Trouble In The Legal Industry

August 7th, 2013

I recently saw an interview of Steve Harper, a former Kirkland & Ellis lawyer (a big international law firm) who recently published a book titled The Lawyer Bubble:  A Profession in Crisis.  Points made in this book are:

  • There are only jobs in the industry for approximately one-half of the lawyers who are being turned out by law schools each year.
  • US News & World Report ranks law schools based on what they spend to produce a lawyer.  This tends to give the deans of law schools incentives to spend and not control costs.  It makes a legal education extremely expensive and leaves graduates burdened with unacceptable debt levels.
  • Hourly billing is a serious problem.  Law firms rate their people based on profitability and many impose minimum annual billings of 2,000 hours which creates a sweatshop environment that has associates working 60–70 hours/week.  There is an average of 3.5 associates per partner and there is an 80% attrition rate.
  • The large firms are not particularly stable.  Lateral moves by business centers are common and major firms fail with some frequency.  One of the causes of failure is that a large lateral move or the loss of a major client may leave a firm with a long-term lease which it is obligated to pay and no way to fill the space.


Update: 10/25/13

The October 14, 2013 New Yorker Magazine has a long article by James Stewart titled “The Collapse”, which analyzes some of the problems that come with the merger of law firms.  There are two dominant cultures in the legal industry.  One is the Cravath model, which is a true partnership in which financial risks and rewards are shared equally.  Associates are hired from top law schools and partners are chosen from the associates, all of whom are steeped in the firm’s culture and traditions.  Partners are paid largely on seniority.  The opposing culture I will call “eat what you kill,” in which compensation is based upon origination of work and production.  In this culture lawyers focus on their individual bottom line and there is much less firm loyalty.

In Stewart’s article he analyzes a merger between Dewey Ballantine, an old line New York firm, ran on the Cravath model, and LeBoeuf, Lamb, Greene & MacRae that was organized more on the eat what you kill model.  These firms merged in 2007 to create a firm with 1,300 lawyers.  The problem started when the dominant Dewey partner was given an overly generous guaranteed contract.  The pattern of large guaranteed contracts followed with subsequent lateral hires when the grand recession of 2008 came corporate clients cut work and cash flow was insufficient to pay the guaranteed contracts.  Partners started jumping ship and the firm would up in bankruptcy.  The take away from this article seems to be that firms following the Cravath model have more stability than do eat what you kill models.  The challenge is to get hard driving type-A personalities to sign up for a one for all, all for one culture.

Another problem that often comes with migrating lawyers is that the remaining firm may be stuck with long term lease obligations on empty space.