Wednesday, July 23, 2008
Posted by Jeff Lipshaw
Coming up for air after working on some other stuff, I finally had a chance to digest Bill Henderson's post on bi-modal distribution of starting associate pay. I have some visceral reactions to the data, as well as some "the sky is not falling" thoughts about how things will play out. This is all casual empiricism and seat of the pants theorizing, so take it for what it's worth.
1. Bill's post doesn't talk much about industry consolidation, but there's no doubt that has substantially impacted the law business since I started at a big Detroit firm in 1979. At that time, there was a big premium to working in a New York law firm - as I recall, as much as $10,000 a year. This will sound quaint and somehow Great Depression-ish, but my offer letter in the fall of 1978 from Dykema promised a starting salary of $22,000, and I am pretty sure an offer from Cravath at the time would have been in the low $30,000s. The gold standard of pay at the time was not as a lawyer, but as a consultant at The Bain Company, which was mainly a place for the JD-MBAs. (I remember this because the starting pay was $44,000, exactly double my offer, but the word was you worked three times as hard.) What Detroit (Dykema), Milwaukee (Foley & Lardner), Pittsburgh (Reed Smith), St. Louis (Bryan Cave), as exemplars, offered, even then, was a trade-off of life style for dollars: billable hour goals in the 1700-1900 range, versus 2200-2800, lower cost of living, accessible suburbs, greater assurance of partnership (ratios then were 1:1 in the smaller cities, with the 4:1 or 5:1 leverage even then in New York.)
What seems clear to me is that the midwestern model indeed did not work, and the continued admission of partners created what one of my late partners used to rail about at partner admission meetings: the creation of negative leverage by admitting so many people as equity partners. The solution was growth, but organic growth opportunities are cyclical with the business cycles, and consolidation growth is the alternative. And that's what we've seen. DLA Piper may be the best example, as a decent firm out of Baltimore turned itself into a global powerhouse over the course of a few years (my late friend Jeff Liss being a major player in that strategy). Dykema just swallowed up a medium-sized firm in Chicago.
My theory is there's less to distinguish the Am Law 200 now, and hence, less to distinguish in terms of non-monetary compensation, hence the trend to bi-modal distribution.
2. I want to suggest the banking consolidation model as a prediction of the way the law industry will go. Banks, like law firms, are natural consolidators. It's largely a service business, the services are fairly homogeneous, and consolidation offers huge cost synergy opportunities. But what happened with all the banks turning into Citis or Chases or Keys or National Citys is that market opportunities sprang up for local service oriented banks. The "private bank" phenomenon is a response to that. I used to listen to radio ads for a locally-owned bank in the Detroit area, Franklin Bank, that made this the focal point of its value proposition. (I'm hearing something similar this summer here in northern Michigan from local pharmacies, particularly those that do compounding, as a reaction to the CVS-Walgreen's-Rite Aid-Walmart consolidation.)
As smart and ambitious lawyers get tired of the bureaucracy of the mega-firms (and more importantly, like David Boies, having fruitful and remunerative new business killed by a conflict!), my prediction is we will see a cycle of boutique firms that return to something like the market distinction of the late 1970s. I can reveal here a not-very-hidden secret: GCs of big companies know that much of what they purchase in legal services is fungible, and they can get quality work in Albuquerque or Nashville or Birmingham, Alabama or Jackson, Mississippi.
My faith in the corrective power of markets is not quite as ardent as my friend and about-to-be co-author Larry Ribstein (Ribstein & Lipshaw, Unincorporated Business Associations, 4th ed., to be available for the 2009-10 school year, get it while it's hot!), but I think that's where we are going (see Larry's observations on this business acting more like other capitalist businesses). Like Larry, however, it's the debt that bothers me, and I second his historical observations on that score.