Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             September, 2010

           Professor Steven Harper, a former Kirkland & Ellis partner and currently a professor at Northwestern University School of Law recently posted an interesting piece about the forthcoming US News and World Report special issue containing a ranking of “[m]ore than 5,000 law firms [which] will be ranked in 125 legal practice areas nationally, by state, and by metropolitan area.”   In January, US News reported that it had by then already accumulated 50,000 client references and had requested data from the law firms it planned on grading.  Insofar as some firms may not voluntarily supply such information, perhaps relying on our view on the subject, US News boldly reported that it “will be able to secure from various sources quantitative data concerning those law firms that do not provide the requested statistical data.”  I am not quite sure that this was a subtle threat, a boast of US News’ unique investigative reporting skills or an expression of unique legerdemain possessed by US News.

           In all events, Professor Harper advances initially advances the hypothesis, indeed, a rather well accepted notion, that AmLaw’s 1985 introduction of the AmLaw 200 rankings changed law firm managers behavior in focusing on the sometimes foolishly exalted and frequently  criticized “profits per partner” metric, which he describes as the “definitive metric.”  With all due respect to Professor Harper, for whom I have enormous respect, I doubt that anybody believes the AmLaw metric to be either definitive or reliable.  But, he is certainly spot on in describing the mere existence of the metric  changed law firm manager behavior in the last 25 years.  Certainly, somewhat sadly, a bit too often not very much for the better.

           In two decades of being involved in law firm mergers and acquisitions and lateral partner movement, the importance of the reported PPP of a particular law firm was always of virtually no consequence to all of the players involved. In every early discussion between law firm leaders of a proposed significant combination, the leaders simply completely discounted and ignored the reported AmLaw numbers and simply asked their counterparts for the “real numbers.”  The only consideration given to the AmLaw annual reports was how the proposed combination would catapult the combined firm’s standing in the ranking. Indeed, in virtually every press release regarding a combination of significant law firms, the release boasts that the combination will elevate the combined firm to a higher AmLaw ranking.

           Insofar as lateral partner or practice group movement, the issue of reported AmLaw PPP is simply treated as a matter mentioned en passant¸ of no significant import to any of the players. As I commented to Professor Harper, market forces dictate actual compensation of new laterals. The market sets the value of a lateral partner based on portable business and the demand or the current vogue or demand  for the lateral’s skill set. In short, a lateral with a particular amount of business and practice area will almost always receive virtually the same monetary offer, with little material variance regardless of the standing of the offering firm in the rankings. A firm of substantial seven figure reported PPP will generally not make a credible offer of materially different remuneration of lower ranked law firms or even unranked law firms.  The only variation may be that a potential lateral may see some future upside in the firm with reported higher PPP. Often, the lower ranked firm will counter that with a longer term “no cut” contract or some other salary enhancements.

           The real question for me is, among other things, why is there a virtual epidemic of publications and web sites that rank lawyers and law firms? Frankly, I dunno.

           There already exists a plethora of lawyer rankings, aside from AmLaw and US News:  Martindale once was the gold standard.  Today, we have, among others, www.superlawyers.com, www.bestlawyers.com, www.lawyers.com, www.lawyers.com, www.avva.com , the ACC Value Challenge and perhaps to a limited extent, www.vault.com .

           Most of these ranking reports are patently efforts, usually largely successful, by the reporting entity to reap substantial financial reward for its own pecuniary interest, not that is something to be embarrassed about.  Some reporting entities shamelessly solicit advertisements from the “winners” in their journals, raising serious questions for a reader as to whether an award is bought and paid for. Some host lavish pricey dinners at which awards to the winners, already previously announced, for which “winners” buy tables and drag along clients for the Academy award inspired fete. Some engage in extensive pre-announcement hype to assure both wide circulation of the particular edition in which the awards are announced and charge advertisers a hefty premium for advertisements in the issue.  In all fairness, none of this can be said of the ACC Value Challenge, which actually does provide a service to the true beneficiaries of its rankings, namely clients who use the results in selecting counsel.

           The consequences of the glut of awards and rankings, intended or otherwise, are, among other things, a spate of press releases by firms of its receipt of high rankings or bestowal of awards to particular lawyers in the firm, inclusion of the awards or rankings in the firms’ web sites and in many instances, law firm corridors lined with framed awards.

           But, again, what’s the point? The rising tsunami of rankings and awards completely dilutes their value and, indeed, their reliability.

           In the end however, market forces and the succor of profitability will doubtless incentivize the various ranking entities to simply proliferate.  Vanity will surely not cause any lawyer or law firm to raise a hue or cry about these various rankings. There certainly is no redress, appellate review or even accountability for any rank bestowed or award conferred.  No Darwinian system will ferret out any of these entities as being less fit. Nor will, I believe, any disgruntled client have the ability to successfully assert a claim against any of these ranking or rating entities, claiming that it retained a law firm relying on the basis of a published ranking or rating and the result was unsatisfactory, notwithstanding the pending lawsuits against financial rating agencies following the recent bursting of the home mortgage bubble.

           I am simply thinking of waiting a year or two and then publishing a ranking of the various ranking entities. There may be a buck or two in that.

 © Jerome Kowalski, September, 2010.  All Rights Reserved.

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             September, 2010           

A Lawyer’s time and advice are his stock in trade

                                                                                                            Abraham Lincoln

 In the revolutionary world of AFA’s is there a role and reason for recording time devoted to a matter?

             I’ve received a surprising number of inquiries from law firm clients who are now working on Alternative Fee Arrangements whether they should continue to require lawyers in the firm to record time.  The short answer is a resounding “absolutely.”  Some clients have put it to me rather simply:  What’s the point, after all hourly billing is virtually dead?  Others postulated that eliminating time keeping would result in the elimination of some costs. 

 Tracking lawyers’ times in AFA engagements is absolutely essential.  It provides a number of vital tools.  I assume that you have by now obtained some greater familiarity with the essence of AFA’s from some of our literature, the growing body of literature generally available, and from clients and professional peers.  

But, too often, when speaking of Alternative Fee Arrangements, law firms simply erroneously equate the arrangement as simply doing work on a fixed fee basis or, simply a flat percentage discount.  Wrong.  Most AFA’s do take in to account and utilize for billing purposes, a component of time actually and accurately recorded.  Thus, actual time expended and such time is an essential ingredient in calculating the ultimate fee.  But it is only one of the ingredients.

 First, accurate time keeping and analysis of the time records provides legal project managers with a tool to measure timeliness and compliance with the project’s timeline.  Second, it provides law firm management with a means by which to measure productivity, in connection with (a) any particular matter, (b) identifying individual lawyer’s demonstrated efficiency when assembling a team for a subsequent matter and (c) annual associate and partner reviews.  Third, astute and well-informed clients are more frequently requiring their outside counsel to provide real-time access to the firm’s time accounting system and monitoring since it provides clients with a method to timely monitor and check on both efficiency and timely compliance with the timeline presumably incorporated within the terms of the scope of the engagement agreement.  Clients of some degree of sophistication, advised by their own inside corporate counsel, project managers and contract compliance officers are more routinely including this provision in their retainer agreements.

 The well-managed AFA engagement also requires regular discussions between client and the firm’s client relations manager regarding the progress of the matter.  Maintenance of accurately reported timekeeping provides client and law firm to have well-informed discussions on the progress of the matter.  Recall, if you will, that the ACC value index reports on the fact that the area in which law firms uniformly score poorly is in connection with budgeting, not merely with respect to matters billed on an hourly basis but also in a firm’s projections regarding the duration of a matter.  These, incidentally are among the matters I cover in my book, “Navigating the Perfect Storm: Recruiting, Training and Retaining Lawyers in the Coming Decade” (Ark Press, 2010) and in my blog Surprisingly (at least to me), I have not received many invitations from late night talk shows, Oprah and the like to plug the book  — which is selling nicely, thank you, thus, I am relegated to using this medium to add a plug. 

 It certainly hasn’t escaped me that the irony is that in the former model of hourly billing, lawyers were incentivized to keep their pedals to the metal and bill large amounts of time.  In the new AFA paradigm, lawyers will be incentivized to go light on the pedal to demonstrate efficiency. The issue of accuracy in reported time exists in large measure because the overwhelming number of lawyers reconstruct time at the end of a day, week, month, or whenever a supervising lawyer demands submission of time records or when a payroll department tells a lawyer that it has been instructed not to issue the next paycheck or partner draw until the time is put in to the system.  The use of the equivalent of an abacus in time recording when a variety of computer based real-time and accurate programs (even an I-Phone App) are available is just one of those enigmas of the profession. Using the reconstruction method (the abacus), has created much well-recognized diverted time n analyzing time when billing and inevitably creating write downs, affecting the former metric of “realization.”

 Tracking of time in AFA’s should also require some radical re-thinking by law firms of the metrics used for measurements of profitability. In the hourly billing model,  profitability was measured by an equation under which time recorded was multiplied by a firm’s standard hourly rates, less write downs and write offs (or in some instances, plus a premium added to a bill) yielding a realization rate.  The fact is that under generally accepted accounting principles as well as under well established, long standing principle used by service providers in other industries,   this metric does not provide an accurate measurement of profitability.  AFA’s permit law firms to measure profitability of an engagement using more conventional metrics:  That is, the calculation of the actual cost of labor, namely the compensation of the time-keeper, together with an allocated portion of G&A, measured against the fee received.  Nonetheless, recording of time is still of the essence of both an AFA and a conventional hourly billing model.

 A separate question has also recently arisen: Whether a client not contractually requiring real-time or other access to time records in connection with an AFA engagement should be entitled to review time records is simply not susceptible to an easy answer. Certainly, the law firm might take the view that time actually expended in the engagement should be a matter of indifference to the client.  After all, why would you need to know how long your home building contractor spent on working on your house, provided it was completed on time and the price paid was in accordance with your initial flat price arrangement? However, a client may make the request, or perhaps should even require, disclosure of these records so that it is afforded the opportunity to have some measure of the firm’s actual costs and profits (realizing that the client would be unaware of the actual cost of labor and G&A) in order to negotiate the next AFA on a more informed basis, compare efficiency with other providers of legal services and provide its input in to the selection of professional personnel in subsequent AFA engagements based on a particular lawyer’s proven efficiency.   Law firms’ responses to such requests, in the absence of a prior agreement on the subject, will be driven by issues of maintenance of quality client relationships and of course the knowledge that such disclosure,  may provide the client with an advantage in negotiating your next AFA, assuming, of course, the AFA was well managed and thus handsomely profitable.

 (c) Jerome Kowalski, September, 2010.  All rights reserved.

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Associate Job Satisfaction (JD)

Associate Job Satisfaction:  Should We Care?

         Jerome Kowalski

Kowalski & Associates

September, 2010

The American Lawyer recently reported the results of its annual survey of associate satisfaction and reported that law firm associate job contentment and morale dipped to its lowest level since 1994. American Lawyer concluded in its survey that job satisfaction, based on a survey of over 5,000 associates found that job satisfaction fell “from 3.897 in 2009 to 3.733 this year. That’s the lowest score since 2004. In particular, associates lowered the individual grades for their own firms, giving an average rating of 3.96 this year–less than the 4.16 rating in 2009–and the lowest score in recent years.”

This report was followed by a series of public comments and blogs that associates who complained were unnecessarily and inappropriately “whining”. Partners and unemployed or underemployed lawyers were particularly critical of associates receiving regular paychecks calling them simply “cranky”; an example of this public dialogue is contained in a recent ABA article, in which some of the nearly 100 posted comments had a rather interesting, if not at times bitter series of comments. The American Lawyer report can be exegetically interpreted and analyzed in a variety of different ways: First, “only” 25% of associates expressed dissatisfaction with their jobs. Second, perhaps cynically, American Lawyer was simply taking a tabloid and a bit sensationalist approach to its report, and the various releases describing its report were made in order to boost sales and interest. Or, perhaps, a rate of 25% of disaffected associates is not acceptable, because it significantly affects lawyer efficiency, morale and law firm profitability.

Employee dissatisfaction is wildly contagious and significantly adversely affects employee efficiency, an unacceptable result in an era in which associate efficiency is critical, in our changing law firm business model of increasing Alternative Fee Arrangements and the death of hourly billing. We have known for at least four decades the reasons for lack of job satisfaction in any work environment. In 1968, the Mayo Clinic identified the factors that lead to job dissatisfaction:  Bickering co-workers  Conflict with your supervisor  Not being appropriately paid for what you do  Not having the necessary equipment or resources to succeed  Lack of opportunities for promotion  Having little or no say in decisions that affect you  Fear of losing your job  Work that you find boring or overly routine  Work that doesn’t tap into your education, skills or interests

The cures for virtually all of these factors is largely greater transparency in law firm management and appreciably greater open and candid discussion, led by law firm management, joined in by partners regarding the state of the firm and how the firm plans to weather the continuing economic turbulence.

Interestingly, Joel Rose, a respected law firm consultant, in a recent guest column described the role of law firm managers. Mr. Rose seemed to suggest that law firm managing partners are hampered in their roles because of their needs to consult and obtain approval of other members of management. He also lists the sundry obligations of the managing partner, listing, in my view, “communications” way too low on the MP’s duties. In the current economic malaise, I frankly would list communication at the very top of the list.

I would take this issue a step further: In thirty years of being deeply immersed in the entire recruiting process, from hiring partner, to heading a legal recruiting firm to ultimately serving as a consultant to law firms on, among other things, lawyer recruiting, training and retention, by far and away, the single most often cited reasons given by lawyers who are asked why they are seeking alternative employment, is one form or another of “lack of feedback,” an absence of knowing what is “going on at the firm” and, finally, a fear by an associate that he or she will not make partner for reasons completely exogenous to the associates performance and a concomitant sense that partnership decisions are made in a fashion that is so deeply mysterious, unfathomable and enigmatic. Every lawyer involved in recruiting and every recruiting professional has heard this mantra repeated consistently and in a virtual talismanic fashion.

Law firms are theoretically well aware of this. Recruiting literature prepared by virtually all law firms for law school graduates consistently cite the firm’s regular feedback and open communications. Similarly, lawyers involved in the recruiting process, upon hearing the gripes of an interviewee of the absence of adequate communications by partners at their former law firms, recite, by rote, as it were, the firm’s open style of communications and regular feedback, with all associates being fully informed about matters affecting their careers. If so many partners hear and say the foregoing, how could so many associates consistently experience a diametrically opposite sense?

More crucially, as law firm economic pressure rise, the level of communications and transparency declines. As candid communications and transparency decline, so too does associate morale and efficiency. A material portion, if not all of these maladies can be mitigated with open and relatively full disclosure of the impact of The Great Recession on the firm, its economic performance as well as the firm’s strategic business plans. Associates (and I daresay the partnership) want to know and are entitled to know how the firm plans to get through these challenging times.

The bickering among associates largely caused by uncertainty of continued employment, in a continuing era of associate layoffs (openly acknowledged or through “stealth layoffs), “accelerated” reviews, deferral of start dates and reduced law school recruiting must be addressed in open forums with associate participation in which the subject is addressed and the subject is put on the table for associate input on the question.

On September 23, 2010, Hildebrandt Robbins Baker casually added substantial fuel to the fire and heightened associates uncertainty of continued employment by issuing a report which speculated that during the next 5 to 7 years 17,500 (out of a total of 65,000) “partner track” associates at AmLaw 200 law firms, amounting to some 27% of the total of such  associates could simply be “eliminated” (http://www.hbrconsulting.com/blog/archive/2010/09/23/chipping-away-at-the-traditional-model.aspx )  While, a reading of Hildebrandt’s report show that it is based on a series of assumptions and speculations,  largely not supported by any facts, the result is clearly heightened concern about associates’ job security.   Hildebrandt’s speculations, while widely correctly criticized, see for example, http://abovethelaw.com/2010/09/consultant-says-17500-non-partner-biglaw-jobs-at-risk/#more-37294 , the mere report sent an unnecessary and unwarranted shock wave among at least the 65,000 “partner track” associates at AmLaw 200 law firms and surely trickled down to a significant number of other large law firms below the AmLaw 200.  The Hildebrandt report, suggesting, among other things a completely unsupportable prescience, certainly had the consequence of sending a shock wave through associate ranks around the nation, who doubtless spent unnecessary time fretting and discussing the foreboding “news.”  I daresay that if Hildebrandt had the ability to predict employment statistics seven years hence, its crystal ball surpasses that of any other economist in the nation.

Thus, in addition to the irresponsible conflagration Hidebrandt ignited and the concomittant increase in associate disaffection, partner time is now required to douse these flames.

Issues like this must be the subject of open discussion by and among partners and associates.  Associate concerns simply must regularly be allayed.

Several recent case studies illustrate the point: The London office of Delloite Touche confronted the fact that incoming work was insufficient to keep all of the professional staff employed. Management and had an open dialogue with its professional staff openly discussed the subject; it proposed a number of alternatives, including layoffs or reducing compensation by approximately 20% and concomitantly reducing by the same percentage the time the professionals were required to work. The professional staff openly discussed these and other alternatives and expressed to management that the latter alternative was the far more desirable alternative. The result: enhanced employee morale and despite the reduced number of hours required, most of the professionals had no hesitation in working beyond the 20% reduction for clients, marketing efforts, mastering new skills and writing professional articles. More recently, Norton Rose of England took the same approach to similar effect.

Perhaps an even more insightful analysis appears in Above the Law, in an essay written by a lawyer who “switched sides”  and moved in house to Aon from Sullivan & Cromwell: http://abovethelaw.com/2011/01/inside-straight-human-resources-and-the-law/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+abovethelaw+%28Above+the+Law%29&utm_content=Google+Feedfetcher

Associates observe the obvious fact that many partners increasingly “hoard” work, partially because the AFA model requires quality legal work to be efficiently delivered by experienced lawyers and, quite frankly, sometimes “hoard” hours for their own job security. These factors, again, need to be discussed openly, with associates invited to openly discuss these issues and suggest alternatives, including ways they can contribute substantively to the firm, even in the new era. Acquisition of new skills (not simply in other practice areas, but also in marketing and project management), pro bono work, accepting the fact that they will necessarily take a step back in matter involvement as they endeavor to improve their own efficiency are obviously areas for open discussion.

Law firm management in this new era also must swallow the fact that associates and partners can no longer be assessed by the number of hours billed, but rather, the new metric is efficiency of delivery of quality work product. Applying these basic principles, associates need to educated that making these contributions will eliminate conflicts with supervisors. Dissatisfaction with compensation should also be openly discussed. Associates need to be inculcated with the plain fact that rather than unfavorably comparing their own compensation with that being paid at other firms, they should be comparing the fact that they are receiving compensation and have meaningful employment with the unfortunate throngs of peers not as fortunate.

Reading the commentaries of the articles I cited above, the fact is that most associates do “get it.” Associates should also be encouraged to devote their own time to various programs conducted by virtually every bar group (such as the New York State Bar Association’s Committee on Lawyers in Transition) which provides counseling to lawyers who are unemployed or underemployed. The essence of all of the foregoing is that transparency in management, open and regular communications and dialogue eliminates or, at least tempers) virtually all of the known reasons for employee dissatisfaction.

Interestingly, Professor Steven Harper of Northwestern University School of Law and a former Kirkland & Ellis partner, in a very recent article notes that associate dissatisfaction leads to lawyer inefficiency and adversely affects a law firm’s profitability. Professor Harper argues, quite correctly I believe, that all of a firm’s partners owe a duty to the firm in assuring associate satisfaction and that a metric which should be considered as partner compensation is determined should include the measure by which individual partners contribute to associate satisfaction, or, on the negative side, associate disaffection.

Surely, these concepts are completely revolutionary, as is so much the profession has been going through recently, such as AFA’s, value billing, the death of hourly billing and legal project management. Informed management, as well as each partner, if they do have some measure of concern for enhancing morale and efficiency by the firm’s professional staff needs to step away from the smoke and mirrors of the Wizard of Oz and the secret huddling of partners behind closed doors. But the fact is that the continued management styles that were widely used in the past, treating associates (and indeed, lower level partners and counsel) as mere mushrooms (being kept in the dark and fed muck) and elevates insecurity, job dissatisfaction, fear, inefficiency, morale, rumor mongering, attempts by associates to spend late nights to rifle through partners’ trash bins, email boxes, hack in to the firm’s computer system, seeking any grain of fact or hypothesis, embellish on it or make unwarranted assumptions and conclusions, spread these among associate ranks, which only escalates in the child’s game of “telephone”, and diminish morale, certainty, confidence and efficiency.

© Jerome Kowalski, September, 2010

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• It Shouldn’t Suck to be an Associate at a Law Firm, Part II (kowalskiandassociatesblog.com)
• Tough Times Bring Out the Poacher in Law Firms (blogs.wsj.com)
• Difficult Times Sometimes Create Desperate People Who Do Desperate Things: Loss Prevention in Handling Client Escrow Funds (kowalskiandassociatesblog.com)
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 Legal Project Management  Interview of Jerry Kowalski on the Importance of Recruiting and Building Legal Project Management Talent. August 27, 2010

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Just What We Need: More ABA Accredited Law Schools

                                                                                                Jerome Kowalski

                                                                                                Kowalski & Associates

                                                                                                August, 2010

We recently reported on what we view as the unwarranted continued establishment of new law schools at a time when the profession cannot even absorb the current torrent of graduates from existing law schools. I doubt that any pragmatist, aware of all of the available facts could possibly come to any contrary conclusion.

Apparently, there are those who think that adding even more ABA accredited law schools is worthy of consideration. The current edition of The National Law Journal reports

The American Bar Association is already tasked by the U.S. Department of Education to accredit U.S. law schools. Now an ABA committee has recommended that it should seriously consider expanding that power to overseas law schools that follow the U.S. model.

In June, the ABA’s Council of Legal Education and Admissions to the Bar appointed the committee of law professors, attorneys, judges and law deans to examine whether foreign law schools should be allowed to seek ABA accreditation. The council is scheduled to consider the committee’s recommendations in December.

The committee cited an earlier ABA report’s conclusion that state supreme courts and bar associations are under more pressure than ever to make decisions about admitting foreign lawyers as the legal profession becomes more globalized.

