The recent hikes in associate salaries at midsize and large law firms have many speculating about the impact it will have on law firms specifically, and on the legal profession in general. Basic economics say that the higher the personnel costs, the less money is available for partner distributions. But this round of raises could have profound implications beyond mere economics.
Consider these four factors:
1. Billing rates at many law firms have been steadily climbing over the last several years, and client protests over the fee increases have been climbing in a similar fashion.
2. Gen-X and Gen-Y lawyers tend to have fewer allegiances to their firms, are looking to have more control over their lives, and are often entrepreneurial.
3. Partnership tracks are extending, fewer lawyers are becoming partners, and even fewer are becoming equity partners at their firms.
4. Technology has made practicing law affordable and efficient, and with nothing more than a laptop, a word processor, Internet access, and a cell phone, any lawyer can research statutes and cases, communicate with clients, negotiate deals and file pleadings from nearly anywhere.
Taken together, these factors have the potential of creating “the perfect storm” — an environment where clients encourage their lawyers to leave larger law firms to establish solo or small firms with lower rates and lower overhead. The math is simple: a junior partner making $350,000 a year, working 2,400 hours and billing $425 an hour can reduce her rate 30% to $300 per hour, bill 1,200 hours per year, and make $360,000, less expenses (which can be $25,000 or less, depending on if she sets up a home office, what kind of marketing she does, and insurance premiums). In essence, she bills half of what she did at her prior firm but makes nearly the same amount of money.
That’s the thinking behind posts such as these, taken from a Greedy Associates message board where lawyers are discussing the new associate salary increases:
First Post:
Beware clients: the prices are about to go up big time at VE,Fish and others. And to you mid-level partners and associates, you are about to be squeazed. Pay attention to what happens now; it happened at VE about four years ago and it will happen again. The senior guys get theirs, the new assoceates to three years theirs and those in the middle will get screwed. In fact they want you to leave because you are too expensive for what you do. The pressure on the younger lawyers will go up, even if you don’t have the work (see Baker Botts) and the client, within 6 months will see huge increases in bills. My suggestions… move your business to more reasonble firms.
Response:
It is exactly this dynamic that I hope to take advantage of. All of the big firms will be raising their rates, but I will not benefit proportionately. I think the time is ripe for senior associates and junior partners to strike out on our own because we can charge less while making quite a bit more than we could at the firm. Of course, the selling point to clients is that they will still be getting the same high-quality work from the same familiar faces.
Before, the risk of starting a small firm wasn’t quite worth the potential reward. The new market dynamics have changed that and I’m sure many in my position at big firm offices in Texas are having similar discussions. We’ll see more than a few spinoffs over the next 6 months I bet.
So are we about to enter into a new age of legal entrepreneurship, where young lawyers leave their large firms en masse to embark on their quest for riches? That’s unlikely. Clients will still require the services of large firms for complex and bet-the-company deals and litigation, and those large firms will fight hard to encourage their best and brightest to stay put. But for less complex, routine and general advice matters, clients may think differently and begin looking for alternatives to large and midsize firms. If enough clients push their day-to-day lawyers to move into a lower-cost model, we might see a marked increase in the number of solo and small firm practicioners, which would certainly create a different dynamic in the legal market. It would also have a direct economic impact on existing midsize and small firms, since the competition in that space would increase substantially.
As the Greedy Associates commenter observes, the next six months will be telling. Maybe it be “business-as-usual,” where clients simply accept higher outside counsel fees as a cost of doing business. Maybe clients will resist fee increases, supporting the lawyers that take the plunge into smaller, less-expensive firms. Regardless of what happens, however, one thing is certain: the economics of legal business just got a little more complicated.
Other Resources:
- Dennis Kennedy’s August 17, 2005 blog entry discussing a survey that indicates 93% of big firm lawyers would not leave their law practice to go solo. [Ed. note: It would be interesting to see the survey methodology, respondent information and dataset. If most of the respondents were partners over age 45 making $500,000+, it would come as no surprise that they don't want to go solo.]
- Story from the Honolulu Star-Bulletin about a 47-year-old senior partner that jumped from a large firm into a solo practice.
