THE NEWEST BIG LAW PARTNERS SPEAK

Posted on November 13, 2013 by thebellyofthebeast

A recent survey of associates who became partners in their Am Law 200 firms between 2010 and 2013 produced some startling results. The headline in The American Lawyer proclaims that new partners “feel well-prepped and well-paid.” But other conclusions are troubling.

More than half (59 percent) of the 469 attorneys responding to the survey were non-equity partners. That’s significant because for them the real hurdle has yet to come. Most won’t advance to equity partnership in their firms. But even the combined results paint an unattractive portrait of the prevailing big law firm business model.

Lateral progress

It should surprise no one that institutional loyalty continues to suffer as the leveraged big law pyramid continues to depend on staggering associate attrition rates. According to the survey, almost half of new partners said that “making partner is nearly impossible.”

It’s toughest for home grown talent. Forty-seven percent of new partners switched firms before their promotions, most within the previous four years. An earlier survey of 50 Am Law 200 firms made the point even more dramatically: 59 percent of those who made partner in 2013 began their careers elsewhere. Long ago, a lot of older partners became wise to this gambit. They learned to hoard opportunities and preserve client silos as the way to move up and/or acquire tickets into the lucrative lateral partner market.

Somewhat paradoxically in light of their lateral paths into the partnership, 90 percent of new partners thought that commitment to their firms was of great or some importance as a factor in their promotion to partner. Yet almost 60 percent said that, since making partner, their commitment to the firm had decreased or only stayed the same.

Why don’t they feel like winners?

More than 80 percent of respondents thought that the “ability to develop and cultivate new clients” was “of great or some importance” in their promotion to partner. Yet more than half of new partners said that they received no formal training in business development.

Other results also suggest that a big law partnership has become an increasingly mixed bag. Almost eight out of ten said their business development efforts had increased since making partner. How did they make room for those activities in their already full workdays as “on-track-for-partner associates”? Eighty-three percent reported that time with their family “had decreased or stayed the same.” More than half said that control of their schedules had decreased or stayed the same. Making partner doesn’t seem to help attorneys achieve the kind of autonomy that contributes to career satisfaction and overall happiness.

The meaning of it all

More than 60 percent of new partners were satisfied or very satisfied with their compensation. Maybe money alone will continue to draw the best law graduates into big firms. A more important question is whether they will stay.

Most partners running today’s big firms assume that every associate has the same ambition that they had: to become an equity partner. Meanwhile, they’ve been pulling up the ladder on the next generation. Leverage ratios in big firms have doubled since 1985; making equity partner is now twice as difficult as it was then. Does anyone really believe that the current generation of young attorneys contains only half the talent of its predecessors?

The law is a service business. People are its only stock in trade. For today’s leaders who fail to retain and nurture young lawyers, the future of their institutions will become grim indeed. As that unfortunate story unfolds, they will have only themselves to blame. Then again, if these aging senior partners’ temporal scopes extend only to the day they retire, perhaps they don’t care.

“I AM A DICTATOR.”

Posted on November 5, 2013 by thebellyofthebeast

Some people think that law professors are boring. A dean in Cleveland is proving them wrong.

A year ago, Case Western Reserve Law School Dean Lawrence Mitchell burst onto the national scene with a New York Times op-ed selling a law degree as a great deal. Shortly thereafter, he gave a Bloomberg Law interview in which he continued to press his case. For his efforts, Mitchell took center stage in my article, “The Law School Story of the Year – Deans in Denial.”

Well, he-e-e-e-e’s b-a-a-a-a-c-k! Mitchell is now the leading man in what is becoming a tragedy for his school.

The principal antagonists

Raymond S.R. KU, became a tenured professor at Case in 2003, co-director of the Center for Law, Technology & the Arts in 2006, and associate dean for academic affairs in 2010. On Halloween 2013, Ku filed an amended complaint against Lawrence Mitchell and Case Western Reserve University for alleged retaliation because he opposed “Dean Mitchell’s unlawful discriminatory practice of sexually harassing females in the law school community.”

Lawrence Mitchell became dean in 2011. The complaint alleges that he arrived from George Washington University Law School with some personal baggage, including several marriages culminating in divorces, one of which involved a student. If the allegations about his conduct after becoming dean at Case are true, his behavior was both stupid and reprehensible. (Spoiler alert: the details are less titillating than most voyeurs might like — and the juiciest stuff is hearsay. UPDATE: Dean Mitchell has moved to strike many of the allegations as “immaterial, impertinent, and scandalous.)

Hubris revealed?

Buried in the salacious allegations that have generated media attention is paragraph 86 of the amended complaint: “In relation to the performance of his duties as dean of the Case Law School, Dean Mitchell stated vehemently, ‘I am a dictator.'”

Allegations aren’t evidence. Maybe he never said it. But what if he did? Maybe he was joking. Or maybe he believed it. Or, worst of all, maybe it was true.

In many respects — from framing a school’s mission to creating annual budgets to doling out office assignments — deans wield enormous power. But the best deans aren’t dictators; they’re consensus builders. They have line accountability to university provosts, presidents and trustees; however, they also have to deal effectively with students, alumni, and faculty. Any dean who likens his role to that of a dictator eventually becomes a problem for his institution.

Dollars behind the drama?

As the controversy swirls around Mitchell, a very good law school suffers. Case graduated 223 new attorneys in 2010. The entering first-year class of 2013 includes fewer than half that number — 100. Apparently, Mitchell’s year-end sales pitch landed on deaf ears.

In his Bloomberg Law interview last January, Dean Mitchell said, “Of course, we’re running a business at the end of the day.” From that perspective, perhaps Case University’s central administration doesn’t view things as badly as Case’s 1L numbers might suggest.

Specifically, there’s gold in law school LLM students, and Case has 85 of them entering its program this year. For a school with only 100 first-year JD students, that’s a lot. (The University of Chicago has 196 entering JD-students and 70 LLM-students.) In contrast to more extensive financial aid available for JD students, those seeking an LLM at Case are eligible only for “a limited number of merit scholarships…in the form of a partial reduction for tuition.”

What lies ahead?

Perhaps Mitchell’s business plan has been to follow the money, focusing on the lucrative LLM recruits. Maybe that’s his vision for the school as a profit-maximizing venture. Maybe that’s precisely the direction that his bosses want him to take. Maybe Case’s central administration has given Mitchell such latitude to wield power that he feels comfortable boasting about it. Or, as I suggested at the beginning, perhaps there’s no substance to any of the claims against him.

If it turns out that Mitchell’s superiors are rewarding what they regard as “business success” by allowing him to run the school as a dictator, they have forgotten an important truth. Sometimes dictators get deposed — especially if they’re defendants in lawsuits.

AS CLIENTS SPEAK, WHO’S LISTENING?

Posted on October 28, 2013 by thebellyofthebeast

Many big law firms pursue a path of mindless growth through mergers and lateral hiring, but few managing partners seem to question the wisdom of that strategy. Growth for its own sake gets protective cover in false rhetoric about serving clients. But contrary data continue to accumulate on the subject of what clients really want.

Challenging traditional views

Two recent articles ought to send a chill down the spine of big law partners everywhere. The first is a recent article for the Harvard Business Review Blog, “Why the Law Firm Pedigree May Be a Thing of the Past,” by Dina Wang and Firoz Dattu.

As the title suggests, the authors argue that clients are increasingly searching for value and efficiency at the expense of big law firms that rely on their brand alone to attract and retain business at premium rates. Insofar as the authors believe that truly elite law firms may be in mortal danger, I think they overstate their case. The most sophisticated clients with the most complex problems will continue to seek top legal talent. Much of that talent will reside in elite firms that will retain their stature, provided they create environments that appeal to the best young lawyers.

But it’s more difficult to quibble with the authors’ survey of general counsel at 88 major companies. In matters that were high-stakes (but not necessarily bet-the-company), 74 percent were less likely to use an Am Law 20 or Magic Circle firm than a less-pedigreed firm, provided they achieved legal cost savings of at least 30 percent. (The article suggests that the actual cost savings in such situations could exceed 60 percent.)

Follow the money

Now couple that finding with these recent Counsel-Link survey results:

“Among the firms with 201-500 lawyers, referred to as ‘Large Enough’ firms in this report, the share of U.S. legal fees paid by clients has grown from 18% three years ago (July 1, 2009 – June 30, 2010) to 22% in the trailing 12 months that ended June 30, 2013.”

Who’s lunch are the “Large Enough” firms eating? The megafirms’:

“Simultaneously, the share of U.S. legal fees paid by clients with more than 750 lawyers, the ‘Largest 50,’ has gone in the opposite direction — from 26% to 20% over the same period.”

The shift is even more dramatic in higher fee legal work: “‘Large Enough’ firms have almost doubled the share of high fee litigation matters — those matters generating outside counsel fees totaling $1 million or more (High Fee Work). ‘Large Enough’ firms grew their portion of U.S. High Fee Work from 22% three years ago to 41% in the trailing 12 months.”

Disruption as a powerful market force

How are the “Large Enough” firms doing it? Here’s a partial answer: “‘Large Enough’ firms billed nearly twice as much under alternative fee arrangements as did the ‘Largest 50’ firms over the trailing 12 months.”

None of this should come as a surprise. For years, law firm management consultants have been saying that there are no economies of scale in the practice of law once a firm reaches about 100 attorneys. In fact, maintaining the infrastructure to support continuous expansion at the largest firms actually produces diseconomies.

Embedded interests die hard

Firms engaged in aggressive lateral hiring and law firm mergers might be adding top line revenues, but most are also adding disproportionately more costs. According to the 2013 Hildebrandt Consulting Client Advisory, 60 percent of law firm managing partners said (in an anonymous survey) that their lateral hires had been financial successes. If 40 percent are willing to admit to deploying a strategy that is “break even at best,” imagine how worse the reality must be.

Perhaps the accumulating intelligence about clients’ actual desires and the true costs (both financial and cultural) of a growth strategy will cause some managing partners pursuing that strategy to pause. Maybe they’ll reconsider the construction of global behemoths that serve their own egos but little else. Don’t count on it.

ARE LAWYERS BECOMING HAPPIER?

Posted on September 16, 2013 by thebellyofthebeast

A recent scholarly study and the 2013 Am Law Midlevel Associates Survey together pose an intriguing question: Is the legal profession becoming happier? If so, that would be a welcome development.

Perhaps the answer is yes and I should take partial credit, at least for improved associate morale in some big firms. After all, for years I’ve been writing and speaking about the extent to which the profession has evolved in ways that undermine attorney well being, especially in large firms. Since the publication of my book, The Lawyer Bubble, many managing partners have invited me to address their partnership meetings on that subject. But before getting too carried away, let’s take a closer look.

No Buyer’s Remorse!

In “Buyers’ Remorse? An Empirical Assessment of the Desirability of a Lawyer Career,” Professors Ronit Dinovitzer (University of Toronto), Bryant Garth (University of California, Irvine – School of Law), and Joyce S. Sterling (University of Denver Strum College of Law) analyzed data from the After the JD project. It tracks about 4,500 lawyers from the class of 2000 who responded to questions in 2003, 2007, and 2012.

Among other things, the authors conclude that “the evidence of mass buyer’s remorse [over getting a legal degree] is thin at best.” (p. 3) I’m not convinced.

First, a new lawyer entering the market in 2000 has enjoyed better times for the profession than graduates of the last several years. That doesn’t render data from the class of 2000 meaningless, but a study based on the experience of those attorneys shouldn’t become a headline-grabber that unduly influences anyone considering a legal career today.

Second, the authors rely only on responses that attorneys provided in 2007. The answers they gave in 2012 are “currently being cleaned and readied for analysis” (p. 5), so the authors didn’t use them. What was the rush to get to print with 2007 data? Why not wait and use the 2012 results to see whether accelerating law firm trends since 2007 affected responses from even the comparatively lucky class of 2000.

(For more on those trends, including partner de-equitizations, salary reductions for non-equity partners, and the environment that has accompanied the accelerating drive to increase short-term profits, read Edwin Reeser’s excellent two-part article in the ABA Journal.)

More on the Data

In the end, After the JD is a useful source of information. But it’s an overstatement to argue, as Dinovitzer et al. assert, “the data from the AJD project are the best (and almost only) data available on the issues currently being debated.” (p. 5)

In fact, there have been dozens of studies on attorney satisfaction, including an October 2007 ABA survey in which six out of ten attorneys who have been practicing 10 years or more said they would not recommend a legal career to a young person. And that was prior to the Great Recession.

Now before defensive academics pull out their knives, let me state clearly that I’m not suggesting that the ABA’s online survey of 800 lawyers is somehow superior to the obviously more comprehensive After the JD project. It’s not. But contrary to the authors’ assertion, AJD is far from “the only data available on the issues currently being debated.”

For example, Professor Jerome A. Organ (University of St Thomas School of Law) recently published a compilation of 28 attorney surveys taken between 1984 and 2007. Rates of satisfied attorneys ranged from a low of 59 percent (South Carolina – 2008) to a high of 93 percent (Minnesota – 1987). The latest national study on Organ’s list (ABA/NALP – 2007) reported a satisfaction rate of 76 percent. (He excluded the ABA’s reported 55 percent satisfaction rate in 2007 because it “was not a random sample of attorneys.” n. 144.)

The Am Law Survey

Meanwhile, Am Law’s annual Midlevel Associates Survey of third-, fourth-, and fifth-year associates reported record high levels of associate satisfaction. Are their lives improving?

Anecdotal evidence of another possibility comes from an observed shift in attitudes among students in my undergraduate and law classes over the past several years. Many members of the youngest generation of lawyers (and would-be lawyers) are so concerned about finding jobs that they are now equating satisfaction with getting and keeping one long enough to repay their staggering student loans. That might explain why the same Am Law survey found that only 10 percent of men and 6.5 percent of women saw themselves as equity partners at their current firms in five years.

Now What?

Even so, inquiries that I receive from law firm managing partners provide more anecdotal proof that some firms have decided to value associate morale. The question is whether firm leaders will have the courage to push positive change into the very heart of the prevailing big law firm business model.

On that front, the news is less encouraging. In March 2013, Forbes reported on a “Career Bliss” survey of 65,000 employees that ranked “law firm associate” first on the list of “Unhappiest Jobs in America.” Likewise, in a recent Altman Weil Flash Survey, 40 percent of managing partners reported that partner morale at their firms in 2013 was lower than at the beginning of 2008 (pre-recession).