“Such an expansion would provide additional guidance for state supreme courts when lawyers trained outside the United States seek to be allowed to sit for a U.S. bar examination,” the committee said in its report. “Since that is a key function of the accreditation process generally, the expansion would be consistent with the historic role of the section in aiding state supreme courts in the bar admissions area.”

Completely absent from this rationale is the ever growing amount of legal work that is outsourced offshore.  Hitherto, work outsourced offshore had inherent limitations precluding offshore outsource vendors from performing substantive legal work.  Work performed offshore was limited largely limited to document review, preparation of largely rudimentary documents, subject to review by lawyers admitted to practice in the United States and some basic legal research, again subject to review and analysis by U.S. lawyers.

Should the ABA grant such accreditation, the result will ineluctably be significantly greater offshore outsourcing, this time, work of a substantive nature.  In short, an increasing number of legal work will be handled by non-U.S. lawyers. Jingoism aside, with the legal profession now at its lowest level of employment since 1991 (think about what that means:  the profession as a whole literally lost hundreds of thousands of jobs in two decades) and there being no likelihood that the profession will be able to absorb at least 20%, if not more,  of new U.S. law school graduates in the near term, the wholesale shipment of legal jobs overseas, the inevitable result of accreditation of foreign law schools will be akin to the virtual abdication of United States preeminence in automobile production to other nations.  Only here, there assuredly will never be any federal bailout.

In the interest of additional disclosure,  in the Spring of this year, there were ten law schools in a queue awaiting ABA accreditation, which are apparently already up and running (presumably in states where bar admission is not predicated on attending an ABA accredited school)  and already adding to the mass of law school graduates.

Of perhaps more curious interest,  The National Law Journal reported on August 11, 2010 that Louisiana College announced plans for the creation of Louisiana’s fifth law school in Shreveport, Louisiana.  The announced raison d’etra of this new law school is, as reported by Joe Aguilard, president of the college, the establishment of a “curriculum that recognizes the moral and religious foundations of the American legal system.”  President Aguilard went on to say “Our extensive feasibility study confirms that Northwest Louisiana is the perfect location for this new institution, and we are grateful to the representatives and officials of the Shreveport area who have worked hard to ensure that we locate there.”  More details about this law school were reported in the September 2, 2010 edition of  the Shreveport Times: http://www.shreveporttimes.com/article/20100902/NEWS04/9020337/Law-school-to-open-in-Shreveport

For those who may not be familiar with Shreveport, a truly lovely city, unfortunately ravaged by hurricane Katrina,  it is populated by some 200,000 souls.  Some will recall that 30 years ago, Shreveport was a relatively major “oil town” and the home of “oil and gas deals,” with which you will not be familiar if you are less than 60 years old. The oil business is gone now as are “oil and gas” syndicated tax shelters which then made Shreveport a mecca for lawyers and deal promoters; all of whom are now gone.  Shreveport’s current economy is largely the gambling industry, apparently ideally suited for a law school whose curriculum is based on moral and religious foundations.

Let’s give the founders of Shreveport’s new law school the benefit of the doubt and perhaps consider that they are motivated by a set of high minded ideals. Let us even suggest (arguendo, only) that there may be some altruism at the University of North Texas which believes Dallas has a jingoistic right to open a new law school in this economy because, after all, Dallas hasn’t opened a new law school since 1967.  (Can Wasilla, Alaska be far behind?)  Let us, for a nanosecond, consider the lack of facial absurdity of accrediting foreign law schools.

Is there any rational or morally supportable reason for Kaplan Higher Education, a sprawling complex of undergraduate, graduate and professional school preparatory programs, trade schools, and, yes, even an on line law school to build a new law school in Washington, DC which already hosts six law schools?  The folks at Kaplan seem to think so.

Kaplan, owned by the Washington Post, believes it has a duty to offers “important opportunities for low-income students.”  Kaplan itself is already investigation following on the heels of the United States Department announcement concerning “wasteful spending on educational programs of little or no value that also lead to high indebtedness for students”   Is that the “opportunity” Kaplan believes should further be bestowed on low income students?

This madness continues unabated. On December 7, 2010, the University of Delaware announced plans for a new law school anticipating its first graduating class in 2015. Elie Mystal of Above the Law had some choice observations concerning this fool’s errand. Apparently, one needs not be either smart or concerned about the future of a university’s students to lead a university. [Update: In May, 2011, the University announced that it was shelving these plans.]

[Update: On May 17, 2010, Indiana Tech announced the opening of a new law school – the fifth in that state. The rationales, according to the school’s trustees, is that Indiana hasn’t opened a new law school in 119 years and that the State of Indiana ranks 44^th in the nation in terms of the ratio of lawyers to the general population.  There is no indication of any kind that something has happened to suddenly increase the demand for lawyers in that state]

I wish I could conjure up a clever punch line for the planned Shreveport law school, Kaplan’s desire to create more debt and unemployment for low income students or the  [abandoned]hubris at the University of Delaware but I simply cannot top the simple reported and unadorned facts.  Indiana just sucks the breath out of the observer.

© Jerome Kowalski, August 2010.  All Rights Reserved.

Related articles

• Chronicle: Should the ABA Accredit Duncan Law School (147 LSAT, 2.99 GPA Medians)? (taxprof.typepad.com)
• The New York Times on ABA Accreditation of Law Schools (volokh.com)
• ABA Standards Don’t Cause Tuition Increases, Law Schools Do (taxprof.typepad.com)
• To Stop the ABA, Do We Need to Allow Everybody to Start a Law School? (abovethelaw.com)
• Revenge Is Best Served… Quickly: ABA DENIES Accreditation To School That Talked To The New York Times (abovethelaw.com)
• Duncan, Rejected by the ABA, Sues for Accreditation (blogs.wsj.com)
• ‘Ridiculously High’ Law Prof Salaries Drive Up the Cost of Law School (taxprof.typepad.com)

More reviews can be found at http://www.mpmagazine.com/publication.asp?pubid=78AE6CEB-1078-4874-9ADD-AD003C5515CD&PDID=F1F4F4D5-F49E-4280-B3C5-58D05F18A220

It is also available on Amazon at 

http://www.amazon.com/Navigating-Perfect-Storm-Recruiting-Retaining/dp/1907787062/ref=pd_rhf_p_t_3 

The Amazon listing does not, as of this writing (August 4, 2010), contain the detail contained in the former listing.

Jerome Kowalski

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Jerome Kowalski

Kowalski & Associates

August, 2010

Like you, I have always looked for an investment counselor, a financial adviser or a bookie that could tell me with some accuracy what the economy will look like in the future or which horse would win the race. Boy, if we could find one, we’d all be so rich.

I think I may have found those folks.

During the last week, a number of extremely prominent law firms announced that they would increase their hiring for summer associates in 2011 (from which they will draw the bulk of their associates for the bulk of the class of 2012.  Other equally prominent firms proudly boasted that offers would be made to all of their 2010 associates, which naturally equates to the fact that those summer associates will become full time associates in 2011.  Further adding to this exuberant suspension of reality was a subsequent report ( http://blogs.wsj.com/law/2010/08/10/further-evidence-that-the-law-job-market-is-thawing/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Flaw%2Ffeed+%28WSJ.com%3A+Law+Blog%29&utm_content=Google+Feedfetcher ) that law firms would increase recruiting activities during the current 2010 recruiting season. And all of this in the face of a simultaneous separate press report that demand for legal services will either remain flat or decline over the coming months.

Well, what does this mean?  Quite simply that some firms have remarkable and, indeed, unprecedented prescience regarding what the demand for legal services will look like in 2011 and 2012, respectively and how our economy will then fare. Don’t get me wrong, these firms stand above the crowd in terms of their leadership in the bar and quality of the service they regularly render.  But, clearly, they seem to have enormous psychic and prophetic prowess in their vision of the future. Or hubris.  They all seem to have a far different and more optimistic vision and understanding of the next couple of years than Treasury Secretary Tim Geitner, Paul Krugman, Nobel Laureate and New York Times Op Ed writer, Robert Reich, former Treasury Secretary, Ben Bernanke, current Chairman of the Fed, Alan Greenspan, former Chairman of the Fed and a host of other prominent economists.  All of these folks have consistently reported that recovery from the Great Recession will be prolonged and that the recovery will be marked by an extended period of unemployment.  Paul Krugman, in particular, has consistently reported over the last few months that the federal government’s current economic policy (and that of European central banks) will surely result in a double dip recession and perhaps even worse.

Let’s be sure we all have a shared understanding of what this means:  As we sit here today, there are some law firms who now purport to know what the demand for legal services will be in 14 months (with regard to the class of 2011).  More remarkably, law firms, sitting here in August 2010 have remarkable confidence, factually unsupportable, that demand for legal services will increase in October, 2012, when the crop of law students now being sought out for summer associate positions for next summer, will graduate. History being our guide, other law firms will in coming weeks and months “meet the competition” and follow suit with similar announcements.

These current announcements also seem dismissive of the Association of Corporate Counsel’s view that it also expects fees paid for outside counsel to continue to decline over the intermediate term.

As much as I admire these law firms for every possible reason, what do these law firms (and the number of law firms that will likely follow suit) know that most prominent economists don’t know?  I surely haven’t a clue. But, if they prove to be right, be assured that I will be at their door asking for their advice on how to invest my meager savings; I suspect that if this indeed proves to be so, I will surely be sitting in their reception areas asking these seers to gaze in to their crystal balls and advise me on what the economic conditions will be two years hence and find each of you there.

The real issue seems to me be twofold:  First, as I previously noted, the entire recruitment process is broken, virtually beyond repair and needs a major overhaul, with law firms, like every other business enterprise hiring graduates of either undergraduate programs or post baccalaureate programs, should be first hiring lawyers in the Spring prior to graduation. No firm has   The second may very well be my fear that “deferrals” of start dates and withdrawal of job offers, based on economic conditions extant in the Fall have now become an accepted and acceptable part of the entire recruiting process and perhaps, just perhaps, firms expressing economic exuberance at this time of year in connection with future hiring, may simply shrug their shoulders if their economic forecasts prove to be wrong and act accordingly.

As I watched the sad events of the past year, I regularly recalled Langston Hughes’ rather famous poem, most apt through the past months,  A Dream Deferred:

What happens to a dream deferred?

Does it dry up
like a raisin in the sun?
Or fester like a sore–
And then run?
Does it stink like rotten meat?
Or crust and sugar over–
like a syrupy sweet?

Maybe it just sags
like a heavy load.

Or does it explode?

Lord, I really hope that Hughes’ poetic question is not again brought to mind in 2011 or 2012.

Related articles

• Citibanks’ Fourth Quarter Report on Law Firm Profitability: Bleak, But, on the Bright Side, That’s As Good As It Gets (kowalskiandassociatesblog.com)
• What is the Fair Market Value of a Full Service Commercial Law Firm? (kowalskiandassociatesblog.com)
• Private Equity Investments in Law Firms Have arrived in the UK and Have Largely Ignored BigLaw; What Will Happen as This Phenomenon Arrives in the United States? (kowalskiandassociatesblog.com)
• Trending for Law Firms in 2012: What to Expect This Year (kowalskiandassociatesblog.com)
• How to Succeed in BigLaw While Really Trying: A Four Act Unfinished Play, Now Playing at a Law Firm Near You (kowalskiandassociatesblog.com)
• It Shouldn’t Suck to be an Associate at a Law Firm, Part II (kowalskiandassociatesblog.com)
• There are Fifty Ways to Leave Your Law Firm (kowalskiandassociatesblog.com)
• Summer Hiring: It was the Most Lackluster of Times, It was the Least Inspiring of Times (blogs.wsj.com)
• A Leaner World for Young Lawyers (blogs.wsj.com)

Kowalski & Associates

 July 29, 2010

       I am pleased to announce that my new book, Navigating the Perfect Storm:  Recruiting, Training and Retaining Lawyers in the coming Decade (Ark Press) will be released late next week.

            In this volume, I address the run up to recent events which affected the profession and forced us to change as well as the challenges that lay ahead.

            Firms have gone through pain and stress and financial loss as the shifting market made demands on different practice areas.  Client and practice concentration has been the bane of firms for many years. Recruiting and staffing for particular disciplines and training lawyers for those disciplines in the new world in which we find ourselves require dramatic new approaches.

            Principle focuses addressed of the book are on recruiting lawyers at every level, the training of those lawyers and retaining those in whom firms have invested substantial time and energy. With the market flooded with high quality flooded lawyers who were the victims of recent layoffs and the waves of 45,000 new graduates entering the market each year.

            Continued and escalating attacks on the citadel of hourly billing created the viral growth of value billing, Alternative Fee Arrangements, fixed fees and convergence. Clients are increasingly requiring their lawyers to assume some degree of risk in virtually every engagement.  These new billing models and client demands, in turn, mandate the introduction of  new disciplines to the profession, namely, project management, training lawyers in project management, client relationship managers and budgeting skills as well as taking our eyes off maximizing hours billed in favor of efficiently delivering quality product within the budget fixed for each engagement.

            The profession’s historical method of recruiting law school students in the early Fall following the conclusion of their first year of law school attendance for summer associate programs with a view towards employing those students as full time law firm associates two years following the initial recruitment process requires impossibly obtainable prescience of business demands and economic conditions.  The result is that students are being recruited in the confines of a completely “broken” system.  I describe below some radical proposals for change initially proposed by important leaders of the profession and expand on these novel approaches.

            In addition to looking at extant recruiting models adopted by law firms given the continued use of antiquated procedures, the importance of associate retention and methods which should be employed for such retention is also discussed. I also address foreseeable issues which the profession will need to address as firms continue to hunker down, recruit smaller numbers of graduates and then compete for a diminished pool of well trained lawyers.

            With clients now purchasing legal services through the prism of corporate purchasing agents and price becoming significantly more important factors than prior relationships or name branded law firms, new opportunities for smaller and middle market firms are ballooning.  The shifting dynamics of the current revolution within the profession also are creating new opportunities for these firms which should be further explored by these firms.

            These shifting sands also require a review of associate utilization and compensation methods, as well as increased reliance on outsourcing of legal work and escalating use of temporary staff lawyers. These issues are also addressed.

            In short, I have endeavored to address pressing intermediate and long term issues regarding hiring, training and retention of associates, the changing landscape of billing demanded by newly empowered clients as well as new opportunities and pitfalls. I hope I have added productively to the public discourse of the needs for change which lay ahead.

The book can be ordered through www.ark-group.com , by calling Daniel Smallwood at - t: (+1) 309 495 2853 f: (+1) 309 495 2858 e: dsmallwood@ark-group.com , or Amazon. Through August 10, Quoting the order code LOR-RTR1, place your order through Ark or through Mr. Smallwood you will receive a $200 pre-publication discount.

(c) Jerome Kowalski, July 2010.  All Rights Reserved

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Jerome Kowalski

Kowalski & Associates

July, 2010

In 1990, the New York Attorney General and the New York City Department of Consumer Affairs began a series of investigations and other proceedings aimed at chains of various health and beauty schools, largely, if not exclusively in underprivileged neighborhoods.  These schools were all licensed by the New York State and City agencies responsible for granting such licenses. The schools advertised broadly, primarily on subway posters, in various newspapers largely directed at underprivileged communities, posters pasted on the walls of these communities, as well as on wrap-around posters on the lampposts in those same areas.

The come-on was simple:  The advertisements pitched the fact that beauticians, cosmetologists, hair stylists, make-up artists earned commendable salaries.  The posters went on to note that many of those positions required both state licensing and a degree of training.  The schools offered the requisite training and assisted the students in obtaining those licenses.  And, then, the real hook in this come-on:  Federally guaranteed student loans for tuition were available for attendance at these schools and, in essence, as far as the students were concerned, tuition would not impose any costs to the students:  all they had to  do was show up, sign a few pieces of paper, attend the program (often a year in duration) and after graduation and licensure, a career in one of these fields would provide a financially more rewarding career than was otherwise to these denizens of underprivileged areas.

The “hook” was exceptionally alluring:  One would simply show up at the school, sign a few forms, fork over not a buck, take the classes and a more financially lucrative career lay ahead of them. Of course, among the stack of papers signed was the student loan applications.  The lending institutions would then advance the entire tuition to the school.

There were only a couple of problems with the entire scheme:  The fact was that there were not sufficient jobs available to the schools’ graduates.  Many students, after graduating from the schools, could not find any jobs in these fields (there was simply a dearth of such jobs) and most of the schools’ students,  after attending the schools and not obtaining any of those so-called well paying jobs, gave up after their job searches and simply found lesser paying jobs and abandoned their job searches. Word also spread from the graduates to the generation that followed and still attending the schools and large numbers of those students just simply walked away from the schools. None of these school graduates or attendees repaid their loaned, quite likely because they felt snookered (which they obviously were), and they simply otherwise lacked the funds.

Of course, the various institutions which either advanced the tuition loans began collection proceeding.  A sufficient number of the victims complained about being hoodwinked and filed various complaints with regulatory agencies, which, of course, served as the catalyst for the commencement of these proceedings.

The question that nobody wants to ask is whether the recent crop of law school graduates, those currently attending law school and the thousands of current law school applicants are victim of a similar scheme, intentionally or not,  created by the profession and the law school community.  I have found very few who have raised or publicly discussed the issue. An absolutely outstanding exception is the blistering report by noted law Professor, Brain Tamahana.

Another interesting question (in the horses are already out of the barn category) is whether a rule recently proposed by the United States Department of Education, 34 CFR Part 668 (http://www2.ed.gov/legislation/FedRegister/proprule/2010-3/072610a.html ) would be applicable to law school tuition loans.  Under the proposed rule, the Secretary of Education is mandated to establish measures for determining whether certain post secondary educational programs lead to gainful employment and if they do not, among other things, if the Secretary determines that they do not, federally guaranteed loans would not be available to students of such schools.

In June of this year, the United States Bureau of Labor Statistics reported that the legal profession lost a total of approximately 30,000 jobs during the preceding year; these numbers are actually misleading, as we shall see. Law Shucks, a blog site which maintains a tally of law firm layoffs, reported  that as of April, 2010 the AmLaw 100 alone lost 14,000 jobs for the preceding 12 month period. Law Shucks acknowledges that its figures do not reflect accurate numbers for the AmLaw 100 alone. The Law  Shucks numbers only include layoffs which AmLaw 100 firms publicly acknowledged and does not include law firms that engaged in stealth layoffs, of which we now there are many. Nor do these numbers reflect law firms, notably Heller Ehrman, which had simply gone out of business, or law firms below the AmLaw 100, of which there are literally thousands. In our work, we found not a single law firm of 50 or more lawyers which had not engaged in some form of reductions in force.

The problem with the BLS statistics is that they are similarly misleading in that they do not include lawyers who became underemployed, for example, lawyers who turned to some form of public service jobs, government jobs, joined smaller firms, all at drastically reduced compensation. The BLS statistics also do not include 2009 graduated who have yet to find employment, nor do they count the armies of lawyers who have descended to the purgatory of staff or temp lawyering positions, where seasoned lawyers and young lawyers, who sit cheek by jowl in these often sordid purgatories.

In short, there are tens of thousands of both unemployed or underemployed lawyers nationally.  There is no accurate metric by which to measure these numbers.  Anecdotal evidence suggests that the total may be anywhere from 30,000 to 100,000 lawyers.  More significantly, law.com reported on July 20, 2010 that employment levels for lawyers as a whole has declined to 1991 levels.

In the face of all of this, law firms, as is widely reported and similarly publicly acknowledged by virtually every law firm in the country in the country, predict that hiring of 2010 law school graduates will be sharply reduced. These same law firms predict continued reductions at least through 2011.

In the face of all of this, our nation’s currently accredited law schools, of which there are now approximately 194, insist on adding at least 45,000 new graduates to these armies of unemployed or underemployed lawyers.  Add to this mix the facts that (a) ten additional  law schools are in a queue to receive accreditation; (b) law school applications have risen dramatically in the last year and a record number of students have enrolled in law schools for the classes of 2013, when, barring an historically and unprecedented event or series of events (perhaps a federal mandate that every municipality hire and compensate a lawyer for every 1,000 of its residents), there will certainly be a pool of at least well over 150,000 lawyers who will be looking for jobs;  (c) economic realities are lowering the demand for lawyers and law firm revenues are in decline and (d) a number of universities announced plans to create new law schools.

With regard to the foregoing, let’s, for example, look at the rather odd recent events in Dallas:

Quixotically, in early 2009, The University of North Texas announced that it planned on establishing a public law school in the Dallas-Fort Worth area as part of its university.  Those plans seem to continue apace in 2010 in spite of the dwindling job market for law school graduates.  Adding to the enigmatic and rationally inexplicably plans of this University is that Houston hosts three law schools (one not yet accredited by the ABA) and 11.5% of the graduates of those law schools were unemployed nine months after graduation; the two existing law schools in the Dallas area, with equivalent post graduate employment results.

West Texas’ rationale: (1) There has not been a law school established in Texas since 1967; and (2) the Houston area had only 538 law school seats available;  (3) the ratio of bachelor degrees in Houston to law school enrollment was 10:1, while the ratio in Dallas was 35:1 and (4) while the Dallas-Fort Worth area purportedly generates 1,400 new legal jobs annually, these lawyers were hired from other regional law schools and schools located in other states.

Obvious flaw in this otherwise inexplicable logic is that all of the positions for lawyers in Texas (including each of the 1,400 new openings for lawyers in Texas)  are quickly filled and there are already multiple applicants for each such position; there certainly is no dearth of job applicants in Dallas.  Another obvious defect is the presumption that Dallas jingoism would somehow favor the employment of students schooled locally by a law school with no track record, while lawyers already employed in the area and those seeking employment there are already drawn from top tier law schools, in existence for many years. Additionally, this new law school does not seem to limit enrollment to residents of the Dallas area; in fact it will likely draw applicants from the rest of the country.

