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Thursday, February 10, 2011

How A Law Firm Operates Like A Pyramid Scheme

Large Law Firms Are Starting To Be More Creative In Their Offers To Hire New Lawyers by Jack Swint-Publisher

A Crumbling Pyramid?

Large law firms have been operating on the “pyramid scheme" ideal that the closer to the top, the less work and more money you will take in. That sounds fair, hire in to a new firm and be expected to do more work for less money than the partners do. The dream of any incoming attorney to a firm is to make the fast track to becoming a partner.

But, now these larger firms are becoming more creative in their hiring practices. One-year renewable contracts are a big tool being used that keeps an attorney off the waiting list to become a partner. The firm can bill higher hourly rates but not have to increase the contracted lawyers pay.

Most important, it gives them the ability to let you go at the end of the year with no recourse like a severance package, vacation pay or health insurance etc. (unless you negotiated that into your contract) Then there are the firms that actually hire not so reputable lawyers with the understanding they have no chance of a partnership. At least one firm hires sanctioned, suspended and even disbarred lawyers as paralegals. The firm earns the same hourly billing of the client by using one of the firms attorneys while the paralegal is the one doing the work.

Some firms have even offered trainees lump sums to defer their places, some up to $10,000. So what does it all mean for lawyers? Some, at least are aware that the nature of law makes it difficult to react quickly to change. Law firms are in an odd position where they do recruit people a long time in advance, up to three to four years, many firms plan to hire ad hoc if they find themselves with vacancies.
“The problem has been that the law firms perhaps didn’t foresee the downturn being quite so bad and now feel like they’ve over-recruited. They’re thinking now that they’ll err on the side of caution and under-recruit and pick people up later,” It sounds clever, but it might not be a great tactic.

Why is all of these changes necessary? Long before the recession began, attrition was a central feature of most large law firm business models. According to one source for this story, “In 2007, lucrative starting positions were plentiful, but big law’s five-year associate attrition rate was 80%. Some of it was voluntary; some involuntary. The survival rate for those continuing the journey to equity partner was exceedingly small. The only really good news now goes to top equity partners. For them, big law’s short-term profit-maximizing model remains alive and well.”

The formula remains simple. Firms are imposing increasingly strict limits on equity partnership entry and charging clients higher hourly rates overall as some partners remain busy with tasks that less costly billers performed previously. (Equity partners have to keep their hours up, too.)

One law firm management attorney observed, “Before the recession, the top-to-bottom equity partner compensation ratio was typically five-to-one in many firms. Very often today, we’re seeing that spread at 10-to-1, even 12-to-1 while maintaining leverage and increasing hourly rates and profits remains intact in billable hours.” As business picks up, firms are hiring fewer associates than in earlier recovery periods. Under the guise of transparency, some newbies are hearing that they have to meet monthly billable hour’s targets in addition to the annual requirements reported.

“Bottom line, during this drop off in workload, the pressure to bill hours is increasing. Unfortunately, the focus on efficiency of completing tasks is not as important as the total number of hours used to get them done.”

There are fewer lawyers producing more work and more revenue. As the economy continues to sputter and young law school graduates worry about their prospects, overall average profits per equity partner will follow their steady upward trajectory. In reality, the growing spread between highest and lowest within equity partnerships is coupled with the plight of everyone else. This may reveal something more sinister like the worst economic downturn of modern times has provided protective cover to greed atop the pyramids.

Some in the industry believe that the current churning of trainees could backfire and leave law firms with a generation gap a few years down the line. In the worst case scenario, an absence of young trainees could eventually even threaten the pyramid model that firms use, whereby one partner is supported by a few senior associates who in turn have more junior lawyers underneath them. When the economy recovers, law firms might find that their pyramids are thin at the junior lawyer level, which is where much of the nuts and bolts work of a deal is done.

Back in the 1990s firms felt this crunch and experienced wage inflation as they frantically tried to hire lawyers from a smaller pool of talent. If they have to engage in big recruitment, then that could seriously hit law firms’ bottom line.

In Closing… Personally, until this past weekend, I had no clue that law firms worked off the same principle as a pyramid scheme and even Amway or Mary-Kay cosmetics. There is a lot more to becoming a law partner in a firm these days…. And, larger firms are learning like everyone else to cut corners and become more resourceful.

End Of Story 

Jack Swint-Publisher
West Virginia News
Twitter:  @WVNewsOnline
LinkedIn: Jack Swint

Link (the below link is a must read for all lawyers)




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