The Bottom Line

In the end, Dinovitzer et al. seem encouraged that “the overall trend is that more than three-quarters of respondents, irrespective of debt, express extreme or moderate satisfaction with the decision to become a lawyer.”

That’s supposed to be good news. But there are more than 1.2 million attorneys in the U.S.. Even a 75 to 80 percent satisfaction rate leaves more than 200,000 lawyers with what sure looks like buyer’s remorse.

The profession can do better than a “C.”

LATEST SYMPTOMS OF AN AILING PROFESSION

Posted on September 4, 2013 by thebellyofthebeast

Together, three recent stories capture much of what ails the legal profession: 1) law schools continue to produce way too many lawyers for the number of anticipated jobs requiring a JD degree; 2) future attorneys incur staggering debt for a three-year degree that can and should be obtainable in two; and 3) many senior partners in big law firms at the pinnacle of the profession have lost an appreciation for their good fortune and a sense of perspective that comes with it.

The End of Lawyers?

The first story reports a continuing drop in the number of law school applicants — more than 30 percent since 2010! Could this be the beginning of what one law professor has predicted will be an actual shortage of lawyers by 2016?

No.

Using 2010 as a baseline against which to measure the comparative decline in applications is misleading. The Great Recession produced a surge of 2009-2010 applicants seeking a three-year reprieve from an impossible job market. At that time, law school still looked like a safe bet, largely because deans could tout 93 percent employment rates without disclosing which of their graduates held jobs that were short-term, part-time, school-funded, or didn’t require a legal degree.

Another fact is more salient: Overall acceptance rates have increased dramatically. In 2003, about half of the 98,000 applicants were admitted. In 2012, law schools took 75 percent of the 68,000 applicants. Bottom line: prior to the Great Recession, first-year enrollment totaled about 49,000; in 2012, it was 44,500. That drop is certainly affecting some law schools. But the overall decline is not as dramatic as the hyperbolic headlines. If first-year enrollment ever falls below 30,000 and stays there for a few years, that will be newsworthy.

What Are Students Getting For Their Money?

Meanwhile, President Obama weighed in on the subject of eliminating the third year of law school. It’s been a great idea for a long time. Of course, the third year will survive the President’s criticism because it accounts for one-third of law school tuition revenues. Such a central component of the law school business model won’t die easily.

Some members of the legal academy defend the third year of formal legal education as necessary for increasingly complex times. That argument may prove too much. After the first year teaches prospective attorneys to think like lawyers and the second year covers basic substantive legal areas, the most relevant legal training occurs outside the classroom under the tutelage of practicing lawyers. Many attorneys develop specialties, but that doesn’t result from taking one or two advanced courses during the third year of law school.

Deans can pass blame for the enduring third year onto the ABA. It has long been a victim of regulatory capture by the institutions it’s supposed to be supervising for the well being of all attorneys and the profession. The vast majority of states require graduation from an ABA-accredited law school and the ABA’s rules insist on course work that requires three academic years to complete. That’s why the few schools that offer accelerated two-year JDs are simply cramming three years of credits into two calendar years.

Moreover, the accelerated programs rarely reduce the cost of law school. Most of the schools offering accelerated programs charge the same total tuition as their traditional three-year programs.

Meanwhile, At Big Firms…

A final story is developing over financial reports concerning the overall performance of big law firms in 2013: Revenues are flat; demand is down. Partner profits might not rise this year!

Where you stand depends on where you sit, I suppose. But what does it say about the most lucrative segment of the profession when law firm management consultants can induce panic at the prospect that average equity partner profits might remain steady or — perish the thought — drop to still-astounding six- or seven-figure levels that seemed remarkably good less than a decade ago?

I think it suggests that too many partners have forgotten why they went to law school in the first place. Very few became attorneys because they thought it would make them rich. But they’ve grown accustomed to that pleasant surprise.

Maybe the next generation will do better.

ONCE MORE ON THE MILLION DOLLAR JD DEGREE

Posted on September 3, 2013 by thebellyofthebeast

In late July, my article “The Dangerous, Million-Dollar Distraction” appeared here before its republication at Am Law Daily and Business Insider. In it, I discussed a study purporting to calculate the lifetime premium of a law degree compared to BA holders. The authors of the study, Professors Michael Simkovic and Frank McIntyre, weren’t pleased and Am Law Daily has now published their rejoinder. Were it not for their now pervasive claims relating to my alleged confusion, errors, and mistakes, I’d let it pass because the study has already received more attention than it deserves.

The real point

There were no errors in my analysis. My view – expressed in the article – is that the decision to attend law school should not turn on the hope of future financial rewards. In that respect, Simkovic and McIntyre take a strong position that looks like career advice based on predictions about the future: “[M]any college graduates who follow the critics’ advice and skip law school will forego a lucrative career and face higher long-term risks of financial hardship.” (p. 12)

The law is a great profession that I love, but it’s not for everyone. Through the years and for many undergraduates, law school has been a default position for liberal arts majors who can’t decide what to do next. For far too many, life after law school becomes a process whereby great expectations clash with harsh reality in a way that creates career dissatisfaction and worse.

As a consequence, for me, the most important problem with the Simkovic/McIntyre study is that it uses aggregate data in inviting students individually to choose a legal career in the pursuit of financial security or a safe return on their educational investment. That is the wrong reason for anyone to become a lawyer.

Multiple markets

No one talks much about the two markets for law schools. The Simkovic/McIntyre study ignores the differences among schools and, in a response to Professor Deborah Merritt’s critique, Simkovic asserted on Brian Leiter’s Law School Reports blog that he “doesn’t think the evidence for a bimodal distribution of lifetime earnings is very compelling.” One wonders what profession he’s looking at.

For some – especially but not exclusively graduates from top law schools who land (and keep) jobs in big firms – practicing law can be lucrative. But those outcomes are on the far end of a severely skewed distribution of attorney incomes. As NALP data confirm, that skewing begins from the moment of graduation. Big law firm first-year associates earn an average of more than $130,000 yearly and average partner profits for the Am Law 100 exceed $1 million.

But big law attorneys account for only about 10 percent of all practitioners. Far more people – mostly but not exclusively graduates from law schools outside the top group – wind up at the much lower end of the distribution. According to the Bureau of Labor Statistics, the median income for all lawyers in the United States in 2010 was $112,760.

Red herrings or real issues?

Professor Simkovic — initially via Professor Leiter’s blog — called my observations about income distribution a “red herring.” But the real red herring is using the average of a skewed distribution to tout a “Million Dollar Degree” – first in his study’s original title and then persisting in the final sentence of the article’s synopsis. Of course, it attracts more attention than even his dramatically lower median (midpoint) value. (In his Leiter blog post, Simkovic endorsed $330,000 as the lifetime (40-year career) net JD-degree premium for the median (midpoint) of his sample.)

At some point below the 25th percentile, even Simkovic’s study proves that the so-called JD-degree premium turns negative. That includes a lot of lawyers, although the study doesn’t disclose the number.

Contrived controversies

My other observations to which Simkovic took exception — initially in his Leiter blog post and now in his Am Law Daily response — relate to points that his own study acknowledges: the presence of a statistical correlation doesn’t prove causation (p. 25) or predict the future (p. 38); the conclusions of any regression analysis depend on its assumptions (pp. 39-41); none of the attorneys in his 1,382-person sample graduated after 2008 (p. 13 and n. 31; companion slide 13).

(One of the more perplexing criticisms in Simkovic’s Leiter blog post was that I was wrong about half of all JD-degree holders finding themselves below the median for all JD-degree holders. My statement simply embodied the definition of a median – half above and half below that midpoint. His related comment about median incomes relative to bachelor’s degree holders is irrelevant to anything I wrote.)

Others will decide the fate of the Simkovic/McIntyre study as an enduring scholarly work. My views will not move Professor Simkovic or anyone else to a different position on the underlying issue of whether law schools today should rethink their business models in light of the profession’s ongoing transformation.

Reality therapy

But the academic debate has little bearing on my mission. Rather, as I wrote, my concern is for young people who “rely on an incomplete understanding of the study’s limitations to reinforce their own confirmation bias in favor of pursuing a legal career primarily for financial reasons.”

Several years ago, I added an undergraduate course to my workload in the hope of providing students with information that might help them in deciding whether to pursue a legal career. The vast majority of those students go on to law school, but with an increased awareness of the road ahead. They understand that even in tough economic times, many JD-degree holders will do well, while others won’t.

The reality of those less fortunate creates challenges for the entire profession because: 1) most prelaw students have a difficult time imagining that they’ll ever find themselves in the lower 25th percentile of anything; and 2) even among the so-called “winners” who wind up a lot higher in the overall income distribution, attorney career dissatisfaction remains widespread.

In short, prelaw students should tread carefully along the path toward law school. The law can lead to a great career, but it’s not for everyone.

Even if the high-end market for new attorneys were booming – which it isn’t – pursuing a JD for financial reasons is a mistake. As a wise person said long ago, ”Not everything that can be counted counts; not everything that counts can be counted.”

THE DANGEROUS MILLION-DOLLAR DISTRACTION

Posted on July 24, 2013 by thebellyofthebeast

A new study, renamed “The Economic Value of a Law Degree,” is the latest effort to defend a troubled model of legal education. It’s especially disheartening because, before joining Seton Hall University School of Law in 2010, co-author Michael Simkovic was an associate at Davis, Polk & Wardwell in 2009-2010. At some level, he must be aware of the difficulties confronting so many young law graduates.

Nevertheless, Simkovic and co-author Frank McIntyre (Rutgers Business School) “reject the claim that law degrees are priced above their value” (p. 41) and “estimate the mean pre-tax lifetime value of a law degree as approximately $1,000,000 (p. 1).”

As the academic debate over data and methodology continues, some professors are already relying on the study to resist necessary change. That’s bad enough. But my concern is for the most vulnerable potential victims caught in the crosshairs of the “Million Dollar Law Degree” media headlines taken from the article’s original title: today’s prelaw students. If they rely on an incomplete understanding of the study’s limitations to reinforce their own confirmation bias in favor of pursuing a legal career primarily for financial reasons, they make a serious mistake.

The naysayers are wrong?

The study targets respected academics (including Professors Herwig Schlunk, Bill Henderson, Jim Chen, Brian Tamanaha, and Paul Campos), along with “scambloggers” and anyone else arguing that legal education has become too expensive while failing to respond to a transformation of the profession that is reducing the value of young lawyers in particular. Professors Campos and Tamanaha have begun responses that are continuing. [UPDATE: Tamanaha’s latest is here.] Professor Brian Leiter’s blog has become the vehicle for Simkovic’s answers.

One obvious problem with touting the $1 million average is that, for the bimodal distribution of lawyer incomes, any average is meaningless. Professor Stephen Diamond offered a rebuttal to Campos that Simkovic endorsed, calculating the net lifetime premium at the median (midpoint) to be $330,000 over a 40-year career. That might be closer to reality. But a degree that returns, at most, a lifetime average of $687 a month in added value for half of the people who get it isn’t much of an attention-getter. As noted below, even that number depends on some questionable assumptions and, at the 25th percentile, the economic prospects are far bleaker.

Causation

In the haze of statistical jargon and the illusory objectivity of numbers, it’s tempting to forget a fundamental point: statisticians investigate correlations. Even sophisticated regression analysis can’t prove causation. Every morning, the rooster crows when the sun rises. After isolating all observable variables, that correlation may be nearly perfect, but the crowing of the rooster still doesn’t cause the sun to rise.

Statistical inference can be a useful tool. But it can’t bridge the many leaps of faith involved in taking a non-random sample of 1,382 JD-degree holders — the most recent of whom graduated in 2008 (before the Great Recession) and 40 percent of whom have jobs that don’t require a JD — and concluding that it should guide the future of legal education in a 1.5 million-member profession. (p. 13 and n. 31)

Caveats

Simkovic and McIntyre provide necessary caveats throughout their analysis, but potential prelaw students (and their parents) aren’t likely to focus on them. For example, with respect to JD-degree holders with jobs that don’t require a JD, they “suggest” causation between the degree and lifetime income premiums, but admit they can’t prove it. (p. 25)

Likewise, they use recessions in the late 1990s and early 2000s as proxies for the impact of the Great Recession on current law graduates (compared to bachelor’s degree holders) (p. 32), minimizing the importance of recent seismic shifts in the legal profession and the impact on students graduating after 2008. (Simkovic graduated in 2007.)

This brings to mind the joke about a law professor who offers his rescue plan to others stranded on a deserted island: “First, assume we have a boat…” The study finesses that issue with this qualification: “[P]ast performance does not guarantee future returns. The return to a law degree in 2020 can only be known in 2020.” (p. 38)

Similarly, the results assume: 1) total tuition expense of $90,000 (presumably including the present value cost of law school loan interest repayments; otherwise, that number is too low and the resulting calculated premium too high); 2) student earnings during law school of $24,000; 3) graduation from law school at age 25 (no break after college); and 4) employment that continues to age 65. (pp. 39-41) More pessimistic assumptions would reduce the study’s calculated premiums at all income levels. At some point below even the Simkovic-McIntyre 25th percentile, there’s no lifetime premium for a JD.

Conclusions

After a long list of their study’s “important limitations” — including my personal favorite, the inability to “determine the earnings premium associated with attending any specific law school” — the authors conclude: “In sum, a law degree is often a good investment.” (p. 50) I agree. The more important inquiry is: When isn’t it?

In his Simkovic-endorsed defense of the study, Professor Diamond offers a basic management principle: any positive net present value means the project should be a go. But attending law school isn’t an aggregate “project.” It’s an individual undertaking for each student. After they graduate, half of them will remain below the median income level — some of them far below it.

The authors dismiss Bureau of Labor Statistics employment projections (pp. 6-7), but it’s difficult to ignore current reality. In 2012 alone, law schools graduated 46,000 new attorneys. For that class, nine months out only 10 percent of law schools (20 out of 200) had long-term full-time JD-required job placement rates exceeding 75 percent. The overall JD-job placement average for all law schools was 56 percent.

Some of the remaining 44 percent will do other things because they have no realistic opportunity for legal careers. Financially, it could even turn out okay for a lot of them. (In that respect, you have to admire the boldness of the authors’ footnote 8, citing the percentage of Senators and CEOs with JDs.)

But with better information about their actual prospects as practicing attorneys, how many would have skipped their three-year investments in a JD and taken the alternative path at the outset? That’s the question that the Simkovic/McIntyre study doesn’t pose and that every prospective law student should consider.

