Caveat Archos

[This is a post from my personal website: getintuit.blogspot.com]

Up-to-date readers of this blog know that the last two posts have been on the topic of first-year associate pay (what, how, why, where its going? etc.) Friend of GetIntuit, Pete L. made some very valid and interesting points in the comment box to the first post citing, among other things, “The firms that are below the most elite firms that are competing with those firms in the market for clients, prestige and respect, believe they have to keep up with the elite firms in as many ways as possible. Firms in this class are in no position to rock the boat basically, because like the most elite, their profits per partner keep rising. If they are competing for the same clients and the same type of work as the elite boys, they are in the position that they pretty much have to play the same game dictated by the elite firms. This is why a firm like Sullivan and Cromwell or Simpson led the pay raises from 125 to 145 and then from 145 to 160 and why within a month about 60-80 other firms fell in line and matched. The partner told me he pretty much believes there are law students more than willing to take my job for half the pay who can probably do it as well, but that pretty much the need to compete and the significance of prestige and reputation in the legal field prevents such a thing from happening.”

This brings up two extremely interesting points for further examination: (1) What is it about law as an industry that currently allows its participants to seemingly flout the corrective dynamics/cost-pressures that occur in every other industry; and (2) How accurate was Pete’s partner in his statement?

I cannot give an empirically verifiable or testable answer to the first question because I am wholly uninformed about the incentive structures facing particular clients of law firms (particularly the ones who employ “the big boys”). I think some of it has to do with the economizing factor of prestige/correlative factor of “going to the right school,” but I don’t think its the dominating factor Pete’s post implies. The market punishes irrationality not based on productivity in the long-run; perhaps I am not taking a long enough historical prospective (note: I purposely used prospective versus “perspective” as it fits the phrase and underlying thought better).

However, I think I do have the answer to the second question, at least in part, thanks to the same writer who broke the bi-modalism story a few weeks ago. According to Amir Efrati, it looks like the legal market outside of the “big boys” are doing exactly what Pete’s partner said they couldn’t: they’re rocking the boat. These “lesser firms” are maximizing their strengths vis-a-vis the “big boys”: While they cannot compete directly on the dollar-amount wage, they can, and seem to be offering the trade-off of significantly lesser demands for lesser pay. For example, typical “billable hours requirements” (a part of the total hours an attorney works) are about 2000 hours/year. Seems reasonable: 2000 hrs/50 weeks= 40 hrs per week; however, billables are an inaccurate measure of an attorney’s total time in the office or working: billables are ONLY what the assigning partner will be recognizing as valid worked-time. I’ve read somewhere that the typical ratio between work hours vs. billables is something like 3:2, meaning for every 3 hours at work, an attorney should be billing for approximately 2 of them. Doing the math, that means for attorneys to get their 40 hour billables over the course of the week, they need to do 8 hours of billing a day (not counting weekends), which ultimately means attorneys need to work 12 hours a day (1.5 * 8 billing hours), 5 days a week, for 50 weeks to meet what is deemed an industry standard of productivity.

The firms in question in Efrati’s piece, however, significantly discounted their requirements, and their overall wages, instead, offering a concomitant increase in “personal time” for the associates billing. Simultaneously, this may have resulted in (and here, I’m intuiting it) a significant increase in the firm’s demand for attorneys to pickup the “slack.” (The argument from here on assumes equal productivity): For example, the Dallas firm cited in the piece has decreased their requirements from 1920 (let’s just say 2000 for ease of comparison) to 1600 hours, while paying $140k. Cutting the 400 hours from each associate means that 1 additional associate is needed to cover the lost hours from 4 original associates. So, instead of 4 associates making 160k and getting burnt out after 3-4 years, this firm has 5 associates making 140k, working the same amount of aggregate hours and (presumably) not getting burnt out as quickly, at the cost, to the law firm, of approximately -60k nominal dollars per cluster of five (140 * 5= 700k in wages vs. 160*4=640k in wages), or -12k per associate per year, nominally. While this may seem like a lot (and it certainly is) I think that the probably resulting increase in firm longevity/loyalty, morale, and “quality of life” versus the losses the firm would sustain by having high turnover might be enough to offset the nominal cost. I don’t know, as I’m not entirely handy with the quantifiable variables here (calling all economists!) but it seems like a very valid and interesting topic for further inquiry.