Editor’s Note: This is the first part in a weekly series examining the lasting effects of the current economy on the legal industry.
Eckert Seamans Cherin & Mellott Chief Executive Officer Timothy P. Ryan took some heat five years ago when he became fed up with increasing starting salaries and decided to cut out the firm’s summer program and abandon the notion of hiring first-year associates.
Other than judicial clerks, the firm hires only second-years or above, and generally only third-years. Ryan said they get the benefit of having other firms train the young lawyers, the ability to maintain what he said was a more reasonable starting salary and avoid costly attrition in the first few years.
Whether it was luck or intuition, Ryan now seems to have been ahead of the curve. But the increasingly loud call for abandoning first-year associates and changing staffing models hasn’t been bought hook, line and sinker by all legal constituencies, including general counsel. One thing that is agreed upon, however, is that lasting change is making its way into the manner with which associates are hired and utilized at large law firms.
As Bruce MacEwen of consulting firm Adam Smith, Esq. has quoted in a number of blog posts, leverage is a firm’s best friend in good economic times and its worst enemy in bad. But it seems the current market has thrown the highly leveraged model out the door for the foreseeable future — maybe even permanently.
In response to the current economy and a clear shift to a buyer’s market, firms are moving from the pyramid model of a few partners at the top and hoards of associates at the bottom to a diamond shape in which several senior associates and junior partners make up the bulk in the middle in an effort to maximize value for the client.
The latest example of that shift comes from Drinker Biddle & Reath, which told its incoming associates last week that it would lower starting salaries for the first six months of the year to $105,000. The associates will then be in a training program for those six months without the pressures of a minimum billable requirement. The salary will then go back up to “market rate” at the end of the six months. During the training period, associates will have formal training but will also be expected to shadow partners in more of an apprenticeship model.
Firm Chairman Alfred Putnam Jr. said he thought about deferring the 34 associates who would be affected, but at the end of the day they would still be first-years, just a year later. Putnam said clients are particularly averse to paying for first-year associates, and this was a way to make them “saleable.” He said he didn’t think clients would automatically change their minds at the end of a deferral year.
“As a result, even for very robust firms that continue to have profitable work flowing in the door, there is a marked shortage of work for newly made lawyers,” Putnam said in the letter to associates. “In addition, the days of large law firms assigning (and clients paying for) ‘armies’ of very junior lawyers to large-scale litigation or transactions are over — likely never to return.”
Whether or not this particular training model will exist at Drinker Biddle in future years is unclear, but Putnam said he would expect it would in some form.
“I don’t see how clients are suddenly going to change,” he said.
This shift in attitudes toward first-years means firms will start to bring in smaller class sizes and will look to bill a smaller proportion of associates’ time, focusing instead on training, Altman Weil’s Ward Bower said.
Less experienced lawyers will accompany more senior attorneys to court, for example, but it will be done as a training exercise rather than as a chargeable matter. That means firms will have to eat those costs at the front end, but in turn pay the younger associates less to help “ease the pain,” Bower said. When they do charge for work, the associates will most likely do so at a lower rate and they also won’t be expected to bill until the second or third year, he said.
The differentiator will be how well firms do on the training process. Eating the cost of first-year associates means attrition would sting even more. Firms will have to start at lower salaries and then increase “pretty quickly” for those they want to keep, Bower said.
This new model could mean there will be fewer 3,000-attorney firms than there may be currently aspiring to reach that model.
“Firms will have to find an equilibrium because they can’t afford to maintain these massive armies of associates,” Bower said.
So when large matters come up, firms will increasingly turn to outsourcing through contract attorneys and might even look to off-shoring work, he said.
In this buyer’s market, clients are dictating what they will pay, how many attorneys will be on a matter and even which individual attorneys they want on those matters, Bower said. They are also going to become more involved with strategic decisions, he said.
An ‘Unfortunate’ Mantra?