More elephants in the room

Notwithstanding the economic benefits of a JD that many graduates certainly enjoy, attorney career dissatisfaction remains pervasive, even among the “winners” who land the most lucrative big firm jobs. That leads to the most important point of all. Anyone desiring to become an attorney shouldn’t do it for the money. Even the Simkovic/Mcntyre study with its many questionable assumptions proves that for thousands of graduates every year the money will never be there.

But the authors are undoubtedly correct about one thing: “The data suggests [sic] that law school loans are profitable for the federal government.” (p. 46) Law schools like them, too.

It doesn’t take a multiple regression analysis to see the problems confronting the legal profession — but it can be used to obscure them.

ANOTHER COMMENDABLE CONDUCT AWARD

Posted on June 19, 2013 by thebellyofthebeast

Big law bankruptcy attorneys may have finally killed their golden goose. We’ll never know if less hubris and more thought might have prevented the U.S. Trustee from releasing new attorney compensation guidelines that surely have prominent members of that bar squirming. Those guidelines earn my latest “Commendable Conduct Award.” Starting November 1, we’ll see how many judges have the courage to apply them.

Restraint in the race to $1,000 an hour billing rates to maximize short-term profits might have served practitioners better in the long run. Likewise, more discretion in responding to media inquiries about the lucrative bankruptcy law world might have been wiser than Weil, Gotshal & Manges partner Harvey Miller’s stunning comment to the Wall Street Journal in 2011: “The underlying principle is, if you can get it, get it.”

Flying Under the Radar

The bankruptcy practice in big firms is unique because there’s no real client putting the usual counter-pressure on attorneys seeking to enhance their personal wealth. It’s the billable hour regime at its worst.

Outside bankruptcy, corporate clients everywhere are pushing back on big law firms’ hourly rate increases, refusing to pay for high-priced first-year associates, demanding budgets, scrutinizing attorney activities, and generally seeking greater economy in the delivery of outside legal services. Bankruptcy attorneys have little comparable accountability. They simply set their rates, decide what tasks to perform, and assign manpower as they see fit.

Hello and Good-bye

Unlike corporate clients who dangle the prospect of long-term relationships and future business to encourage their outside attorneys to be more efficient, bankruptcy practitioners have a series of one-shot engagements. When the current proceeding is over, their bankruptcy “client” of the moment disappears, never to return.

Bankruptcy petitions are also vehicles for law firm oligopolists to share pricing information. When most senior big firm bankruptcy partners request $1,000 an hour, it becomes the reasonable and customary rate. But even more remarkable are the $400 an hour and up rates that they can often get for junior associates — the same ones who add so little value that real clients refuse to pay for them at all.

Theoretical Oversight

The U.S. Trustee reviews fee petitions. But to date, those efforts have amounted to quibbling over obviously suspect expenses, such as $500 hotel rooms when cheaper accommodations were available or taking limos when taxis were a reasonable alternative.

Likewise, attorneys representing competing interests in the bankrupt’s estate — creditors, for example — can object to the fees of other attorneys in the proceeding. But none has any incentive to rock the lucrative hourly rate boat in which they all sit. Bankruptcy judges have the final word on attorneys’ fees petitions and they routinely rubber-stamp them.

Now It’s Becoming Real

When the U.S. Trustee first proposed the new guidelines, big firm bankruptcy lawyers throughout the country united in opposition. The most strident objections were to the idea that firms should reveal hourly rates for comparable non-bankruptcy associates and partners working for real clients.

Were firms worried about providing data that would allow the U.S. Trustee and supervising courts to compare hourly rates sought in bankruptcy with those resulting from a market that is at least somewhat more competitive? Soon, we’ll find out.

The new forms accompanying the guidelines require, among other things, that firms reveal the “blended hourly rates” of their personnel in 10 different categories ranging from equity partners to paralegals. In addition to the blended rates sought in the fee petition, firms also must disclose their firmwide (or, in some cases, office wide) blended rates for each category.

A Step on the Road to Transparency

The new guidelines aren’t perfect and attorneys will manipulate them. Budgets are optional. Hourly “step rate” increases are automatic as attorneys gain seniority. Attorney categories are too broad, with a single category for all equity partners and with associates grouped into categories covering three years. An especially large loophole allows firms to report either the “billed” or “collected” comparable hourly rate. (Real clients request discounts from standard hourly rates, and they often get them.)

Even so, the U.S. Trustee deserves credit for moving a dark corner of the profession from opacity to translucence. Free market devotees — of which big law has many — should embrace the changes. So far, big firm partners have resisted them vehemently.

The governing principle for too much of the large law firm world has become “if you can get it, get it.” Perhaps many of those espousing that view are about to “get it” in a much different way than they have in the past.

PROOF OF THE PROFESSION’S CRISIS

Posted on June 5, 2013 by thebellyofthebeast

This article won the “Big Law Pick of the Week.” BigLaw‘s weekly newsletter reaches the world’s largest law firms and the general counsel who hire them.

Someone should remind law firm leaders that the Fifth Amendment protection against self-incrimination isn’t just for clients. It can work for them, too. The latest Altman-Weil survey of firm leaders is proof of widespread management incompetence, stupidity, and worse.

The survey went to the chairs or managing partners of 791 firms with 50 or more lawyers. Firms with more than 250 lawyers (that is, mostly Am Law 200 firms) had a much higher response rate (42 percent) than smaller firms (26 percent). In other words, the survey results tilt toward big law firm attitudes.

The troubling big picture

The Am Law Daily’s summary includes comments from the survey’s author, Thomas Clay, who said that too many firms are “almost operating like Corporate America…managing the firm quarter-to-quarter by earnings per share.” That shortsighted approach is “not taking the long view about things like truly changing the way you do things to improve client value and things of that nature.”

For example, 95 percent of respondents view increased pricing competition as an ongoing trend, and 80 percent expect shifts to non-hourly billing structures. But only 29 percent have made significant changes to their own pricing practices in the wake of the recession.

Group stupidity

It gets worse. When asked to identify their greatest challenges over the next 24 months, the item that managers cite most often is “increasing revenue.” The rest of the list is, in order: new business, growth, profitability, management transition, cost management, and attracting talent. If you’re wondering where clients fit — other than as a source of revenue and profits in items one, two, and three — “client value” finished eighth.

Long-term thinking? Forget it. The client silo mentality and resulting culture of short-termism are widespread and deep. Almost 30 percent of law firm leaders say their firms lack adequate mid-level partners to whom they could transition clients. In another set of responses, they reveal why: 78 percent say that “senior partners don’t want to retire”; 73 percent admit that “senior partners don’t want to forfeit current compensation by transitioning client work.”

Lateral incompetence

Meanwhile, lateral hiring remains the prevailing strategy to achieve growth. Ninety percent of respondents plan to hire laterals in 2013; more than 60 percent seek entire practice groups. For firms of more than 250 lawyers, the numbers are even more startling: 100 percent plan to acquire laterals; 92 percent plan to acquire groups.

How much time do lateral partners get to prove their worth? Almost 60 percent of responding firm leaders say two years or more; 30 percent don’t set a time frame.

What happens when laterals don’t meet the expectations that brought them into the firm? Two-thirds of firm leaders said that they “sometimes, rarely or never” tell unproductive lateral hires to leave.

Institutional ineptitude

Almost 40 percent of respondents say their partners’ morale is lower compared to the beginning of 2008. And those partners survived the purges of 2009 and beyond.

If you’re looking for contributors to declining morale, try these. Seventy-two percent of firm leaders report that fewer equity partners will be a permanent trend going forward. Three-fourths have either tightened their standards or take them more seriously. Meanwhile, 92 percent of responding two-tier firms don’t have an up-or-out policy as non-equity partner profit centers grow.

To summarize:

Managing partners know that change is coming and clients are demanding it, but firms aren’t revisiting their basic strategies or business models.

Growth and profits finish far ahead of enhancing client value as most law firm leaders’ top concerns.

Leaders view aggressive lateral hiring as critical to law firm growth, but when laterals don’t produce, most firms don’t do much about it.

Succession planning is problematic because senior partners don’t want to relinquish compensation that is tied to their client billings.

As senior leaders continue to pull up the equity partner ladder on the next generation, morale plummets and managing partners worry about the absence of mid-level talent to serve clients in the future.

Taking all of this together, psychologists would call it a severe case of cognitive dissonance — simultaneously holding contradictory thoughts in your head. Those who assert that most big firms are resilient and face no life-threatening problems are wrong. A crisis of leadership is already upon us as lot of supposedly smart people continue to do some really dumb things. Don’t take my word for it; they’re outing themselves.

MAKING MONEY ON OUR KIDS

Posted on May 29, 2013 by thebellyofthebeast

Where can an investor earn a 7.9 percent guaranteed annual rate of return? Not 30-year United States Treasury bonds; they pay around 3 percent. Not other countries’ sovereign debt; some of the most economically fragile nations in the Euro zone sell 10-year bonds bearing interest rates of less than 6 percent—and it’s certainly not guaranteed.

Try your kids. The interest rate on subsidized federal student loans is currently 3.4 percent, but it will jump to 6.8 percent on July 1 and covers just a slice of the market anyway. For undergraduates who don’t qualify for the subsidy, it’s already 6.8 percent. For graduate students (including law students), the rate is 7.9 percent.

Big returns with no risk

The program is a moneymaker for the government. According to a February 2013 Congressional Budget Office report, the federal government makes about 36 cents in revenue for every student loan dollar it puts out. Graduate (and law) student loans are especially lucrative — 55 cents on the dollar.

These eye-popping returns are especially juicy because the loans have virtually no risk of non-repayment. If a student defaults, the feds retain a collection agency to pursue the money (total cost of all federally retained debt collectors last year: more than $1 billion). Eventually, they’ll get it because such loans are in that small category of debts that survive a personal bankruptcy filing, along with alimony, child support, certain fines, and taxes. An exception for debtors who can demonstrate “undue hardship” rarely applies.

Bipartisan blame

How did this happen? Good intentions went awry. In the 1960s, Congress followed economist Milton Friedman’s earlier recommendation that the government provide direct loans for higher education. The underlying principle still resonates: a society’s investment in human capital pays long run dividends. The corollary is that those who benefit personally should repay loans for the education that gives them a better life.

Unfortunately, as that better life has become more elusive for so many, the student loan program has converted struggling young people into profit centers for the government. In the trillion-dollar world of educational debt, students entering the professions — including law — are among the most unfortunate victims, in part because both their tuition and their loan interest rates are the highest.

The special plight of young lawyers

Lawyers generate little sympathy from the rest of the population. But 85 percent of today’s law graduates have educational loans exceeding $100,000. The grim market for new attorneys means that only about half of them are finding full-time long-term employment requiring a legal degree. Even fewer earn enough to repay their staggering loans. (Before blaming these young people for their plights, take a close look at the behavior of many law school deans who misled them into the profession with deceptive information about post-graduate employment prospects. Meaningful transparency on that topic is a recent phenomenon.)

As the July 1 deadline nears, proposals that seem to be gaining traction in Washington would preserve all above-market rates and the student loan program’s profitability. They also suggest that we’ve learned little from the subprime mortgage debacle. The House recently passed Rep. John Kline’s (R-MN) bill , resetting the graduate student rate at 4.5 percent above the 10-year Treasury, subject to a 10.5 percent cap.

In the unlikely event that the House bill gets past the Senate, President Obama has threatened to veto it. However, he is willing to have students borrow at a lower variable rate that’s still significantly higher than the 10-year Treasury, but with no cap (although once set, the rate would remain for the life of the loan). Combining the floating rate elements of the House proposal with the president’s plan could produce a truly disastrous compromise. The president also wants income-based repayment and debt forgiveness. Because Republicans with blocking power oppose those partial remedies on the grounds that it will encourage students to take on bigger debt, those proposals seem doomed.

Recently, Sen. Elizabeth Warren (D-MA) offered her first bill. For a year, it would cut the student loan rate to 0.75 percent—the same rate that big banks get on their borrowing from the Fed. Unfortunately, a prospective one-year solution is no solution at all. Sen. Kirsten Gillibrand has the best current plan: set a 4 percent rate for all student loans and allow graduates with existing debt to refinance at that rate. But that won’t happen, either.

Guiding principles

As policymakers grapple with the growing educational debt bubble, they might consider two governing principles.

First, those running institutions of higher education should be held accountable financially for their graduates’ poor employment outcomes. Otherwise, federal dollars will continue to worsen the situation as administrators focus myopically on filling classroom seats to maximize tuition revenues. Allowing the discharge of educational debt in bankruptcy and permitting the federal government to seek recourse from schools that impoverish their graduates with tuition loans might alter some schools’ worst behavior.

A second principle should be even easier to implement. No mechanism for funding higher education should convert our kids into profit centers.

COMMENDABLE CONDUCT AWARD

Posted on May 22, 2013 by thebellyofthebeast

Regular readers know that I’m often critical of many law school deans. But when one of them gets it right, let’s give credit where it’s due. As the glut of new attorneys persists, the University of Kansas School of Law Dean Stephen Mazza became the latest dean to announce significant reductions in incoming class size. With that action, he has earned a “Commendable Conduct Award.”

Not the first

The University of Kansas isn’t the first to implement such cuts. Last year, Frank Wu, chancellor and dean of the University of California Hastings School of Law announced a 20 percent reduction in class size for the fall of 2012.

“The critics of legal education are right,” Wu said. “There are far too many law schools and there are too many law students and we need to do something about that.”

George Washington University, Albany Law School, Creighton University School of Law, and Loyola University Chicago School of Law have reduced entering class size, too. In March, Northwestern Law School Dean Daniel Rodriguez said his school would reduce the fall 2013 class by 10 percent. “We can’t ignore the destabilizing forces that the legal industry is facing today,” he said.

KU deserves special praise

All of these efforts to reduce the size of entering classes are commendable. But there are several unique aspects to the University of Kansas announcement that make it especially noteworthy.

First, the reduction as a percentage of enrollment in prior years is large: from 175 students graduating this year to a target of 120 students for the 2013 entering class and for the foreseeable future.

Equally significant, it appears that KU didn’t have to take its laudable step. The dean said that applications were down only about 10 percent — far less than many other schools. Moreover, an impressive 82 percent of 2012 graduates secured long-term jobs where a JD was required or preferred — far above the national average.

As an added bonus, a KU legal education is a relative bargain compared to many other schools: $18,600 tuition for full-time students who are state residents; $31,500 for out-of-state.

