With most economists (and indeed President Obama) warning the American people that there will likely be no recovery from the current economic downturn until sometime in 2010 at the earliest, I suppose it was predictable that some big law firms would start to cut their losses in the transactional areas of their practices. The carnage last week at big law firms locally and nationally was but the latest round of personnel reductions that started at East and West Coast firms and is now moving inward.
Layoffs at law firms tend to hit young lawyers the hardest. First- and second-year associates are the most expendable since they are still in training, have probably not developed any deep client relationships, likely don’t generate any business yet and are usually dependent on more senior lawyers for work assignments. At big law firms locally associates start at $120,000 a year fresh out of law school (and more in a number of other markets.) If you look at Faegre & Benson’s recent layoffs, you can see that, assuming the majority of them are younger lawyers, layoffs of 29 at an average salary of, say, $160,000 a year yield a tidy little cost savings of $4.6 million a year. Economically, it seems to make sense because everybody knows that newbie lawyers aren’t worth anything near what they’re paid, which in some markets is as much as (or more than) a seasoned federal judge.
The reason firms don’t engage in this kind of cost cutting more often is that it breaks an implied social contract. Yes, young associates at big firms get paid more than they’re worth (regardless of how many hours you chain them to their desks), but the idea is that they are an investment rather than a money-making machine. They are the larvae which, if all goes well, will develop into the future leadership and rainmakers of the firm. It’s how big firms keep themselves stocked with top law school grads; it’s why those grads work god-awful hours; it’s the promise of those jobs that allows law schools to convince law students to pile up $100K or more in student debt.
I don’t blame the law firms for making the cuts they feel they need to make to stay competitive. That is the essence of a market economy, and law firms are, after all, businesses. Locally, we have seen Adam Smith’s invisible hand reach out and smack down what were once very prominent and well-established law firms, including Popham Haik, Doherty Rumble & Butler and, most recently, Rider Bennett. I am afraid no law firm qualifies for “too big to fail” status. And if you think that the American people would ever agree to a bailout of a major law firm, I’ve got some swamp land in Florida I’d like to sell you …
My issue is not with the downsizing, but with the entire model, starting with law students being encouraged to take on so much debt that these big firm jobs — which are growing scarcer before our eyes — are an almost necessary way out. I don’t expect things will change any time soon — it’s been this way for decades and through a couple of prior pretty serious recessions — but, like the housing bubble, I don’t think it’s sustainable into perpetuity. The increasing number of heavily indebted law students vying for a now shrinking supply of big firms jobs can lead nowhere but to hardship for more and more of them. If the economy continues down this road, the next raft of “foreclosures” you start hearing about may be on young lawyers’ student loans.
I agree that the model is broken, but it isn’t the associate salary that is breaking the bank. A quick calculation shows that 2,000 hours at $175 is $350,000. Firms make money off of associates by buying them at wholesale and them selling them at retail. The “training” at big firms is a big myth.
They want to burn out associates because they don’t want them to all become partners. Partners force them to divide the pie.
You bring up a good point. Even new associates make firms money for a big firm when there is enough work to spread around. It’s really the clients (not the firm) footing the tab for the young lawyers to cut their teeth. In return, the big firms are supposed to mentor the attorney and supervise the work. (You are right that not everyone provides that mentoring, which is too bad.) But my point was a lot of the functions that a young associate carries out could theoretically be carried out by someone at a lesser pay grade (e.g. support staff) with a similarly high mark up, but the firm makes a conscious choice to have a first- or second-year asociate do it in order to let that attorney learn so that he/she can gradually take on higher-level functions (more aptly requiring a law license). Of course, once the associate starts taking on those higher-level functions, the firm starts charging him/her out at an even higher hourly rate, thereby making even more money for the firm and perpetuating the circle of life ….
This is a great post Mark. I am a 3rd year “big-law” attorney and could not agree more. The economics of our industry are silly and I believe, unsustainable. I am at big law because of $100K plus in loans. Unlike the dinosaurs down the hall, I have no desire to have my name on the letterhead, or become an equity partner. Rather, I need the money because of the freeedom it brings. Don’t get me wrong, I enjoy winning my cases, but, I am confident that I could find enjoyment in many fields where success was achieved through hard work.
Most of my business I could say good-bye to if there was a job out there I could consider in light of my debt load. Unfortunately, there is not. Not too many people think one person is worth $400 per hour. I am still amazed that clients find that palatable.
[...] quite a bit on this site about the pernicious effects of growing law student debt loads (see, e.g., here, here, here and here.) In case you missed it, there was a story in the New York Times that [...]