My PBS Newshour interview about THE LAWYER BUBBLE is now available at http://to.pbs.org/143eTTG
Part I of this series considered the possibility that a key metric — average partner profits — has lost much of its value in describing anything meaningful about big law firms. In eat-what-you-kill firms, the explosive growth of top-to-bottom spreads within equity partnerships has skewed the distribution of income away from the bell-shaped curve that underpins the statistical validity of any average.
Part II considers the implications.
Searching for explanations beyond the obvious
In recent years, equity partners at the top of most big firms have engineered a massive redistribution of incomes in their favor. Why? The next time a senior partner talks about holding the line on equity partner headcount or reducing entry-level partner compensation as a way to strengthen the partnership, consider the source and scrutinize the claim.
One popular assertion is that the high end of the internal equity partner income gap attracts lateral partners. In fact, some firms boast about their large spreads because they hope it will entice laterals. But Professor William Henderson’s recent analysis demonstrates that lateral hiring typically doesn’t enhance a firm’s profits. Sometimes selective lateral hiring works. But infrequent success doesn’t make aggressive and indiscriminate lateral hiring to enhance top line revenues a wise business plan.
According to Citi’s 2012 Law Firm Leaders Survey, even law firm managing partners acknowledge that, financially, almost half of all lateral hires are no better than a break-even proposition. If leaders are willing to admit that an ongoing strategy has a failure rate approaching 50 percent, imagine how bad the reality must actually be. Even worse, the non-financial implications for the acquiring firm’s culture can be devastating — but there’s no metric for assessing those untoward consequences.
A related argument is that without the high end of the range, legacy partners will leave. Firm leaders should consider resisting such threats. Even if such partners aren’t bluffing, it may be wiser to let them go.
“We’re helping young attorneys and building a future”
Other supposed benefits to recruiting rainmakers at the high end of a firm’s internal partner income distribution are the supposedly new opportunities that they can provide to younger attorneys. But the 2013 Client Advisory from Citi Private Bank-Hildebrandt Consulting shows that lateral partner hiring comes at the expense of associate promotions from within. Homegrown talent is losing the equity partner race to outsiders.
In a similar attempt to spin another current trend as beneficial to young lawyers, some managing partners assert that lower equity partner compensation levels lower the bar for admission, making equity status easier to attain. Someone under consideration for promotion can more persuasively make the business case (i.e., that potential partner’s client billings) required for equity participation.
Such sophistry assumes that an economic test makes any sense for most young partners in today’s big firms. In fact, it never did. But now the prevailing model incentivizes senior partners to hoard billings, preserve their own positions, and build client silos — just in case they someday find themselves searching for a better deal elsewhere in the overheated lateral market.
Finally, senior leaders urge that current growth strategies will better position their firms for the future. Such appealing rhetoric is difficult to reconcile with many partners’ contradictory behavior: guarding client silos, pulling up the equity partner ladder, reducing entry level partner compensation, and making it increasingly difficult for home-grown talent ever to reach the rarified profit participation levels of today’s managing partners.
Broader implications of short-term greed
In his latest book, Tomorrow’s Lawyers, Richard Susskind wrote that most law firm leaders he meets “have only a few years left to serve and hope they can hold out until retirement… Operating as managers rather than leaders, they are more focused on short-term profitability than long-term strategic health.”
Viewed through that lens, the annual Am Law 100 rankings make greed respectable while masking insidious internal equity partner compensation gaps that benefit a relatively few. Annual increases in average partner profits imply the presence of sound leadership and a firm’s financial success. But an undisclosed metric — growing internal inequality — may actually portend failure.
Don’t take my word for it. Ask lawyers from what was once Dewey & LeBoeuf and a host of other recent fatalities. Their average partner profits looked pretty good — all the way to the end.
On Saturday, May 11 at 4:45 pm (EDT), C-SPAN 2 (Book TV) will broadcast my earlier appearance at The Book Stall in Winnetka, IL.
“The legal profession is facing some fundamental changes and Harper deserves credit for sounding the alarm…[His] big-picture argument is undoubtedly correct, and it is a real cause for concern.” — Adam Cohen, Yale Law School, “Is There A Lawyer Bubble?” in Time Magazine
Additional reviews are collected here.
Some law school deans are revealing what they regard as innovation in the face of the legal profession’s continuing crisis. Plummeting law school applications have tested their creativity in selling classroom seats. But recent trends — fewer applications amid a dismal job market for law graduates — haven’t deterred some efforts to preserve an unsustainable business model.