Motivations matter; outcomes matter more

Everyone expects that the decline in the number of law school applicants will produce lower average LSATs and GPAs for the entering 1L class. That, in turn, would hit the selectivity component of a school’s overall U.S. News ranking. It’s possible that some deans have reduced entering class size as part of a strategy to protect their rankings. But if the overall net outcome is that law schools as a group produce fewer lawyers three years from now, then the rankings may have helped to mitigate damage that they have caused since their first appearance in 1987.

Ay, there’s the rub. Will there be fewer total law graduates, or will other schools (and new ones in the pipeline) enroll the students that KU and others don’t accept? Indeed, will some schools expand enrollments solely to increase their tuition revenues? Asking those institutions to consider the long-term well being of the marginal students they recruit, or the sad state of the profession itself, would be asking too much, I guess.

One way to counteract the agendas of deans who refuse to do the right thing is to recognize those who do. Even more important is the task of helping prospective law students make informed decisions before they apply to law school. Over time, perhaps more of them will take advantage of increased transparency to assess realistically their own suitability for a satisfying and successful legal career. But at any age, encounters with confirmation bias are never easy.

Meanwhile, kudos to Dean Stephen Mazza and the University of Kansas School of Law. He’s been dean only since April 2011, but he’s already making a profound difference in the way that matters most — one person at a time. (And thanks to one of my regular readers who brought Dean Mazza’s announcement to my attention.)

THREE EMBARRASSING DATA POINTS

Posted on April 17, 2013 by thebellyofthebeast

Three recently released numbers tell an unhappy tale of what ails the legal profession in particular and society in general. Specifically, those data points reveal profound intergenerational antagonisms that are getting worse.

Dismal job prospects persist

First, the ABA reports that only 56 percent of law school graduates in the class of 2012 secured full-time, long-term jobs requiring a legal degree. The good news is that this result is no worse than last year’s. The bad news is the number of 2012 law graduates reached an all-time record high — more than 46,000. The even worse news is that the graduating class of 2013 is expected to be even bigger.

Sure, the number of students taking the LSAT has trended downward. So has the number of law school applicants. But students seeking to attend law school still outnumber the available places. Meanwhile, the number of attorneys working in big law firms has not yet returned to pre-recession levels of 2007. If, as many hope, the market for attorneys is moving toward an equilibrium between supply and demand, it has a long way to go.

Law school for all the wrong reasons

A second data point is even more distressing. According to a survey that test-prep company Kaplan Inc. conducted, 43 percent of pre-law students plan to use their degrees to find jobs in the business world, rather than in the legal industry. Even more poignantly, 42 percent said they would attend business school instead of law school, were they not already “set to go to law school.”

I don’t know what “set to go” means to these individuals, but if they want to go into business, first spending more than $100,000 and three years of their lives on a legal degree makes no sense. That’s especially true in light of another survey result: Only 5 percent said they were pursuing a career primarily for the money; 71 percent said they were “motivated by pursuing a career they are passionate about.”

Maybe these conflicted pre-law students are confused by the chorus of law school deans now writing regularly that a legal degree is a valuable vehicle to other pursuits. Let’s hope not. Many deans are simply trying to drum up student demand for their schools in the face of declining applicant pools.

Follow the money

The third data point relates to the money that fuels this dysfunctional system: federal loan dollars that are disconnected from law school accountability for student outcomes. Recently, the New York Times reported that on July 1, many student loan rates were set to double — from 3.4 percent to 6.8 percent.

Young law school graduates are among the unenviable one-percenters in this group because 85 percent of them hold, on average, more than $100,000 in debt (compared to the overall average of $27,000 for all students). Like all other educational loans, those debts survive a bankruptcy filing.

In the current economic environment, an investor would search in vain for a guaranteed 6.8 percent return and virtually no risk. According to one estimate cited in the Times article, the federal government makes 36 cents on every student loan dollar it puts out.

Kids as profit centers

Ironically, those who favor raising the current 3.4 percent interest rate on many federal student loans to 6.8 percent are the same people who express concerns that growing federal deficits will saddle the next generation. The reality is that we already treat that generation as a profit center. For too many people, there’s money to be made in sustaining the lawyer bubble.

Until it bursts.

PARDON MY CYNICISM

Posted on March 27, 2013 by thebellyofthebeast

A friend sent me a letter that he received recently from Wake Forest University, where his son is a sophomore. Actually, it came from the Law School, which was “excited to announce” a “Pre-Law Program for Undergraduates.” Last summer, the school offered a single course, “Legal Theory, Practice, and Communication.” It was such a hit that the school has now added a second summer prelaw class, “Advocacy, Debate, and the Law.”

Noble motives

The letter outlines a laudable premise: “The primary purpose of this Program is to show undergraduates what law school is like. Some college students in the past have applied to law school simply because they could not decide what else to do after graduation.”

So far, so good. The letter then acknowledges that law school “is now far too expensive to engage in a ‘test drive’ for a whole year. This Program gives college students a realistic view of law student life and educates them about the career opportunities of lawyers.”

Again, so far, so good.

A worthy endeavor

Adequately informing undergraduates tracking themselves to law school is a vitally important educational mission that is long overdue. Colleges and universities have largely refrained from efforts to penetrate the confirmation bias of young people who think they’ll lead lives depicted in Law & Order, The Good Wife, and Suits. A legal career can be personally and professionally rewarding, but it’s not for everyone.

Wake Forest boasts that its program “gives college students a realistic view of law student life and educates them about the career opportunities of lawyers.” It’s nice to give undergraduates a taste of the Socratic method so it doesn’t upend them in law school. But other aspects are far more important.

Does the program include data on new graduates’ dismal job opportunities? For example, nine months after graduation, only 56 percent of the Wake Forest Law School class of 2011 secured full-time, long-term jobs requiring a legal degree — the same as the overall average for all law schools.

Likewise, does Wake Forest’s prelaw program cover the staggering six-figure debt that now burdens the vast majority of new attorneys generally, whose median starting salaries have fallen to $60,000? Does it discuss the widespread career dissatisfaction among practicing attorneys? Let’s hope so.

Troublesome turns

Assuming Wake Forest has, indeed, included these and other essential elements of a truly valuable prelaw curriculum, other aspects of the program suggest competing agendas at work.

Why does Wake Forest offer its prelaw program only in the summer — at a cost of $3,240 per course? (“An interested student would receive maximum benefit from enrolling in both courses,” the letter notes.) Why not offer a course that provides meaningful insights into law school and the profession during the regular academic year? And don’t tell me that professorial teaching loads have become too burdensome.

Another item gave me pause. The press release announcing the Wake Forest program included this enticing remark from the law professor who co-teaches the classes: “Since we will have gotten to know the students, we will also gladly write letters of recommendation about the student’s ability to do law school work.”

His colleague added this: “In fact, we are very excited that one of our students, who applied to law school this year with our help, was accepted at several top-ranked law schools.”

Those comments don’t neutralize student confirmation bias; they reinforce it.

Closing the deal

And then there’s this: The law school admissions office “will waive the $60.00 application fee for any student who attended the summer Program this year who later applies to Wake Forest Law School.” More applications — even from unqualified students — lower a school’s acceptance rate and thereby raise its U.S. News ranking.

But that’s not all. Again, directly from the press release: “[I]f that student is admitted and enrolls at Wake Forest law school, the student will receive a tuition credit for the first year equal to the amount spent for tuition in attending the summer program. That’s right—you could get the law school to pay you back for the money spent on tuition this year for the Summer Pre-Law Program!”

Here are the only words missing from the pitch: Act now while supplies last!

Something is amiss when the lines used to sell a prelaw education read like a late-night infomercial for steak knives.

FROM CRAVATH TO CHASE TO CADWALADER

Posted on February 27, 2013 by thebellyofthebeast

James Woolery is on the move again. We’ve never met, but I’m beginning to feel as if I know the guy.

Woolery first appeared in my June 3, 2010 post about a policy change at Cravath, Swaine & Moore. The Wall Street Journal featured the then-41-year-old Cravath partner in an article about the firm’s plan to allow lawyers in their 30s and 40s to “make a name for themselves” by taking the lead on client deals. Historically, the WSJ reported, Cravath had reserved that role for partners in their 50s.

Six months later, I wrote about Woolery’s departure from Cravath to become co-head of JP Morgan Chase’s North American mergers and acquisitions group. He told the New York Times that he’d developed a business development focus and the Chase opportunity allowed him to build on those skills. So much for practicing law.

Now, two years after joining Chase, Woolery has become the first firmwide deputy chair of Cadwalader, Wickersham & Taft — a new position apparently created specially for its prominent lateral hire. The Wall Street Journal suggested that the move “is a big personal bet for Mr. Woolery. He is jumping back to the legal industry when it is still struggling with a shortage of work, and he is leaving J.P.Morgan just as mergers are showing new signs of life.”

Regardless of the particular reasons for Woolery’s various moves, the contrast between where he started (Cravath) and where he has now ended (Cadwalader) is remarkable.

Cravath

Whatever else people may think of Cravath, it has an unrivaled reputation for attracting first-rate attorneys. It is also a partnership in the truest sense of that concept: A single tier with a lock-step compensation system that resists an undue emphasis on short-term thinking. The Cravath model promotes longer run values, such as institutional stability.

For example, a lateral hiring frenzy pervades big law, but it’s a relatively rare event at Cravath. The firm focuses on developing talent internally. Its attorneys work hard, run a challenging gauntlet to equity partnership, and reap rich rewards for success.

In May 2007, an American Lawyer interviewer asked Cravath’s then-presiding partner Evan R. Chesler whether partners would stick around if the firm made less money. “I don’t know the answer to that,” he said. “I think there is more glue than just money.”

Cadwalader

Cravath’s ethos wouldn’t appeal to attorneys drawn to Cadwalader’s culture. In the mid-1990s, Cadwalader began moving aggressively toward what its new chairman Robert O. Link Jr. called a meritocracy. Others call it “eat-what-you-kill.”

In a February 2007 interview with the American Lawyer, Link expressed an attitude about firm culture that differed dramatically from Chesler’s. “Everyone should wake up in the morning and feel a little vulnerable,” he said.

Link meant it. In 1995, the 268-lawyer Cadwalader firm’s two-tier partnership had 76 equity partners, giving it a leverage ratio of three-and-a-half. By 2005, the firm had nearly doubled in size, but it had only 75 equity partners. Its leverage ratio of seven far exceeded that of all other Am Law 100 firms.

Cadwalader’s asset-backed structured finance practice fueled much of its growth. By 2007, it had 645 lawyers and a stunning leverage ratio of eight-and-a-half. But when the residential housing market cratered and took asset-back structured finance legal work with it, the firm’s fortunes slid badly.

By the end of 2012, Cadwalader had 435 lawyers — down more than 200 from five years earlier. Only 55 of them were equity partners — down 20 from 2007. The good news for the survivors was that by 2012, average equity partner profits had recovered almost completely to their 2007 all-time high of $2.7 million.

Differences that transcend metrics

As Cadwalader became smaller, Cravath maintained average partner profits ranging from $2.5 to $3.2 million, a leverage ratio of approximately four, and moderate growth from 412 to 476 attorneys. Even more to the point, it’s hard to imagine any circumstance short of dissolution that would cause Cravath to shed almost a third of its equity partners, as Cadwalader did from 2007 to 2012.

Back in May 2010, Woolery told the Wall Street Journal, “This is not your grandfather’s Cravath.” It’s not clear what that characterization of his former firm means or if it is correct, but offspring sometimes underestimate the value of a grandfather’s gifts. And offspring sometimes grow up to be grandparents themselves.

MORE LAW SCHOOL NON-REFORM

Posted on February 20, 2013 by thebellyofthebeast

Every week, there’s a new proposal to reform legal education. In a recent New York Times op-ed, John J. Farmer Jr., dean of the Rutgers School of Law in Newark, offered his suggestion: two-year apprenticeships.

Most deans operate in good faith and are genuinely concerned about the current state of the profession. In fact, a core element of dean Farmer’s idea is quite sound. Hands-on training was a good idea when Clarence Darrow studied under the tutelage of a practicing attorney, and it still is. The British placement system of training contracts has kept its lawyer bubble smaller than ours.

But Darrow began his apprenticeship after one year of classes. Farmer’s suggestion of a two-year residency following three years of law school misses the mark, as do his predictions about what it would accomplish.

Problems of mysterious origin

Farmer begins where he must: a collapsing job market; law school deception in creating the oversupply of lawyers; record tuition levels and student debt. But he ignores an important question: How did those things happen? The answer: a flawed law school business model.

Consider Farmer’s point about law school deception. For years, his school joined most others in reporting 90-plus percent employment rates for the newest graduates. In the 2008 ABA Official Law School Guide, Rutgers-Newark showed a 93.3 percent employment rate; as recently as the 2012 Official Guide, it was 91.3 percent.

Starting in 2012, the ABA required schools to reveal which graduates had long-term full-time jobs requiring a legal degree. Rutgers-Newark hit the overall average for all law schools: only 56 percent for the class of 2011.

As for lawyer oversupply, Rutgers-Newark has been a continuing contributor. According to the 2008 Official Guide, Rutgers-Newark matriculated 182 full-time students from 3,010 applicants. Since then, the number of applicants has declined dramatically, but the number of enrollments hasn’t.

The 2013 Official Guide reports that Rutgers-Newark received only 2,218 applicants to its full-time program. Yet the school still matriculated 174 new students. In other words, since 2007, the number of applicants has dropped by 800 (26 percent), but first-year enrollment has declined by only eight students (4 percent).

Farmer also laments record levels of tuition and resulting student debt. The 2008 Official Guide listed Rutgers-Newark’s full-time non-resident tuition and fees at $27,976; residents paid $19,623. Today, non-resident tuition at the school exceeds $37,000 — a 33 percent jump. Resident tuition has increased by almost 30 percent and now exceeds $25,000.

Non-solutions

Ignoring the role of law schools in creating the current crisis leads Farmer to a proposal that won’t solve it. He suggests scrapping the system whereby big firms “hire graduates from a few select schools, paying them exorbitantly.” In its place, he wants a residency program that would allow law firms “to hire more lawyers, at lower rates, and give talented graduates of less prestigious institutions a chance to shine.”

During his proposed two-year apprenticeships, students would work for minimal wages (“repaying their debts could be suspended, as it is for medical residents”). At the end of the period, firms “could then select whom to keep.” For the losers in that contest, job searches would start anew.

