The Am Law 100 Is In - Will Smart General Counsels Smell an Opportunity?
They do it every year; leaving a trail of elation, depression and confusion in their wake. I'm talking about American Lawyer and the AmLaw 100 list. This time, the numbers are not just jaw-dropping, they are full of interesting revelations.
Just 23 Am Law 100 firms have only one partnership tier, compared to 55 in 1994, the year we first began tracking nonequity partnership. The average number of nonequity partners at Am Law 100 firms increased to 65 this year, up almost 11 percent from 2002. The average number of equity partners, by contrast, grew only 4 percent. There are now seven firms on the Am Law 100 chart with more non-equity partners than equity partners. (They are Bingham, with 60 percent nonequity partners; Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, 57.5 percent; Kirkland & Ellis, 54.5 percent; Pillsbury Winthrop, 53.3 percent; Shook, Hardy & Bacon, 52.3 percent; Winston & Strawn, 51.5 percent; and Foley & Lardner, 50.5 percent.)
But don't be sad for the non-equity partners; they're making plenty of money too. But the point is, big law firms, even some that had resisted the notion for years, are starting to accept partnership tiers. And this trend will only continue.
What AmLaw does not bother getting into (perhaps they think it is beneath them) is the tier-ification of associates and the wider trends of law firms restructuring the way they do business.
Many large law firms now have "staff associates" - attorneys who are not in the associate pyramid but do the bulk of litigation drudge work (laborious document review and the other discovery-related document shuffling that more resembles factory work than legal work). Although they are paid far less, these associates are usually billed out at the same rate as a "real" junior associate. Firms also use temporary attorneys and paralegals for these tasks, pay them by the hour, and then charge that hour to the client (times three or four). These are serious profit centers; profits that accrue, as the AmLaw article makes abundantly clear, to the equity partners.
Likewise, the partnership tier structure provides a handy carrot to the associates who know they will never make equity partner, but are nevertheless happy to have the job and the possibility of becoming a second tier partner or of-counsel. In the meantime - bingo - more profits for the equity partners.
Finally, as litigation (and a significant amount of corporate due diligence) becomes entirely electronic, firms are outsourcing bulk work to consultants and legal technology companies that specialize in electronic discovery or document management or research. Before the outsourcing wave, these services were in-house at law firms, and thus an expense item. Now they are re-billed to the clients and, frequently, a profit center to the firm.
So obviously, it is not just partnership structures that are changing in large law firms, it is fundamental ways of doing business. Big firm lawyers have figured out how to turn expense items into profit items, how to organize their practices for maximum profitability, and how to utilize their associates (of whatever form) most efficiently.
One would think that, with a million lawyers in America, competition would drive costs down, or at least keep growth reasonable. But the fact is full competition has not yet hit the big firms. Corporate General Counsels (whether out of intimidation, a desire to maintain collegiality, or unexamined received wisdom about "switching" costs) are still wary about pushing firms to compete like any other professional services vendor. Inevitably, this will change. The two trends will then reinforce each other: clients, demanding cost and service accountability as never before, will threaten to switch firms; as clients move more freely between firms and competition increases, firms will continue to evolve their structures - building tiers and compartments - in order to keep equity partner profits from dropping. From out of these changes will be born new sub-professions within law firms, increasing levels of client service professionalism, and specialized categories of attorneys and support personnel.
Knowledge Management and Law Firm Cultures
I wish they had gone into some of the cultural issues and challenges, because they are numerous and profound. How does one go about massaging the firm culture toward the kind of KM that we all know is becoming a requirement for efficient practice? Issuing a firm wide memo won't do it. And CIOs or savvy managing partners who charge forward without a full cultural buy-in and consciousness commitment by the entire firm - partners and associates - will find themselves out on a long branch.
We've all seen disastrous wastes of energy and money that come from KM (or for that matter CRM) half-measures, false starts and cul-de-sacs. All it takes is one technology burn for a managing partner to become permanently gun shy. And in my personal experience, I've met a significant number of skeptical young partners and senior associates. These are people from the generation that already understands and is comfortable with the technology and its benefits, but wonders - while looking for their place within an increasingly inhospitable, insecure profession and a cutthroat firm hierarchy - to what extent their personal time and resource commitment to KM and CRM projects is in their best interests (as opposed to merely the firm's best interests).
Having said all that, I still agree with Dennis Kennedy's closing assessment:
"Those questions, and some similar ones, are the $64 billion dollar questions for the legal profession. It comes down to this, "Is the legal profession different?" What makes us so sure that we are immune to the changes that technologies and the Internet have brought to every other type of business? For me, I don't see how we can conclude that we are immune."