Rather obvious additional questions come to mind:  (1) what’s the point? (2) Why add to the enormous pool of unemployed and underemployed lawyers?  (3)  How can one reasonably expect a faculty and university administration with such patently unsound judgment be entrusted to educate aspiring lawyers in logical thinking, careful analysis and honesty and candor demanded of lawyers?  (4)  How does the fact that a growing metropolitan area has an entitlement to establish a new law school simply because it hasn’t had a new law school created in forty years make any sense?

It might be a cheap shot to call this proposed law school as Texas’ version of a bridge to nowhere. The fact is that there now exist 194 other bridges to nowhere.

Jim Leipold, the director of The National Association for Legal Placement, whose crystal ball is as good as anyone’s, announced last week that the earliest he sees an “uptick” in legal employment for new law school graduates is 2012. Any simple analysis of the facts on the ground ineluctably leads to several conclusions:  The current graph shows a complete vertical decline in unemployment and underemployment of lawyers; that straight down vertical drop may move in 2012 to a drop that may move a few degrees to the right in 2012; there is no possibility that the total number of unemployed and underemployed lawyers will ever be absorbed in to the market.

Far more significant is the press release issued on July 22 by NALP, frankly one of the most opaque reports I have ever read and in which at least the second paragraph quoted, may have been inspired by Lewis Carroll,  reads in part:

“The national median salary for the Class of 2009, based on those working full-time and reporting a salary, was $72,000, unchanged from that for the Class of 2008, and the national mean was $93,454. However, because some large law firm salaries cluster in the $160,000 range while many other salaries cluster in the $40,000–$65,000 range, relatively few salaries were actually near the median or mean, as the Jobs & JDs report details. The national median salary at law firms based on those reporting a salary was $130,000, compared with $125,000 the prior year, and the national mean at law firms was $115,254.

With the Class of 2009 report NALP introduces the concept of an adjusted mean as an additional way to provide a broad measure of salaries for full-time jobs as a whole and for full-time jobs in law firms. Essentially, the adjusted mean compensates for the fact that the distribution of reported full-time salaries is not the same as the distribution of reported full-time jobs, particularly when it comes to law firm jobs. Whereas salaries for most jobs in large law firms are matters of public record and reported, fewer than half the salaries for jobs in small law firms are reported. The calculation of adjusted means is accomplished by giving more “weight” to the mean or average salary in small firms and less “weight” to the mean or average salary in large firms to calculate the overall law firm mean and also the adjusted mean for all full-time jobs. In other words, adjusted means are based on estimates that account for the unreported salaries. The adjusted mean for all full-time jobs reported was $85,198 (in contrast to the unadjusted national mean of $93,454), and the adjusted mean for full-time law firm jobs was $102,959 (in contrast to the unadjusted mean of $115,254).”

I do not mean to impugn Jim Leipold, NALP’s dedicated executive director, previously trained and having served with distinction as a tax lawyer at DLA Piper,  but  you may want to try and pierce the opacity of the entire report, particularly the quoted text.  The simple meaning appears to be that since NALP does not include compensation figures for small law firms, which employs the largest number of lawyers in the nation and similarly excludes staff or temp lawyers, the reported median salary for 2009 graduates of $72,000 per annum is largely a wild assed guess and the actual median salary is probably much lower.  The newly coined phrase, “adjusted mean,” as Mr. Leipold explains (it may take a few readings to comprehend), results in lowering the previous blindfolded shots at the dartboard hitting, which previously, quite fortuitously, I suppose, hit higher numbers.

And, whether we do not address the 12% of 2009 graduates completely unemployed still.  In fairness, it does include, apparently those 11% of 2009 graduates who are employed in positions for which a law degree is not required (“would you like fries with that?”)

Certainly, using a “median” or “mean” or “adjusted mean” is simply Orwellian.  Using a median number simply begs and avoids the single most important  question:  “What is the average salary of a 2009 graduate?”

The fact is that even the reported “median salary” of $72,000 is less than many, if not most, legal secretaries earn at large law firms.

Herwig Schlunk, a professor at Vanderbilt University Law School in an article published in 2009 entitled “Mamas Don’t Let Your Babies Grow Up to be Lawyers” ( http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1497044 )performed an investment analysis  of the monetary value of a law school education. He determined that the cost of attending a second or third tier law school ranges from $201,000 to $280,000. Graduates of such law schools require average compensation of between $80,000 and $150,000 to justify the expense of law school, while the average compensation of those graduates is below $65,000, although some top of the class graduates do earn up to $145,000. In all cases, Schlunk determined that the expense of law school simply does not yield a reasonable return on investment.

More interesting and indeed perhaps even scandalously shocking is a document published in late 2009 that first surfaced and was only widely reported in January 2011 from some deep catacomb of the ABA entitled “The Value Proposition of Attending Law School.”  This paper was authored by the ABA Commission on the Impact of the Economic Crises on the Profession and Legal Needs.  The paper notes:

            Although many factors may influence one’s decisions about whether and where to attend law school, a proper understanding of the economic cost of a legal education is vital for making an educated decision. Far too many law students expect that earning a law degree will solve their financial problems for life. In reality, however, attending law school can become a financial burden for law students who fail to consider carefully the financial implications of their decision. ….

Many prospective law students are already familiar with the steep price of a legal education. What many do not know, however, is that these costs often exceed the expected return on their investment in the job market.  Prior to the recession, starting salaries for associates at large law firms stabilized around $160,000 a year, and many prospective law students expect to be able to earn a comparable amount. In reality, however, only 23% of the graduates of the class of 2008 started with such a high salary, including only 37% of those who went into private practice.  Shockingly, most of the rest of the graduates, about 42%, started with an annual salary of less than $65,000…..

The combination of the rising cost of a legal education and the realities of the legal job market mean that going to law school may not pay off for a large number of law students. Dean David Van Zandt of Northwestern Law School estimates that to make a positive return on the investment of going to law school, given the current costs, the average law student must earn an average annual salary of at least $65,315.  As the data above show, however, over 40% of law school graduates have starting salaries below this threshold. Thus, many students start out in a position from which it may be difficult to recoup their investment in legal education. Even students who do ultimately prosper over the course of a career face difficulties from high debt loads during the beginning of their career. High debt can limit career choices, prevent employment in the public service sector, or delay home ownership or marriage.  In short, going to law school can bring more financial difficulty than many law students expect. [Footnotes omitted]

I frankly cannot fathom why this four page report was not delivered to every prospective law school applicant after its rather clandestine publication by the ABA, nor why the 979 word report was never prominently posted on the NALP web site nor why this critical warning is not contained in every law school catalogue.  It could be easily argued, I would suggest, that the report is a veritable “smoking gun” evidencing the fact that critical material information was being withheld from law school applicants.

The fact that data released and distributed (and withheld) by both law schools and NALP are obtuse, misleading and, a group of law school graduates recently formed a group known as Law School Transparency, whose mission statement is:

[I]nform prospective law students about the value of a law degree by providing open access to ABA-approved law school employment information. To this end, our website functions as an employment information and data clearinghouse. We aim to help prospective law students sort through employment information to understand some aspects of beginning a career post-graduation. We have also begun an initiative to collaborate with law school administrators and the ABA in the creation of a new reporting standard.

Towards that end, the project, in July, 2010 sent out requests to 199 law schools asking for meaningful data, which, among other things, would demonstrate more meaningful information than that which is currently available from both law schools and NALP. As of mid-September, 2010, 10 law schools responded and with the exception Northwestern and Ave Maria) the balance said no, thank you. Ultimately,  Northwestern and  announced that they will instead rely on data Forbes Magazine will purportedly be releasing in its ranking in its ranking of law schools, which will include some as yet undefined “return on investment.”  The only source I have found for the proposition that Forbes will include or report on such data is a blog maintained by some law school professors, which merely noted that Forbes will “reportedly” will include data, in its maiden law school ranking, information concerning “return on investment” based, in part  on employment data for both recent graduates and graduates five years after graduation. Notably, on September 16, 2010, Ave Maria law school, ranked By US News and  World Report  in the fourth tier (the lowest tier).  While Ave Maria is to be much commended, the obvious question is what do the other law schools have to hide?

[Update:  On February 23, 2011, Ave Maria reneged; so much for commendation].

On November 17, 2010, The Law School Transparency project, issued a second rather polite revised request for data.  Don’t hold your breath waiting for any responses.

The smoke and mirrors continue.

Add to that the fact that the nation’s law schools inexorably add 45,000  new lawyers in to the gaping and growing canyon of unemployment and underemployment lawyers every year.  What we have here is the equivalent of  BP oil relentlessly spewing out tens of thousands of barrels of oil, with no possibility at the current time that anybody has any interest in sealing this annual eruption.

There are an additional series of bizarre enigmas that must be added to the equation:

1.    Law school tuitions are rising well above the rate of inflation annually.

2.  As the hordes of new graduates are added to the kettle, simple rules of supply and demand will likely reduce Professor Shlunk’s suggested average compensation of $65,000 and even NALP’s optimistic and speculative $72,000.

3.  These facts are well known to law school administrators, particularly deans and admissions personnel.

4.  Although these facts are presumably ascertainable by those extremely bright college graduates who apply to law schools, law schools which are replete with (a) lawyers of presumably the highest moral integrity; (b) professors who are charged with imbuing law students with the ethical mandates required of lawyers; and (c) every law school has a passel of securities and corporate professors who spend their time drilling in to law students about the legal requirement of making full disclosure of all material facts while also being obligated not to make any omission of material facts; and that failure to do so would result in severe civil and criminal penalties.

5.  All of the nation’s law schools are extremely well served by selfless alumni, hard working lawyers of accomplishment, who dedicate their time and service to the leadership and guidance of their alma maters.  They well know the score.

Illustrative of these inexorable facts is a lovely glossy full color 64 page brochure I received from my own alma mater, New York Law School, just yesterday.  The first eight pages contain a one page encouraging note from the law school’s extremely well regarded – and highly compensated new dean, Richard Mastagar —  a distinguished legal scholar, with an outstanding biography.

When I attended that school, 35 years ago, tuition was $1,200.  Today, with the creep of inflation, it is $67,000. Yet, a significant number of 2009 graduates of are still unemployed and the majority who actually have found employment are likely earning starting salaries less than that amount.

Dean Mastagar’s brief  one page introductory message was “the [current] economic crisis continues to hit our profession hard.” (a) That he was proud of the fact that New York Law School’s graduates are flexible [emphasis in original].in terms of jobs they have taken.  I may be improperly projecting, but I read that as saying that the school’s graduates are taking jobs that are either low paying or completely outside the profession; (b) The school’s graduates are innovators  [emphasis in original] “Where other see problems, they see solutions.” Isn’t that the hallmark of any successful lawyer? And (c) the school’s graduates add value [emphasis in original] “in countless ways.” That reminded me of William Shakespeare’s oft quoted “damning with faint praise” from Twelfth Night. And, I must confess, while I do not intend to impugn any of the school’s graduates,  my barista, Tony, describes himself as having all of these three attributes.

Not a word about the actual employment gained by the school’s recent graduates.  Not a word about their average income.

Dean Mastagar’s cheerful introduction was followed by a mere three page article punctuated by handsome photographs (remember, this is a 64 page glossy brochure) entitled Navigating the Legal Job Market,  stating (a) the virtues of patience, the history of the recession and its effects on the profession, (b)  finding a job will be prolonged, (c) “The wait may yield unexpected rewards” ( I guess so would winning the lottery, (d) the “need to see the “big picture,” (e)  “the need to interview effectively,” (Wow, I didn’t know that), the need to develop a network,  (f) consider employment opportunities at small and medium sized firms (with no mention of the fact that tens of thousands of graduates are doing the same thing nor that the compensation offered at these firms often do not provide enough money to repay student loans, while simultaneously eating or paying for housing, and for at least 50 years, most NYLS graduates wound up practicing at small firms; in 1977, for example, there was only one NYLS graduate who obtained a job in the then equivalent of an AmLaw 100 firm: me ), (g)  consideration of temp jobs (same problems as the preceding suggestion only worse working conditions) coupled with a daily fear that the temp job can abruptly end and the young lawyer will then look for another open casting calls), (h) starting your own law practice, citing the example of one graduate who successfully did so; and, finally the need to “think strategically.” (Clearly another innovative thought).

All of the parentheticals are mine.

The next 55 pages in this glossy handsome brochure are about the joys of photographing wonders of nature (you can’t make this stuff up), the school’s admirable bar pass rate and on campus activities and little bits about the faculty and school graduates.

I certainly have no particular gripe about New York Law School. It provided me with an excellent education and the skills necessary to have a wonderful career at the law.

But the fact is that more than 150 law schools regularly issue similar blather.  What they should be saying, as loudly as possible, is “OMG, our hair is on fire! Run for your lives!”

A quick note about another vice in which law schools have recently been engaging, particularly third and fourth tier law schools: Most graduating college students, when applying to post graduate programs, apply to both “safe schools” and schools at the height of their grasp.  Third and fourth tier school in recent years, in order to improve the employment reports of their graduates,  have been inducing and recruiting top college graduates (in campaigns similar to that engaged in by NBA teams for LeBron James) to enroll in their schools with expansive and enticing scholarships, which are extremely difficult to decline.  These students tend to do well and most often do wind up with far better jobs than their peers; not great jobs, just better jobs or  at least get a job.  The direct consequence is that students below the top quartile, those least likely to gain meaningful employment, are actually subsidizing the education of students who are far more likely to do well professionally.

So, you may wonder, what’s the point of all of the foregoing?  Here it is:

•  Law schools owe a duty to make full and fair disclosure to all applicants.
• The nation’s law school student population must be reduced by at least one-half, probably two thirds, for the near term, probably at least three years.
• The nation’s bar owes a duty of every nature to demand these changes and shepherd through the inevitable resistance of the academic community.

I must confess that my conclusions, which are seem beyond dispute, are not mine alone.  At least four law firm managing partners, a number of other prominent lawyers and several law school professors have shared these thoughts with me.  However, they openly expressed fear about making public statements supporting these obvious conclusions because they all felt they would be seen as pariahs, shunned by the profession, insofar as the practicing lawyers were concerned, they expressed the fear that their firms’ recruiting activities would be hampered at important schools; the academics also expressed the concern of being shunned by their colleagues, since, in effect, they would be encouraging significant unemployment among the academic community.

Analogous defenses to a securities fraud lawsuit brought on the grounds of failures to disclose or omissions of material facts, would certainly not fare well. An issuer could not defend his non-disclosures because investment bankers would shun him, non-disclosures or omissions would be viewed as contrary norms by issuers or that making honest disclosures would result in a reduction in force at his or her own company, without meeting with loud guffaws from judges, juries and prosecutors.

If you have reached this point in this note, in the unlikely event you haven’t already come to these other rather undebatable conclusions, here they are:  (a) law schools must stop behaving like the beauty schools of 1990 and (b) law schools should make full, fair and candid disclosure to every law school applicant (before they even remit the application fee) and have each applicant sign a document that he or she has read the disclosures and understands them.

Finally, law school graduates, law school administrations and law professors might take a look at 16 CFR Part 254 and speculate whether these rules apply to law schools directly or by extension and if there is any private right of action thereunder.  The recent spate of class action lawsuits brought against trade schools ( http://www.usatoday.com/news/education/2010-09-27-1Aforprofit27_ST_N.htm?loc=interstitialskip ) , asserting claims against trade schools based on the fact that students at these trade schools were defrauded by the trade schools regarding their employment prospects following graduation should give the legal academic community some serious pause.

A glimmer of light is now appearing at the end of the tunnel:  On December 13, 2010, US News and World Report announced that it intended to publish more detailed information regarding actual employment figures for law students nine months after graduation.  In addition, an ABA panel is considering requiring law schools to make fuller disclosure and at least a handful of law school deans are displaying some pangs of conscience and are advocating greater disclosure of actual post graduation employment prospects.

It is sometimes said that historical events do not exist unless they have been reported in the New York Times. Thus, for better or worse these matters were covered by the Times On Sunday, January 9, 2011 in a feature first page article in the business section entitled “Is Law School a Losing Game?” by Times reporter David Segal.

You are invited to read much more on the subject in my book, “Navigating the Perfect Storm,” to be published by Ark Press of London.  You can order by contacting me or Anna Shaw at Ark at ashaw@ark-group.com or Daniel Smallwood at Ark at dsmallwood@ark-group.com

(c) Jerome Kowalski, 2010.  All Rights Reserved.

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                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             June, 2010

        At our family’s ritual Fourth of July barbecue, a family member would invariably sit back on a lawn chair and sigh “man, what a hard winter we just had.”  Acknowledging nods and grunts would circulate, bottles of beer would bottom up, which was then followed by bursts of discussion for what the summer cycle would bring:  Time at the shore, golf, long weekends, a trip to a country resort. And, one family member or another would always bring this exchange to a grinding halt by saying something along the lines of “this year we’re going to be painting the back porch” or something akin to “this year we’re going to finally be cleaning out the garage.”  What was particularly enraging about these sanctimonious relatives was that they meant it, they did it and their houses were always in marvelous condition.

This year, we not only have a hard winter; it was preceded by an even tougher winter.  Next winter isn’t looking great either. Swimming, sunning, golfing and hiking, all important diversions to be sure, now must take a back seat to required home maintenance as the winter to follow shows no real sign of global economic warming. This is not the summer during which you should relax and then anticipate that things will get back to “normal” after Labor Day. There simply is no “normal” anymore.   I have long cautioned about the serious danger of a double dip recession.  Yesterday, Nobel economics laureate and New York Times Op Ed columnist Paul Krugman, upped the bidding and warned about the real danger of a “Long Depression.” 

It’s therefore essential to be grownups and use the coming two months productively.  Let’s put off the sunning and funning until we know the storm warnings have passed.

Here are some of the things we should be doing over the next eight weeks:

First, take a hard and realistic look back at what the first half of the year actually yielded. No, it’s not time to sling back in a hammock, toss back a brew and simply hope that the second half of the year will be better.  Yes, the winds of this year’s summer must be put to their utmost advantage

This summer, we all need to be Twelve Steppers and seriously invoke Reinhuld Niehbur’s “Serenity Prayer:”

God grant me the serenity
to accept the things I cannot change;
courage to change the things I can;
and wisdom to know the difference.

We cannot change economic realities by wishing them away or hoping they blow away while we sun and fun.  But, we do need to have the courage to make changes necessary to accommodate those things we can alter.

First, take a walk around your entire house and take an objective look at what needs fixing.  Some thoughts:

1. Take a hard and critical look back at the preceding six months. Has the flow of business from a significant client decreased?  If so, have you met with the client and had the hard discussions?   If the client is suffering its own reversals, use the opportunity to express concern and offer assistance, even if the result is not immediate revenue generation. Cement the relationship; let the client know your interest in its welfare does not end when the revenues stop flowing.  Is the business going elsewhere?  Ask why and inquire as to what you need to do to get the business back.  Is there an existing or new client that has increased its reliance on your firm and generated new revenues?  Cement this relationship further.  Find out what you did right and what lessons you can take away for other prospects.

2.       Take the time to talk to peers at other law firms. Gain an understanding of how they weathered the months past and how they are planning to deal with the coming “R” months.

3.       The longer days of summer also provides you with the opportunity to spend time with partners and associates to share with them the direction the firm is headed, solicit their input, eliminate the fear of the unknown and create a sense of shared common purpose and increased transparency. This year’s summer outing should not be only about golf, softball, volleyball, sunning, sailing and swimming.  All of these activities should simply provide more comfortable venues for open substantive dialogue and an absence of opaque leadership.

 4.      The late spring and early summer have wrought significant substantive changes to vital areas of the law vitally affecting your clients. These include (a) recently enacted federal financial reform; (b) the continued vitality of Sarbanes Oxley in light of the Supreme Court’s ruling on June 28 in Free Enterprise Fund v. Public Company Accounting Oversight Board; (c) what is the practical effect of the Court’s holding in Bilski v Kapposs in regard to patenting business methods? And (d) health care reform legislation. Are you on top of these issues?  Are you ready to respond intelligently to your clients’ inquiries on these issues?  More importantly, why are you waiting for the phone to ring?  The next few weeks should be the time during which you should be sending your clients succinct alerts and bulletins explaining in crisp simple English sentences how each of these events affect them and their business.  And, while you are at it, you should also be taking the initiative and staking out and establishing your credible expertise in these areas by posting informative blogs on these important emerging issues.  The New York Times opined on June 26 that the new regulatory schemes were actually intended to provide federal aid to employment in the legal sector.  Nobody is coming up from Washington to hand you a check.  You need to do the work to obtain your entitlement.

5.    Take stock on the performance of your own firm’s practice areas.  Compare year to date performance with the prior two years.  Take note of the trending in these areas and determine where assets and talent might be better deployed. Be sure that you are not falling in to a business concentration trap to post short term revenue gains.Reach in to the bottom left drawer of your desk and dust off your current business plan and take stock of how the firm is performing midway this year and determine where tinkering is essential. The same should also be done with regard to your current budget.  Business plans and budgets, in the current economic climate, are precisely like well thought through and thoroughly researched military battle plans. They are perfect until the first shot is fired.  The summer solstice lifts the fog of war and provides the opportunity to revamp, revise, amend or trash plans that aren’t working. Don’t double down on bets that haven’t been working.  Do increase investments in areas that are showing growth and staying power.

6.    Become fully acquainted with the metrics of The ACC Value Index .  Your firm is being graded by the Association of Corporate Counsel and those grades are publicly posted. Do not put yourself in jeopardy of being voted off the island only because you failed to appreciate on what bases you are being graded .

 7.     Alternative Fee Arrangements are not a passing fad.  Our colleagues at Altman Weil reported just last week that a whopping 94.5% of law firms utilize varying forms of AFA’s.  Firms which have more thoroughly embraced these billing arrangements are experiencing real increases (often double digit increases) in revenues and profitability and substantially enhancing client relationships.  Now is the time to make sure your partners understand that clients are no longer buying in to the palaver that legal matters, particularly litigation, are so unpredictable that the only way for lawyers to be fairly compensated is through an hourly billing model. It is now the time for everybody to slake their thirsts and enjoy the Kool-Aid. 