Moving through the five stages of grief
As deans confront declining applicant pools, many are moving through the five stages of grief — denial, anger, bargaining, depression, and acceptance.
Previously, I looked at deans in stage 1 — especially those who took to the editorial pages of major newspapers, touting the inherent value of a $150,000 legal degree for students who couldn’t get jobs practicing law. Apply now, they urged, because declining applications improved prospects for admission. Then you can do lots of great things that don’t require a JD.
Case Western Law School Dean Lawrence Mitchell made himself a poster child for such deans in denial, but he wasn’t alone. Other deans and former deans have similarly offered analyses that miss the mark on the causes of the lawyer bubble and offer proposals that distract attention from their own culpability. Some have advanced to stage 2 — anger over the situation and anyone who publicizes it.
From anger to bargaining
A few deans have reached stage 3 — bargaining. Some schools have reduced tuition and/or guaranteed freezes during a student’s three years. But Touro Law recently announced a special kind of bargain that targets the least informed potential applicants who are most vulnerable to law schools’ superficial sales pitches.
Under a partnership with the University of Central Florida, prospective law students can apply to an accelerated program whereby they attend UCF for three years and then complete their fourth year at Touro Law. They would receive their UCF bachelor’s degree upon completion of their 1L year at Touro.
Quite a deal, right?
Some things you should know
Touro Law inhabits the world of U.S. News and World Report’s unranked nether regions. Readers know that I’m no fan of those rankings, but it’s safe to say that no one would regard Touro as a top law school by any measure. According to U.S. News, it accepted 64 percent of all applicants last year.
Touro’s recent trends are especially revealing. (The following statistics come from the archives of the LSAC “Official Law School Guide.”)
In 2005, the school awarded 158 JD degrees. Tuition was around $26,000 a year.
In 2009, the school awarded 200 JDs. Annual tuition had increased to more than $36,000.
In 2011, the school awarded 221 JDs. Sixty percent found full-time long-term jobs requiring that degree.
In 2012, the school awarded 244 JDs, but only 53 percent had long-term full-time jobs requiring a JD. Tuition is now $43,000 a year.
In other words, as the Great Recession worsened and the demand for lawyers collapsed — especially for graduates of places such as Touro Law — the school increased both tuition and class size, even as its ability to place graduates in legal jobs declined.
The business model at work
Perhaps it’s unfair to single out Touro for behavior that has pervaded legal education: increasing class size and raising tuition as demand for new lawyers declined. But the school’s latest initiative invites close scrutiny of its motives.
According to Touro Law’s new dean, Patricia Salkin, “It’s a financial bargain for the UCF undergraduates and takes some pressure off the law school application process.”
My guess is that it’s a financial bargain for Touro Law, too, especially if it gets to keep most of the tuition that the UCF students pay to attend first year law school classes. (Annual tuition at UCF is $6,200 for residents; $22,300 for non-residents — compared to $43,000 for Touro Law.)
As for relieving the pressure of the law school application process, Touro can claim that benefit for itself, too. There’s nothing like locking in a law student three years before he or she might otherwise apply.
What are we doing to our kids?
It’s bad enough that current UCF undergraduates are eligible for this “fast-track program.” (Even the name implies a selectivity that sounds enticing, doesn’t it?) But encouraging — or even allowing — woefully uninformed high school students to apply to law school as entering UCF freshmen is something else.
The next step for some law schools seems painfully clear: setting up recruiting tables in middle school cafeterias across the country.
“[Harper has] a complete mastery of his subject matter, both from an economic and legal perspective…. Not only is Harper a gifted lawyer able to marshal facts, but he is an especially deft writer, and he tells his story as only a gifted author can…. Harper does not simply criticize the current state of affairs; he offers solutions, if only we are wise enough either to embrace them, modify them, or come up with additional curatives…. The Lawyer Bubble is a wake up call for those of us who love our profession, and it is a book that all lawyers should read.”
– Hon. Jeffrey Cole (USDC, ND IL) book review in “Circuit Rider,” the official publication of the Seventh Circuit Court of Appeals Bar Association (April 2013)
Bloomberg Business Week recently featured THE LAWYER BUBBLE in two more articles: “The Case Against Law School” and “Howrey’s Bankruptcy and Big Law FIrms’ Small Future.” The latter also appears in the current issue of the print edition.
On Tuesday, May 7 at 1:00 pm CDT, U.S. News & World Report is hosting a Google-plus Hangout, during which Simon Owens, Assistant Managing Editor of USN&WR, will interview me. Members of the public can RSVP and participate via this link: https://plus.google.com/events/cu2d4q7klmrcts5eb775iv7jkas