Not gonna happen

Apart from retaining the flawed law school business model that has taken the profession to its current state, Farmer’s plan requires a remarkable leap of faith in big law firm behavior. In particular, he hopes that firms would charge lower hourly rates for new associates and, as a result, hire more of them.

Unlike many law school deans, Farmer has extensive experience as a practicing lawyer. But when he tries to predict the behavior of big law firm leaders, he enters tricky terrain.

The prevailing law firm business model perverts the definition of productivity to mean total billable hours, rather than the efficiency with which lawyer inputs produce outputs for clients. The model emphasizes the metrics of near-term profits at the expense of longer-run values. It would view reducing associate labor costs as a godsend to its bottom line, not as a reason to spread the same amount of existing work among more lawyers.

Farmer doesn’t suggest reducing tuition, enrollment, or the duration of law school itself. Such steps would challenge the law school business model directly. That’s the real lesson of dean Farmer’s op-ed: Until deans revisit their roles in creating the current mess, their proposed solutions are likely to remain wanting.

Dean Farmer suggests, “Legal education has not so much failed the profession as mirrored it.” Actually, it’s done both.

BIG LAW’S 2012 PERFORMANCE — NUMBERS AND NUANCE

Posted on February 13, 2013 by thebellyofthebeast

Two recent reports sound a warning that most big law firm leaders should heed. One is the Georgetown Center for the Study of the Legal Profession/Thomson Reuters Peer Monitor Report on the State of the Legal Profession. The other is Citi Private Bank’s Annual Law Firm Survey.

Lessons from Dewey & LeBoeuf

The Georgetown/Thomson Reuters Report is noteworthy because, at long last, thoughtful analysts are giving Dewey & LeBoeuf’s collapse the larger context that it deserves. For the most past, today’s managing partners have persuaded themselves that Dewey’s failure resulted from a unique confluence of management missteps that they themselves could never make. But most current leaders are making them.

In particular, Dewey wasn’t an outlier; it was among the elite of the Am Law 100. The firm embodied a culmination of prevailing big law firm trends that can—and will—produce future disasters. As the Georgetown/Peer Monitor Report explains, those trends include raising the bar for promoting home-grown talent into equity partnerships while overpaying for lateral equity partner hires, increasing internal compensation spreads to create a subgroup of real players within equity partnerships, and ignoring the importance of morale and institutional loyalty to long-term stability.

Crunching the numbers

Meanwhile, Citi Private Bank’s annual full-year survey of big firms produced this upbeat headline: “Firms Posted a 4.3 Percent Rise in 2012 Profits.” But important underlying details are more troubling.

Although revenue and profits were up by 3.6 and 4.3 percent, respectively, overall demand at the 179 firms in the Citi sample grew by just 0.2 percent in 2012, expenses increased by 3.1 percent, and headcount grew more than demand. It’s a decidedly mixed bag of financial results.

In fact, Citi’s Dan DiPietro and Gretta Rusanow fear that the 2012 fourth quarter revenue surge saving many big firms “may not be sustainable.” For example, “survivorship bias” contributed to the final 2012 numbers. That is, Citi’s analysis removed Dewey & LeBoeuf’s revenue, demand, and equity partner figures from the 2011 base year because the firm disappeared in 2012. But most of Dewey’s revenue went to surviving firms, thereby artificially inflating the overall 2012 numbers. To some extent, it’s like comparing 2012’s apples to 2011’s oranges. Including Dewey’s 2011 numbers would have resulted in negative demand growth in 2012.

Citi also discussed the impact of accelerated year-end collections. They’re an annual event at most firms, but the expiring Bush-era tax cuts gave partners unique incentives to push clients for payment in December 2012. The report also mentioned a related possibility: firms may not have prepaid 2013 expenses.

A more insidious prospect goes unmentioned: some firms may have deferred expenses that were due and owing in December 2012. If the 2013 first quarter Citi report is surprisingly weak, look for a spike in expenses as a factor. Freedom to ignore generally accepted accounting principles in financial reporting gives law firms financial flexibility that can become dangerous.

Or maybe the numbers don’t matter

Transcending all of these possibilities is, perhaps, the simplest. Averages are often deceptive. For example, in a firm where the internal top-to-bottom equity partner income spread is ten-to-one or higher, average partner profits may reveal that some partners are players and most aren’t. But as an economic metric describing a typical partner in the firm, it’s useless.

Just as average profits can mask enormous differences within an equity partnership, so, too, overall average profits for the industry can hide the gap between successful firms and those struggling to survive. That means 2013 could be another year in which some Am Law 200 law firms will fail (or become absorbed in last-resort mergers).

Fragile winners

But even firms that regard themselves as financial winners in 2012 should beware. Many would do well to heed the Georgetown/Thomson Reuters caution about the loss of traditional partnership values that undermined Dewey & LeBouef. Considered from a different perspective, numbers that appear to demonstrate success can actually reveal lurking failure.

After all, as recently as the May 2011 list of the Am Law 100, Dewey was #23 in 2010 average equity partner profits ($1.8 million), #22 in gross revenue per lawyer ($910,000), and #19 on the Am Law profitability index with a profit margin of 36 percent. In February 2012, the firm made Am Law’s annual “most lateral hires” list for 2011, but no public report disclosed the firm’s staggering (but by no means unique) top-to-bottom equity partner income gap.

As a wise friend reminds me periodically, things are rarely as good as they seem — or as bad as they seem. He’s definitely right about the good part.

BANKRUPTCY AND BILLABLES

Posted on January 30, 2013 by thebellyofthebeast

Let’s replace a recent Am Law Daily headline — “Judge Slashes Fees in Dewey Bankruptcy” — with this: “Golden Age for Bankruptcy Professionals Continues.”

In bankruptcy proceedings, lawyers get paid ahead of everyone else. If they didn’t, insolvent debtors would go without representation. But that doesn’t explain why high-profile bankruptcies have become increasingly lucrative for lawyers. An absence of accountability does.

Professional compensation in bankruptcy matters comes from a dying entity’s estate. As the client disappears, so does close scrutiny of its legal bills. In its place, the United States Trustee reviews bankruptcy fee petitions, as does the supervising judge who eventually approves them. But both offices have limited capabilities and a restrictive mandate.

Low-hanging fruit

The limited capabilities arise from an understandable reluctance to second-guess lawyers’ strategies and, more importantly, the deployment of manpower to execute them. As a result, post-facto review of fee petitions usually focuses on obvious abuses.

For example, at the recent Dewey & LeBoeuf fee hearing, Judge Martin Glenn criticized $550 per night stays at the Waldorf-Astoria, private car expenses for driving around Manhattan, and excessively vague time entries. But the sanctions were minimal. According to the article, the court reduced a restructuring expert’s $250,000 request by “$4,455 in fees and $9,175 in expenses in addition to the amount Glenn axed [$4,400] during the hearing.”

Dewey’s lead bankruptcy attorney, Al Togut, wasn’t in court for a tongue-lashing over certain of his firm’s “excessively vague time entries” and “a page of expenses related to car rides,” according to the Am Law Daily. But at the end of the day, Togut, Segal & Segal’s $4.7 million bill for five months of work emerged largely unscathed, save for “$57,139 in fee cuts and $1,378 in expense cuts after consultation with the U.S. Trustee’s office, which had objections to several of the fee requests.”

The real money

The real story isn’t unique to Dewey’s professionals. In fact, small boutique firms such as Togut’s probably conduct their cases more efficiently than big firms that can throw armies of bodies at any problem. But all such attorneys benefit from extraordinarily high hourly rates that result from the absence of a competitive market and the perverse incentives of a billable hour regime.

That’s where the restrictive legal standard for approval enters the picture. In particular, the fees sought must be reasonable for the services rendered. However, law firms in the select club of prominent bankruptcy practitioners use publicly available information, including other firms’ fee petitions, to set hourly rates for their own personnel. Voila! The relative uniformity of such rates makes them “reasonable” — including the $700 an hour associate and the $300 an hour legal assistant.

The key players in this tautological circle don’t compete on hourly rates. What economists call conscious parallelism is far more lucrative for them. Because there’s no paying client searching for better value in response to rising legal costs, that potential market-driven constraint disappears. When Weil Gotshal submitted a $430 million fee petition for the Lehman bankruptcy, it listed 40 partners with hourly rates of $1,000 and some senior associates at $800 to $900 an hour.

The market gone awry

Defenders argue that complicated restructuring matters require talent and skill comparable to trying a big case or guiding a large transaction. After all, in 1978 Congress specifically made that determination in adopting a new compensation standard for bankruptcy lawyers. Today, they say, the market sets everybody’s rates. That position would be more compelling if hourly rates for bankruptcy attorneys were the result of a well-functioning market, but they aren’t.

If big law firms already competed on price in bankruptcy cases, they wouldn’t fear the transparency that the U.S. Trustee proposed last summer. The Trustee wanted firms to disclose whether they use a differential fee schedule — charging one rate for attorneys working on bankruptcy cases and a lower rate for the same attorneys working on other matters. More than 100 big firms united in strenuous opposition to that idea.

It’s easy to see why they objected. Especially in recent years, paying clients have demanded discounts and alternative fee arrangements to reduce legal costs. In bankruptcy, it’s not happening. Where else can firms charge more than $400 an hour for first-year associates, which Weil Gotshal sought for many such newbies in the Lehman case?

Add incentives for inefficiency and abuse that accompany the billable hour regime generally and the consequences become even more ironic: one of the most lucrative pockets of the profession reaps outsized rewards from the carcasses of distressed enterprises (and those enterprises’ creditors).

The entire system is uniquely vulnerable to creative innovation. Someday, it will arrive. But then again, for those currently reaping the greatest rewards, someday always seems to be somebody else’s problem.

THE LAW SCHOOL STORY OF 2012 — DEANS IN DENIAL

Posted on January 9, 2013 by thebellyofthebeast

Doubling down on a losing hand is rarely a good move. Case Western Reserve University Law School Dean Lawrence E. Mitchell generated a flurry of criticism — including my earlier post, “The Lawyer Bubble” — for his November 28, 2012 op-ed in the New York Times. On January 4, 2013, he took to the airwaves in a Bloomberg Law interview. It made me wonder whether he hears his own words as he speaks them.

Mitchell has made himself the poster child for deans in denial — the law school story of the year. It emerged in a big way last June when, for the first time, the ABA released meaningful jobs data. Nine months after graduation, only about 50 percent of the law school class of 2011 had full-time, long-term jobs requiring a legal degree. Deans everywhere began dissembling, as reported in the Wall Street Journal.

Sometimes offense isn’t the best defense

As the growing lawyer bubble made headlines, a handful of wise deans followed the lead of University of California Hastings School of Law Dean Frank Wu, who had previously acknowledged, “The critics of legal education are right. There are too many law schools and too many law students and we need to do something about that.”

In contrast, Dean Mitchell went on offense, most recently in a 15-minute interview with Lee Pacchia. To his tenuous op-ed points, Mitchell added a few more.

What oversupply?

For example, he said, “It’s not clear to me that there’s an oversupply problem at all.” As support, he cited low-income people who go without legal services. Pacchia asked him how debt-ridden graduates paying Case more than $40,000 in annual tuition could take on such work full-time.

It’s a mistake, Mitchell responded, to “measure the worth of higher education by the dollar return on the investment.” Perhaps he has a point, but it’s not really an answer. Earlier in the interview, Mitchell said this about high tuition cost: “Ninety percent of my class receives financial aid. The mean offer is $25,000 a year.” Critics focus on the sticker price, he said, “but law schools discount fairly heavily.”

What proportion of those financial aid packages is grants, rather than loans that can’t be discharged in bankruptcy? Mitchell didn’t say, but here are two clues.

In his op-ed, Mitchell reported accurately that overall average private law school student debt is $125,000. In his April 3, 2012 blog post, he boasted that Case graduates have “almost 22 percent less debt than graduates of other private law schools.” The resulting arithmetic implies that Case’s financial aid packages result in average student loan debt of about $100,000 for its law graduates.

Cost spiral

In another defense of soaring tuition, Mitchell argued that, in 1985, medical school was four times more expensive than law school. So what? In the intervening 25 years, law school tuition has caught up with and, in some cases, surpassed that of medical school. Does that make sense to anyone other than Mitchell?

He also said that schools must pay top dollar for law professors because their opportunity costs are high: they could be making big bucks in big firms. But the only relevant question is, do they want to?

Mitchell’s own experience may provide a partial answer. His CV lists six years as an associate at three different New York law firms from 1981 to 1987. Sometime during that period, he said, it became “hard to get out of bed in the morning and I didn’t like going to work.” So he “took a two-thirds pay cut and went into teaching.”

How about decent jobs?

Throughout the year, Mitchell travels the country, “like Willy Loman in Death of a Salesman,” meeting with hiring partners of big law firms. He interviews his students and writes personal letters of recommendation to help them get jobs. Doesn’t the need for such efforts tell him something?

Yet for all of Mitchell’s laudable sales pitches, Pacchia noted, the Law School Transparency Project reports that 38 percent of 2011 Case Western graduates were still unemployed or underemployed nine months later.

“I haven’t myself taken a snapshot a year out,” Mitchell said, “but I’ve talked to my admissions staff about this a lot and I suspect if you looked a year out, things would change dramatically. I’m really confident if you looked a year and a half out, they would.”

Mitchell offered no supporting data, but he “suspects” and is “really confident” that, eventually, things will turn out just fine.

Optimism untethered to reality

Why is Mitchell convinced that things are better than the available facts suggest? Because, for example, most of his 1981 Columbia Law School class took jobs in big law firms. Ten years later, his class reunion book revealed that “almost nobody was at a law firm.”

It’s hard to know where to begin dissecting Mitchell’s anecdote, but start with the fact that his students aren’t graduating from Columbia Law School.

Just another business

Finally, Mitchell observed, “Of course, we’re running a business at the end of the day.” Without acknowledging the destructive impact of short term business-type metrics, such as the annual U.S. News & World Report rankings, he argues that “using business sense in managing law schools is going to help us get some of these problems under control.”

Until Mitchell and many other deans with similar attitudes get past denial over what is happening to the profession, they’ll never reach, much less overcome, the subsequent stages of grief — anger, bargaining, depression, and acceptance. Perhaps another reading of Death of a Salesman will help.