Todd Borow, president of DELVACCA and senior corporate counsel at Johnson Matthey, said the firms that understand this paradigm shift will be ahead of the curve even when the economy picks up. Corporate CFOs aren’t going to jump to put money back in the legal budget as soon as the economy improves, and many of the changes occurring now in terms of the law firm/law department dynamic could become permanent, he said.
Borow has certainly seen the trend among general counsel to push back on paying high rates for first-years.
“I don’t think it’s a problem that a first-year is involved in doing some of the work, but being billed out at $300 an hour, or whatever the rate is, can be objectionable,” he said.
First-years are the future of law firms and general counsel want to see them developed, Borow said. The issue is how to make them valuable to the client in the first few years.
Maybe there are certain things a first-year has traditionally done that a paralegal could do, Borow said. Pricing models could also be different, he said. It is in the firms’ best interest, he said, to staff matters efficiently and probably consider alternative-fee arrangements.
Many people have been pointing to training models used in Canada and the United Kingdom in which first-year associates have something akin to an internship in the first year.
On a recent managing partner’s panel at the NALSC conference in Philadelphia, Pepper Hamilton partner Joan Arnold pointed to a decades-old study that suggested doing away with the third-year of law school and making it a training year. She said there needs to be a seismic shift in the way attorneys are trained before they even join a firm.
“I find the mantra of ‘clients won’t pay for first-year associates’ unfortunate,” Arnold said. “Clients will pay for value.”
Fox Rothschild Co-chairman Abraham Reich, also on the panel, said that mantra was an “attack on the most vulnerable” of the profession. He said first-years do have value if priced and placed properly.
But panelist Arthur Makadon of Ballard Spahr Andrews & Ingersoll said most firms, because of the recent rash of deferrals, won’t have first-years this year and into next because many large clients won’t pay for it.
“Associate hiring is going to change in very, very radical ways,” he said.
That is good news, Makadon said, because it liberates firms from having to follow what their competition is doing.
Arnold argued that firms have to hire first-year associates — otherwise there would be no second-year associates.
But Eckert Seamans’ Ryan, who said he has never had a problem filling spots through lateral hiring, would disagree. He said he didn’t think it would be a bad thing if every firm adopts the model he has and stops hiring first-years.
“What would happen if everyone adopts this model is an economic rationality will return and the law students’ expectations will be more aligned with [their] contributions,” Ryan said.
One of the reasons the firm stopped hiring first-years was because it didn’t want to pay the increasing salaries but felt it was losing out on top talent, he said. Law firm salary wars, he said, could have priced first-years out of the market. If the model were realigned and expectations were a bit different, his firm might be able to attract the best talent from the start. If that happened, Ryan said he would be open to hiring first-years again. He said he would have to if every firm did what he did.
Duane Morris partner Alexander “Lex” Bono has been both the client, as general counsel for Commerce Bancorp, and the provider of legal services. He said he has definitely noticed clients being less interested in seeing first-years show up on billing statements and didn’t like seeing it that much himself when he was a GC. But there are consequences for the profession, the individual and the client if firms don’t use and train first-year associates, he said.
Young lawyers learn mainly by watching partners and joining them on certain matters, he said. That type of training provides the intangible qualities that are invaluable to clients — experience and judgment.
“I think we’re becoming a little more task-oriented with the shift that has occurred where people are focusing on their knitting and not so much the big picture,” Bono said.
Firms need to start explaining staffing to clients and get pre-approval for how they staff matters. They need to communicate with clients and explain the value of the attorneys on a matter, he said.
What Bono tried to get firms to do when he was a GC, and what he is doing now at Duane Morris, is to work on creating a brief bank of prior work product so that young associates don’t have to reinvent the wheel with each new client or new matter.
How firms go about fitting first-year associates into a more valuable and accepted model will most likely, vary but the emphasis on achieving that goal is starting to permeate through the large law firm model.
Read next week’s article on the change in compensation models for associates and partners in next Monday’s Legal . •