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Article Excerpt
INTRODUCTION
I. AN UPDATED TOURNAMENT: A NEW MODEL OF LARGE LAW FIRM GROWTH II. REVIEWING THE EVIDENCE OF A SECOND TRANSFORMATION A. Firm Size, Geography, and Competition B. Tier Structure and the Tournament C. Partner Mobility D. The Emerging Equilibrium III. IMPLICATIONS FOR THE LEGAL PROFESSION A. Decline of Large Firms as Exemplars of Legal Ethics B. Challenges for Racial and Gender Diversity 1. Minority Lawyers 2. Female Lawyers C. Millennial Lawyers and the New Lifestyle Firm CONCLUSION
INTRODUCTION
Periodically law students, faculty, and practitioners come together to reflect on the issues and problems affecting the legal profession. We welcome the opportunity to take part in this discussion under the auspices of the Stanford Center on Ethics. One way to organize this discussion is to focus on lawyers' practice settings. According to the most recent edition of The Lawyer Statistical Report, (1) which contains data for the year 2000, 672,901 lawyers (74%) worked in private practice. Of these lawyers, slightly less than half (324,903) worked as sole practitioners (but there is clear evidence that this portion is shrinking). (2) Among the remaining 347,998 private practice lawyers in the United States, slightly more than a quarter (95,892) worked in law firms with 101 or more attorneys. In total, large law firm lawyers comprised 10.5% of the U.S. legal profession. Yet this is the fastest-growing, most prosperous, and most dynamic sector of the profession. If the recent past is a reliable guide, the institution of the large law firm--its power, influence, and prestige--will once again be a dominant theme in this discussion. (3)
More than in earlier times, however, this emphasis may be especially justified. Over the last three decades, an increasing proportion of law school graduates are beginning their careers in large law firms. (4) Based on the size of the 2007 summer-associate classes, The American Lawyer magazine estimates that the nation's two hundred largest law firms (based on revenue) are set to hire ten thousand entering associates during the fall of 2008. (5) "That astonishing number," observes editor-in-chief Aric Press, "equals about one-quarter of all the students who will graduate from U.S. law schools next year. To put it another way, the top 20 law schools will only produce about 6,500 graduates." (6) Because virtually all large law firms still aspire to some variant of the original "Cravath system," in which the firm establishes its brand by hiring only the best students from the best law schools and providing them with the best training, (7) the laws of supply and demand dictate that thousands of entry-level associates now command the princely sum of $160,000 per year. (8) By extension, elite and semi-elite law schools are able to take a proportionate share through ever-higher tuition (and corresponding debt loads), without "billing" any additional hours or changing the way they (we) teach. (9)
The partner-owners of large law firms have also benefited, at least financially. A persistent multidecade surge in demand for corporate legal services, (10) has given partners in large law firms dramatic gains in their compensation, especially in comparison to their counterparts in small and solo practice. (11) Nonetheless, because of the relentless pace of modern large law firm practice, there are few (if any) partners who regard the present as a golden era of professional felicity. In a recent column in the alumni magazine, Larry Kramer, the dean of Stanford Law School, reviewed the many changes in large law firm practice, including soaring billable hour expectations, the resistance of clients to paying for associate training, the explosion of lateral hiring, unprecedented associate attrition, and a diminution in the sense of firm culture and community. (12) Kramer then queries, "Does anyone actually want this? The lawyers, managing partners, and general counsels I meet are deeply concerned about what's happening. Yet they feel unable to stop it, powerless to resist the stifling market forces that drive their decisions." (13)
In light of the disproportionate sway and influence of large law firms--and a widespread perception among law students, faculty, and practitioners that we are being pulled into new and uncharted territory--the time is ripe for an updated and more contemporary account of the modern large law firm. Drawing on recent empirical evidence, we observe that the well-known "promotion-to-partner tournament" remains a core feature of large U.S. law firms. (14) However, the new model, which we dub the "elastic tournament," involves a different set of ground rules and ultimately includes a much larger (and mostly older) set of players in more roles. Moreover, until a large law firm lawyer renounces any interest in prerogatives of ownership (e.g., a claim on residual profits, a voice in firm management), the duration of the tournament can now be expected to last one's entire career. In short, the only finish line is death or retirement.
