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.