 8.    As I wrote some months ago, ACC metrics, maximizing profitability, maintaining best practices and requires that law firms be populated with experts on project management. Many firms have already stood up and not just taken notice but have moved forward and developed this expertise. The summer months provides you with the time to clean this part of your garage and develop the requisite in-house expertise necessary for success in this market.

9.  Take stock of your colleagues’ ability to adapt to the revolutionary changes required of lawyers in this challenging and unprecedented competitive economy and make sure that your partners’ resistance to change is being treated with appropriate antibodies.

10.  Realistically reassess, once again, your hiring projections for 2L’s and 3L’s. You won’t be caught up short if you under hire; you will doubtless have an agita relapse if you over hire. When you add the recent law school graduates to the pool of unemployed lawyers laid off in the last couple of years, the available labor pool is now in excess of 60,000.  In 2011, it will exceed six figures. Think about it like packing for a vacation trip:  Take half as much luggage as you planned and bring along twice as much money.

11.  Dramatically expand your own network of contacts.

And, in the Fall, when well tanned visitors come calling, let them be impressed by how fantastic your home looks.

© Jerome Kowalski, June, 2010.  All Rights Reserved.

An IBM Selectric typewriter, model 713 (Selectric I with 11" writing line), circa 1970. (Photo credit: Wikipedia)

The Times — They Are Changing

How to Overcome Lawyers’ Innate Resistance to Change

                                                                             Jerome Kowalski

                                                                             June, 2010

In the early 1970’s, when I was a very young lawyer, exciting new technologies, or at least what we then saw as exciting new technologies, were sweeping the profession.  Some of you may even recall what we old timers then saw as “holy crap” moments (this is a family blog, after all).  Some readers won’t even know what I am talking about. There are many arcane terms used below; you may need to ask your parents or grandparents to explain them.

The Changes of the Late 20^th Century

The “mag card” typewriters – IBM Selectric typewriter with a “memory” that retained information typed on the machine (no screen – the typist had to find particular entries through trial and error and sheer dumb luck to find the part that required editing).  But, the document could be printed at the lightening speed of four minutes a page.  Vydec machines; a prehistoric version of a word processor; (it was the size and had the feel of a small space station). It came with a screen, and, gets this, the ability to print a document at a warp speed of two minutes a page. Portable hand held dictating equipment.  Direct dial telephone numbers; Voice mail (one of my former partners threatened to vote to dissolve the partnership if the firm acquired a voice mail system). Computerized time keeping and billing.  Sharing secretaries. Lexis. High speed printers.

My personal favorite was the fax machine. The device then cost upwards of $15,000 a unit, and, get a load of this: you could stick a document in, dial a number and then, assuming the proposed recipient also had a fax machine in some other part of the world, the recipient would receive an exact copy, printed out on long endless rolls of wax paper – at the amazing rate of four minutes a page. Long documents produced a ribbon of wax paper that might stretch to the size of a football speed.

Then ultimately, two decades before the Internet, PC’s, which actually was my second favorite, since prior to the early 90’s, virtually no lawyer had a clue as to what they were or how to use them.

All of these innovations, and many, many more had a few things in common:  One, at first, only the largest and best firms initially acquired these marvels. Second, anybody then over the ripe old age of 40 resisted each change. Smaller and midsize firms refused to invest in these technologies. The “older” generation swore they would never use them. But, slowly, and I do mean very slowly, each (and others not mentioned here) became regular tools of the trade.

As I said, faxes were one of my favorites. It was initially a sign of enormous prestige for a law firm to boast a fax number on its letterhead. Most still had cable addresses (if you don’t know what these are, ask your parents). Fax use spread at a snail’s pace. An older acquaintance, a single New York practitioner, an old family friend, finally succumbed to the pressure of an important client in Pittsburgh and invested $1,000 and purchased one. He had his mail room person unpack the contraption, read the instructions and install the device. Later that day, the lawyer dictated a long letter to his secretary, who used Pittman shorthand, who then transcribed it, using carbon paper for the two required office copies (who remembers this 0 and 2?).  Changes and typos were made by cutting and pasting. The lawyer summoned the mailroom guy and bellowed (proudly) “fax this letter to Pittsburgh.”

The lawyer returned to other matters and two hours later the wildly angry client called and demanded “Murray!! What are you doing?  I have 40 copies of your letter and you’re totally tying up our fax machine.”

Murray charged in to the mailroom and demanded to know what was going on.  “Boss, “the mailroom attendant said, “I was just going to come in and see you.  The machine is broken.  I keep putting the document in, dialing the number, hit the send button and it keeps coming out on the other side.”

My second favorite was the desk top PC.  In the early 80’s almost no lawyer had a clue as to what they were, except that they looked real neat.  In 1985, while I was 35 year old partner in the world’s second largest law firm and absolutely nobody at my firm had a PC (and even if they did, wouldn’t have a clue as to how use them or their reason for existence), I traveled on business to Denver to work with a midsize firm which was our co-counsel on a matter. I was blown away by the fact that each lawyer in the Denver firm had a PC on his or her desk.  I asked my Denver counterpart what this paraphernalia was.  He said he didn’t have a clue; one of the managing partners bought a bunch of screens, mounted them in each lawyer’s office and visiting clients were simply wowed by their existence.

Kicking, fighting and screaming, the profession as a whole and individual lawyers adapted to these changes and more.

The point is that lawyers are genetically resistant to change.

21^st Century Changes

The changes described above are mere child’s play when compared to the economy’s enormous demands that lawyers engage in spectacular change or join the piles of dinosaur bones: As Jeffrey Carr, General Counsel (and Five Star General of the army of corporate counsel demanding change)  of FMC Technologies said “To quote a former U.S. Army chief of Staff, ‘If you dislike change, you’re going to dislike irrelevance even more .’”

We know the changes demanded of us:

Alternative Fee Arrangements

Get to know the ACC Value Challenge and live up to its standards.

Give us a real budget on an engagement and live up to it.

Take on some of the risk when we engage you.

Give us a quality product and do so efficiently.

Train your associates on your nickel and we’ll pay for them when they know what they are doing

Recognize, as we do, the inefficiencies and high costs hourly billing breeds.

Don’t overstaff or overwork a case.

Provide true transparency in the billing process.

There are plenty of providers for legal services and less demand for outside counsel. You’re going to have to meet the competition.

Well, all of that is easy. Perhaps. But given the professions’ genetic resistance to change how does the profession and how do law firms overcome that resistance?

In fact, resistance to change is not unique to the profession. It is widely known among psychologists and much ink has been devoted to the issue, including a note by Dr. A. J. Schuler, the observations of Value Based Management, strategies suggested by Team Building, Inc., and the more detailed exposition of The American Society for Quality.

In fact, there is nothing unique to the legal profession’s resistance to change. It exists in every stratum. A century’s study by academia and management professionals of resistance to change, applied to the law firm community, dictates the methodology which must be embraced by law firms to avoid extinction.

Transparency.  Perhaps one of the most overused nouns of the decade; it does have real resonance here and is, indeed, the core principle to lawyers’ endemic resistance to change in the new era.  Transparency must be adopted by law firms within every aspect of their very own societal culture and permeate every fiber of their being. Transparency is not limited to dealing with clients alone; it must be part of every law firm’s culture. Fear of change is brought about by fear of the unknown and inherent uncertainty of the future. In days of yore, associates, and, indeed partners, hade simple metrics by which they could readily determine their own compensation. Minimal hour billing requirements yielded certainty of compensation; meeting higher hours billed equaled a guaranteed bonus. Bringing in a level of revenues yielded an arithmetic equation by which partner compensation could be calculated.

Management must share openly with the partnership how demands by a newly empowered client base will be met and engage in open dialogue regarding how these challenges will be dealt with by the law firm. Dialogue means active and full participation and consideration of substantive productive suggestions and ideas of the full partnership, a clear, common and shared understanding of the challenges confronting the law firm and how they are going to be met.  Sorry, top down management and fiat doesn’t work here.

Transparency also means that associates participate regularly in the discussion, understand the client demands and be part of the dialogue in which how these challenges will be addressed.  Do not set hearts thumping and, more important, fear of the unknown, by summoning the troops to a conference room and issue diktats from on high. That is, unless you want your associates live in total fear and uncertainty and have an insatiable desire to provide grist to Above the Law and the rest of the blogosphere about imagined chaos at the law firm.  Clients and potential laterals read this stuff; more traditional trade journals report on it, fed by the blogosphere. It has become the 21^st century’s version of the childhood game of “telephone.”

A simple case in point: Had management openly discussed with the associate corps in 2009 the need to reduce payroll of the professional staff in 2009 and offered them the option to have a secret ballot of one of two options, namely, reduce salaries across the board or terminate some number of associates, there is little doubt that the vote would have been overwhelmingly for the former and an enhanced sense of common cause, rather than fear or resentment resulted.

And now, let’s get down to same basic principles of human nature, not confined exclusively to the legal profession. Actually, lessons learned over a century by management professionals:

1.    We all fear that the risk of change is greater than the risk of standing still.  The full and open dialogue now mandated, as discussed above,  is designed in large measure to convey to the law firm’s entire community that the risk of standing still is far greater than the risk of standing still. Be sure that the message conveyed is an institutional sea change is required to be undertaken by the firm to survive as a continuing and thriving institution.  The message: The risk of standing still far outweighs the need for change.

2.    The nature of organizational life is that members of the lower level of the totem pole look to their seniors for role modeling. Young associates dress and act like their seniors. Senior associates dress and act like partners. Organizational life is one in which tone, tenor and style is indeed top down and set by example. Accordingly, as younger associates observe their seniors, mentors and role models adapting to the new realities, so will they.

3.       The great motivator is the carrot and stick. Accordingly, lawyers within the firm adapting to and meeting the new challenges to the profession are those who should be rewarded.  New yardsticks for compensation must be developed and clearly communicated. Instead of the old metrics for calculating compensation on the old “minder, finder and grinder” measure,  the new yardsticks must be based on rating lawyers (and compensating them), utilizing numerical scores, on the identical scoring system of the ACC Value Index: [1] understanding objectives/expectations; [2] legal expertise; [3] efficiency/process management; [4] responsiveness/communications; [5] predictable cost budgeting skills; and [6] results delivered/execution. Lawyers within the firm must be educated on these new requirements and the annual review process demands that those who convey the reviews explain in detail how the yardsticks were applied in assessing performance and areas in which improvement is required.

4.     At the same time, the law firm must instill a communal notion that attracting new clients, serving those clients and retaining them is a firm-wide obligation; part of the woof and fabric of the institution.  Just as those who meet high grades using an internally applied ACC Value Index, so too should these efforts be gauged and included in the calculus of pain and pleasure on an individual basis, but viewed in the context of the firm as ongoing enterprise. Transitioning in to the new “new” should not be viewed as a threat to those who have the talent and ability to bring in new clients and simply be rewarded for those critical efforts.  Rather, adapting to the new world will require weaning and time and should not be seen as a threat to those who had achieved money, fame and glory because of their unique ability to bring in new clients. Law firms and its partners simply need to begin to remove the personal pronoun and use the collective pronoun in reference to clients; it’s no longer “my” client, it’s “our client.”

5.      Prevent systemic and personal overload by expecting and requiring changes overnight. Regular roundtables and group meetings must merge as a critical of the firm during which the new yardsticks are discussed; difficulties (no doubt shared by partner and associate alike), are discussed openly, with no judgmental factors attached. Participants should be encouraged to raise problems they may have encountered in this new paradigm and invite suggestions from those assembled on how to meet these challenges.  Regular discussion of how the firm is meeting new client requirements removes fear of change, embracing change, have the competence to meet change, remove skepticism of change, threat of changes in personal standing wrought by change and universal buy in to its application and essential need.

© Jerome Kowalski, June, 2010.  All Rights Reserved.

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                                                                             Jerome Kowalski

                                                                             June, 2010

Yesterday, The New York Law Journal reported that significant clients, like Citibank,  Viacom and others simply won’t pay for time billed by summer associates.  The result of that fact, well expected before the summer began, resulted in a whopping reduction in the number of summer associates hired, as reported in the same edition of the NYLJ and, I suspect is otherwise well known to each reader of this piece.

            This trend is consistent with the ongoing trend by corporate clients to also not pay for the training of first and second year associates, as we previously discussed.  The result of that trend is that fewer law school graduates (3L’s) will also be hired in the coming hiring season, which is discussed in that same posting. The resulting on campus malaise was discussed the preceding day at law.com.

            All of these issues raise a number of issues, which the profession has not adequately grappled with; perhaps not even adequately thought about.   First, the whole issue of hiring summer associates – which, in effect,  requires law firms to predict how many full time associates they will need two years hence.  Simply put, law firms recruited summer associates in the Fall of 2009 to serve this summer (2010), with a view towards having those summer interns become full time first year associates in the Fall of 2011.  I’ve previously discussed the impossibility of law firms, or, indeed any business enterprise, to have adequate prescience to foresee what the economy will look like two years hence or to have anything but a wild guess as to how many new associates it will require or afford to train, since the clients have made it clear that they won’t be doing so.

            One obvious solution is to go to a Spring 3L hiring program, as boldly suggested by visionary K&L Gates Chairman, Peter Kalis and as is common in every other profession and large corporation hiring B-School graduates (which often leads to the question: who knows better: the legal profession or the rest of the world?).  Another solution, which may well be forced upon the profession by ineluctable exigencies is completely revamping the entire training process, also a matter of previous discussion.

            But we should also now be thinking of the coming conundrum: Small and medium sized law firms have for years, been comfortably sitting back, avoiding entirely the profession’s version of an American Idol type selection/elimination/weeding out process Rather, they have been exceedingly comfortable in letting AmLaw 100 firms train young associates and then pick from among those who have either been “voted out” of the process or decided to drop out or induced to drop out of large law firm life, leaving the American Idol stage.  

            But, here is the inevitable conflict that will arise in four years’ time:  Large law firms are now simultaneously scaling back dramatically in the hiring of 3L’s with a view towards waiting to see what the economy will look like four years’ down the road and then back and fill their needs for third and fourth year associates (for which clients will pay) by mutually cannibalizing associate ranks of their market peers. In this process, small and mid-size firms will concurrently compete for this diminished pool of talent. 

            The solutions, other than a new state of chaos in 2014 and afterwards, will, I believe, compel new models for substantive associate training, some of which have been previously addressed by me.

            Another possible solution may be far more practical skills instructional programs at the LLM level, where, inevitably, many law school graduates will nonetheless be looking for cover while the current economic storm continues to brew and the nation  — and the world – goes through an excruciatingly slow recovery,

            Shortly after I began to practice law in 1976, a client once told me that there is nothing more distasteful than hearing its lawyer saying “I told you so.”  I will promise to try to hold my tongue, as hard as that may be, in 2014 when this crisis over the horizon inevitably engulfs many significant parts of the profession.

© June, 2010, Jerome Kowalski.  All rights reserved.

Image via CrunchBase

Recently, a  deputy general counsel for the Association of Corporate Counsel, reported at a conference about a corporation that chose to conduct a “beauty contest” for a particular engagement by independently identifying the top five lawyers in the country who had the expertise to handle the matter.  Of the group invited to make presentations, most were New York based.  The client selected a Kentucky firm, since its rates were 25% lower than its East Coast competitors. James  Merklinger of the ACC, who conveyed the anecdote, explained  “In this day and age of technology, it doesn’t really matter where you are, so there’s no reason to pay top dollar if you can find someone who’s considered just as capable.”

Neat story with obvious lessons.

But the astute reader should be thinking about a different question:  How in the hell did the client find a lawyer in Kentucky, of all places, with the precise expertise it needed?  A better question you should be asking is: Instead of your chasing around looking for new clients and business opportunities, attending de rigueur lunches, golf outings, industry specific conferences (where you are competing with a score or more of lawyers looking for the same work) is there some efficient way, other than late night TV ads,  for you to have clients look for you, instead of your looking for them?

The fellow from Kentucky figured out how to do this.

ALM Legal Intelligence Group, in association with the Zeugheiser Group released early this week the result of a survey it recently conducted which will lead you to obvious conclusions:  27% of in-house lawyers used blogs posted by lawyers on relevant topics as the “most important” tool in researching for outside counsel for a particular engagement.  Another interesting statistic: only 96 of the AmLaw 200 firms used blogs.

So I assume that each lawyer takes pride in his or her specialized expertise in a subset of his or her broader generic practice area.  So for example, you are a litigator with relatively unique expertise in nuclear reactor construction disputes involving concrete.  Likely, your firm’s web site will have you listed as part of its litigation group or part of its construction group.  A Google search made by a prospective client for lawyers with that unique expertise (expertise in nuclear reactor construction disputes) will never find you doing a web search.

Don’t believe me? Try it yourself.  Identify a specific area in your practice for which you have specialized and conduct a search a lawyer with that expertise. The heavy odds are you will be shocked not to find your name popping up. So, how are the 27% of in-house lawyers who rely on blogs as their most “important tool” in searching for outside counsel going to find you?

Lesson 1: create and maintain a blog (don’t know how? Skip the call to your IT department and just go to Google or a similar search engine and type in this question: How do I create a blog? Or ask your kids or grandkids).  Lesson 2: put postings of interest  and of substance on your blog, and please, don’t  make them boring or make them look like they were written by a second year law student writing an analysis of a case.  Short, interesting, substantive, informative is part of the solution (Example this is a recent development that you should know about [please, please, no case citations and no procedural history, nobody cares]).  Lesson 3: Post regularly (I suggest once a week). Lesson 4:  use the key terms of your special expertise (such as nuclear reactor construction disputes involving concrete and use those terms in different combinations often.  Lesson 5: circulate a very short, sweet and enticing email among your clients and prospective clients very briefly advising the reader that you’ve just written a piece about the subject and include a link to your posting .  Keep adding to your email list new prospective clients. I previously addressed this issue, if you forgot, click this link.  Lesson 6: Sign up to www.jdsupra.com , a novel, robust, easy to use, and extremely effective web site signing up is free, the modest price of an upgrade is well worth it). JDsupra.com circulates your blog entry to tens of thousands of lawyers.  When posting on jdsupra, be sure to include your firm’s logo and a link to your web site and your firm’s web site.  (there is some chace you may need some small amount of assistance from either your marketing director or IT specialist, if you can’t figure out how to insert the web site or blog links,  but once a template is created, it can be used by you regularly.  Lesson 7:   Register with Lexology (www.lexology.com ), a portal for thousands of lawyers particularly in house corporate lawyers and which is co – sponsored by the ACC .  Lesson 8: Include a link to your posting on Linked In and the relevant groups to which you belong (there are 1,500,000 lawyers on Linked In, thousands of groups dealing with nuclear reactors and construction, which have too many millions of members for me to count), as we previously recommended. Chances are that if you are reading this, you just saw how this all works.

As you go through these exercises, consider the tools available and that are actually being used by clients to stay in touch with new developments and trends in their industries.  The most common and easiest to use is Google Reader.  Google Reader will provide you with real time access to new information posted on the Internet in areas specified by the user.  The user defines the terms of the areas in which he or she has an interest.  Your client and potential are using this tool regularly and you should as well.  Thus, you will not have to wait for any of this information to crawl to your attention through your reliance on traditional media, print or electronic.  You will not only be ahead of the curve, but when the client asks for your views on a cutting edge issue he or she may have read about on the web using these tools and with which you will likely not have acquired any information unless you are using the same tools, you will in fact be able to respond on an informed basis.  More significantly, you may actually place yourself ahead of the curve and be able to take the initiative in commencing a dialogue on such an issue with a client or potential client.  Google offers a simple training video on how to use this tool at http://www.google.com/reader/view/?utm_campaign=en&utm_source=en-ha-ww-ww-bk&utm_medium=ha&utm_term=google+reader#welcome-page

The net critical point:  The more often you use the terms associated with your area of expertise and the more times people link up to your web site, the more often your name and area of expertise will show up when one of those 27% of corporate counsel are looking for somebody who needs the very special skills you have.  Or, when an ACC member or other in house corporate lawyer calls a colleague and asks if he or she knows somebody with expertise in nuclear reactor construction disputes, hopefully he or she will say check out so and so. I’ve read his or her blog and he or she seems to know what they are talking about.

A useful guide in getting started can also be found at http://associatesmind.files.wordpress.com/2010/08/new-legal-blogger-guide.pdf

Succesful marketers are also familiar with a basic maxim, namely, most often to successfully get new business, you need to ask a client to retain you.  Thus, frequently conclude your blog with some version of  “”I (or our firm) am (or is) happy to discuss our availability and our experience in this area of the law.  Feel free to review our web site at ____  and contact me at _________.  I would also be happy to provide you with a representative list of transactions (or cases we have handled in this area.”

And then keep a pile of new matter intake forms piled on your desk as the phone rings off the hook.

In accordance with my own advice above, feel free to contact me at jkowalski@kowalkiassociates or at 212 832 9070, Extension 310, to discuss the assistance I may be able to provide you and your firm in connection with marketing your services.

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Jerome Kowalski

Kowalski & Associates

May, 2010

If I or any of you could predict with any degree of precision what the economy was going to look two years from now, I would not necessarily be writing this note and you surely would not be reading this posting.  Should we have the ability to know what the world will look like four years from now, we would each be as wealthy as Bill Gates, Warren Buffet, Oprah Winfrey or at least Croesus.

Yet, every large law firm that participates in the NALP choreographed minuet that takes place every fall in connection with the hiring of summer associates feigns the ability to be remarkably prescient.  Even now, law firms’  hiring partners, executive committees and department heads and firms’ recruiting staffs are devoting substantial time in rehearsing for the legal profession’s version of “Dancing with the Stars”, but more significantly, throwing hundreds of thousands, if not millions of dollars out the door.  In these recessionary times of continued cost cutting, and watching every penny on the expense side, law firms’ hiring expenses, both hard and soft, are economically irrational and may be the most wasteful expenditure that any law firm engages in.

Whose fault is it that we are now in this pickle?

