Changing Models of Law Firm Organization in the New Economy Bernard A. Burk University of North Carolina School of Law

Q: Why have larger law firms grown since c. 1970 as much and as fast in the configuration we see A: Consistent forces foster growth loose coherence (brittleness) A: Important evolutions in the market (buyer/client sophistication) the nature of larger-firm work

Growth 1968: 38 firms > 50 largest firm = 168 ~150 firms larger than the largest in 1968 largest firm = 962 2008: ~700 firms > 50 >250 firms larger than the largest in 1968 ~25 firms > 1,000 largest firm > 4,000

Configuration Paradigm into the 1980s: 2-class system Partners and partnership-track associates Associates move up or out Paradigm has eroded over the last 20 years: More firms have more indefinite-term non(-equity) partners Associates = 60% of large-firm lawyers in 1987 55% in 2001 48% in 2010

Leverage Mid-1960s: between 1.1 and 1.5 Mid-1980s: between 1.5 and 2.2 2003: average 3.5; 75th percentile > 4

Coherence (Fragility/Brittleness) 1968: lateral movement rare 1988: ¼ had acquired ½ their partners laterally ¼ had acquired ½ their associates laterally 2000-2005: over 14,000 lateral partner moves in the AmLaw 200 ~½ of BigLaw partners changed firms in 6 years! At the same time, firms have continued to grow in number of lawyers

The Great Recession (2009-??) Widespread lawyer layoffs by larger firms (10-15% or more, predominantly more junior lawyers) Stringently reduced entry-level hiring (20%-50% smaller entering classes) Widespread partner “de-equitizations” and dismissals 1/3 or more of new law grads unable to find full-time legal work

CYCLICAL OR STRUCTURAL?

Structural Trends Increase in buyer (client) sophistication Better understanding of their own needs and how to meet them More thoughtful “make vs. buy” (in-house vs. outside) decisions More selective shopping for outside counsel Decline in client stability and exclusivity Disaggregation of legal services “Hire a lawyer, not a law firm” Recent drive towards dis-integration within single projects Focus on individual lawyers rather than the whole firm Individual experience, reputation and connections win work Partner compensation based on individual marginal product Less and less of a lawyer’s “human capital” is firm-specific

Changes in Cost and Technology Reconfigure the Law Firm Firm is bounded by what it is cheaper to make rather than buy Change in the world: The digital revolution Change in the work: Legal process becomes a greater part of the effort and cost in legal services Who and how: Insourcing Outsourcing Downsourcing

The Future of the Law Firm Disaggregation accelerates Far fewer high-paying entry-level jobs, and significantly fewer full-time legal jobs overall Old 2-class configuration fanning out into a 4-class structure: True Equity Partners (more concentrated; based on marginal product/relational capital = rainmaking ability) Associates (fewer; perhaps a vanishing class) Nonequity “Partner”/”Counsel” (more numerous) Staff/Contract/Temp (paid and billed at low rates; law license optional?)

What makes the modern law firm worth more than the sum of its parts? Focus on individual achievement, individual retention by clients and individual marginal product minimizes shared risks and benefits Law firms become aggregations of individual practices sharing only overhead Economies of scale exhausted Diseconomies of scale increase with size

How do you pursue success and cohesion in the “new normal?” Larger practices: Rethink: Up or out Leverage Hire smarter: Know your practice’s core competencies (plural!) Hire to those competencies Retain longer: Find the right place for anyone who fits Tailor status and compensation Grow better: Cultivate complementarity of practices, skills, reputation, connections Build client relations tighter: Seek long-term, stable relationships Explore pricing arrangements based on such relationships

Smaller practices: Consider growth to achieve economies of scale Diversification or complementarity? Use technology, downsourcing and outsourcing to cultivate the “footprint” of a larger firm without the overhead It’s already natural to hire to your competencies and retain Build long-term, stable client relations as your practice allows Explore pricing based on long-term relationships

Your ship won’t sail itself any more: Figure out which aspects of the weather are likely to toss your boat Watch the horizon—Storms ahead! “Good evening Mr. and Ms. America, from border to border and coast to coast and all the ships at sea.”