These changes are driven by a confluence of factors, including firm size, geographic dispersion, client demands, lower information costs via technology, and shifting generational tastes. (15) Yet, the fundamental economic reality that underlies this transformation is the inability of large law firms to underwrite a prize of partnership that includes both long-term financial security and eventual repose. (16) At the same time that large law firms have grown to truly behemoth proportions, aided in part by a large cadre of professional lawyer-managers, the locus of firm control has shifted to an inner core of "partners with power" (17) who may or may not be strongly wedded to the firm. (18) Large law firms that refuse to privilege these partners inevitably run the risk of large-scale defection and implosion. (19)
This Article is organized in three parts. In Part I, we discuss the key features of the new "elastic" tournament model. In Part II, we assess the accuracy of the elastic tournament model by reviewing the empirical evidence. In the process, we note the emergence of a separating dynamic in which large general service law firms without an optimal mix of lucrative practice specialties will soon be vanquished in the salary wars. (20) We speculate that these less-endowed firms may form the basis for new and distinct second tier of large law firms that will compete on the basis of specialized service and price rather than elite lawyer credentials. Finally, in Part III, we consider three implications of our model: (a) with reduced risk sharing among partners, large law firm lawyers will be less independent of their clients and thus less reliable exemplars of professional ethics; (b) the atomistic ethos of modern large firm practice is likely to hinder the profession's aspiration to gender and racial parity at the partnership level; and (c) the new generation of "millennial" lawyers will get their wish of greater work-life balance (21) in exchange for an expanded array of "off track" career options. Nonetheless, similar to earlier generations, (22) we suspect that a large number of the best and brightest will continue to be drawn into the tournament by the money and status that come with making partner.
I. AN UPDATED TOURNAMENT: A NEW MODEL OF LARGE LAW FIRM GROWTH
The promotion-to-partner tournament has been a defining feature of large corporate law firms since their emergence on the legal scene in the late nineteenth century. (23) The basic scheme of the tournament was that lawyers blessed with more work than they could personally handle would recruit highly qualified but inexperienced young graduates of the newly flourishing law schools, which were displacing "reading law" as the preferred entryway to the profession. The partners would hire these young lawyers to work on the cases of the firm, a manifestation of the human capital of the senior lawyers, under the supervision of those seniors. After an extended probationary period marked by increasing responsibility, the most proficient of these associates (as they came to be called in the early twentieth century) would, be taken into the partnership. Under the "up or out" principle, the others departed and were replaced by new recruits. Promotion marked the point at which the young lawyer had accumulated more human capital than could be combined with his own labor. So when an associate was taken into the partnership, the firm needed not only to replace him, but also to add sufficient labor power to utilize the additional increment of human capital. In this scheme the partnerships of successful firms, consisting of those who won the tournament, would grow gradually over time. Growth was internal, generated by the tournament. Apart from the departure of associates who did not become partners, there was virtually no lateral movement in or out of the firm. Partners enjoyed a kind of tenure and remained with their firms for the course of their working lives. The successful tournament firm can be schematically represented as an inverted funnel.
[FIGURE 1 OMITTED]
With minor variations, this was the shape of virtually all large American law firms providing legal services for organizational clients over the course of the last century. These firms grew over time; their style of work became the industry standard for provision of complex and continuing legal services. (24) The tournament firm successfully adapted to changes in technology, to a great enlargement in scale, and to diversification of its personnel. (25) And after World War II, and especially toward the end of the century, it became a model adopted in many countries around the world. (26) It is widely viewed as a successful and stable form. (27) For most of its inhabitants and spectators it has been naturalized; it is the unsurprising and expected form of organizing legal work.
As firms grew and their surroundings changed, firms underwent a transformation, beginning in the 1970s. Removal of restraints on the flow of information made them more visible to media, public, clients, other firms and themselves. Clients and lawyers became more mobile, as long-term retainer relationships with clients gave way and the lifetime commitment of lawyers to firms was threatened by the lateral movement of lawyers. Firms adapted to these new fluidities by becoming more commercial and market-oriented, embracing marketing and professional management. In response to the new world of information and mobility, firms departed from equal shares distribution to discourage or encourage lateral movement. (28)
Developments in the past decade suggest a second and equally dramatic transformation in the character of the tournament and in the shape of the firm that it produces and that surrounds it. This transformation is the most drastic and significant metamorphosis in the large law firm since the invention and spread of the tournament firm in the closing years of the nineteenth century--a transformation that portends major shifts in the way that legal services are produced and delivered. It includes a number of discrete changes of considerable importance:
* Liberalization of the traditional up-or-out principle (by retention of "permanent associates" (29) and appointment of non-equity partners who do not graduate to equity partnership); (30)
* A growing share of non-tournament lawyers, such as of counsel, staff lawyers, staff associates, contract lawyers, and lawyers at outsourced locations, collaborating in the production of corporate legal services;
* Abandoning the equation of seniority with ownership and acceptance of permanent employee status for lawyers. Previously, power and standing were correlated with age; now they are not--a firm may have a thirty-five-year-old equity partner and a sixty-year-old associate, non-equity partner, or of counsel; (31)
* Softening of the commitment of partnership as a permanent achieved status--i.e., tenured--through de-equitization, outplacement, (32) and mandatory retirement; (33)
* Acceptance of lateral inward movement (which depends on client loyalty to lawyers rather than firms). (34) But firms still fear the departure of rainmakers and stars; (35)
* Acceptance of differentials in compensation and control that are not based on seniority or election; (36)
* Management becoming a separate function performed by specialists; there are nonlawyer management auxiliaries like marketing director, public relations, technology, etc. (37)
With these changes we see the inverted-funnel shape of the classic early tournament firm replaced by what we might call the core-mantle model of the firm--a firm in which a core of owner-partners is surrounded by a much larger mantle of employed lawyers that includes not only aspiring associates, but also non-equity partners, permanent associates, of-counsel and de-equitized former partners. We visualize this model two-dimensionally in Figure 2.
