The Georgetown/Peer Monitor Report on the 2013 Legal Market

    Georgetown University’s Center for the Study of the Legal Profession and the Thomson Reuters Peer Monitor recently released their joint report on the state of the legal market (the “Georgetown Report”).  The Georgetown Report claims that the legal market has changed irrevocably and that law firms may need to fundamentally alter the way they do business:

Legend has it that in 1519, when he and his cohort of some 500 soldiers and 100 sailors
landed on the shores of the Yucatan intent on conquering the large and powerful
Aztec empire, Spanish conquistador Hernando Cortez promptly ordered his men to
"burn the ships" . . .

Perhaps it's time for us, like Cortez, to burn the ships - to force ourselves to think outside our traditional models and, however uncomfortable it might be, to imagine new
and creative ways to deliver legal services more efficiently and build more
sustainable models of law firm practice.

    I agree that law firms will have to become more efficient for reasons that have been noted by Bill Henderson and others.   However, this is not a challenge that it is unique to the legal field and has little to do with the contraction in the legal market in the aftermath of the 2008 recession or its doldrums ever since.

    What is the basis for the dire prognosis offered by the Georgetown Report? The Report notes that productivity (measured in billable hours) has been stagnant since 2010 and that the annual growth in demand for legal services from 2010-2012 has fallen far short of the demand growth from 2005-2008.  It also notes that profits-per-partner at U.S. law firms grew "modestly" in 2012, on average by 3.58%.

    None of this data is particularly troubling when viewed in light of the faltering nature of the U.S. economic recovery.  The Georgetown Report presupposes, however, that today’s legal market should be judged against that of the previous decade, when gains had been inflated by the real estate bubble.   A recent Client Advisory from Citi and Hildebrandt Consulting ("Citi Advisory") indicates the problems with such comparisons:

Year-after-year double-digit profit increases are a phenomenon of the boom period. They did not characterize the years before that time and certainly do not characterize today’s market.  The new definition of a successful year should be just that - PPEP [profits per equity partner] growth in the low single digits.  Unfortunately, many partners who “grew up” during the boom years still cling to the expectation that healthy firms should see double-digit PPEP growth.

    Without establishing that the legal market is underperforming or that a 3.58% average increase in profits in 2012 should be a cause for concern, the Georgetown Report then advocates for, inter alia, dramatic changes in law firm hiring practices.  One of its main proposals is that law firms cut costs by taking advantage of the current oversupply of new lawyers to hire far fewer partner-track associates and more staff attorneys, part-time attorneys, and non-lawyer specialists.   

    Such proposals are already being instituted and may make business sense for the vast majority of law firms going forward, although perhaps not for elite ones that primarily handle high-stake matters and must carefully safeguard the quality of their work product.  But the data presented by the Georgetown Report does not support this course of action.  Partners, not associates, are the primary reason that law firm productivity is lagging as the Citi Advisory indicates:

[A]ssociate productivity is approaching pre-recession levels. But this improvement is more than offset by the lower productivity levels seen among both income and equity partners . . . To exacerbate the problem, associate ranks have shrunk in recent years, while the percentage of income partners has climbed. Associates made up just 64 percent of salaried lawyers in 2011, down from 81 percent in 2001. Conversely, income partners accounted for 19 percent of salaried lawyers in 2011, up from 10 percent in 2001.

    The Georgetown Report’s own data reveals the stark gap in associate and partner productivity, but the Report's authors do not consider it in any detail.  The Georgetown Report's solution to overcapacity is for firms to hire fewer tenure-track associates, even though these associates are currently the most productive firm employees and generate far more in fees for firms than do staff and contract attorneys.

    It may well be time to “burn the ships,”  but the Georgetown Report fails to make the case. 

Comments

[John Steele]

Milan, I wonder if the "burn the ships" metaphor was a coded message to "do to unproductive partners what we've done to the associate ranks." I take it that the associates are productive because the firms have thinned the ranks to the point where the work matches the number of associates.

[Milan Markovic]

John,

The report is far more circumspect on the issue of weeding out unproductive partners whereas it specifically states that successful firms will be the ones that "burn the ships" when it comes to associate staffing. I suspect that many firms are resistant to substantially thinning their partnership ranks for cultural reasons and alike and the Report appears sensitive to that (the lead author is a former managing partner of a major DC-based law firm).

[John Steele]

Milan, thanks. The author is a very knowledgeable guy whom I know pretty well (disclaimer).

I have no doubt that lots of people are circumspect about explicitly saying, "thin out the partner ranks" even when that's the message being sent. I'm also sure that firms are far more hesitant to do that than to thin out associate ranks -- just as law schools are shedding every category but tenured ranks.

[Derek Tokaz]

Cortes didn't burn his ships, he sank them in order to prevent his men not from fleeing, but reporting on his actions back to Cuba.

Cortes was in a sort of open rebellion against the Spanish Governor, refusing to give up control of his forces when ordered to do so, and killing the messenger who brought the order. He needed to conquer Mexico in order to redeem himself and gain so much favor that his superiors wouldn't be able to seek retribution. So, there is the same fatal terrain dynamic going on, but just not with he burning ships.

[John Steele]

Derek, very interesting, thanks. I had always heard the popular myth but perhaps the author of that report (a smart man who knows what he talks about) did understand as you did, given that he said only that "legend has it . . . ." I've since seen here and there on the internet the historical version you mention.

According to Winston A. Reynolds, who is apparently the "go to" source on this issue,

"The expression in English and Spanish "to burn one's boats" (quemar las naves), a reference to Cortés in the minds of many people, has contributed to its continuing popularity and perpetuation. In the end, to present the legend today as historical fact can only be attributed to ignorance; but its use in creative literature must not be condemned, for it is dramatically appealing and actually a mere embellishment of the truth. Cortés' deed, one way or the other, remains a universal symbol of bold vision and heroic action."

For me the larger point about the report is that it is a forward looking prediction, based on the best data about big firms, collected and analyzed by someone who has been living these issues and getting the analyses correct for decades.

[Grandpa Moses]

Thank you for this excellent post. Let's just get real about what the vision here: More upward redistribution to a smaller group of partners and corporations. The other elephant in the room: there's less demand for lawyers because the same group of partners and corporations has lobbied for legislation (or eviscerated current law) that slams the courthouse door in the face of most of the population. BigLaw helped put itself out of business by entirely identifying with the basest commercial interests of its biggest clients.

[Ray Campbell]

I read the "burn the ships" analogy as a reference to Clayton Christensen's work on disruptive innovation. Christensen's research shows that when disruptive change comes to an industry, the previously dominant firms initially keep on doing what they've been successfully doing for so long. At first, the changes don't really impact them, and can even help them increase profits as weaker competitors exit the market and their sales shift to the high end work not yet available to the disruptive entrants. A point comes when the market has changed so substantially that the same old same old doesn't work any more, and the dominant firms fail. I read the report to be saying that that process might well be underway in the legal services industry, with LPOs and document processing software and so on so reshaping the market that at some point in the future the Cravath leveraged partnership model will no longer work for most firms in light of the changed dynamics of the market. To the extent firms agree that the changes in the market are structural, the necessary change in their business models and way of doing business will be so profound as to seem equivalent to burning (or sinking) their ships. I don't think trimming a few non-equity partners meets that standard - after all, there have been a lot of equity and non-equity partners alike set loose since 2008.