer. As the quote suggests, that's already been happening to some extent in recent years. The more it happens, the worse off firms will be.