[FIGURE 2 OMITTED]
We call this "later" form the "elastic tournament" since it involves a stretching of the tournament so that it does not end with the promotion to partnership, but instead becomes "perpetual" or unending as partners work longer hours, accept differential rewards, and fear de-equitization or early, forced retirement. (38) The core of owners is thinner compared to the early classical model, and, arguably, its relative size vis-a-vis the rest of the firm is shrinking. (39) Further, there is more competition and tension within the firm. Since the tournament is longer, thinner, and tenser, elastic seems a fitting image.
Although large law firms, in the aggregate, continue to grow rapidly, there appears to be a fair amount of volatility at the individual firm level. Of the 236 firms that made the National Law Journal 250 list in both 2006 and 2007, the average number of partners (equity and non-equity) increased by an average of ten partners per firm. Yet, remarkably, 58 firms (24.6%) reported a diminution in the number of partners. The decline might result from one or more of several factors, including a large cohort of retirees, (40) the defection of an entire practice group to another firm, (41) or systematic pruning of the partnership ranks. Indeed, large-scale demotions or firings of partners have become commonplace. (42) When firm managers resort to this tool, what happens then? Does the partnership recommence growth at the same rate as before? Or at a lower rate? Or does it stay steady or even shrink while the mantle (non-core) grows? Figure 3 suggests some of the possible patterns of partnership size over time.
[FIGURE 3 OMITTED]
The transition involves the abandonment or downgrading of several norms that once helped define the world of large law firms and a shift to norms that intensify competition within the firm:
* The decline of the norm of age-graded equality among lawyers permits differentiated compensation and hierarchy (such as two-tier partnership) within firms;
* The decline of the norm of loyalty to the firm and immobility permits lateral movement. A necessary concomitant is a decline of roughly equal magnitude in client loyalty to the firm, because it is the shift of attachment to individual lawyers that facilitates the lateral movement;
* The decline of the norm of confidentiality, secrecy, and reticence permits the flow of information that enables interlawyer and interfirm comparisons, which has been aided by the rise of the legal press. (43) In addition, sophisticated software enables detailed utilization and realization comparisons on an intra-firm (office-by-office, practice group-by-practice-group, lawyer-by-lawyer) level;
* The decline of the norm of priority of professional accomplishment facilitates an emphasis on individual monetary and status rewards and facilitates the measurement of firm standing by Profits Per equity-Partner (PPP).
In positing this shift in the character of the tournament and the shape of firms, we acknowledge that it is not a single abrupt all-at-once transition, but a more or less gradual process punctuated by smaller discrete changes (such as the abandonment of lockstep compensation or the creation of non-equity partnership). Nor do we claim that it holds throughout all tournament-based firms. The observations on which we base our conclusions come from what Heinz and Laumann called the "corporate hemisphere," (44) and, specifically, only its higher peaks (represented in the Am Law 200 or NLJ 250). Nor do we think the Late, or "Core and Mantle," Tournament is a destination or terminus in the evolution of the large firm. We cannot identify a regime combining the stability, repose, and gradual change of the sort that was for several generations a feature of the Early Tournament.