JUXTAPOSITIONS

Posted on December 11, 2012 by thebellyofthebeast

Shortly after Thanksgiving, a California court denied Thomas Jefferson Law School’s motion to dismiss its alumni’s fraud claims. The school made headlines in early 2011 when some graduates claimed that misleading employment statistics caused them to incur staggering debt for a degree that didn’t lead to a legal job. It was the first school to face such a suit and is now the third one to lose a motion to dismiss the claims.

Reasonable consumers?

Last summer, two other law schools failed to get the cases against them thrown out: the University of San Francisco and Golden Gate University. A California state court judge hearing both cases ruled that whether those schools’ representations were “likely to deceive a reasonable consumer is a question of fact.”

The court observed, “[P]laintiffs allege that they were in fact deceived by the statements they attribute to defendant, and there is nothing before me to suggest that any of the plaintiffs were not reasonable consumers of a law school education.”

Sophisticated consumers?

The California court in the USF and Golden Gate University cases distinguished an earlier ruling that went the other way. In a similar case against New York Law School (not NYU), a New York state court judge described prospective law students as “a sophisticated subset of education consumers.” He thought that they should have looked more carefully at the numbers that the school touted, as well as data available to them from other sources. The losing plaintiffs have asked the appellate court to take another look at the issue.

Likewise, courts in Michigan and Illinois have dismissed four other lawsuits against Thomas M. Cooley Law School, DePaul University College of Law, John Marshall Law School, and Chicago-Kent Law School. Wait for the results of more appeals before accepting as definitive the schools’ quick claims of vindication.

Who’s right about these prospective consumers of legal education? Are they a special class of individuals who possess unique skills in evaluating law school representations about their graduates’ fate? Do they have special strength that allows them to resist the promise of a well-paying legal job as the reward for three years’ work and a $100,000+ investment?

Either way, aren’t they somebody’s kids?

Today, it’s seems easy to say that students who believed law school claims of 90+% employment rates and six-figure starting salaries for their graduates should have known better. But abandon such hindsight for a moment and think back to 2004, when some of the current plaintiffs were thinking about attending law school.

The lawyer bubble was growing, but until the summer of 2012 the ABA didn’t require schools to provide meaningful employment data to prospective students. Full-time, part-time, non-degree-required, and law school-funded positions were lumped together to create a rosy picture of job security that was, in fact, a cruel illusion. As the Great Recession began in 2007, that picture looked even more appealing to young people who were looking for any employment lifeboat in a sinking economy.

Accountability

So far, no plaintiff has prevailed on the merits of any claim against any law school. The preliminary rulings in California mean only that those plaintiffs get an opportunity to prove their cases. As that process unfolds, no one should let would-be law students off the hook completely. But confirmation bias is a powerful force; it takes uncommon perception to see things that contradict preconceived notions, including some students’ naive dreams about what life as a lawyer might mean.

If law schools continue to act without any serious accountability for their roles in creating the massive and growing oversupply of lawyers, greater student introspection alone won’t solve the problem. Case Western Reserve Law School Dean Lawrence E. Mitchell proved that point in his recent (and flawed) New York Times op-ed, “Law School is Worth the Money.” For those who prefer data and analysis to self-serving salesmanship, Vanderbilt Law School professor Herwig Schlunk has a response: for too many young lawyers, it isn’t.

For far too long, deans have avoided accountability for behavior that has created the lawyer bubble. At long last, perhaps some judges will correct that injustice.

THE LAWYER BUBBLE

Posted on December 5, 2012 by thebellyofthebeast

Case Western Reserve Law School Dean Lawrence E. Mitchell’s recent op-ed in the New York Times proves that, like many law school deans, he is living in a bubble. Indeed, the views he expresses are one reason that I wrote THE LAWYER BUBBLE – A Profession in Crisis, which Basic Books will publish in April 2013. (Another reason is the troubling transformation of most big law firms, but that’s for another day.)

Mitchell’s spirited defense in “Law School Is Worth the Money” concludes that the “overwrought atmosphere has created irrationalities that prevent talented students from realizing their ambitions.” Apparently, he thinks everyone should just calm down, ignore facts, and keep pushing naive undergraduates into law schools, without regard to what will happen to them thereafter. He’s wrong.

Employment

Mitchell argues that a legal career is no worse choice than any other because the job market is bad in many industries. He notes that the Bureau of Labor Statistics projects growth in the number of lawyers’ jobs from 2010 to 2020 at 10 percent — about as fast as the average for all occupations.

Here’s the thing: that 10 percent growth is for the entire ten years from 2010 to 2020 — a total net increase in the number of lawyer jobs of 73,600. And that number is down from a 2008 BLS estimate of 98,500. As 44,000 new law graduates hit the market each year, law schools are pumping out enough new attorneys for a decade every two years.

Other studies factoring in attrition suggest that, given the mismatch between supply and demand, there might be law jobs for about half of all graduates over the next 10 years. Case Western Reserve, where Mitchell is dean, is typical of mid-range law schools: it’s a fine institution, but according to the ABA, nine months after graduation, only 94 of the 201-member class of 2011 had full-time long-term job requiring bar passage.

Excessive tuition

With respect to the cost of a legal education, Mitchell says that “one report shows that tuition at private law schools has increased 160 percent from 1985 to 2011.” He doesn’t identify his source, but according to the ABA, median private law school tuition in 1985 was $7,385. In 2011, it was $39,496 — a more than 400 percent increase. The rate of increase for resident public law school tuition was far greater. Assuming that he’s adjusting for constant dollars, that’s still a whopping increase.

Then Mitchell compares legal education with medical schools where, even by his calculations, tuition has increased less (63 percent since 1985). But he excuses law school excesses by arguing that medical schools began the period with average tuition four times higher. That’s a false equivalence.

It should cost far less to train a lawyer than a doctor — as it did in 1985. But today it doesn’t. Why not? Because law schools have become cash cows, returning as much as 30 percent of tuition revenues to their universities. Moreover, pandering to U.S. News ranking criteria encourages law school expenditures without regard to value added. Federally guaranteed student loans fuel the system in ways that relieve law schools from meaningful accountability as they glut the market.

Debt

Mitchell dismisses the fact that average law school debt exceeds $125,000 with the cavalier assertion that “the average lawyer’s salary exceeds that number. You’d consider a home mortgage at that ratio to be pretty sweet.” He notes that attorneys’ average starting salaries have increased 125 percent since 1985.

Unfortunately, the average includes only those who actually have lawyer jobs, and it doesn’t consider the fact that, as Above the Law’s Elie Mystal emphasizes often, the average masks the bimodal distribution of attorney income. Thanks to the skewing effect of big law firm compensation (where only 15 percent of lawyers practice), most lawyers earn far less than the industry average. Moreover, median starting salaries for new attorneys have been dropping like a rock — from $72,000 to $60,000 since 2009. Meanwhile, law school tuition keeps going the other way.

Mitchell’s real complaint is probably that prospective law students are finally beginning to see the legal world more clearly and, at long last, the results may be showing up in reduced applications to schools below the top tier. But he need not worry because ongoing market distortions make equilibrium far, far away. In 2012, almost 70,000 prospective lawyers applied for almost 50,000 law school spots — even though there may be legal jobs for only half of them.

Armed with complete information about the challenges and rewards of a legal career, the best and the brightest future lawyers will still enter the profession. They’ll incur six-figure debt that can’t be discharged in bankruptcy because they’ll conclude that the investment is worth the risk — but they’ll consider the risk. Making an informed decision requires them to separate facts from magical thinking. For that, they’re on their own because, as Dean Mitchell reveals, most deans don’t — or won’t.

BONUS TIME – 2012

Posted on November 28, 2012 by thebellyofthebeast

It’s always interesting when two respected legal writers approach the same story in different ways. That happened in the coverage of recently announced associate bonuses.

Ashby Jones at the Wall Street Journal penned an article in the November 27 print edition of the paper that ran under this headline:

“Cravath Sends Cheer — Law Firm Lifts Bonuses for Some Associates as Much as 60%”

As always, Jones accurately reports what is true, namely, that Cravath, Swaine & Moore led this year’s associate bonus announcements with an increase over last year’s base bonus levels. Five paragraphs in, he acknowledges that this significant bump still leaves associates well below the 2007 pay scale. The highest associate bonuses this year are $60,000, compared to $110,000 for combined regular and special bonuses in 2007.

Meanwhile, at the New York Times…

On the same day that Ashby Jones’s article ran in the WSJ, Peter Lattman at the New York Times was a bit more circumspect. In that paper’s print edition, the bold line that ran in the middle of the story reads:

“[Cravath’s] year-end awards set the bar for others, and the payouts are up a bit in 2012.”

Like Jones, Lattman observes that base bonus amounts are substantially higher than previously. But he correctly notes that “when spring bonuses are added to the equation, there has been little increase for Cravath’s associates over the last two years. The law firm did not award spring bonuses in 2012, but last year paid its associates a small stipend in addition to a year-end award. When 2011’s spring bonuses and year-end bonuses are added together, total bonus compensation actually exceeds this year’s level.”

Both Jones and Lattman report that Cravath had $3.1 million in average partner profits for 2011. For perspective, that’s slightly above the $3.05 average for 2006, and not all that far from the $3.3 million all-time high in 2007. Needless to say, associate bonuses haven’t enjoyed a similar recovery. But depending on what happens in the spring, they still could, which leads to a final point.

Who’s right?

The answer is Elie Mystal over at Above the Law. Mystal observes that spring bonuses more properly belong in the analysis of total compensation for the immediately preceding calendar year. That is, a bonus paid in early 2011 is really compensation for 2010.

The analysis is straightforward. Big law firms waiting for more complete information on how the fiscal year will end preserve flexibility by lowballing the November bonus numbers. Evidently, Cravath concluded that its $3.1 million average partner profits for 2011 were inadequate to justify any significant spring bonus for associates in early 2012.

The fate of the “special” bonus

The question now is whether spring bonuses are gone forever. After all, they first appeared as “special bonuses” — meaning that they came with this implied caveat: don’t build those dollars into next year’s expectations. Of course, that message has landed on deaf ears. But it gives firm leaders a way to convince themselves that it’s fair to leave associate compensation far below 2007 levels, even though average partner profits have recovered almost completely to those lofty heights. Indeed, some firms have even bested their pre-recession records.

In all of this, two things are working against associates who dream of a return to the good old days (of 2007). First, the glut of attorneys grows as the demand for new associates shrinks. Second, most law firm leaders are dealing with a revolution of rising expectations among senior equity partners. The potential loss of a rainmaker strikes fear in the hearts of many firm leaders.

But here’s a reason to hope. True visionaries seeking long-term institutional stability let such troublemakers walk. They promote cultural values that transcend the impact on the current year’s income statement. They let resulting gains in client service and attorney morale produce ample financial and non-financial rewards for all.

And all of this reveals itself in how partners at the top of a firm treat associates at the bottom — a place where too many seem to have forgotten that they themselves once stood.

A BIG LAW FIRM THREE-WAY

Posted on November 13, 2012 by thebellyofthebeast

With Hurricane Sandy and the election dominating last week’s headlines, news of another blockbuster merger didn’t receive the attention that it deserved. Later this month, the combination of SNR Denton, the Canadian firm (Fraser, Milner & Casgrain – FMC), and Paris-based Salans will create a 2,500-attorney enterprise known as Dentons, assuming their respective partners approve the merger. The transaction merits a closer look.

Not so long ago

Twenty years ago, Elliott Portnoy graduated from Harvard Law School. In 2002, he joined Sonnenschein, Nath & Rosenthal. Prior to that, he’d headed the public policy group of Arent Fox, an Am Law 200 firm, in Washington, D.C.

In June 2006, at age 40, Portnoy became the youngest chairman in Sonnenschein’s history. At the same time, the firm released a new strategic plan whereby it would increase average equity partner profits from $800,000 to $1.4 million by 2008. That didn’t happen.

In 2007, Sonnenschein had 600 lawyers and average partner profits of $915,000, but since then it hasn’t seen profits numbers that high. Central components of its strategy have been the aggressive recruitment of lateral partners and the pruning away of others. In early 2008, 37 lawyers and 87 non-attorney employees received their walking papers. By year-end, average partner profits had dropped to $805,000. Of course, the onset of the Great Recession contributed to that decline, but many other firms weathered the storm with much less damage.

Time to merge

The 2008 drop in average partner profits didn’t seem to affect Sonnenschein’s strategic plan. Aggressive lateral hiring continued, including 100 lawyers from failing Thacher, Proffitt & Wood in December 2008. Average partner profits kept dropping — to $780,000 in 2009. The following year, 2010, brought the ultimate lateral hiring event: Sonnenschein’s merger with U.K.-based Denton, Wilde & Sapte to create a 1,200-lawyer firm.

As a Swiss verein, the two firms retained their independent financial status. But according to the Am Law Global 100, SNR Denton’s first full year as a combined entity produced overall average partner profits of $700,000 in 2011. The former Sonnenschein side of the firm reported $880,000 in average partner profits, so Portnoy heralded the merger a success and “not a destination, but a part of the journey.”

The journey continues

In 2011, SNR Denton was one of several firms exploring merger possibilities with Dewey & LeBoeuf as it careened toward disaster. According to the Wall Street Journal, Sonnenschein’s leadership had named its proposed deal “A Phoenix Rises from the Ashes” and contemplated a full-scale merger that combined all 1,000 Dewey & LeBoeuf attorneys with SNR Denton. Borrowed money would have financed the transaction — a tactic apparently drawn from the big law firm “lessons not learned” list.

Unexpected bad news may have saved SNR Denton from itself. According to the Journal, the deal was gaining momentum when it cratered after Dewey’s revelation that Manhattan district attorney Cyrus Vance, Jr. had opened a criminal investigation into Dewey.

Doubling down on a dubious approach

The journey has now led to the proposed combination of SNR Denton, FMC, and Salans. If consummated, the merger would double the size of the current SNR Denton. If the transaction goes through, what results won’t be a partnership. Whether it would become a profitable business venture for the participants is an open question.

To help answer that question, SNR Denton’s management got limited outside help. According to Portnoy and SNR Denton’s global chairman Joseph Andrew, “branding and advertising advisers” recommended a single-name moniker, Dentons. (Do they know that Dr. Dentons are children’s pajamas with feet?) But Andrew also noted that the firm used no strategic legal consultants or advisers in its process.

I don’t know if the other firms had advisers. Nor do I know if Salans had advisers in 1998, when it blazed a trail by becoming the first major law firm to complete a transatlantic merger, acquiring Christy & Viener. But that transaction didn’t turn out very well.