To blame NALP, as some have done, most notably Peter Kalis, the visionary leader of K&L Gates has said in his thoughtful essay and as Pete Kalis has advocated in the press , misplaces the blame.  To blame the law schools for relentlessly spewing out in excess of 40,000 new graduates, the overwhelming number of which will likely never earn enough money to repay their student loans, also misplaces the blame. In fact, a reading of NALP’s recent and incisive report on the employment statistics for the class of 2009 should serve as a long overdue wake up call for law firms, law students and should be required reading for any law school applicant.  To blame the ABA for its own juggernaut of accrediting law schools (140 at last count; ten more in the pipeline) also misplaces the blame.

In fact, as much as I admire and respect Pete, I think Pete’s basic premise is far too conservative.  Pete Kalis’ premise is that law firms are being forced to make staffing decisions two years in advance.  In fact, professional staffing decisions are in reality being made four years in advance, as I describe below, based on skimpy information extracted from candidates and without even the slightest clue as to what the world will look like four years hence.

In fact, laying blame is a uniquely Western unproductive tradition (as John Kennedy famously said in 1961, “Victory has a thousand fathers and defeat is an orphan”), the Japanese tradition is to acknowledge a problem and focus on curing the problem and not pointing fingers.

The fact is that NALP is a membership organization, made up of major law firms and law schools.  It is not a deus ex machina that lives and breathes a life of its own.  And the ABA is a membership organization, comprised of lawyers.  Thus, if we insist on looking for the villain, he or she appears every morning in your mirror.

We have previously written on the subject and return to it again because the recent NALP report and the continued and escalating focus on reducing expenses wherever possible, demands that we do so.

How did we get in to this pickle?

A quick review of the process is rather remarkable to anybody who looks at it from a clearheaded objective perspective. In fact it almost has an Alice in Wonderland quality to it.

In the spring of each year, firms spend hundreds of hours completing the requisite NALP questionnaires and the fungible essays on each firm. Firms then take a wild-assed guess on how many new associates they will need each year.  Dozens of senior lawyers engage in this activity:  Practice leader, office heads, law firm management, CFO’s and countless others who believe that they have something to contribute to the process. Once all of these contributions are stirred in a pot, shaken vigorously and baked overnight a raw number emerges. Recent experience suggests that simply throwing a bunch of numbers in a hat and having a partner pick the number while blindfolded would yield the same speculative result and save a great deal of time.

The next step is sending out platoons of lawyers on campus to conduct on campus interviews of law students who have nine or ten months of legal education under their belts (we used to dispatch regiments, but some recent recession compelled thoughtfulness prevailed here and the number of campuses visited by each firm and the number of candidates interviewed has been sharply reduced, given the economic realities we all now face).  The on campus process is often 18 – 20 law students seen for 20 minutes by a lawyer representing the law firm, too often distracted by thoughts of pressing client engagements, Blackberries, rushed cell phone calls and the like.  Typically, the interviewer has a single piece of paper in front of him or her used to assess the candidate:  A resume that all too often carries little of real substance:  Law school and undergraduate honors, a summer job or two and a word or two on language or technical skills and interests outside the law. Too often, these resumes are read for the first time while the candidate sits before the interviewer (the 20 minute clock is counting down).  Rarely, if ever is there any substantive discussion of the law (huh?  Isn’t that how we make our living?)

The interviewer then makes some quick judgments and invites some number back to the office (two sounds right; maybe three?) No decision for a callback is based on any criterion essential to the successful practice of law.

Now we get to some of the most amusing parts.  On the callback, the candidate usually spends about five or six hours meeting a mix of partners and associates. These sessions range from 30 to 45 minutes.  Protocol requires that almost none of these chats involve any substantive discussions of the law.  A de rigueur lunch is almost always included; proper table manners being somehow thought to be an accurate yardstick by which future success at the law can be measured. Writing samples and transcripts are submitted by the candidate.  Evaluations are completed by the interviewers and lunch companions and are then the subject of a deliberative meeting in a somber conference room; white clouds emanate from these sessions signaling that decisions have been made as to which candidate will receive an offer.

Wait; it gets better.  Although most firms have reduced the number of weeks of their summer programs and scaled back the Disneyland quality of summers of yore, each summer associate is compensated on a weekly basis the same rate of compensation as first year associates. And, here is another one of my favorites:  As a recruiting tool for generations to come, firms bend over backwards to make as many offers of full time positions for the following year to summer associates as possible (90% plus is often the case).

In short, as we all know too well,  law firms make decisions about which and how many  law students will become part of a law firm’s ranks based on an aggregate of perhaps six hours of chitchat and these decisions are made two years before they are to start work.

How much do we spend on these garnishes?

The estimated hard costs (travel expenses for interviewers and interviewees, salaries for the summer associates, even the scaled down romps) for recruiting these young men and women is estimated to be about $75,000 per summer associate. Like so much else of the anomalies of economics of law firms there are precious few economies of scale. The soft costs (primarily lawyer time in the interviewing process, mentoring and so on):  Like the folks at MasterCard say, “priceless.”

Now, the next part gets even more interesting and certainly breathtakingly more expensive.  Since as well now know too well, and as we previously reported , clients are simply refusing to pay for first and second year associates. Accordingly, scads of time is dedicated to training and mentoring first and second year associates:  CLE programs; workshops, observing the various negotiations, client meetings, transactions, closings, hearings, motions, trials and the other stuff we do to earn our keep. And while we teach and train these young associates, we also insist that we pay them in a grand style (at least that small percentage – NALP estimates approximately 22% — of law school graduates that make it in to “the big game”;  I believe the percentage is actually far lower) the “going rate” — $160,000 per annum.  The cost of paying these young lawyers and the incremental allocation of overhead together fringe benefits during these first two years typically exceeds $400,000 per lawyer.  And again, there is insufficient data to calculate the substantial soft costs, namely, the time of more mature lawyers involved in the training and mentoring process.

In all fairness, associate compensation should not be trivialized.  We of course do need to recognize the crushing debt carried by young lawyers.  But, by the same token, so much of the gravity defying salaries paid by most of the AmLaw 200 firms are rationalized by “competitive pressures” by law firms that are AmLaw top 50 wannabes.

At the ultimate end of this grueling four year process, $500,000+ expenditure, when productive lawyers are first added to a law firm’s profit centers, the most explosive result occurs: Attrition.  As associates move in to their third and fourth years, associates begin to think about alternative careers:  Government service, in-house corporate departments, smaller firms, competing firms, public service careers, family businesses and a host of other endeavors.  A fair number of associates are found by their employers to be wanting and are asked to leave.  The generally accepted estimate is that the attrition rate at the third and fourth year is 40%.

Now, let’s recap the dollars out the door and, because math is not my strong suit, I will simply arbitrarily assume an incoming class of 100 summer associates:  (a) $75,000 for the summer; plus (b) $500,000 in direct expenses for each associate’s first two years; times (c) 100; less (c) the 40% of associates that leave the track equals a very real hard cost of almost some $960,000 to produce each productive third and fourth year associate.  If your firm is larger or smaller, the math is fairly readily calculable. If your law firm is paying lower salaries or you have lower overhead costs, you still cannot escape the ineluctable facts:  There are whopping amounts paid for bringing along third and fourth year associates, all predicated on some irrational guess as to what the world will look like four years from now.

The awful pain the profession went through in 2010, as we slaughtered so many of our young, is the product of this system.

And, I return to the basic premise here:  No man or woman on this planet has a clue as to what the economy, let alone the demand for legal services, will be at the end of the four year gestation period required for the creation of a productive third and fourth year associate by current convention. But we do know that it will take at least two years of billing hours by these hard working associates to amortize these costs.

And how do we get out of this pickle?

But, there is no reason for us to now run around screaming like Chicken Little that the sky is falling.  There are plentiful solutions:  Spring prior to graduation hiring, as so many have suggested.  Some examples:

(a)    Requiring mandatory clerkships prior to bar admissions:

(b)    More rigorous screening than the causal six hour process we now employ.  We should take some important lessons from the processes used by major consulting firms, the financial services industry, the accounting profession and Fortune 1,000 companies.

(c)    Most significantly, the best example from which we must draw important lessons from is the medical profession through the use of the national residency matching program (www.nmrp.org) and the mandatory residency programs required by the medical profession.

Recently, as I lay awake in the wee small hours of the night, focused on the optimization of profitability of the legal profession, as I so often do, the idea of utilizing the medical residency analogue for the legal profession hit me like a thunderbolt.  I knew I had conjured up a unique and novel solution to the hiring and training process. I actually thought that when I revealed what I truly thought was a unique contribution to the legal profession I would be hailed as a consummate visionary.  But, as I devoted some time to researching the feasibility of using this model, I inevitably found my way to an absolutely compelling article written in 2009 by Professor Ashish Nanda, the Robert Braucher Professor of Practice, Faculty Director of Executive Education, and Research Director at the Program on the Legal Profession at Harvard Law School  Professor, assuredly a far more substantial and thoughtful intellect than me, authored a riveting piece in which he revealed, among other things, that he had analyzed the problem and thoughtfully addressed the “matching”  concept I innocently thought that I invented one dark pre-dawn spring day.  Thus, in spite of Professor Nanda’s stealing my thunder, I encourage you to read his piece.

The professions’ tossing out millions of dollars in the current completely broken system is the profession’s own fault and its collective inertia. In any new system, NALP would fill an even more vital role.  And, please remember at year end, as partners divide a continuously shrinking pie, how much money was tossed out the window in the current recruitment process.

In the weeks ahead, I will further explore some of the other concepts I described above.

© Jerome Kowalski, May, 2010; all rights reserved.

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                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      May, 2010

            As the days become longer and warmer at this time of year, too many of the profession’s resources are focused on the administration of  a recruiting  system, that is broken, illogical, irrational, expensive and simply do not make any sense.  Corporate clients, who seek out the profession’s guidance in respect to their own enterprises, are watching and concluding that we are in fact nuts. They won’t pay for the profession’s folly and are wondering how they can rely on our advice in regard to their important business matters while we so poorly manage our own affairs.  Our system requires a complete top to bottom overhaul.   The process of hiring and then training needs to be brought in to a more rational and economically sound system. And, we should be more seriously scrutinizing the issue of lavish summer programs and questioning whether we continue these programs at all.

            The continued economic challenges we confront demand dramatic changes, which will enhance profitability and produce what our clients demand:  The delivery of a quality product efficiently delivered.

A Little Background

             Law firms have historically been economically anomalous business enterprises in almost every respect.  They defy basic rules of supply and demand, make a mockery of principles of economies of scale and are incapable of measuring profitability in the traditional manner on individual client engagements  (the rest of the world: revenues less cost; law firm yardsticks:  hours billed multiplied by hourly rates, less write offs and write downs yielding “realization rates”).  Similarly, law firms also defy extremely basic principles of labor economics; chief among them is the simple fact that no enterprise can predict what its needs for employees will be two years hence.  Yet law firms conducted themselves as uniquely being capable of doing so. Thus, they rush to recruit summer associates, before they even completed first year final exams and bend over backwards to make as many full time offers to these summer associates as possible (in order to induce next year’s crop of summer associates). 

        Last year’s perfect storm created by the downturn in real estate pricing,  the implosion of securitization and the deaths and near deaths of major Wall Street houses was not only a traumatic blow to the legal profession and its previous defiance of basic economic norms.  Suddenly principles of supply and demand burst on the scene, as consumers of legal services outstripped providers.  The plain imprudence of hiring a workforce two years prior to the commencement of their employment came crashing on the scene, as law firms withdrew job offers, deferred starting dates, sometimes for almost two years and dispatched other offerees to “public service” sectors.  This brew then became lethal when law firms engaged in wholesale layoffs of associates, some 5,000 among AmLaw 200 firms and probably an additional 25,000 at firms of 50 or more and clients (the consumers now holding greater power) simply announced “we are not going to pay for the training of young associates anymore.”   At the same time, law schools continued to inexorably spew out some 15,000 graduates each year.  In 2010, law firms began to realize that they were in fact subject to basic economic principles. Offers to law students were essentially halved.  There was certainly no concomitant reduction in students attending law school.  Oh, and we forgot that just as rules of supply and demand now govern pricing of legal services, so too should these principles govern the hiring process, with supply so far exceeding demand.

            In April of this year, Paul Lippe, CEO of www.legalonramp.com, and a regular contributor to AmLaw Daily, publicly revealed in a New York forum, that the king has no clothes: Mr. Lippe let out our little secret: law schools are “misaligned” and teach no practical skills. Oh, my goodness, how could we have all not noticed?

            At that same forum, Chester Paul Beach, associate general counsel of United Technologies, re-emphasized what all clients have been consistently saying for the last year:  UT will absolutely not pay for first and second year associates. “They’re worthless” said Mr. Beach. Clients, he said and as we previously noted  clients “are not going to pay for people who can’t add value.” To be sure, this is not a unique or a startling revelation; rather, this is a mantra that has been repeated by clients for the last 18 months or more.

            Here is another fact we never talk about:  The United States is proudly the only Western democracy which permits lawyers to be admitted to the bar without undertaking a mandatory period of clerkship or, as it is called in many parts of the world, “stagers.”  

            We must also recall the genesis and evolution of “summer clerkships.” Some 40-odd years ago, when the world was different and law firms much, much smaller, some law firms needed a couple of extra hands to handle clerical and some administrative duties as lawyers and staff took summer holidays. A few law firms hired a few second year law students at token salaries to fill these needs. We’ve all witnessed this nifty idea morph into today’s Godzilla.  I invite each of you to spend a moment or two with the septuagenarians at your firms (the few who might still be around), and let them regale you with the tales of yore, starting salaries of $50 a week, etc.

Time for a New Paradigm (Oh no, not another new paradigm!)

             The most obvious solution to the pickle in which we now find ourselves is to skip the nonsense about hiring summer associates and adopt a rational universal method of training new associates so that they can indeed provide value. These concepts, which have been the subjects of hushed discussions in many corners, will doubtless be met with the same vigorous rancor that health care reform was for forty years. Most egregiously, these concepts are rooted in basic concepts of sound economics and fiscal responsibility.

            The mandatory clerkships prior to bar admissions, as is required by the rest of the world is a concept so revolutionary to these shores and would simply take too many years to implement here quickly. But a modified version can be rather readily implemented.

              Modified clerkship programs already have some traction here: the need for training physicians through residencies are universally required and accepted; many industries, such as the media and many financial institutions require internships; a prestigious internship is a badge of honor for these professionals as they pursue the rest of their careers.  And a smattering of law firms have already accepted and adopted this concept.

            The system I propose is one in which law firms would hire law school graduates in the spring preceding their graduation and they would first be dubbed as “fellows,” a designation which may have greater gravitas attached to it than “clerks.”  These fellowships would last two years and would include not only the assumption of the duties now performed by first and second year associates, but also a series of regular and frequent practical skills workshops, clinics and training sessions delivered by not only partners, but clients of the law firm, academics and members of the judiciary. Quite likely, the eminence of law firms would thus be measured in part by the quality of these practicums and their faculties. “Fellows” should receive quarterly reviews in which performance and participation in these seminars should be important elements.

            At the conclusion of these fellowships, these reviews should be collated and a committee of the law firm would confirm that the fellowships were completed, perhaps with “honors” or “high honors.”

            There are certainly other issues which need to be addressed for the successful implementation of this system.

            One issue is the fact, well known for more than twenty years that the period of greatest turnover – that is, associates leaving their firms to join another – occurs during the third and fourth years. A related fact is that many firms, almost all exclusively below the AmLaw 100, simply do not hire young associates, and sit back while larger firms train young associates. These firms hire associates from the crops of those trained by larger firms. Some might call these other firms predatory, opportunistic or economically prudent.      

              Another question is how a law firm, having invested in the training of its “fellows,” receives a fair return on its investment by effectively deploying and using the services of the now well trained, efficient and productive cadre of lawyers. As much as some associates might think otherwise, they cannot be chained to their desks. The solution, it appears to me, to be that incoming associates sign a contract committing to stay with the firm for four years.  One would hope that aspiring lawyers would honor such contractual obligations.  Firms would, however, retain the right to terminate “fellows” for performance reasons.  Further, the formal conferral of completion of a fellowship would only occur upon the conclusion of four years of service.  The contract would further provide that should an associate leave prior to the termination of the four year period, any inquiry by a future employer would result in a response advising a prospective new employer that the associate failed to complete his or her fellowship.

            The successful conclusion of the fellowship would give the associate a resume builder, a proud badge of honor: “Fellow, Firm X”, “Fellow with Honors, Firm X” or “Fellow with High Honors, Firm X.”  These designations would obviously appear on web sites and firm literature.  Our physicians shamelessly post analogous information on their own web sites, on hospital web sites, on their CV’s and even decorate their offices with plaques boasting of their own training.

            Ah, but what of the issue of compensation?  At what level should these “Fellows” be compensated?  Some of the few firms which have adopted comparable systems offer lower compensation levels to their lawyers in training.  Some pay higher levels. In the end, market factors will dictate the answer.

            Even before all of these issues have been settled, three law firms, Howrey, Fross Zelnick and Gibbons have already begun such apprenticeship programs.  These firms are compensating their apprentices substantially less than the rates paid to first year associates, with Gibbons paying $48,000. http://www.lawjobs.com/newsandviews/LawArticle.jsp?hubtype=News&id=1202473054427&src=EMC-Email&et=editorial&bu=Law.com&pt=LAWCOM%20Newswire&cn=nw20101008&kw=N.J.%20Law%20Firm%20Starts%201-Year%20Apprentice%20Program&slreturn=1&hbxlogin=1

Update: On March 9, 2010, Howrey, after an unfortunte downward spiral, called for a vote of its remaing 141 partners (it previously had 279 partners) to dissove.  There is no doubt of the result. http://blogs.wsj.com/law/2011/03/09/ceo-ruyak-partly-blames-contingency-fees-discovery-vendors-for-howreys-fall/?mod=WSJBlog

Summer Associate Programs

            In truth, there is no rational basis for continuing summer programs

            Summer programs are inordinately expensive and economically irrational endeavors. If the purpose of having these programs is to recruit full time associates upon their graduation, we have already shown, and the profession has learned through its excruciating recent experience, that nobody can predict a firm’s professional staffing requirements two years in advance.

            Summer associates are not, by any measure, profit centers.  They are, as we well know, large money pits.  While I personally know the Herculean efforts of young aspiring lawyers have exerted through years of schooling and single mindedness of purpose (having done so myself and having been bestowed upon me a wonderful and memorable summer), this past year forced the conclusion that hard work and academic excellence do not automatically result in an entitlement of a plush summer program. Nor do summer programs adequately provide a yardstick by which either the law student or the law firm can be assessed.

            The profligacy of these programs is notorious. The costs are almost incalculable:  Some estimates of the hard cost for each summer associate are in excess of $75,000 per summer associate, consisting of compensation, recruiting costs, wining, dining, touring, summer camps and so on. The soft costs, partner and associate time spent in this unnecessary courtship are largely incalculable, particularly when opportunity costs (that is, time which might be otherwise productively spent servicing clients) are added to the calculus.

            Many firms have already either simply ended this exuberant spending or sharply curtailed their programs. If law firms feel an irresistible need to publicly display their wealth as a recruiting tool, there are a host of other places to send this money.

            Indeed, as heretical as it may appear, a well informed law student would wisely prefer to join a law firm that is fiscally well managed. Clients, too, would prefer to see parsimony rather than profligacy.

            Finally, while issues of decency hardly ever enter in to discussions of law firm economics, we should also share some sense of shame about the odious appearance of a law firm having recently laid off scores of its own dedicated associates, many of whom served the firm for years with distinction and self sacrifice, rationalizing such layoffs as being compelled by current economic conditions and then bestowing largess upon a new crop of graduates who may some day in the future make some contribution to the firm and its clients. The lesson imparted is that while firms demand loyalty and dedication from its associates, it has no reciprocal obligation.

Collateral Issues

            While there is universal recognition that revolutionary and dramatic change is required, a wide number of constituencies will doubtless vigorously challenge these ideas.

          One expected opponent will surely be NALP (the National Association of Legal Placement) www.nalp.org.   NALP describes its own history and mission statement as follows:

NALP was founded in 1971, during a period of rapid change in both the legal profession and legal education, in response to a perceived need by many law schools and legal employers for a common forum to discuss issues involving placement and recruitment.

NALP is dedicated to facilitating legal career counseling and planning, recruitment and retention, and the professional development of law students and lawyers.

                Forty years later, in a period of even more rapid changes, NALP, which has largely devolved in to an organization which largely exists primarily as the choreographer of the annual recruiting minuet between the profession and law schools, and, like so many other bureaucracies, its own continued existence and relevancy.  While NALP has for many years made important contributions to the recruiting process its relevancy and potency in this new world is increasingly being challenged and questioned. 

            Recently, NALP elbowed in on the discourse on the integrity and lack of consistency of law firm financial reporting.  Attempting to exercise muscle it no longer has, NALP, despite the fact that its position was well grounded, simply regrettably capitulated and lost the battle.

            Another controversy upon issue was joined earlier this year was an open challenge by major law firms to the continued efficacy of the timing and requirements of the NALP choreography.  The antagonists of opposing views were the most highly respected law firms in the nation and our very best law schools: Sullivan & Cromwell proposed to defy NALP’s offer timing requirements. Other major law firms suggested that they would decline to participate in on campus recruiting.  Law schools responded by stating that such firms would be thereafter banned from on campus recruiting. While it has been suggested that Sullivan & Cromwell was the first to blink,  in fact NALP backed down on its insistence that it alone had the right to direct the choreography and largely capitulated.

            The slim reed upon which NALP relies upon to avoid its increasing marginalization is the threat to ban law firms from on campus recruiting unless it was done, as NALP requires, in the early fall with late fall deadlines for offers and acceptances. The threat is, in my view, impotent.

            As is widely known, the prospects for employment by 2010 law school graduates are grim. Let’s get real:  If any law firm announced it was going to hold a job fair in the spring at an off campus facility, would any student without an offer decline to attend?  Would any student holding an offer withdraw his or her acceptance because of the firm’s temerity in defying NALP rules?  I don’t think so.

            Once again, the issue is a belief that rules of supply and demand are suspended in the legal profession.  Nobody can dispute that the supply of graduating law students spectacularly exceeds demand. The basic reality here is that it is the consumers of law school graduates have the unique ability to dictate the rules to the suppliers.

