The Problems with the Traditional Law firm Management Model

post # 496 — January 31, 2008 — a Managing post

I received a multi-part question about law firm management, which questioned the “traditional” model which many firms use. Here’s the question:

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My premise is that the traditional system is not only antiquated, it is the cause of many of the problems and issues facing large law firms today.

I am referring to (a) the whole process of law school recruiting, (b) the “class” system for associates, (c) the “up or out” progression to partner and (d) the concept of being a partner inclusive of lockstep compensation.

(a) Law school recruiting / summer program:

This is very expensive from both an attorney time and a financial perspective. Typically the first year class is larger than needed due to a high number of departures over the first three years.

Classes 1 to 3 are, from an actually working perspective, an unknown commodity and are being trained. They typically start by earning $160,000 plus bonus. Many are looking to only pay off their law school loans or aren’t even committed to practicing law and often treat this period as a career determining step which accounts for the high turnover. Considering all the firm investment in these attorneys they aren’t usually profitable to the firm till the third year by which time many have already left. In addition, a growing number of clients are refusing to pay for these associates as their billing rates far outstrip the level and often the quality of work they perform.

Proposed solution: First, maintain a pool of staff attorneys and document analysts to perform the low level routine (years 1-3) type work. Made up of part-timers, those wanting a home/life balance (1,800 hour requirement with bonuses paid for hours in excess) and those from second and third tier law schools but with previous work experience. Hired laterally with no pretense for marked advancement thus there being reduced expectations. Provides a well paying prestigious job for attorneys otherwise not able to work at large major firms likely resulting in dramatically reduced turnover than currently exists with law school recruits. Treated as paralegals are treated, quasi administrative/quasi professional staff. Paid less than 1 to 3 year associates and bill out at less as well which makes clients happy.

Also, hire laterally attorneys with 3 years experience with excellent backgrounds and slot them into “levels” 1 through 5. Let someone else recruit and train them! Once an attorney has 3 years of experience they are a much more stable and valuable asset. We will pay greater than market as well as guarantee partnership. Therefore, we will target only “A” quality attorneys. We will also be able to command top dollar for these attorneys since they are all top rated and will be more stable since they are being paid more than market and guaranteed partnership. This appeals to clients knowing that they will likely be dealing with the same attorneys and not incurring transition costs associated with having to bring in new attorneys on their deals in mid stream when others leave.

(b) The “class” system. Even though people mature and progress at different rates, under the traditional system people advance strictly based on the passage of time. Poor performers are asked to leave but decent and average performers advance at the same pace as the excellent performers. This causes an inequity in the allocation of work, both the type and amount, which ultimately leads to disgruntled attorneys further adding to turnover.

Proposed solution: Progression from level to level is earned based on performance as evaluated on a semi-annual basis. The intention is that each attorney will “graduate” from level 5 in a 5 to 7 period when joining at level 1. Unlike the current “class” system, attorneys will progress from levels 1 through 5 based on performance, not merely the passage of time. A minimum of 3 years experience is required for level 1. The purpose of promotion to the next level is the continued growth and development of the attorney with increased training, responsibility and client contact. Since partnership upon “graduation” from level 5 is guaranteed, this level ascension is viewed as more than just annual salary and rate increases but as partner building. Since we’ll be starting with “A” quality associates with at least 3 years experience, the success rate should be quite high.

( c) Up or out.

For the vast majority who don’t make partner for one reason or another after 8 or 10 years, they are typically either asked to leave or invariably leave on their own if given the inauspicious title of “special counsel”. This then results in the firm’s loss of investment for after training and mentoring all those years these people take their human capital elsewhere. Sometimes to a competitor.

Proposed solution. Upon “graduation” from level 5, partnership would be guaranteed. This will lead to low leverage which has worked quite well at a firm such as Wachtell with leverage of just 2.51 in 2006 as per the American Lawyer and was the model in the 60s, 70s and 80s when leverage at large New York firms averaged less than 2 to 1 as per the National Law Journal.

Clearly over time partnership ranks will expand at a rate either equal or possibly in excess of our level based associate ranks. However, this is viewed as a benefit and will enhance retention and overall performance. The theory is that most partners will perform at a high level given their background and mentoring. In addition, since there will be a large pool of staff attorneys not eligible for partnership the makeup of our attorneys will be the opposite of a bell curve with large numbers of staff attorneys performing the first through third year type work, relatively few level based associates and a large partner group.

(d) Partner comp.

In the traditional model, the lucky few who make partner are then compensated on a lockstep or modified lockstep basis. Almost certainly every year a handful of new partners are made. This results in the firm’s need to exponentially grow to maintain the same leverage. In addition, by simply converting associates to partners, there is a dilution of the profits per partner (barring an increase in business and/or rates.) Here again there is client backlash against the ever rising billing rates forcing more law firms to grant discounts and write-offs. Finally, lockstep or modified lockstep is becoming more difficult to maintain at most firms with rainmaker partners either wanting a greater share of profits at their current firms or willing to go to the highest bidder.

Proposed solution. Two-tiered partnership compensated based on a meritocracy. Since we are starting with “A” quality associates and providing partner building training and mentoring, the idea is that the vast number of those attaining partnership will be worthy. In addition, since we will be a two tiered partnership compensated based on merit, all partners will be compensated in proportion to their firm contribution.

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OK, folks. What’s your reaction to my questioner’s analysis and proposed solutions?