Maybe this time will be different. For the sake of many fine lawyers and even greater numbers of staff who are relying on management to chart a wise course for three law firms, let’s hope so. Among the most important lessons of Dewey & LeBoeuf are these: the margin for leadership error is slim and the consequences of missteps can be catastrophic.

BIG LAW FIRM MANAGEMENT PUZZLES

Posted on November 7, 2012 by thebellyofthebeast

Last month, ALM Legal Intelligence released “Thinking Like Your Client: Strategic Planning In Law Firms,” a curiously titled survey of Am Law 200 law firm leaders. The title is curious because the results demonstrate that most law firm managing partners are neither thinking like clients nor planning strategically for their firms’ futures.

Lateral self-delusion

The appendix of actual law firm responses from 79 out of all Am Law 200 partners is more interesting than the narrative explanations in the report. For example, one question asked them to identify their firms’ top three priorities. In order, the most frequent answers were:

Growing the firm’s revenues — 66 percent

Talent acquisition and retention — 59 percent

Improving firm profitability — 54 percent

Eighty percent said they had a strategic plan in place to address firm priorities. But other responses suggest that the plans are pretty simple: hire more lateral partners.

When asked how, as part of their strategic plans, firms were pursuing growth in the next two years, 96 percent said “acquiring laterals.” Seventy-six percent of the 75 respondents who listed this strategy said they would pursue laterals “aggressively.” More than 70 percent of respondents expect that, as a staffing category, lateral partner hires will increase over the next five years.

Yet they also acknowledge that laterals have been a mixed bag. Only 28 percent of managing partners said that their lateral strategies over the past five years have been “very effective — most laterals have been retained and contributed to business growth.” And those are just the dollar impacts. Ignored are the cultural consequences for a firm whose growth strategy depends on endless acquisition of outside talent. Nevertheless, most big firm leaders are doubling down on a dubious approach.

Is it really about the clients?

As for other half of the report’s title — “thinking like your client” — fewer than a third of respondents included “client performance management and client satisfaction measurement” as one of their top three priorities. Responses to other questions echoed that attitude. Forty-one percent admitted that they had no plan in place to build, track and measure client loyalty and satisfaction. When asked what aspect of their client relationships they would most like to change, only 21 percent said higher service levels — far behind the desire to take work from other firms and improve profitability.

When asked to identify the top three metrics they regarded as most important in managing firm performance, leaders listed a familiar trinity: firm revenue, firm profit, and profit per partner. Client retention metrics got a whopping 4 percent response, tied at the bottom of the list with “other.”

Only 18 percent use “client retention metrics” to reward partners, but more than 70 percent identified collections, firm profit, billings and client business development as the key criteria. (Apparently dollars from new clients are worth more than dollars from old ones.)

Look out for what’s next

How well is all of this working? Better for some than for others, and that will continue. When asked whether non-partner to partner leverage ratios had left their firms properly resourced to provide exceptional client service while also growing the firm business, 70 percent of law firm managers said they needed to make adjustments.

We all know which way those “adjustments” will go: in the direction of fewer equity partners. With respect to staffing categories that managing partners expect to experience the biggest decrease over the next five years, the largest plurality chose equity partners. Additionally, more than 90 percent of law firm managers said they had “unprofitable partners.” Seventy percent said that such subpar performers were at risk for de-equitization or removal.

Finally, if you’re wondering about the hourly rate regime and whether law firms can deal with any other system, consider this: When asked to compare alternative fee arrangements (AFAs) to hourly rate matters, 12 percent of firm leaders said AFAs were more profitable, 23 percent said they were less profitable, and 65 percent had no clue. How’s that for a leadership confidence builder?

Perhaps some of these managing partners have a subconscious awareness of their shortcomings. When asked to list the top three areas where their firms have a competitive advantage, only 14 percent chose “strong firm leadership.” Unfortunately, it seems clear that even that dismal number is too high.

A COMMENDABLE (AND COURAGEOUS) COMMENT AWARD

Posted on October 29, 2012 by thebellyofthebeast

As the executive director of National Association for Law Placement (NALP) — the organization that sets the rules whereby big law firm employers and their prospective new hires find each other — James Leipold has a tough job. Sometimes, NALP has looked like a victim of regulatory capture. Students’ interests have often taken a back seat to two constituencies that wield far more economic power, namely, law schools and big law firms.

Such power was one reason that NALP initially “back-pedaled” in early 2010, when big firms balked at NALP’s request to provide detailed information about equity partners’ gender and race. At the time, Leipold acknowledged that some firms threatened to withhold all information from the annual NALP employer directory, which “represents an important revenue source for us.”

Another example of big law firm influence over NALP is the evolution of the rules governing employment offers — including the powerlessness of students when a big firm unilaterally rescinds a previously accepted one. But NALP’s shortcomings are topics for another day.

Today’s commendation goes to Leipold because he recently stood up to deans who wanted him to provide prospective law students with a “better message” about the legal job market. That is, they wanted him to lie. Leipold said he was “surprised” at this turn of events, including deans who asked him to describe the job market as “good.” He refused. But his real act of courage was in revealing that some deans were applying such pressure. They should be ashamed. And they should be named.

Nothing new

Many deans have been hyping their schools with misleading employment statistics for a long time. Truth is finally catching up to a lot of them, notably with the ABA’s newly required data. Harsh reality hit with the news that, nine months after graduation, slightly more than half of all 2011 law graduates were able to get full-time long-term jobs requiring bar passage. The recent past has been bad and the current picture is ugly. So some deans have tried to shape perceptions about the future.

Leipold rightly resisted. The employment prospects for law graduates generally are not likely to brighten any time soon. Leipold could have said even more about that: there are still far more law school applicants than places for them; most estimates project that over the next decade, schools will produce twice as many law graduates as the number of legal jobs available for them. Even at the so-called pinnacle of the profession — big law firms — the total number of attorneys has yet to return to pre-recession levels.

The case for names

What will stop this insanity? Unfortunately, the problematic deans are responding to institutional pressures. That’s because law schools have become large cash cows for their universities. The impulse to run a school as a business that maximizes short-term profits is irresistible to them and their superiors. Every incentive they see encourages them to pump-and-dump: pump up demand for law students and dump debt-ridden graduates on a glutted market. Their unemployed graduates become someone else’s problem.

It turns out that the someone else is not just the victimized students themselves. Eventually, the profession itself suffers. Staggering student debt will haunt some graduates forever because bankruptcy won’t discharge it. Income-based repayment programs will help some of them, but as Professor William Henderson observes, taxpayers could wind up paying large portions of those participants’ ultimate obligations when the federal government picks up the tab for residual unpaid debt.

Will anything make these deans stop? The villains are giving all other deans a bad rap. They know who they are. Now, James Leipold does, too. Perhaps it’s time for the rest of us to learn their names. Where all else has failed to alter unfortunate behavior, maybe public humiliation will help. Nothing else seems to be working.

LAW SCHOOL DYSFUNCTION, ARIZONA STYLE

Posted on October 10, 2012 by thebellyofthebeast

Anyone holding out hope that the market for new lawyers might self-correct will be disappointed. Two recent developments continue to make that clear.

More lawyers needed?

The first comes from Arizona State University’s Sandra Day O’Connor College of Law, which is considering a move from Tempe to downtown Phoenix. It’s seeking approval from the ASU Board of Regents for a three-year capital improvement plan that includes $129 million toward construction of a new law school complex.

The proposed site is now a parking lot. Compared to the current 165,000 square feet, the new facility would be 294,000 square feet. Documents reportedly sent to the regents include a business plan that would increase the school’s current enrollment and degrees by 50 percent.

A failing grade

Why would ASU entertain such an idea? Presumably because school officials think they can fill classrooms by using statements like those currently appearing on ASU’s website:

“96% of [2011] graduates seeking employment were employed or continuing their education…82% of those employed secured full-time, long-term employment.”

Those numbers look respectable, but take a closer look at the school’s most recent ABA employment data.

In 2011, ASU awarded 201 law degrees. Nine months later, only 137 of those graduates — 68 percent — had long-term, full-time jobs requiring bar passage. (Ten of them became solo practitioners — a tough beginning for any new graduate.) Another eight had jobs where a J.D. supposedly provided an advantage; another eight held other non-legal professional positions. That’s 153.

The 82 percent “full-time, long-term employment” statistic on the ASU website results from excluding 15 more students: seven unemployed and seeking work, three pursuing graduate degrees, three with unknown employment status, and two unemployed but not seeking work.

As for the rest? The school itself funded full-time, short-term positions for 18 new graduates. Add in the others holding short-term or part-time jobs and — voila! — you reach the stunning “96 percent employed or continuing their education” number.

Curiously, the same article reporting the school’s plans to increase enrollments and degrees by 50 percent also quoted Dean Douglas Sylvester’s comment that the school has “no current plans to grow our J.D. (Juris Doctor) class beyond its historical size and beyond the capacity of the college to continue to find productive employment for all of our graduates.”

If the dean’s remark — “the capacity of the college to find productive employment for all graduates” — defines a passing grade, his school is already failing.

Predictable response to unfortunate stimuli

In March 2012, Dean Sylvester promised “to reduce the cost of attending law school to make it more available to students of different income levels.” So far, there’s no evidence that he is succeeding in that mission, either.

In-state resident tuition at ASU has increased from $19,225 in 2009-2010 to $26,267 for 2011-2012. For non-residents, tuition has risen from $32,619 to $40,815. The stated goal of these dramatic tuition hikes is financial self-sufficiency for the school.

Meanwhile, spending lots of money on new facilities enhances the average-cost-per-student component of any school’s U.S. News & World Report ranking. But if ASU is pandering to that metric, it’s doing so at a steep price to students.

As ASU and other state schools try to eliminate their need for public funds, student loan debt is filling the gap. The average debt for ASU’s law school graduates is $103,436. Together with the school’s employment statistics, such growing indebtedness suggests that techniques aimed at self-sufficiency for the school are having the opposite impact on many of its graduates.

Bouncing back?

Finally, the ongoing glut in the market for lawyers illuminates the second aspect of law school dysfunction. A recent Am Law Daily article heralded the legal sector’s “bounce-back” month in September, adding about 1,000 jobs. “Bounce-back” to what is an interesting question.

From September 2011 to September 2012, the net growth in legal jobs was 5,900. During the same period, law schools graduated more than 44,000 new attorneys. Anyone who thinks that retirements and other natural attrition will close that gap is dreaming. One state-by-state analysis estimates that net lawyer surpluses will exceed 25,000 annually through 2015. Overall, the legal sector is still 50,000 positions below its pre-economic crisis 2008 employment level (1.17 million in 2008 vs. 1.12 million currently).

That takes us back to the contest for the best use of space in downtown Phoenix. If the choice is what’s there now — a parking lot — and a proposed big new ASU law school complex, root for the parking lot.

HAPPINESS IS…CRAVATH?

Posted on September 26, 2012 by thebellyofthebeast

Big law’s future has become big news. On September 25, The New York Times published a special section that included several articles on large firms; two are particularly interesting.

“Culture Keeps Firms Together in Trying Times” discusses the handful of large firms that have shunned the widespread eat-what-you-kill approach to partner compensation. It focuses on three firms, Cravath, Swaine & Moore, Debevoise & Plimpton, and Cleary, Gottlieb, Steen & Hamilton, all of which have retained lock-step compensation systems. For any class of associates, those who survive to partner continue advancing together throughout their careers.

“The only way a partner does better is if the firm does better,” says Debevoise presiding partner Michael W. Blair describing the behavior that follows such structural incentives.

Lock-step is a sharp contrast to most other big firms, which follow what Dewey & LeBoeuf’s management called the “barbell” system: Lots of service partners on one side of the barbell balance out a handful of star partners on the other side. Then-Dewey partner Jeffrey Kessler rationalized the yawning equity partner compensation gaps that this approach creates: “The value for the stars has gone up, while the value of service partners has gone down.”

Not worth it

The Times quotes Cleary managing partner Mark Leddy’s answer to the Kesslers of the world: “People who want to be a star and make $10 million a year don’t fit in here…Breaking the lock-step system for them would be an unacceptable cost to our culture.”

Why does culture matter? There are many answers, but Major, Lindsey & Africa’s recent compensation survey may have identified an important one. Almost eighty percent of partners in lock-step compensation systems are satisfied or very satisfied with their work. A closer look at the MLA survey reveals that the combined group of satisfied and very satisfied partners is about the same for lock-step as for non-lock-step firms. But the lock-step firms’ have a big advantage in the very satisfied group — fifty-five percent compared to only twenty-six percent for non-lock-step firms.

Satisfied versus very satisfied

That leads to James B. Stewart’s observations about Cravath, where he was an associate in the 1970s. In “A Law Firm Where Money Seemed Secondary,” Stewart notes that all attorneys in his firm were intelligent, well-credentialed and hard working, but those advancing to partner had something else in common: They loved their work. It gave them a huge competitive advantage over those who didn’t. Returning to the MLA survey, I think Stewart may have captured a significant difference between the lawyers who are very satisfied and those who are merely satisfied: Attitudes about work affect performance.

Stewart also notes that “of the 20 or so associates hired each year, one or two might be chosen to be a partner.” He concludes that “over the ensuing decades, Cravath doesn’t seem to have changed much.” He’s right.

But the rest of the large law firm segment of the profession has. In fact, many have modeled themselves after the Cravath attrition-and-leverage model, but they added an unfortunate twist away from lock-step compensation: Partners eat what they kill, so every year’s compensation review is a new self-justification exercise. That incentive structure produces a much different culture; most of it is ugly and little of it enhances a firm’s long-run stability.

About the associates…

Before getting too misty-eyed over life at Cravath, it’s worth pausing on one more data point. In the most recent Am Law Survey of Midlevel Associate Satisfaction, Cravath placed 119 out of 129 firms — down from 111 in 2011. The firm has been dropping steadily on that list since 2010, when it placed 84th out of 137. (Both Cleary Gottlieb and Debevoise did much better.)

A closer analysis suggests that Cravath associates do, indeed, enjoy their work. Unfortunately, they don’t seem to enjoy it enough to offset the things that place the firm near the bottom of the satisfaction survey.

Cravath scored above the all-firm averages in work-related subcategories, including quality of work assigned, opportunities to work with partners, and level of responsibility. But it received low marks in other subcategories, including likelihood of staying two years, morale, communication about partnership prospects, and family-friendliness. Lock-step partner compensation isn’t a panacea, but imagine how much worse a place like Cravath would be without it.