            I, for one, do not recall any law school course, law school professor or dean ever welcoming law students to a warp zone in which rules of supply and demand do not apply. Nor is there any law school course in which law students are instructed to ignore or forget about basic economic principles upon admission to the bar,

© Jerome Kowalski, May, 2010; all rights reserved.

Mandatory Law Firm Partner Retirements

Midlevel Service Partners Beware

                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      April, 2010

In times of war, famine, plague and pestilence, it is, sadly, the old and the young who die first.  The same unfortunate fact applies in recessionary times.

In 2009, we all bore witness to the tragic series of layoffs in which young lawyers, of impeccable credentials and prior selfless dedicated service to their law firms were tossed overboard, like so much ballast, to help keep the law firms’ ships afloat.  An unanticipated consequence of reductions in force of associates by the score was the realization of unexpected revenues, as salary expenses for these lawyers disappeared, while revenues produced by these lawyers at the time of their departures in the form of both accounts receivable and work in progress were realized; a ramp down effect.  Thus, many firms were able to report increased profitability, despite declines in gross revenues.

Now, it is the older generation which seems to be too often pushed to the gangplanks.

Many, if not most, law firms, having partnership agreements drafted in the first part of the 20^th century, when productive life spans rarely exceeded 70, include mandatory retirement at the ages of 65 or thereabout. In a 2008 study, Altman Weil determined that 58% of firms responding to the study had mandatory retirement ages. But these requirements were, as noted above, prompted by mortality statistics of the time of the drafting of the pertinent partnership agrrements.

Contemporary art of that era illustrates the point. Film aficionados and those of us of a certain age will recall the 1955 Academy Award winning movie Marty, starring Ernest Borgnine, playing Marty Peretti, a 34 year old unmarried butcher, who took over the shop established by his then deceased father. His immigrant widpwed mother constantly badgered him about getting married.  “Marty,” she would say, “I’m an olde lady, I’ma fifty tree years old. Soona, I’ma gonna die and I won’ta see any grandchildren.  Marty, whena you going to get married?”

In the go-go years of the last quarter of the last century and through the first eight years of this century, as business continuously expanded as did life expectancy, law firms routinely waived the mandatory retirement requirement keeping headcounts high, taking advantage of sound judgment and experience of these older partner derived over years of practice and, most significantly, cementing client relationships developed by mature partners over the decades.

Times are no longer flush. More ballast needs to be tossed overboard. Accordingly, mandatory retirement requirements are more miserly granted.  If at all, they are frequently granted one year at a time, with concomitant annual reductions in compensation, while the law firm battles to pass clients on to a younger generation of partners. Soon enough, when a firm believes the client transitions have taken place, no further waivers are being granted.

In our view, neither the young nor the old should fall victim. Rather, younger lawyers should have been retained with their compensation being more carefully rationed and the mature, productive lawyers being retained as irreplaceable assets.

Some firms, realizing the profitability of ramp downs, described above, anticipate that a byproduct of forced retirements is that in an era of declining revenues, profitability, in the face of continued declining revenues, will again probably materially adversely affect profitability; indeed, given the higher hourly rates of mature lawyers, the revenues derived by these ramp downs (accounts receivable and work in progress) should theoretically be higher, particularly given the higher rates and incomes of these partners.

More forward thinking firms, recognizing the combination of experience. the ability to efficiently deliver quality services that mature lawyers offer and long personal client relationships developed over decades, frequently result in clients’ rejections of being “transitioned” to younger less experienced partners.  These other law firms, having rejected mandatory retirement ages,  are very successfully mining the crop of retired partners, most of whom bring along most, if not all of their clients.  Noteworthy firms who have taken advantage of thee opportunities include K&L Gates, Pillsbury, Stroock, Kassowitz Benson and Winston & Strawn. A host of midsize firms have been grabbing – indeed actively competing for this treasure trove and benefitting quite handsomely.

One significant point to consider here is that of the firms mentioned, the only large firm that has been soaking up retired partners and admitting them as true equity partners are, apparently K&L and Pillsbury.  Midsize firms recruiting partners forced in to retirement have varying policies.

The game changer is, of course, the Federal Equal Employment Commission, which, consistent with our previous report, recognizes that law firm partners are in fact employees at will  and accordingly applied its regulations barring age discrimination to first sue Sidley in 2007 for these practices, with the case being disposed of by Sidley’s paying $27,500,000 for this practice. Kelley Drye most recently came under the EEOC’s cross hairs and in short order Kelley Drye, a firm widely well regarded for both its litigation skill and keen intellect, as its outside counsel on the matter, Proskauer, which is also widely respected for its skill in labor matters, simply said no mas¸ and on April 8 announced that it was simply dropping its mandatory retirement policy, which K&Land Pillsbury had done voluntarily two years ago to wisely take advantage of the opportunities created by the application by large law firms of anachrostic rules adopted 75 ago.

It seems quite obvious that many, if not all, of the rest of the large law firms will react to the EEOC actions or the escalating number of lawsuits brought by de-equitized senior partners or older partners who, while not being de-equitized, having their compensation reduced to pauper’s wages, most simply sloughed off recommendations made three years ago by the American Bar Association the New York State Bar Associations that such mandatory retirement policies be eliminated. The significant Sidley financial settlement provides a mighty strong inducement or firms to similarly cave in, in this epoch of continued declining revenue.

Now confronted with the Sidley and Kelley Drye precedents, the EEOC’s announced readiness to bring more such claims and the litigious penchant of some pissed off partners pushed in to involuntary retirement to sue the firms and partners to whom they had dedicated their entire careers, all of which must necessarily be contrasted with the demonstrated ability of septuagenarian lawyers to be at their most productive points in their lives, we firmly believe the wiser course would be for firms to simply drop these rules born of a different time and take fullest advantage of senior lawyers, with experience, sound judgment and often very loyal clients.

In short, continuing the application of forced retirements is in most instances, probably illegal, deadheaded and counterproductive.  Lawyers with seniority, whose years of practice and leadership in the firm, and who have mentored many younger lawyers, coupled with loyal clients, create both voids and loss of valuable assets.

Firms seeking to suppress the negative publicity of associate layoffs and forced retirements by announcing the inglorious (at least from clients’ perspectives) $160,000 starting salaries are simply doing themselves a disservice.  Clients made it clear starting last year that they will not pay for training young lawyers. Consumers of legal services are making it abundantly clear that they favor the skill, judgment and, most significantly, the efficiency of mature capable lawyers. Too many clients who see their law firms retire their trusted and efficient senior counsel simply get in to the same act and retire the firm.

The bad news is that the economy has far from fully recovered. Clients’ demands for fee reductions and efficiency continue unabated, and competition from medium sized firms that can deliver quality work product at reduced rates hover at the gates. More ballast may be required to be jettisoned. The most likely victims may be midlevel service partners lacking client followings and age discrimination claims, whose work may be able to be replicated by a combination of lower paid younger partners, counsel and senior associates.

Sadly, as we see it, there is still more tunnel at the end of the tunnel.

But the plain fact is that midlevel service partners are fully capable of making valuable contributions to the firms and its clients. These capable midlevel lawyers do perform quality services efficiently.  They also make important contributions to the firm and its clients.  Most significantly, in our view, it is this class of midlevel lawyers who are most suited to provide project management, a tool essential to both profitability and viability in this era of client demand for value billing and AFA’, a subject we have addressed in the past. Mature lawyers, trained in a different day, found it difficult, if not impossible, to adapt to even the digital era; learning the skills of project management will likely be pushing that envelope too far. Young associates are ill suited for project management, given their lack of experience.  Service partners should be the vanguard for critical project management that will distinguish law firms in the coming years. And, these service, who must be supported by management, should train the generations that follow not only in the skills of lawyering but also in the need for careful matter management and efficiency.

So much of the recent carnage could have been avoided if associates compensation would have been be rationalized by rules of supply and demand and law firms’ recognition that all of the old rules of the road are no longer extant. For the good and future weal of the law firm as an institution, firms need to return to a time of true partnership, the joint sharing of ownership of an enterprise, sharing both the rewards of the years of feast and some of the pain of the years of famine and maximizing the value of every level of lawyer. Fear of unemployment, uncertainty, management conducted behind smoke and mirrors and lack of transparency all work against a shared purpose. Firms with declined morale breed inefficiency.

But, most significantly, firms need to grasp the reality that the luxuriant years, yielded by the leverage model, must now simply give way to the demand for efficient delivery of quality services at prices now demanded by the marketplace.  Value billing and informed well managed AFA’s will stand in the stead of leverage.

The focus simply needs to be on skill and competency coupled with far greater attention to the management of a resourceful machine through which legal services are processed.

Associate reviews and compensation must be centered on the quality of the services rendered, the efficiency with which the services were rendered, the comprehension of the clients’ objectives and timely meeting those objectives, not on how many hours did you give us last year. No other service provider or manufacturer would tolerate an employee boasting of the extended and exaggerated amount of time it took to produce a finished product, instead of crowing about how efficient he or she was in producing the product or service.

Clients, in this new era of value billing, will handsomely reward firms which are efficient and obtain results consistent with client objectives, rather than law firms whose primary focus is on squeezing out as many billable hours as possible from the denizens of its precincts. The law firms which will prosper are those which most quickly grasp these obvious facts and recognize that these realities are not merely a fad or a passing storm.

© Jerome Kowalski, 2010. All rights reserved.

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                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             April,, 2010

            A series of different articles and blog postings that appeared today (April 11, 2010) in various trade media continues to emphasize the critical necessity for law firms to focus on alternative fee arrangements and value billing in order to remain competitive and relevant.

            Today’s Law 360 posted an interview with UPS general counsel Norman Brothers, Jr. Mr. Brothers notes that while UPS undertook a radical convergence program in 1999, drastically reducing the number of its outside counsel from the previous 200 law firms that previously served as outside counsel to UPS. Despite this convergence, Mr. Brothers notes that currently, despite its radical convergence a decade ago, UPS now solicits bids from within its network and from other firms outside its limited network to ensure competitive pricing and maximize value for legal services delivered. This process, says Mr. Brothers assures “competitive pricing” and value pricing. Favorable rates are negotiated and outside counsel are encouraged to propose “creative alternative fee pricing” in which outside counsel assume risk coupled with incentives when matter are efficiently brought to a successful conclusion. 

            This, of course, is the trend we previously discussed in our previous primer on Alternative Fee Arrangements.

            Law.com also today reported about on a competitive process in which a variety of law firms presented proposals to the Creditors’ Committee of Heller Ehrmann to pursue a $58,000,000 hotly contested claim by the estate against bank lenders of Heller Ehrmann.  The winner – an 11 lawyer boutique which was prepared to assume substantial risk by accepting a $1,000,000 flat fee, in a case which will likely consume a multiple of that amount if traditional hourly fees were charged, against a 5% premium of any benefit received.

            Today’s Legal OnRamp.com, reports on an article originally published on January 10, 2010 by Microsoft Associate General Counsel Brad Smith in Inside Counsel in which Mr. Smythe advises:

At Microsoft we expect that 45 percent of this year’s and more than half of next year’s U.S. spending likely will be based on alternative billing arrangements. The reason we’re interested in alternative billing arrangements is simple—efficiency. We want to align economic incentives so both client and firm are motivated to make legal services more productive. In the medium and long term, that should lead to lower costs.

But this isn’t a zero sum game between clients and firms. More efficient legal processes can also help law firms become more profitable. For example, a well-structured fixed fee arrangement incents a law firm to increase profitability by becoming more efficient and reducing its costs.

            OnRamp.com also featured a piece by Paul Lippe in which he made a number of salient points, including:

In law, prices have only gone up; for clients, prices of lots of goods and services (including the ones they sell) have gone down. In the new normal, the theme will be predictable pricing, where clients and firms share a reasonable expectation of price and value, and work together to meet it.

 In law, the attitude has been “what we do is so complex it can’t be measured.” Meanwhile, clients have grown accustomed to measuring everything. In the new normal, the theme will be defined quality, where work product will be assessed according to explicit, outcome-based criteria.

            And finally, Hannah Halsi-Kelschner, associate general counsel at Lorillard posted today:

If more firms viewed case matters (both litigation and transactional work) from a project management perspective, with more input from the client as to what the true goal is (even if that goal evolves over the course of the project), a large number of the project segments could be priced with some certainty. That’s where the attorney’s level of experience and expertise comes in. Furthermore, the level of communication and the working relationship that develops from this high level of interaction would also engender the kind of trust and understanding that could accommodate the need for revised pricing when the unforeseen arises.

There is a big difference between asking for a blank check at the beginning of a matter versus providing a level of certainty up front with the assumptions and limitations on which you basis that pricing certainty laid out clearly. You can then jointly working through hiccups as they arise.

Firms that get on board with this will thrive and prosper because they are helping the client gain “control” of what is perceived to be a runaway cost. Those who remain closed to anything but the billable hour will be at a competitive disadvantage

                The take aways from the ongoing dialogue: (1) the hourly fee may be a mastodon.  (2) Alternative Fee Arrangements provide unique opportunities for middle market and boutique law firms to represent companies previously outside of its weight class. (3)  Clients’ demands that counsel assume part of the risk in legal engagements must be met. (4) Legal services are now being acquired through a purchasing agent mentality. Just like a corporation would not purchase office supplies based on price and quality, not because a vendor was a fraternity brother of a senior corporate executive.  (5)  Clients of any degree of sophistication generally reject the old bromide that hourly billing is the only fair way to compensate counsel because legal engagements necessarily involve so many uncertainties and unknowns. After all, so does air travel.

© Jerome Kowalski, April, 2010, All Rights Reserved.

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Alternative Fee and Billing Arrangements: A Primer

Jerome Kowalski

Kowalski & Associates

March, 2010

The most significant current public discourse regarding law firm revenues which will surely continue in the months and years ahead is the increasing popularity of Alternative Fee (or Billing)  Arrangements. The tide of its increasing popularity has even provided a generally accepted acronym of AFA.  These billing arrangements are aimed at destroying or at least seriously maiming the invidious hourly billing process, which economically incentivizes inefficiencies and subordinates a law firm’s economic interests to those of the client.   The hourly rate may be either dead, suffering a lingering death or in a simple state of somnolence, depending only on whether the observer is an optimist, a pragmatist or an ostrich.  Nonetheless, keeping careful track of hours billed will remain a much needed tool to monitor productivity, efficiency and, most significantly, profitability on engagements.

The facts are plain.  We all know about the rising tide of fixed fees, alternative billing, and holdbacks depending on results, success fees, radical convergence and fixed retainers. Let’s be completely clear on what this means:  Clients, particularly those of significant economic clout are passing all or most of the risk on legal engagements to the law firm.

However, the implementation of an AFA that serves the best interests of both law firm and client requires careful planning and implementation so as to maximize revenue production, limit the risk assumed by a law firm and provide the greatest value to the client. Some of the detailed planning and implementation of an AFA are described in detail below.

Added to this new discourse is yet another game changer:  The data base recently announced by a significant group of corporate counsel (the “ACC Value Index”)  under which law firms will be rated by clients on a scale of one to five for six  criteria ( [1] understanding objectives/expectations; [2] legal expertise; [3] efficiency/process management; [4] responsiveness/communications; [5] predictable cost budgeting skills; and [6] results delivered/execution]) and this data base will be available for all corporate counsel.  Thus far, more than 1,800 evaluations have been made of 600 law firms.  Currently these evaluations are being made on a general basis.  Inevitably, I am confident, they will likely be subdivided in to different practice areas.

The one area in which law firms consistently score the lowest in the ACC ratings is in the area of cost budgeting skills.

In late March of this year, Evershed’s, London “Magic Circle” firm released the results of a survey it had undertaken of corporate counsel and leaders of major law firms.  The Evershed report, as reported in the ABA Daily Journal of March 24, 2010, is critically instructive:

“The legal landscape has changed permanently and more quickly than anyone imagined,” the report says. In the new, post-recession legal market, general counsel have more status and influence in their corporations, fee levels will decline or stay the same, and legal work will become more efficient as tasks are outsourced and technology is used.

In this changed world, law firm structures may be vulnerable. Forty-six percent of managing partners said a reduction and change in premium legal work available would change law firms’ shape and size. The larger firms reported long-term cuts in headcount and leverage, and possible changes to the “up and out” pyramid structure of law firms. Only 30 percent of the partners said they were wedded to the traditional partnership model.

In this new legal world, hourly fees are giving way to value billing that is based on the value of work to the client rather than lawyer hours expended, the report found. Two years ago, only 22 percent of in-house clients and 48 percent of partners surveyed saw value billing as a trend for the future. Now, 86 percent of clients and 88 percent of partners say they often or sometimes use value billing. Among the partners surveyed from the United Kingdom, 79 percent said the hourly rate was almost dead.”

In our own surveys, we have heard from a few law firm leaders that the current focus on alternative or premium billing is merely a passing fad, which will inevitably go the way of the hula hoop.  Another small group of large firm leaders continue to press the argument, already proven without factual basis based on significant engagements of the past two years at least, that the nature of legal work is such that so many unknown variables are involved the only reasonable basis to compensate lawyers is based on the hourly rate.  In our view, those who continue to stridently hold that outlook are putting their firms in to extreme jeopardy.

The most strident objectors to changing the hourly fee arrangement are the litigators.  They claim to be in a unique position to explain that the nature of litigation is so complex and the variables so unforeseeable, that only hourly rates provide an appropriate medium for compensating the professional.  They tend to be dismissive of the fact that a transaction may prove more complex than anticipated because of materials reviewed in the due diligence process. They also ignore the fact that a capital or other market transaction requiring regulatory approval may also be more complex than anticipated because of unanticipated government opposition or unanticipated regulatory hurdles.

The consumers of legal services, now emboldened by the excess of supply over demand are more and more seeing the economically anamolous view of legal vendors that services must be paid for on an hourly basis.  They recognize that airlines do not increase the cost of a flight because of a weather delay or technical problem extended the time of the flight. They also reject the idea, as do lawyers, that the Lexus they have under ordered should now be subject to a higher price because Toyota was required to expend additional time in curing engineering defects.  Nor would any purchaser of an apartment or home under construction blindly accept the notion that the purchase price must be raised because construction costs were higher than anticipated because of labor, weather or heightened local zoning or building requirements.  (Actually, the most articulate riff ever created on the anomaly of hourly billing, and well worth seeing, appeared here)

At the same time as demand exceeds supply, as clients make rational demands of their lawyers regarding fee structures,  law firms seem to find the need to announce that they have somehow “beat the system,”  by announcing,  indeed boasting annually, that their profitability has increased, even as their clients are beaten down by a flagging economy.

Those who scoff at the notion of fixed fees, fee caps, reduced fees during the pendency of a matter coupled with a premium at the conclusion of a matter, portfolio representation, straight contingency work and the myriad other AFA’s available (limited only by creative minds), on the grounds that legal representation, whether in litigation or transactional work contain so many unknown variables that only the hourly billing of days of yore make sense, share substantial DNA with those who scoffed at Eli Whitney, Thomas Edison and the Wright Brothers. The same arguments might be made by companies that agree to build a fighter jet for the Defense Department, design a building, provide a software solution, engage in a complex consulting arrangement at a fixed fee (too many unknown variables), yet those industries involved have, for many years, moved far away from hourly billing and entered into their own industry’s versions of alternative fee arrangements.

Again, clients, whose current demands for legal services are significantly lower than the existing supply, are requiring efficient delivery of quality legal services at predictable rates, consistent with the current market and with the law firms themselves, assuming a degree of the risk in such engagements.

Jeffrey W. Carr, Jr., Vice President and General Counsel of FMC Technologies, a company with sales of $4.4 Billion, has in recent months taken a leadership role on behalf of private industry in regard to the need for AFA’s and the insistence that corporate clients should dictate to outside law firms the terms of any engagement and that virtually every engagement demands “performance-based pay”.  Mr. Carr has been a strong advocate of requiring that outside counsel have “a laser like focus on value.”  In a recent interview with Law360, Mr. Carr did not mince his words: “ FMC has advised all of its outside counsel that FMC required that “all existing matters to be handled below current matter budgets. [FMC] also advised that [it expected] new matters to have budgets 10 to 15 percent below historical budgets for similar types of matters.”

Mr. Carr’s advice to outside law firms, as reported by Law360 is direct, succinct and beyond misinterpretation:

“Change and do it now. Learn to focus on delivery of value by reducing your costs to remain profitable as opposed to leveraging the pyramid and focusing only on top line revenue growth. To quote a former U.S. Army chief of Staff, ‘If you dislike change, you’re going to dislike irrelevance even more.’”

Let’s also be clear on what the passing of that risk mandates:  Legal work must be handled efficiently by experienced well trained lawyers.  Mr. Carr is hardly a lone voice in the wilderness making these demands on outside counsel.

Passing the risk, requiring law firms to have “some skin in the game” will require law firms, for their own survival, to vastly improve their budgeting skills.  The inevitable result of the combination of passing the risk as well as the public data and rankings is that there will emerge a new critical category of either non-lawyer managers or specifically trained lawyers who will function as project managers, of the kind that exist in so many other industries.  In order to further compete effectively in this new transparent world, law firms will require (a) client relationship managers; (b) competent and efficient lawyers; and (c) embedded quality control standards and personnel.   Deployment of resources to fulfill an engagement while taking every reasonable precaution that a matter results in taking on too much water in a rocky sea.  Critical function of these project managers, sometimes dubbed as “client relations managers” involves risk management, monitoring work flow and budgetary issues.  Risk management is essential in assessing the financial risk the firm is undertaking in an alternative fee arrangement.  Budgetary management is critical in monitoring the successful and cost efficient Similarly, budgetary proficiency requires, particularly on an hourly fee engagement, the ability to more accurately provide a fee estimate, monitor and manage the progress of the matter keep the client timely informed of any required changes in the budget, with detailed and informed reasons, while being able to adequately explain why a higher budget was not foreseen.

