February 4, 2011 9:50 PM

Greed Atop the Pyramids

Posted by Ed Shanahan

By Steven Harper

Three recent reports are more interesting when read together: the National Law Journal's annual head count survey at the largest 250 law firms, Citi Private Bank's third quarter 2010 report on law firm performance, and the alternative billing survey produced in late 2010 by The American Lawyer (TAL) and the Association of Corporate Counsel (ACC).

The big news out of The NLJ 250 was a drop of 1,400 in 2010 total attorney head count. This qualified as a welcome improvement over the far deeper plunge in attorney head count seen in 2009. Associates took the biggest hit, accounting for about 1,000 of last year's eliminated positions.

That doesn't sound too bad, until you realize that's a net reduction. As 5,000 new law school graduates got large firm jobs, many more--over 6,000--lost (or left) theirs. This simple arithmetic suggests an unsettling reality: The relatively few who land big-law jobs may discover that keeping them is an even more daunting challenge.

In some respects, that's nothing new. Long before the Great Recession began, attrition was a central feature of most large firm business models. In 2007, lucrative starting positions were plentiful, but big law’s five-year associate attrition rate was 80 percent. Some of it was voluntary; some involuntary. The survival rate for those continuing the journey to equity partner was exceedingly small.

That takes us to the Citi report. 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, according to Citi, 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.) Amid the bloodshed elsewhere, average equity partner profits for The Am Law 100 actually rose slightly in 2009--to $1.26 million. Not bad for the first full year of the worst economic downturn in a century.

But even that remarkable average masks growing wealth gaps within equity partnerships. One law firm management consultant observed, "Before the recession, [the top-to-bottom equity partner compensation ratio] was typically 5-to-1 in many firms. Very often today, we're seeing that spread at 10-to-1, even 12-to-1." That is stunning.

While maintaining leverage and increasing hourly rates, the third leg of the profits stool likewise remains intact: 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 hours targets in addition to the annual requirements reported to NALP.

The ACC/TAL survey reveals why: Earlier rhetoric surrounding the new world of alternative fees was largely empty. Hourly billing remains king of the fee-generating hill. As another survey from Am Law sibling The Legal Intelligencer confirmed, simple discounts from regular hourly rates accounted for 80 percent of so-called alternative fee arrangements last year.

The pressure to bill hours is increasing. Unfortunately, it remains an important, albeit misnamed, productivity metric. Indeed, rewarding time alone is the antithesis of measuring true productivity, which should focus on the efficiency of completing tasks--not the total number of hours used to get them done.

As one law firm management consultant told the National Law Journal: "We're finally seeing the bottom of the legal recession…There's been a reset. There are fewer lawyers producing more work and more revenue."

When average partner profits for 2010 are reported by The American Lawyer in May, Citi's prediction will likely come true: 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.

The growing spread between highest and lowest within equity partnerships--coupled with the plight of everyone else--may reveal that the worst economic downturn of modern times has provided protective cover to greed atop the pyramids.

Steven J. Harper is an adjunct professor at Northwestern University. He recently retired as a partner at Kirkland & Ellis, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at www.thebellyofthebeast.wordpress.com. A version of the column above was first published on The Belly of the Beast.

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