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In the recent past, large law firms could justify skyrocketing salaries for incoming associates by passing the costs along to their clients. But with the economy in shambles, clients are finally starting to say no. And this has put the economic model of large law firms in grave danger.
So says the Boston Business Journal's excellent Lisa van der Pool in her article, "When the dust settles: Surveying changes to the legal landscape." Writes Lisa:
Change is coming to law firms. In the wake of attorney and staff layoffs in recent weeks, the relentless call among clients to slash billing rates, and the sharpened focus on the ballooning salaries for young associates who begin their highly paid gigs with zero experience handling legal matters, change is inevitable.
Tweaks to the model will likely include smaller summer associate class sizes, flexible hourly billing rates and even lower compensation for young lawyers who are still cutting their teeth and don’t deserve their inflated first-year salaries, according to experts.
These experts then play a dirge for the large law firms' economic model. (OK, truth be told: it's me playing the dirge — but others join in.):
"The law firm model that we’ve been using is not going to keep working,” said Jay Shepherd, founder of Boston-based law firm Shepherd Law Group PC. “(The economy) is going to expedite change in the law firm model. I think without the recession, the change would have taken longer to come. We’re seeing a number of industries where the models don’t work anymore: airlines, recording studios, newspapers — and large law firms.”
While the article focuses on one of the problems — that of insane salaries for inexperienced junior associates — the real problem is more rudimentary. The legacy economic model at traditional law firms is based on cost-plus pricing. The firms charge their clients a price based on the law firms' costs plus a desired profit. Under this system, there is no incentive for the firms to lower their own costs (and by extension, their clients' fees). And this works fine (for the firms, that is), so long as the clients are willing and able to pay. But recessions have a tendency to smoke out one-sided pricing models. (For more on cost-plus pricing, see "Clients of the world, unite!")
Bottom line: High associate salaries are just a symptom of the greater problem. The big issue is not overpaid associates. Nor is it hourly billing versus "alternative billing." It's about law firms' interests being aligned with their clients' interests, which cannot happen under a cost-plus system like hourly billing.
The Revolution is coming. And the recession is speeding it up.