These client relationship, project and risk managers will need to deploy existing technologies, in use for more than a half of a century, to provide an informed and intelligent assessment of the likely cost and risk involved in any engagement.  These technologies have been used by engineering firms, consulting firms, architects, R&D firms and other service providers who have been delivering services for fixed fees for decades. The application of these skills will permit a law firm to propose an AFA on a more fully informed basis than is currently the vogue:  A partner receiving an RFP for an AFA simply circulates an email to his or her partners and billing department inquiring as to total fees charged in the past on similar engagements aligns the responses on a bulletin board in his or her office and then tosses a dart at the board, with the fee closest to the dart being the suggested AFA total.

This point requires repetition and emphasis. The consequence of the increasing demand for AFA’s is that as the recession subsides, the entire ecology of the law firm/client relationship will radically change.  Leverage is largely irrelevant.  Law firm survival and success will be dependent on the effective deployment of the relationship managers, project managers, efficient lawyers and quality control.

And, speaking of game changers, the most remarkable example of convergence and the complete passing of the risk was the deal announced in November of last year between Orrick and Levi Strauss. Under the terms of that arrangement, Orrick undertook the complete and unfettered legal representation of Levi Strauss on a worldwide basis for a fixed single fee, with the exception of trademark work to be continued by Townsend & Townsend.  The deal requires Orrick to provide all legal services required of Levi Straus, anyplace in the world on every matter (with one small exception in the trademark area).  It is rumored that the annual fee is approximately 20% less than Levi Strauss’ total bill for legal work than it incurred in 2008.  Orrick is taking on the entire risk.  If outside counsel is required in a jurisdiction in which Orrick does not have an office, Orrick is required to engage and pay for that counsel.  A super sub-specialist needed that Orrick does not already have in its ranks?  Orrick’s problem.

Recently, convergence, AFA’s and disdain for hourly rates have jumped across the pond, as these concepts take root in the UK:  http://www.law.com/jsp/article.jsp?id=1202472210613 .

And even more recently, Jeff Carr has added yet a new twist on convergence:  http://kowalskiandassociatesblog.com/2010/09/23/are-100-page-responses-by-law-firms-to-client-rfps-really-efficient-or-necessary-some-radical-and-revolutionary-changes-are-upon-us/

The advantages and risks are obvious.  Orrick obtains predictable and regular payments of significant amounts. Levi Strauss no longer has any risk in exceeding its legal budget for any reason. Levi Strauss no longer has a need to put its counsel’s detailed bills under a microscope.  In fact, Levi Strauss can and probably will reduce its in house staff dramatically.  Win-win situation? Maybe.  But one cannot over-estimate the risk taken by Orrick.  Similarly, one should not under-estimate Orrick’s potential rewards.

However, with proper risk management and assessment, together with excellent project management, this model is beyond intriguing.  Carefully consider your own client base and ponder while you carefully deliberate whether such an arrangement might provide advantage to the client and the firm.   Risk is always measured against reward.  Risk may be tempered with prudent risk assessment and project management.  But, the opportunity may provide the firm with enormous opportunities: expansion in to new practice areas, developing new relationships with firms around the world, and, of course, regular and predictable cash flow. Today’s “new” new thing is Portfolio Representation or sometimes called Portfolio Pricing. , in which a law firm undertakes representation of a client’s entire portfolio of a particular practice area for a fixed annual fee. The risk must be measured against the reward. The risk is mitigated by appropriate project management.

The clout of the ACC, which is gelling more and more as a potent force in the buying and selling of legal services is contributing mightily to the new realities; the collateral and long term consequences of the current recession.  Individually and in unified action, they have plainly told law firms that the pockets of hourly billing that remain extant, will be subject to material cuts in hourly rates.  Those decreases, in this buyers’ market are most often a return to 2008 rates or a flat 10% reduction of 2009 rates. Firms that had hoped for a modest 3% or 4% rate increase in 2010 have been knocked down.  Firms that had based budgets on the expectation of a flat 2010 now need to confront a likelihood that 2010 will show less revenue, a fact further exacerbated in the widespread reaction in timekeepers.  Here, the remedies are few:  Further reductions in support personnel, more efficient reliance on technology and the probability of reduced revenue and profitability expectations.  As bad as that news might be, it is far better than becoming a member of the unfortunate trash heap of firms that are no longer. Survival will in some measure require greater transparency within the firms and sharing the news of lowered expectations early on.

Interestingly, Citibank reported on January 21, that its annual survey of the confidence level of managing partners for positive outlooks for 2010 showed that the majority of managing partners felt positive that 2010 would be a positive year and one of growth of stability.  We should note that neither Dan dePetrio, the voluble and extremely well regarded head of the law firm group at Citibank, who always has something wise to add to the public discourse on law firm economics, uncharacteristically had no comment on the survey results.  There may in fact be some reason for optimism, but that optimism must be based on some realistic planning, based on an understanding of the past and careful methodical planning.  Recall vividly that the former heads of each of the dozen or so firms that failed within the last two or so years all voiced optimism that they had weathered the storm and everything would now be fine.  Assuredly, had they had a better view of what lays on the horizon, everything may well have turned out fine.

We have all travelled to some third world country and been approached by a waiting taxi driver who offers to take us to our downtown destination for a fixed fee instead of the amount he would need to charge if he used the meter, assuring us that we will receive a bargain.  Clients today are far too sophisticated to accept that claptrap.

Rather, clients want to limit their risk and have their counsel put some skin in the game by assuming some of the risk. Law firms, at the same time have a natural aversion to avoiding the safe haven of the ticking meter. Add to this formulation that clients are prepared to reward lawyers who assume some risk and at the end of the day, are more than comfortable in awarding a premium to counsel prepared to do so.

Accordingly, while AFA’s may be as diverse as the imagination may allow  — from fixed fee to straight contingency engagements — a more prudent and mutually acceptable approach to an AFA, particularly on more complex engagements, would be one in which the law firm agrees to either undertake a matter for which it will bill a fixed monthly amount is paid, which amount should be the equivalent under which, after careful assessment by an appropriate risk manager of all available data, the law firm makes an informed assessment of  (a) the likelihood of success on the engagement; (b) the amount of personnel, both professional and support staff likely to be required;  (c) the level of professional staff required, from junior to senior associate; (d) the length of the engagement; and (d) any unique or novel reasonable foreseeable issues that may arise.

Once these key ingredients for the AFA recipe are gathered and assessed by the client relations manager teams, the next steps are the most critical:  Preparation of a work flow chart, including time lines and identification of critical path points (time proven PERT or GANTT charts or variations of these tools are probably the best gear for this purpose).  Identification of the professional staff who will proceed along the time line, informed estimates of the time and (at least for internal purposes) the hours and typical hourly rates must be estimated.

The work flow chart, whether using PERT, GANTT or another format, should be reviewed in detail with the client so that there is a shared understanding of expectations, milestones, activities and critical paths. In reviewing the work flow chart, the client must receive assurance and comfort that historical bubbles of unexpected time charges (such as those arising from departure of personnel,  duplicative work, unwarranted legal research, extended conferences among large groups of lawyers, opposition to foreseeable motions to disqualify, extended document review, extraordinary disbursements and the like) will not be chargeable to the client except upon express prior approval. Again, it is the responsibility of the client relation manager to monitor these activities and, where necessary inform the client of a change in circumstance requires an exception and approval.

Upon gathering the ingredients for the recipe and preparation and analysis of the work flow charts, an informed estimate by the firm of the total fees to be charged for the project based on ordinary and customary hourly charges.  The most attractive proposals to the client are ones in which the firm offers to charge a fixed monthly fee equal to a total of 65% of the total fees to be charged (based on the firm’s calculations of the total fees which would customary rates be charged on an engagement of this type) divided equally among the projected number of months estimated necessary to complete the project.  Clients would, of course, be most interested and attracted to a cap of these payments.  Cash flow would thus be predictable and regular, to the benefit of the firm and the client. The ultimate premium would then be a “kicker” of a fixed amount payable upon the (very carefully defined) successful conclusion of the matter, which should be equal to 110% or more of realization rates, had the more customary hourly rates have been charged.

The engagement agreement should also contain carefully defined exceptions for extraordinarily material variances of the particular engagement as well as the ability of the law firm to identify those material variances to the client in a more timely fashion.

The firm’s financial success on AFA engagements would thus be contingent on the two most significant aspects of this process: careful risk assessment during the intake process and regular monitoring of the work flow and the processing thereof, following closely the work flow charts.

Anything short of this detailed process, again, on more complex engagements, would be the equivalent of the firm taking its money and taking a chance in Las Vegas, Atlantic City or their equivalents.

Certainly, these processes are shockingly revolutionary to law firms and the historical billing process.  However, as I noted above, this system or its equivalent has been successfully deployed for more than half a decade by other service providers.

Further, monitoring the quality and efficiency of the professionals involved in the engagement as it proceeds and a post mortem analysis following the conclusion of the engagement provides a clearly objective instrument to measure performance and value of the professionals involved in servicing the client.

Additionally, use of these instrumentalities would give law firms the tools they so sorely lacked in the past, namely, the ability to make an intelligent and well informed AFA proposal and to more accurately and regularly report to the client on the progress of the matter.

These added complexities, acquisition of newly required skills on the part of partners responsible for the matter as well as the use of client relations managers is a direct consequence of the new world of AFA’s which properly deployed add profitability to the law firm, predictability to the client and an informed assessment by the law firm of the degree of risk it is assuming in an AFA engagement.

At the end of the day, the result should be a satisfied client and enhanced profitability to the law firm.

The unintended collateral consequence is the deterioration, if not the destruction of the leveraged, “Cravath” style pyramid.  In the new era, an inverted pyramid may very well be the progeny of AFA’s.

Once you have read this, you may want to move on to:

The Continuing Public Dialogue on Alternative Fee Arrangements at: http://kowalskiandassociatesblog.com/2010/04/08/alternative-fee-arrangements-and-value-billing-the-continuing-public-dialogue/

Then, you will be interested in the question of dealing with the unique genome lawyers have which makes them resistant to change: http://kowalskiandassociatesblog.com/2010/04/08/alternative-fee-arrangements-and-value-billing-the-continuing-public-dialogue/

Obviously, you will want to know how to effectively market AFA’s.  Here’s the scoop:  http://kowalskiandassociatesblog.com/2010/09/06/how-to-effectively-and-efficiently-integrate-your-marketing-with-your-other-marketing-activities/

You are ready for Chapter II of the primer:  http://kowalskiandassociatesblog.com/2010/08/24/alternative-fee-arrangements-lesson-ii-of-the-primer/

And, finally, the basics for drafting an AFA agreement which you can find here: http://kowalskiandassociatesblog.com/2011/03/23/alternative-fee-arrangements-and-value-billing-lesson-iv-%e2%80%93-drafting-the-alternative-fee-arrangement-agreement/

© Jerome Kowalski, March 2010, All Rights Reserved.

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NYC TEACHERS' PROTEST RALLY AGAINST LAYOFFS & CUTBACKS / MARCH FROM CITY HALL > WALL ST. > BATTERY PARK - Lower Manhattan, New York City - 05/12/11 (Photo credit: asterix611)

The Question About the Announcement Concerning the Howrey Partner Layoffs Was That it Was Newsworthy At All

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             March, 2010

          Some portions of the legal community seemed to take it by surprise that Howrey announced this week that it was laying off 30 partners.  The primary surprise was that Howrey elected to make the announcement public.  The other surprise was that so many in the profession and the media professed to be shocked by the news.  In some of our earlier posts, we discussed the trend towards partner layoffs at law firms.  We were hardly prescient; we simply reported on facts on the ground that escaped much of the trade press and frequently the attention of much of the legal community.  Moreover, we have predicted that this trend will likely continue for the near and intermediate term.  Nothing we have seen suggests that this unfortunate trend will abate soon.

An enigma to some observers of the 60 or so partner layoffs at Howrey, may be the faintly lingering myth that partners have virtual life time tenure and are equity owners of the enterprise.  Robert Ruyak, managing partner at Howrey helped debunk that myth when he recently described the relatively wholesale partner layoffs as a “massive restructuring” facilitated in part by the ability to outsource discovery to offshore vendors. One does not “restructure” by firing owners, nor can ownership, or, indeed, tenure be outsourced.    While Mr. Ruyak explained that the reduction in force of Howrey was essential for its economic survival, he also suggested that such layoffs could have been largely avoided but for American legal principles precluding law firms from simultaneously representing conflicting interests.

Of course, at the sad end of the day, Mr. Ruyback’s “massive restructuring” ended with his call for his partners (or at least 75% of them) to all jump ship and board the lifeboats being offered by Winston & Strawn, leaving at least 25% of his partners adrift.

The fact is that for the past fifteen months, large law firms have been quietly asking partners to leave.  Some of those partners were primarily “service” partners; others were partners whose practice areas were in a downturn or whose client base could not and would not pay the high fees that the fixed infrastructure of large law firms requires.  Members of the latter group certainly have many recourses.  Middle market law firms, who have fared comparatively well during the Great Recession, have their welcome mats out for these lawyers. These middle market firms are driven by middle market clients who are far more comfortable in paying reduced rates which those firms can profitably charge.

The sad irony was that prior to 2009, partners at middle market law firms were moving up the food chain, entreating larger firms to have them join their ranks, because their client bases were growing and the platform afforded by larger firms allowed these partners to offer a greater diversity of services in a greater number of geographical locations. The trend is now reversed as partners for their own survival and to maintain their own client bases find themselves to now move in the opposite direction.

However, before law firms act on these new opportunities, they should carefully read our earlier post entitled The Market for Laterals in 2010; partners seeking new opportunities in this changing market should similarly read that posting and be fully prepared to respond to the questions suggested there.

Law firms are in many material respects economically anomalous in a variety of ways.  One of these great anomalies is that there are no economies of scale in large firms.   In fact, the larger the firm, the higher is the fixed cost of the firm to maintain each lawyer, exclusive of compensation.  The inexorable result is that large law firms are constrained to pay high hourly rates simply to meet fixed expenses.  The converse is axiomatic, smaller firms have lower per lawyer costs and are therefore able to charge lower rates and yet yield comfortable profits. These smaller firms are also less prone to fall victims to wild swings in economic cycles. In other words, partners at well managed middle market law firms make steady relatively predictable profits and are not prone to be victims of large market fluctuations.

As we all know and as mentioned above, law firms have been quietly asking partners to leave for the last fifteen months.  We all understand that the notion that partners, equity or contract, are, in today’s world as much employees at will as anybody else in the law firm universe.

Certainly, most, if not all, partnership agreements contain provisions that require either a majority or super-majority vote to oust a partner.  However, a partner who is summoned by a managing partner or an executive committee group and is asked to leave the firm almost always recognizes the plain reality that while he or she can demand a partnership vote, as is his or her contractual right, it is extremely unlikely that the partnership would buck management recommendations, particularly in these perilous times.  Moreover, demanding such partnership votes inevitably results in a public spectacle and deprives the departing partner to use the cover, when seeking a new position, to explain to a prospective new employer that his or her decision to leave was made reluctantly and that his or her client base could no longer afford the high hourly rates large law firms require. Rather, by demanding the contractually mandated partnership vote, the departing partner is inviting a public announcement that he or she was fired — indeed, his or her tenure at the firm began and ended the same way:  Fired with enthusiasm.

Partners, vested with maturity, almost always saw the wisdom to leave quietly and certainly not immediately report to the various blogs that the law firm is engaging in layoffs, stealthy or otherwise, as so many associates feel is an imperative.

As we have also noted in the past the strange year end announcements from various law firms that while revenues for 2009 took a dip, profitability had increased.  Many of these blips were not only attributable to sharp reductions on the expense side, but also resulted from the “ramp down” effect:  Just as law firms make an investment in bringing in a lateral partner by compensating him or her during the 90 to 120 day period following a start date until WIP results in cash in the bank, so too, eliminating the expense of compensation, while continuing to collect A/R and WIP, results in one time booster of profitability.  The danger in enjoying the benefit of ramp down profitability is that these are events not subject to replication and often result in revenue issues for the years that follow.  Reduced headcount limits revenues.  Replacing those who have been shown the door in the years that follow, as the economy expands, requires new investments in laterals and incurring “ramp up” expenses.

So, yes, partners have been shown the door with some degree of regularity for the last past 15 months. The evidence is conclusive in walking through corridors and seeing vacant partner and associate offices. Further evidence is made available as firms report on headcounts as the new year begins.  Yet the headcount reports are certainly not always terribly reliable, since not all firms, quite regrettably, report with consistency or accuracy the true headcounts at year end.

All too often removal of partners by firms fail to take in to account the new reality:  Leverage and hours billed are models very much on the wane.  Clients are demanding the efficient delivery of quality legal services at predictable costs.  They are becoming most indifferent to the numbers of hours required to complete an engagement.  Rather, clients simply want to know how much an engagement will cost from start to finish and are, as a whole, most cost conscious.  And the most valuable resource law firms possess who have the capacity to efficiently deliver quality legal services is mature, well seasoned and experienced lawyers.

As I said, law firms are uniquely economically anomalous enterprises.

© Jerome Kowalski, March 2010; All Rights Reserved.

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          Another reason to be wary of any material growth in litigation is the slowdown in class action litigation.  Statistical studies done at year-end in 2009 showed a declining number of class actions filed (with the exception of the slight blip created by Bernie Madoff litigation, that is, the myriad lawsuits generated by Bernie Madoff and other Ponzi wannabees and their progeny,) – actually a total of a 5% decline in the early part of 2009.  Based on current trends, it is likely that the decrease in 2010 will be about 24%.  As a feeder to corporate firms, class action, as much as we might bemoan the avarice of plaintiffs’ firms, only a naïf would suggest that large firms have not benefitted from the largesse spawned by their defense. This slowdown on the defense side will not only affect large firms, but will trickle down to midsize firms as large firms may be incentivized to compete for a declining volume of litigation business.

          Another unintended consequence of l’affaire Madoff and its progeny, is that the SEC and to a lesser extent, some other regulatory agencies have doubled and tripled their enforcement activity.  This is perhaps bad news for both some business firms and promoters who get caught up in this web, rightfully or wrongfully, but, of course, these various proceedings and enforcement actions create a very significant area of growth area for both enforcement experts and litigators.  But, like many practice areas, this practice area involves a relatively small club.  However, admission to the club is available through a variety of means and given the long half-life of these types of proceedings, it is well worth the investment in time to gain admission.

          Turning back to general commercial litigation, statistics reported by the Federal Judicial Conference and the New York office of Court Administration must be carefully analyzed.  The federal courts report a decrease in newly filed commercial litigation.  While Chief Justice Roberts reported that the federal courts experienced a 7% uptick in business at the federal level, there was an actual decline in commercial cases.  The federal judiciary busied itself with the enormous rise in bankruptcy filings – some 1,200,000 last year – up more than 20% from the preceding year – the overwhelming majority of these cases were individual filings, not corporate filings. The federal courts also experienced a material increase in labor and employment litigation cases, overwhelmingly consisting of cases arising out of the national pandemic of layoffs.   As you know, much of this work has been commoditized and is high volume, low margin work.  An interesting footnote to consider here is that much of the engagement of counsel by clients in this arena is done by HR departments directly, with little or no involvement by in house corporate counsel. Similarly, HR departments typically are independently tasked with the engagement of immigration counsel.  The acquisition of such services is performed with a purchasing agent mentality, with the focus being on the best value for the lowest cost.  Old school ties, institutional ties and golf club or social relationships play little or no part in this world; except to gain an entitlement to respond to an RFP.  That entitlement can just as easily obtained by straight up marketing activities.  I believe that this purchasing agent mentality will be the norm in many legal engagements, with in house legal departments being pressured to reduce costs of outside legal fees.

          Returning to the most recent report by the New York Office of Court Administration, there has in fact been an almost 20% increase in new case filings.  That’s the good news.  The bad news is that these new filings are made up of a tsunami of mortgage foreclosures and consumer debt litigation.  The result is that many parts of the New York courts are being sucked up in this tidal wave and fewer resources are available to adjudicate commercial disputes.  The natural consequence is that judicial resolution of corporate disputes are proceeding at a glacial pace, global warming notwithstanding. Corporate clients are not unmindful of these delays and attendant costs.

          Verdict Search, a National  Law Journal affiliate, confirmed the 2009 downturn litigation.  As reported by The National Law Journal on March 15, 2010, ” Commercial verdicts, including breach-of-contract recoveries, fell from $1.4 billion in 2008 to $421 million last year. Fraud recoveries plummeted by nearly 70 percent to $561.3 million.”   Excluding several extraordinary IP verdicts, IP litigation also experienced a downturn.

              The profession also assumed that a mainstay for the future would be the world of intellectual property. Certainly, with so much of the American economy relying on our ability to deliver advanced technology, not manufactured goods, to the world, we did not recognize that we are in fact in a perfect storm. The plain fact is that technological development relies on the availability of capital.  Our perfect storm has put the brakes on IP. We’ve all seen the decline in business in this area.  This decline was further evidenced by the PTO’s announcement on December 10, 2009 of a decline in new filings.  But, here, with small openings in capital markets appearing and with stimulus funds being on the horizon, it is our considered view that IP work will realize some resurgence. 

             As we noted above, one of the real boogeymen in the actual litigation arena has been the huge burgeoning cost created by E-Discovery.   A simple breah of contract case can easily result in the production of tens of thousands of documents. And Judge Shira Scheindlin of the US  District Court for the Southern District Court, in a series of opinions outlined the explosive hidden landmines that counsel and litigants may suffer should strict compliant when  E-Discovery rrequirements are not strictly followed. E-Discovery equirements, standing alone, has further tampered the historical rise in litigation, which heretofore has resulted in a rise in litigation and served as a counterweight to falling revenues in othe practice areas.  We do note that some large firms, at some substantial risk, has captured some declining litigation revenue by assuming pro-active roles in E-Discovery. Middle Market law firms have shied away from taking active roles in E-Discovery given both the risks involved and the cots of developing an expensive infrastructure.

            Accordingly, law firm managers should not anticipate any rise in litigation during the intermediate term.   Unlike other downturns, we have not seen, nor should we expect to see a rise in litigation revenue during this economic downturn. Staffing in the litigation area should continue to be lean.

It is quite certain there will be less activity and opportunities than occurred in the past.  An added layer of complexity will be the fact that 2010 will also be a year during which law firms will reduce partner headcounts; this reduction will largely be the elimination of partners deemed to be unproductive, a population largely consisting of service partners, with little or no portable business.

A look backward is essential for planning by firms to plan for a challenging 2010. In 2008, there were approximately 1,200 lateral moves by partners in AmLaw 200 firms. Those partners were largely partners with portable books of business, sometimes accompanied by a small cadre of service partners who were deemed essential for the continued service of existing clients who follow a team leader.  In 2009, this number was less than half.  Simply put, partners are subject to inertia and feel far more comfortable with the devil they know, capitalizing on years of goodwill developed with partners of many years.  Others follow the Jerry Seinfeld approach:  You should bow out only when you are on the top of your game. Most partners have seen a drop off in their business and are reluctant to move when they are not at the top of their game.

Due diligence in this market is far more critical than ever.  A significant value we add to servicing our clients is in providing active assistance in such due diligence.  As we noted above, a multi-million dollar producer necessarily relies on a cadre of others to manage client matters, particularly if the work originated is outside his or her areas of expertise.  These other partners will have developed relationships with the clients.   Accordingly, a review of prior history should include acquiring a thorough understanding of which partners had matter responsibility in the past.  The questions should be obvious:  Is the acquiring firm prepared to bring along service partners?  An affirmative answer simply requires an increase in the investment.  Ramp up costs simply escalate.  Such service partners, if left behind, will for their own survival, make strong pitches to the clients that such clients continue to have them handle the work at their existing firms, for which they have demonstrated previous expertise.  They will caution the clients that moving their work to a new firm will increase the client’s fees as new lawyers will have to first familiarize themselves with files, matters and new clients, while the service partners remaining behind will assure continuity.  A wise firm which is advised that a significant rainmaker is jumping ship will assist these service partners in these efforts.  Management will join in the bear hug.  They will actively participate in these client bear hugs.  They will also be prepared to offer a more attractive fee schedule or fee arrangement to build greater loyalty to the firm.  Service partners, even if invited to join the new firm, may be encouraged by management at the former firms to stay at their old firms and will be offered incentives for retaining clients.

Firms will be less likely to waive notice requirements, almost universally required of a partner electing to withdraw from a partnership and require the departing partner to remain at the firm until the expiration of the partnership agreement’s advance notice obligation.  Some have and will also severely restrict the departing partner’s activities during the waiting period; even going to the extent of requiring the departing partner to leave the office during the waiting period so that clients will be more amenable to the bear hug.  Others have and will severely restrict the partner’s activities during this waiting period, while taking every step necessary to assure the continued representation of the departing partners’ clients.  Management will demand the cooperation of the departing partner; failure to provide such cooperation will be deemed a violation of the partnership agreement and raise ethical issues – on all sides concerned.

All law firms must take note of this strategy if one of its significant rainmakers announces that he or she is pulling the ripcord.  Law firms must also give serious consideration to amending their own partnership agreement to extend such notice requirements so as to protect its own valuable assets.  We suggest a ninety day notice requirement. Law firms may waive or shorten this notice requirement.  The departing partner will have far less wiggle room. They may be placed in a state of suspended animation, unable to join a new firm while still ostensibly a partner at their former firms, while the former firm limits the departing partner’s access to firm resources and, when possible, limitations on client access. During this state of suspended animation, efforts by the partner who has given notice of his or her intention to withdraw from the partnership will be constrained by ethical constraints to solicit clients to a new firm, of which he or she is not a member.  Such partners may in fact be subject to damage claims for failing to exercise his or her continuing fiduciary obligations to the firm in which he or she is ostensibly a partner.  Such damage claims may even be asserted to the acquiring firm.

Part of an acquiring firm’s due diligence must include checking references, at the appropriate time, which should be after an offer is made and the offer should also be subject to positive references.  Be assured that no potential partner will ever identify a reference that will provide anything other than a glowing recommendation.  Accordingly, a strategy must be developed for speaking to others with whom the partner has crossed paths.  These inquiries must be discrete and carefully couched, for every obvious reason. The experienced recruiting firm is uniquely positioned to add significant value here.  Reports to the acquiring firm must be made with complete fidelity, without reference that the recruiting firm may be jeopardizing its own fee. Successful recruiting, most particularly in this market must be more focused on building enduring relationships with law firms rather than focusing on grabbing a fee on a particular transaction.  Certainly, placing a partner does provide immediate economic gratification. Placing a partner who has been less than candid about his or her business or a partner who has a track record of being less than a good citizen and has a track record of being a management problem simply tarnishes the recruiter’s long term relationship and credibility with a law firm.

We have successfully provided our client law firm clients with a more palatable solution.  We conduct such due diligence on a strictly fee for services basis and agree to condition our engagements in such matters on our not offering an alternative candidate, eliminating any sense that our loyalties are divided.  Such engagements, while not being quite as financially rewarding as making a contingent fee placement does demonstrate the high quality of the services we provide; more significantly, it also enhances our relationships, which in the long term are substantially more critical than grabbing a substantial fee for a placement that does not work out.  Future candidates offered by recruiting agencies who previously placed partners who became problematical, results in skepticism when future candidates are presented, particularly when the recruiter knew or should have known that a candidate posed significant issues.

And, the acquiring should also, within ethical constraints, consider meeting with and speaking to major clients.  But before they even get there, the firm must have vetted, more carefully than ever before far more detailed financial disclosures potential partners provide. Again, this is an area in which we do provide significant value.  Reviewing and making recommendations regarding amending  a firm’s lateral questionnaire so as to require more detailed prior performance, future projections and calling for and reviewing a business plan is another area in which we do provide value.

Firms and recruiters will also be seeing many partners who will explain that they are leaving their firms because (a) they have great opportunities which they are not able to exploit at their current firms;  (b) they are not getting adequate support from their current firms;  they actually have the client relationships although others receive origination credit because of historical anomalies; (c) their firms are in financial extremis or (d)  their firms are not amenable to alternative billing requirements that clients are requiring.  We will also see partners seeking life rafts when two or three large firms will inevitably implode this year.  There will be many gems among this group of potential laterals, but the wheat must be very carefully separated from the chaff.  Rest assured we will all see much chaff.  Law firms pride themselves in their due diligence skills, investigative abilities and finely honed discovery techniques on behalf of behalf of clients.  These skill sets must be deployed to the fullest extent in this market. Recruiting firms which have proven track records of client loyalty can and do provide significant value in these areas.

More on lateral partner movement issues can be found at http://kowalskiandassociatesblog.com/2011/01/05/essential-due-diligence-in-lateral-law-firm-partner-movement/ and in my book, Navigating the Perfect Storm: Recruiting, Training and Retaining Lawyers in the Coming Decade ( http://kowalskiandassociatesblog.com/2010/11/18/navigating-the-perfect-storm-recruiting-training-and-retaining-lawyers-in-the-coming-decade-now-available-in-paperback/ )

Much of what we describe here is certainly a sea change in how business has been done in the past.  But only an ostrich can ignore the enduring sea changes of the last 18 months.

Our follow up report containing both a post mortem of 2010 actual results in lateral law firm partner movement and projections for 2011 can be reached through this link.

(c) Jerome Kowalski, 2010.  All Rights Reserved

2011 MLS Salary Grid (Photo credit: Bernhardt Soccer)

A long, hard look at associate compensation is in its infancy and long overdue.  There is no cosmic obligation that firms universally set the gold standard at a $160,000 starting salary nor is there a divine imperative by associates to demand compensation at that level.  Law firms have received no exemption from compliance with the laws of supply and demand. Nor are they exempt from basic concepts of basic economically rational behavior.

At the outset, let’s recall how law firms got to the gravity defying $160,000 plus bonus starting salaries.  In the last decade, as investment banks became increasingly profitable and the pool of bright B-school graduates was limited, investment banks turned to top law school graduates for fodder.  Recent law school graduates of well ranked schools were then certainly bright enough to perceive that their own economic opportunities, both short term and long term, was far rosier in the investment banking world.  Top ten law firms, upped the ante and spiraled starting salaries to the $160,000 plus level. The next tiers of law firms, forgetting that their business base was largely middle market thought that merely because they had increased in size and paid rent in major metropolitan markets they were cut of the same cloth as traditional top ten firms.

If royalty was cloaked in red velvet and astronomic starting salaries were part of that vestment, these newly large firms thought that they would also be viewed as part of the regal clan by including this vestment, ignoring their somewhat humbler roots.  So, the legal profession went in to a bidding war with the investment banks for this talent.  We’ve now seen the virtual death of the investment banking industry and, guess what?  The legal profession won the bidding war.  But, what it won was the booby prize; the investment bank world has largely died.  The competition for the high priced talent died with them.  And, law firm clients were no longer interested in financing either the no longer existing bidding war or the cost of training young lawyers.  Rather, the primary focus is on efficiently deployed legal expertise, understanding the client’s objectives and budgeting.  I have scoured the curricula of over 100 law schools and none offer coursework in these vital areas.

Rather anomalously, another driver in maintaining logic defying extraterrestrial associate compensation levels are the various blogs in which so many associates happily and anonymously share gossip,  divulge confidential information about their law firms and whine about salaries.  These blogs have assumed a jarring force in the profession.  Assuredly, many, many lawyers and professionals either sneak peeks at these blogs or follow their titillating tales with religious regularity, but basing important business decisions on these blogs is as rational as making life decisions based on the tabloids piled at supermarket checkout stands.

It certainly has not escaped our attention that in the waning weeks of 2009 and upon the dawn of the new decade, some firms announced bonuses and the unthawing of salary freezes.  Many of these announced bonuses were cosmetic, as were the thawing of the freezes. Some of the bonuses as well as increased salaries were conditioned upon realizing minimum annual hourly billing; an unrealistic achievement for many associates who are both honest recorders of time and simply haven’t been assigned enough work to get to the brass ring. Some of the “unfrozen” salary and concomitant cosmetic raises now also include a “holdback” of material portions of annual compensation, a neat way to also preserve capital and at year end, microscopically scrutinize performance, giving the firm the option to decline paying holdbacks because of purported failures to pass muster.  In some cases, the unthawing of salary freezes came with an elimination of lockstep compensation.  Thus, some firms could give the appearance of joining the elite in the AmLaw and simultaneously deal with associate compensation in the ever changing black box we witnessed in early 2009.  The ultimate results in continued declines of associate morale will again reoccur.  (Associate job satisfaction is not something not to be trifled with: http://kowalskiandassociatesblog.com/2010/09/13/associate-job-satisfaction-why-law-firms-should-care/ ). Since early 2009, we have been strong advocates of complete transparency on associate retention and compensation issues, including involving the associates in the factors being considered by management in making these crucial decisions.   That view has not changed.

In the case of some of the early 2010 announcements of unconditional thawing of previous freezes and the resumption of bonus payments by a small number of law firms which are simply top ten wannabes,  this is simply a short sighted error in judgment, with long term adverse consequences.  It is a repetition of previous lemming-like conduct, for which the financial penalties will be the same experienced in 2009.  As George Santayana famously said in 1905, “those who don’t learn from the past are condemned to repeat it.”  Or, as psychologists are wont to say, the repetition of the same acts expecting different results is the ultimate definition of insanity.

The year end associate public bonus announcements demonstrate a lack of a grasp to reality.  Surely, rewarding those who have contributed to a firm’s year end success, whatever that may be, is certainly commendable.  But, fixed amount bonuses make no economic sense.  Munificently rewarding those who are simply still breathing at year end and survived the scythe of layoffs and crowing about that grandiosity publicly also shows an indifference to client concerns that “lawyers are making too much money,” a sentiment we now know widely exists among clients.  Such bonus awards, if appropriate, should be granted privately during personal year end reviews. Associates should be told during year end reviews why he or she received or did not receive a bonus. It defies credulity that each surviving associate at each level of seniority performed and contributed equally to the firm’s year end results is simply absurd.  No firm would reward partners an equal bonus, based only on seniority.  Rewarding associates in this public fashion not only makes no sense but serves to throw more sand in client’s eyes. No other business awards annual bonuses and salary increases by simply taking an employee’s pulse, measuring continued brain wave activity and simple confirmation of continued life at year end.

Rewarding additional bonuses based on yearend total hours billed is plainly pernicious. Dr. Atul Gawande, the renowned surgeon, MacArthur Fellow and New Yorker journalist has poignantly pointed out that paying physicians on a simple fee for services basis only provides economic inducements for physicians to order and provide more services, needed or not and certainly does not provide better medical care or better medical results. Compensating associates (and indeed law firms as a whole), based on hours billed breeds only more hours, not better results. When the economic risk is passed on to the law firm, as sea changing alternative billing arrangements require (http://kowalskiandassociatesblog.com/2010/08/24/alternative-fee-arrangements-lesson-ii-of-the-primer/ ), closer scrutiny of hours billed by the firm will be the only economic result; improved or enhanced legal services will not necessarily be achieved.  The firm will more carefully consider whether a particular item of research is really needed, whether a deposition of a particular witness is really necessary.  Clients now really understand this; firms too often just don’t get it.

And, let’s say openly what we have been afraid to say publicly for a generation or more:  When you base associate compensation on hours billed or bonuses on reaching higher plateaus, you simply encourage cheating at worst and exaggeration at best. A reading of http://kowalskiandassociatesblog.com/2010/09/14/222/ is instructive.   If the associate is performing well and he or she is not billing sufficient hours, it is the firm, not the associate who is at fault. It is the firm’s obligation, not the associate’s obligation, to fill his or her plate, with due consideration to the performance of the associate.  Our deep and dark dirty little secret is that compensation and bonuses based on hours billed breeds a culture of dishonesty.

While statistics sometimes make the eyes glaze over, it is significant to quickly review some significant raw data about young associates and future recruiting: The recent publicly acknowledged round of layoffs of associates in 2009 at AmLaw 200 firms alone numbered in excess of 5,000.  That number does not include so called “stealth layoffs,” that is, lawyers who were let go because of accelerated or routine annual reviews, for which the “bar” was set higher. That number does not include layoffs for firms of 100 or more lawyers, not members of the hallowed AmLaw 200.   Nor does that number include partners or counsel who were let go; greater discretion and judgment kept these partners from wagging their tale of woe to the nearest blog. All told, we believe that approximately 27,000 lawyers are now unemployed who previously worked at firms of 100 or more lawyers.

And, the pipeline keeps spewing out more lawyers. Approximately 40,000 students graduate each year.   At the height of the hiring boom in 2007, AmLaw 100 firms hired a total of 10,000 new graduates. The estimated total number of recent graduates hired by firms of over 100 lawyers during that same top of the curve is estimated at approximately 27,000.  Accordingly, the total available labor pool for 2010 will be more than 75,000 lawyers – new graduates plus currently unemployed or underemployed lawyers.  Accordingly, if miraculously the demand in 2010 equals the demand that existed at the previous zenith; there are still three times as many available applicants as openings. We must also add to this calculus that headcounts at AmLaw 200 firms declined by about 5%. Sadly, we know that miracles seem to be in rather short supply.   2011 will add at leat 45,000 new graduates to this pool.

The incredibly long lines appearing in 2009 before the windows reading “hiring today” tells the story. Forty thousand applications were submitted for 1,200 federal clerkships. Hundreds of applicants apply for each lawyer posting appearing on www.usajobs.com. And that’s just federal jobs. Anecdotal evidence suggests that there are more than 30 applicants for each government job; the openings range from assistant counsel at a municipal waste district to the hallowed halls of the Justice Department. Six applications are made for each pro bono position. Imagine that:  six people competing for a job that offers no compensation.  The Manhattan District Attorney’s office took on so many pro bono applicants this year that it didn’t even have enough folding chairs, let alone desks, to seat them. Aspiring lawyers, $150,000 or more in debt are sitting on the floor trying to work for free to enhance their resumes in the hope of landing a paying job when the smoke clears. One bright small note is the passage of legislation which provides for law school tuition loan forgiveness for lawyers employed in the public sector ( http://legaltimes.typepad.com/blt/2010/09/doj-to-finally-give-government-lawyers-loan-relief-.html )

We have all heard a bit too often recently that employment is a lagging indicator in a recovery from a recession. But, your blood may further chill upon learning the fact that job recovery for the legal profession following a recession is one of the most significant and longest lasting indicators.

While I feel a need to apologize for numbing you with these numbers, these rather ugly statistics should play an important role in fixing associate compensation, deployment of associates and the recruiting process as a whole.

As an aside, I have frequently observed over the last year that if law school deans who recruit college graduates to enroll in law schools were held to the same standards of disclosure as issuers or underwriters of securities, many, if not most, would now be housed by the Federal Bureau of Prisons.

My own guess is that economic realities will compel a continued downward spiral of starting salaries; tiering of associates; moving associates up through the tiers only upon their mastery of important client demanded skills.  Most significantly the powerful Association of Corporate Counsel is now publicly ranking law firms by clients on a scale of one to five for six objective criteria. Thus far, 1,800 evaluations have been made of 600 law firms. Associates will be necessarily evaluated on their mastery of the ACC identified skills.

Nor does it make sense given the current state of affairs to maintain a bench full of young lawyers to be available for that call from the Big Client for a major matter.  Rather, with the streets teeming with well educated and often well trained lawyers, more associates will be engaged directly by law firms on a project by project and as-needed basis, subject to oversight by  project managers and quality control systems and personnel. Less than voluntary flex time and part time lawyers will be more common.  These lawyers obviously will be paid less and will not receive benefits.  The increasing use of temporary help, as opposed to full time employees, across all industry lines was a trend noted and reported on December 19, 2009 by the United States Bureau of Labor Statistics.  And, given the vast army of such lawyers pounding the streets, as I previously described, the necessity to use contract lawyer agencies to effectively act as distributors of these resources and paying them a distributor’s profit, the efficient law firm will retrofit its own recruiting personnel, no longer engaged as deeply in on campus recruiting and deploy them to find these project lawyers.  Some number of these project lawyers will shine and be offered full time employment.  Most others will return to await the next casting call.

Law firms in the coming months and years, are going to be dragged, perhaps kicking and screaming, back in to basic economic norms, including laws of supply and demand, rational compensation systems, merit based increases, leaner staffing, more efficient delivery of legal services and compliance with client demands.

It’s a brave and scary world out there.  But virtually every other member of the business community has already learned to survive and often thrive adhering to basic economic norms.  The fallout to the legal profession is ineluctable.  Associate compensation will continue to scale down. Numerous lawyers will be day laborers. Many lawyers now in the profession will never again work as lawyers.

© Jerome Kowalski, January, 2010, All Rights Reserved.

Related articles

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It has not escaped our attention that several firms in early annual reports  for 2010 are announcing both reduced revenues yet increased profitability.  Much of this is due to the ramping down effect and is therefore short lived.  We are all familiar with “ramp up” investments.  The other side of the equation is ramp down yields; that is once a lawyer is discharged, his compensation package and associated expenses disappear.  But, collections on his accumulated WIP and A/R continue to flow in to the firm’s coffers. Thus, there is no eureka announcement or reason to believe that the firm has fixed the problem, or that good times are on their way back.  Yes, year end business did show some increase and that did boost both revenue and profitability.  But only negligibly, since 2009 year end work will likely result in an early 2010 cash flow stream.  But that cash should be held on to tightly to brace against a 2010 rough sea.  More significantly, the loss of time billers could potentially adversely impact the firm’s ability to produce a full head of billable hours. 

          Accordingly, an influx of work in early 2010 does not and should not give rise to a sense that the storm is over and it’s time to restock the pond with more time keepers.  2010 and lessons of the past do dictate that any influx of work and hours billed should be monitored more closely than ever. The nature and quality of any new work must be scrutinized.  Examine the nature of the work coming in:  litigations do settle transactional work does close or become aborted. Do not mollify your egos or enhance your perceived reputations by crowing about the fact that you are building up a new head of steam and that you are hiring again. Rather be afraid, very afraid that an early build up of business suggest that the storm is over and, to mix a metaphor, it’s now time to restock your benches. The appearance of a few swallows does not assure the arrival of spring.  A rough midyear may find you overstaffed again.  Rather, as I will suggest in a moment, consider carefully the deployment of staff or contract attorneys until you have some seriously greater assurance that the inflow of work has some assurance of longevity.

          And, yes, some firms did announce record profits.  Those were the firms that had significant insolvency practices.  But, as I said before the ebb and flow of business cycles may or very likely result in a bench full of insolvency lawyers with little to do.

          Thus, it does not make sense given the current state of affairs to maintain a bench full of young lawyers to be available for that call from the Big Client for a major matter or to meet early 2010 new engagements.  Rather, with the streets teeming with well educated and often well trained lawyers, more associates will be engaged directly by law firms on a project by project and as-needed basis, subject to oversight by the project managers and quality control systems and personnel. Less than voluntary flex time and part time lawyers will be more common.  These lawyers obviously will be paid less and will not receive benefits.  The increasing use of temporary help, as opposed to full time employees, across all industry lines was a trend noted and reported on December 19, 2009 by the United States Bureau of Labor Statistics.  And, given the vast army of such lawyers pounding the streets, as I previously described, the necessity to use contract lawyer agencies to effectively act as distributors of these resources and paying them a distributor’s profit, the efficient law firm will retrofit its own recruiting personnel, no longer engaged as deeply in on campus recruiting and deploy them to find these project lawyers.  Some number of these project lawyers will shine and be offered full time employment.  The others will return to await the next casting call.

          The start of this next decade will be marked by numerous challenges:  Increased competition in every area; continued pressure on fees; declining unavailability of capital; flat, at best, demand for legal services; and certain unavoidable increases on the expense side.  Some will see the approaching storm warnings and take measures to deal with the next storm. Some will see this is a year of opportunity and will successfully exploit these opportunities to their advantage.  Others will simply repeat their prior actions and anticipate different results.  Some call that the classical definition of insanity.  We will all sit sadly by and see several firms fail next year, having failed to realize that perfect storms do sometimes repeat themselves.

© January, 2010, Jerome Kowalski.  All Rights Reserved.