[FIGURE 4 OMITTED]
As depicted in Figure 4, several factors continue to shape the size, strategy, and work conditions of the contemporary large law firms. During the 1970s, a "new information order" resulted from the demise of the restraints on information (about prices, salaries, profits, clients, available services, etc.), sparked by judicial release from ethical constraints on communication and, shortly thereafter, the emergence of a new, celebratory legal press. (45) Over the last three decades, this new flow of information has exposed clients to a wider array of lawyers and has exposed lawyers to law firms that could potentially offer them a larger share of profits. This disaggregation of corporate work appears to have taken the shape of a "winner-take-all" market--a dynamic most prevalent in entertainment and sports--in which the highest stakes transactional and litigation work flows to the most capable practitioners. (46) Thus, a relatively small number of partners at the top of the hierarchy earn disproportionately large rewards. (47)
In their book, The Winner-Take-All Society, economists Robert Frank and Phillip Cook argue that a wide array of professions now take this form, primarily due to increased information flows from computer and telecommunications technologies. (48) Law has been the site of spectacular changes of this kind. The Early Tournament firm emerged in an era of new office technologies--the typewriter, the telephone, the filing cabinet, the elevator, and a proliferation of organized printed material--that enabled lawyers to be more productive in servicing the demands of corporate clients. (49) From the emergence of the promotion-to-partnership firm until about 1960, the office, research, and communication technology of law practice remained largely unchanged. Then, in rapid succession, the firm's productivity, scope, and scale were enlarged by photocopying, computers, jet air travel, faxing, the Internet, and the myriad innovations that accompanied them.
Not surprisingly, in a globalized, market-driven world, flooded with information and corresponding ignorance, there is a devouring appetite for heuristics to manage that excess. Among the most popular devices is the proliferation of publicized rank orderings of everything from pizza parlors to brain surgeons. Among large law firms, the arrival of ranking has accentuated and perhaps accelerated a shift in the economy of regard and prestige. The search for honor has shifted from the accumulation of incommensurable professional accomplishments to the currency of ranking in metrics of size, profit, and income that signify importance, success, and power and are, at most, indirectly correlated with achievements measured by avowed professional values. Of course success and power have always played a role in professional regard. But that role has become more prominent in a setting where they are measured with supposed precision and where these rankings are privileged over the less determinate and more recondite professional discourse. We shall see the role of these rankings as both a mechanism and a driving force in the ongoing transformation of the large law firm.
II. REVIEWING THE EVIDENCE OF A SECOND TRANSFORMATION
In Part 1 of this Article, we styled part of this process (from 1975 to the present) as a story of transition from the "classic" to an "elastic" promotion-to-partnership tournament. Part II chronicles a series of market developments over the last three decades that corroborate our earlier claims. Subpart A provides evidence that a confluence of reputational capital, firm strategy, and firm size and dispersion has reshaped the promotion-to-partner tournament so that it takes different forms according to a law firm's competitive position. Subpart B examines how in almost all law firms two-tier partnerships have emerged as a device to mitigate competitive pressures and preserve the promotion-to-partnership tournament. Subpart C discusses the factors that have given rise to the age of lawyer mobility. Finally, Subpart D suggests the emergence of a separating dynamic based on a firm's mix of practice specialties and provides evidence that this separation process is expedited by a linkage between the elastic tournament and the associate salary wars.
A. Firm Size, Geography, and Competition
During the last three decades, large law firms have mushroomed in size and geographic dispersion. Although the underlying growth in the total number of lawyers is clearly driven by increases in the demand for legal services, the law firm marketplace has itself undergone a significant structural transformation. In earlier years, large corporate law firms competed primarily on a regional basis and relied upon friendly networks of out-of-town firms to oversee their clients' legal needs in other markets. With the proliferation of branch offices, a large number of national and international law firms are capable of competing for work that originates in a specific regional market. In other words, there is more work for corporate lawyers, but the anticompetitive benefits of a localized guild have, in the process, been destroyed. (50) This Section documents how firms with different levels of reputational capital have adapted (rather than scuttled) the promotion-to-partnership tournament in response to these structural changes.
As discussed earlier, (51) the original promotion-to-partner tournament implied the existence of a nonbinding but credible agreement between partners and associates. By dint of technical skill, judgment, past results (we presume), and the growth of corporate clientele, the owners of the firm had available to them more legal work than they could perform personally. This surplus work was thus performed by associates in exchange for a salary, mentorship, and the prospect of partnership. At the end of some predetermined time period (usually six to ten years), (52) the prize of partnership was awarded to the associates who had performed the best in terms of high-quality legal work and the production of additional excess human capital. To entice maximal effort from associates, and thus optimize its own financial interests, the firm committed itself to a routinized and meritocratic promotion process. The nonsequential nature of the agreement was mitigated by its relative transparency. Specifically, by observing the treatment of preceding classes, an associate could verify that the firm was making good on its commitment. (53)
As noted in Tournament of Lawyers, because each newly promoted partner requires the hiring of additional associates, the maintenance of the tournament essentially commits the firm to a long-term pattern of perpetual growth. In the years since its publication, this claim has come under heavy scrutiny. (54) Yet, as we step back and review the growth patterns of the nation's 250 largest firms based on the number of lawyers (NLJ 250), in the aggregate the predicted pattern of upward growth appears to hold true.
[FIGURE 5 OMITTED]
As shown in Figure 5, each year since 1978, when the National Law Journal first published the NLJ 250, the average (and total) number of partners per firm has increased at a remarkably steady pace. (55) In contrast, the number of associates appears to vary with the ebb and flow of the business cycle.
Yet, when the data is unpacked at the firm level, there is clearly much more to law firm growth than the expansion required to maintain a viable promotion-to-partner tournament. Among the 129 firms that appeared on the NLJ 250 in both 1979 (the first year of publication) and 2007, the average change in the number of partners ranged from +57% to +1782%. Although all of these large firms continue to maintain a multiyear partnership track (56) and pay high entry-level salaries, (57) they differ on several dimensions, including reputational capital, which in turn affects a firm's ability to attract desirable clientele and recruit lawyers with strong qualifications. (58) Firms with large endowments of reputational capital also have greater latitude in controlling the rate of firm growth or alternatively pursuing a more aggressive long-term strategy.
To examine these dynamics, we generated a scatterplot of profits per equity partner (FY 2005) and the natural log of the percent change in firm partnership size between 1978 and 2006. (59) As shown by the best fit-lines in Figure 6, the relationship between these two variables is best summarized as a quadratic rather than a linear function ([R.sup.2] of 0.261 versus 0.133). Following the U-shaped quadratic fit-line, the sample can be divided into three stylized groups: (1) strong reputation/slow growth firms (top left); (2) strong reputation/high growth firms (top right); and (3) medium growth firms with lesser reputational endowments (bottom middle). The firms are also delineated by tier structure because, as an empirical matter, this attribute is strongly correlated with firm prestige. (60)
[FIGURE 6 OMITTED]
Under this categorization, the first group (strong reputation/slow growth) often occupies a dominant position in capital market specialties, such as mergers and acquisitions or securities offerings. High levels of reputational capital make it mutually advantageous for firm clients and partners to remain with the firm. (61) Because aggressive expansion outside this specialty area runs the risk of diluting profits (through the promotion of partners who do less lucrative work), the optimal strategy is to limit the rate of firm growth by running a highly competitive and grueling tournament for a very lucrative prize. (62) Indeed, the ten slowest-growth firms appear to fit a distinct profile: (a) all but one are based in New York City; (b) they tend to have fewer branch offices and fewer total attorneys; (63) (c) they are highly profitable, with 2005 profits per equity partner (PPP) ranging from $965,000 (the non-New York City firm) (64) to $2.6 million, which is significantly higher than the $906,000 average PPP for the remaining 107 firms; (65) and (d) they tend to have a much higher ratio of associates to partners (2.59 on average) than their faster growing counterparts (1.39 on average). (66)
Firms that safely fall into the first group include Cravath, Swaine & Moore, (67) Wachtell Lipton, (68) and Cahill, Gordon & Reindel. (69) Yet, in regards to the underlying tournament, over the last thirty years, even these slow-growth firms have expanded their partnership at more than 50%. Assuming the firm partners were managing the firm according to their own financial self-interest, the expansion of the partnership was presumably part of a prudent strategy to maintain the firm's lucrative client base and ensure the steady supply of highly qualified associates.
At the fast growth part of the continuum, the second group (strong reputation/high growth) includes high-prestige firms that have followed a "megafirm" model. (70) For example, during the mid-1980s, Skadden Arps, which currently has 1915 total lawyers and 541 partners at eighteen offices throughout the world, made a strategic decision to diversify beyond its lucrative domestic M&A practice and pursue an aggressive strategy of international expansion. (71) Although many of these foreign offices failed to produce a profit for several years--a fact decried by some of the Skadden partners who opposed the plan yet were nonetheless subsidizing it--basic cost accounting inevitably understated their value to the firm. As described by firm biographer Lincoln Caplan, Skadden's international program "depend[ed] on the amount of work generated for Skadden in the United States as a result of its foreign offices. Skadden called this 'but-for business'--the firm would not have attracted it but for...
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