Following the money

Perhaps the most telling comment about the interaction between compensation and firm culture comes from former Dewey & LeBoeuf partner Ralph Ferrara who spent twenty-three years at lock-step Debevoise before making what he describes as “an imprudent decision” in leaving: “In my heart, I never left Debevoise; it’s a place that I still love to this day.”

If the bankruptcy judge approves the proposed former partners compensation plan, Ferrara will pay almost $3.4 million to help fund repayments to Dewey’s creditors. Even so, given the amounts he reportedly made at Dewey, his move in 2005 was probably advantageous financially. I wonder if the additional money was worth it to him — and how his heirs will spend it.

LAW SCHOOLS AS PROFIT CENTERS

Posted on September 4, 2012 by thebellyofthebeast

Recently, I wrote about law schools using merit scholarships to fill seats in their entering first-year classes. Economists would say that such price-cutting makes sense in a declining market for new students. Today’s topic considers what may seem at first to be a contradictory trend: Average law school tuition continues to rise at more than double the rate of inflation.

An article in The National Law Journal mused that perhaps rising tuition in the face of reduced demand meant that the fundamental laws of economics might not apply to law schools. In fact, rising tuition along with the proliferation of non-need-based scholarships are parts of the same failing model that regards law school as a business for which U.S. News & World Report rankings provide the definitive metric.

Is relevant demand sufficiently low?

There were 68,000 applicants for the fall 2012 entering class. But in 2011, law schools admitted 55,800, of whom 48,700 enrolled. Two points about these numbers are key.

First, admissions and enrollments may be down, but not nearly enough to create equilibrium with the far fewer available legal jobs for new graduates. In fact, the recent drop in enrollments has simply returned them to 2006 levels. (Law schools were producing too many lawyers in those days, too.)

Second, the laws of economics are performing as expected. Student demand (68,000 applicants in 2012) still outstrips supply (48,700 enrollments in 2011). That sends a signal to deans that they can raise the list price that they charge for tuition, provided that the quality of the applicants doesn’t matter to them.

But quality — as measured by U.S. News rankings methodology — does matter to them. That’s where discounts enter the equation. Published tuition is the list price, but many schools are offering individual scholarships (discounts from list price) in an effort to bolster the U.S. News ranking credentials of their entering first-year classes.

As part of a total profit-maximzing strategy, increasing the list price accomplishes two objectives. First, it generates additional revenues from students willing to pay (or borrow to pay) the full amount. That’s easy money for the school.

Second, it enhances pricing flexibility to recruit so-called desirable candidates (that is, those who will enhance the school’s U.S. News ranking). A higher starting price creates more room to maneuver — through selective and even bigger discounts (scholarships) that seal the deal.

What’s ahead?

In this scenario, U.S. News wields stunning power to determine the characteristics of the next generation of lawyers. But the magazine can’t solve the problems that arrive at graduation time. At the current rate of attorney production, only about half of new graduates will find jobs requiring a legal degree. Since the Great Recession began, the Bureau of Labor Statistics has already revised downward its projection of new legal jobs over the next decade. But even that revision results in an estimate that is probably overly optimistic.

Meanwhile, in case you missed it, yet another law school dean departed recently in a dispute over her university’s efforts to funnel law school revenues back to the mother ship. That implicates another U.S. News rankings item as it relates to rising tuition: The ranking methodology incentivizes deans to spend more, regardless whether it adds value to a student’s education or employment prospects.

The victims

Put it all together: Declining admissions aren’t declining enough, rising tuition is rising too much; discounts go to students with desirable LSATs and GPAs at the expense of other students who really need financial aid; law schools return a portion of profits to their universities; and every year the system is still producing far too many attorneys. Added to this is the exploding educational debt that is financing this mess.

The current hype that borders on hysteria suggests that declining student interest in law school heralds a major self-correction of the market that will remedy all of these problems. But the sad truth is that the problems are still growing and the end is nowhere in sight.

BLOOMBERG LAW INTERVIEW

Posted on August 25, 2012 by thebellyofthebeast

Last week, Bloomberg Law’s Lee Pacchia interviewed me on two topics that are frequent subjects of this blog. Two segments are now up and running on the Bloomberg Law channel. Here are the links:

Law Prof: Why Discharging Student Debt in Bankruptcy is Good for Lenders
http://youtu.be/z4Q3Y4PRwqQ

Ex-Partner: $1M Salaries Should Satisfy BigLaw Partners
http://youtu.be/2TErRjB9j6Y

BACK TO SCHOOL SPECIAL: LAW SCHOOL TUITION!

Posted on August 21, 2012 by thebellyofthebeast

A recent article in The Wall Street Journal highlights the efforts of some law schools to generate applicants (and enroll students) in the declining legal market. The print version of the paper included a large photograph of University of Illinois College of Law Dean Bruce P. Smith. It’s an odd time for that school to seek publicity. Not long ago, the ABA fined the school $250,000 for intentionally submitting false LSAT and GPA data.

The new initiatives include scholarships, although for many schools those aren’t really new. For years, some law schools have used non-need-based financial aid to lure students with high LSATs. Lurking behind the current initiatives — and the counterproductive behavior of far too many law school deans — are the ubiquitous U.S. News rankings. Obsession over those rankings created a climate that produced the University of Illinois College of Law’s sanctionable conduct.

There’s just one problem…

The difficulty for many “merit” scholarship recipients is two-fold. First, the money often disappears after year one. For years two and three, the law school business model reasserts its power and, for most students, loans for tuition keep school revenues and profits flowing. The New York Times wrote about that phenomenon last year.

I don’t know what the University of Illinois College of Law’s approach will be, but tuition there is $44,520 for non-residents and $37,100 for residents. Dean Smith said that grants went to every member of the class of 2014 (including those admitted from the wait list) at a total cost of $3.6 million. Maintaining that average of $18,000 per student (assuming enrollment of 200) for all three years would be a daunting task. After all, it’s a state school and Illinois is in terrible financial shape.

Make that two problems…

The more abiding challenge for many students surfaces a bit later: limited job opportunities. For example, the University of Illinois College of Law awarded 190 J.D. degrees in 2011. According to its July 2012 ABA employment report, nine months after graduation, only 96 had full-time long term jobs requiring bar passage.

Other schools mentioned in the WSJ article include:

USC (Gould School of Law): 207 graduates in 2011; nine months after graduation, 134 with full-time long term jobs requiring bar passage.

UCLA: 344 graduates in 2011; 211 with full-time long term jobs requiring bar passage.

George Washington University: 518 graduates in 2011; 421 with full-time long term jobs requiring bar passage.

Brooklyn Law School: 455 graduates in 2011; 215 with full-time long term jobs requiring bar passage.

The overall full-time long term employment rate for all 2011 law school graduates with jobs requiring bar passage was 55 percent.

An old trick

The premise of these scholarship programs is simple. Rather than reduce tuition for everyone, keep the list price high (hotel managers would call it a room’s “rack rate”) for those who can afford it and offer differential discounts to those who are price sensitive at the margin. The secrecy of individual grants creates a perfect environment for implementing what economists might call pricing along the demand curve. Extract as much as possible from each buyer while maximizing total sales (enrollments).

For anyone with a long-run perspective that extends beyond filling up next year’s law school classrooms, the approach might seem a bit perplexing. If there are twice as many law jobs as there are graduating students with J.D.s, might it make more sense to adopt a strategy that reduced total enrollment?

To their credit, some schools, including George Washington University, are doing that. But for the most part, each law school is striving to maintain enrollments and the credentials of entering classes. Insofar as they are now throwing scholarship money at prospective students who are uncertain about whether to attend law school at all, they’re making things even worse.

U.S. News strikes again

Professor William Henderson correctly closes the article with this observation: “It’s the fear of a U.S. News downward spiral. It’s hard to come up in the rankings when your applications are going down.”

Thank goodness the U.S. News rankings’ guru Robert Morse clarified his magazine’s position on all of this: “[T]he rankings should not be a management tool that law school administrators use as the basis for proving that their school is improving or declining.”

Unfortunately, they do.

WHEN FACTS GET IN THE WAY

Posted on July 31, 2012 by thebellyofthebeast

Facts should matter, especially to newspaper editors. On July 25, The Wall Street Journal based its lead editorial on a factually incorrect premise. I happened to notice the Journal’s error because I’m writing a book about the legal profession’s current crises, one of which is exploding law school debt. But the WSJ blunder raises an important question: How often does the truth lose out to editors’ ideological convictions?

“You Don’t Owe That” suggested that current bankruptcy law proposals to modify the impact of burdensome student loans would “reverse a hard lesson learned during the 1970s.” The editors claimed that provisions barring the discharge of educational loans in bankruptcy occurred “[a]fter a surge in former students declaring bankruptcy to avoid repaying their loans.” For that reason, the WSJ continued, “Congress acted to protect lenders beginning in 1977.”

Not true. There was no such 1970s surge. There was no empirical record of abuse to support the legislative change that began a 30-year slide down a slippery slope, culminating in an even more unfortunate 2005 amendment to the bankruptcy laws.

Perpetuating myths

Old misconceptions die hard. Prior to 1976, all educational debt was dischargeable. That year, Congress amended the Higher Education Act of 1965 to prohibit the discharge of federal educational loans until at least five years had passed since the beginning of the repayment period. Why?

More than 20 years ago, a thorough examination of what some critics characterized as a “loophole” that “allegedly allowed graduating students to discharge their loan obligations through bankruptcy on the eve of lucrative careers” was “more myth and media hype than reality.” More recently, the Congressional Research Service noted that the 1997 Bankruptcy Commission found “no evidence to support the assertion that when student loans were dischargeable the bankruptcy system was ‘systematically abused.’”

Fear and anecdotes — not facts or evidence — resulted in federal student loans joining the same bankruptcy category as child support, overdue taxes and criminal fines. Except for rare exceptions based on undue hardship, a person paid those debts or died, whichever came first.

Bipartisan blame

The Bankruptcy Reform Act of 1978 continued the new five-year rule, even though statistical analyses from the General Accounting Office and a House report confirmed that earlier claims of abuse were “virtually nonexistent.” In 1990, Congress and the first President Bush extended that period to seven years. In 1998, Congress and President Clinton decreed that debtors would never discharge their federal educational loans. In 2005, Congress and the second President Bush extended that protection to private lenders as well.

The recent Journal editorial worries about those private lenders. No one has been able to identify the author of the 2005 amendment giving financial institutions that huge break. It also gave them something else: a new incentive to lend money with less concern for how debtors would repay it.

Framing the question

The WSJ position seems somewhat paradoxical for the otherwise libertarian-leaning newspaper. On the one hand, personal responsibility is an easy argument to make when focusing on young people who incur debt: “They should be careful and make better choices.”

On the other hand, what entitles such students’ older, wiser and more knowledgeable bankers to put the government’s heavy thumb (in the form of granting special creditor status to lenders) on the scale? For some law school graduates, the result is enormous educational debt for degrees that won’t lead to jobs necessary for repayment. Shouldn’t lenders feel the consequences of their poor decisions? Might everyone be better off if lenders sat down with pre-law students and asked them what they planned to do with their J.D. degrees before approving loans for tuition?

Moreover, from the debtor’s perspective, the underlying issue involves the exercise of a constitutional right. Against the backdrop of eighteenth century debtors’ prisons, the founders empowered Congress to enact uniform national bankruptcy laws so that a debtor didn’t risk losing all assets in one state only to be thrown in jail for not paying debts in another.

Accountability

Perhaps questions of accountability and personal responsibility turn on the characterization of the issue — and who should be accountable to whom. The Wall Street Journal is accountable to more than two million daily readers. Those readers assume the honesty of editors who include purported facts in an op-ed piece on important policy questions.

This time, readers got what an important newspaper’s editors would like the facts to be, instead of what they are. Even worse, most of them will never know it.

	Mike on AN ARROGANT SUPREME COURT IS N…
	thebellyofthebeast on My Latest Interview
	Tom Kieselbach on My Latest Interview
	thebellyofthebeast on Whatever Happened to the New Y…
	Jerry Esrick on Whatever Happened to the New Y…
	Laura Miller on HELP WANTED: Five Rational Rep…
	annette turow on The Lawyers Who Enabled Trump…
	thebellyofthebeast on Trump and His Allies Are…
	Annette Turow on Trump and His Allies Are…
	thebellyofthebeast on WHERE HAVE I BEEN?
	Patricia F Bak on WHERE HAVE I BEEN?
	thebellyofthebeast on WHERE HAVE I BEEN?
	Bob Helman on WHERE HAVE I BEEN?
	thebellyofthebeast on WHERE HAVE I BEEN?
	MARCU, Aaron (ARM) on WHERE HAVE I BEEN?

The Belly of the Beast

Steven J. Harper, Esq.

Category Archives: News You Might Have Missed

THE NEWEST BIG LAW PARTNERS SPEAK

“I AM A DICTATOR.”

AS CLIENTS SPEAK, WHO’S LISTENING?

ARE LAWYERS BECOMING HAPPIER?

LATEST SYMPTOMS OF AN AILING PROFESSION

ONCE MORE ON THE MILLION DOLLAR JD DEGREE

THE DANGEROUS MILLION-DOLLAR DISTRACTION

ANOTHER COMMENDABLE CONDUCT AWARD

PROOF OF THE PROFESSION’S CRISIS

MAKING MONEY ON OUR KIDS

COMMENDABLE CONDUCT AWARD

THREE EMBARRASSING DATA POINTS

PARDON MY CYNICISM

FROM CRAVATH TO CHASE TO CADWALADER

MORE LAW SCHOOL NON-REFORM

BIG LAW’S 2012 PERFORMANCE — NUMBERS AND NUANCE

BANKRUPTCY AND BILLABLES

THE LAW SCHOOL STORY OF 2012 — DEANS IN DENIAL

JUXTAPOSITIONS

THE LAWYER BUBBLE

BONUS TIME – 2012

A BIG LAW FIRM THREE-WAY

BIG LAW FIRM MANAGEMENT PUZZLES

A COMMENDABLE (AND COURAGEOUS) COMMENT AWARD

LAW SCHOOL DYSFUNCTION, ARIZONA STYLE

HAPPINESS IS…CRAVATH?

LAW SCHOOLS AS PROFIT CENTERS

BLOOMBERG LAW INTERVIEW

BACK TO SCHOOL SPECIAL: LAW SCHOOL TUITION!

WHEN FACTS GET IN THE WAY

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: