Sunday, July 15, 2012

A Picture of the Melting Right Mode

I created the graphic below to depict the shrinking right mode of the bi-modal distribution since its 2007 high water mark (measured in February 2008). 

Nalp07_11comparisons

[Note: The difference between the mean and adjusted mean in the 2011 distribution is due to the fact that law grads who fail to report their salaries tend to have have less lucrative employment; so NALP makes a prudent statistical correction --basically a weighted average based on practice settings.]

From a labor market perspective, the class of 2007 entry level salary distribution was extraordinary and anomalous.  Why?  Because we can safely assume that legal ability, however it might be defined, is normally distributed, not bi-modal.  So when such a distribution appears in a real labor market, something is significantly out of kilter. 

Why did the entry level market become bi-modal? As the legal economy boomed from the mid-90s through the mid-00s, many large law firms (NLJ 250, AmLaw 200) were trying to make the jump from regional dominant brands to national law firms.  For decades, going back to the early to mid-20th century, these firms followed a simple formula: hire the best and brightest from the nation's elite law schools. As they continued to enjoy growth, they reflexively followed that same formula.  Yet, by 2000s, the demand for elite law graduates finally outstripped supply. 

This micro-level logic ("let's not tinker with our business model") produced a macro-level bidding war.  This is how the right mode came to be.  Yet, because it was a macro-level phenomenon, clients, led by industry groups such as the Association of Corporate Counsel (ACC), reacted by saying, "Don't put any junior level lawyers on my matters --they are overpriced."  Outsourcing and e-discovery vendors have also eaten into the work that used to go to entry level lawyers.  So the volume of BigLaw hiring has collapsed, hence the melting of the right mode. For a more detailed overview, see NALP, Salary Distribution Curve.

Long Term Structural Change in Big Law

That said, it is not just the entry level market that is under stress -- the fundamental economics of Big Law are also changing.  Consider the chart below (from Henderson, Rise and Fall, Am Law June 2012), which shows that revenues per lawyer at AmLaw 100 firms has gone flat and moved sideways since 2007, breaking a pattern of steady growth that dates back to the pre-Am Law 100 days.

Amlaw25 years

Stagnant revenue is a source of enormous worry for law firm managers.  Without higher profits to distribute--and growing the top line is the usual profitability fomula--their biggest producers might leave, causing a run on the bank ala Dewey, Howrey, Wolf Block, etc.  So the dominant strategy now has nothing to do with entry level hiring.  Rather, the goal is to keep and acquire lateral partners with portable books of business.  After all, clients aren't protesting the value of most senior level lawyers. And seniors lawyers are plentiful, thanks to the excellent health of baby boom lawyers and the poor health of their retirement accounts. 

This strategy may work fine for this fiscal year, but over the middle to long term, BigLaw is going to get older and dumber.  Further, this dynamic produces substantial ripple effects on legal education -- albeit ripple effects that feel like tremors.

Endgame

The long term solution -- for both law firms and law schools -- is for the price of entry level talent to come down to the point where young lawyers are more cost-effective to train.  And that price point is not $160,000.  This inflated pay scale (which has supported ever higher tuitions at law schools) only persists because large firms are deathly afraid of adjusting their salary scales and being labeled second rate.  So the solution is keep the entry pay high but hire very few law school graduates.  This is not a farsighted or innovative business strategy.

It's been 100 years since law firms engaged in sophisticated business thinking. And that last great idea was the Cravath System, which was method of workplace organization that performed expert client work while simultaneously developing more and better human capital.  See Henderson, Three Generations of Lawyers: Generalista, Specialists, Project Managers.   According to the Cravath Swaine & Moore firm history, published in 1948, the whole point of the Cravath System was to make "a better lawyer faster." 

I think the next great model for a legal service organization (law firm may not be the right term) likewise will be based on the idea that there is a large return to be had by investing in young lawyers. As my friend Paul Lippe likes to say, "When it appears, it will look obvious."

[posted by Bill Henderson]

http://lawprofessors.typepad.com/legalwhiteboard/2012/07/a-picture-of-the-melting-right-mode.html

Current events, Data on legal education, Data on the profession, Innovations in law, Law Firms, New and Noteworthy, Structural change | Permalink

Comments

It looks to me as if the bottom peak of lawyers has gone up--- that is, they are earning substantially better salaries now than in 2007. That may just be the smart people from the top peak dropping into the bottom market. But that bottom market sure does look healthy, contrasting with the gloom about jobs for lawyers. Is the gloom really just about the elite market, and not about the market that's more realistic for more lawyers? How has the median lawyer's salary changed?

Posted by: Eric Rasmusen | Jul 16, 2012 7:02:45 AM

"It looks to me as if the bottom peak of lawyers has gone up--- that is, they are earning substantially better salaries now than in 2007. That may just be the smart people from the top peak dropping into the bottom market. But that bottom market sure does look healthy, contrasting with the gloom about jobs for lawyers. Is the gloom really just about the elite market, and not about the market that's more realistic for more lawyers? How has the median lawyer's salary changed?"

Median starting salary in 2007, in 2011 dollars: $71,750

Median starting salary in 2011: $60,000

The mode in the leftward point in the distribution is $50,000 in both years, which means it was 9% higher in real dollars in 2007.

Also, the percentage of graduates who had salaries reported to NALP dropped by 20% between 2007 and 2011. Since higher salaries are reported at much higher rates than lower salaries, this suggests the deterioration in starting salaries is greater than these numbers alone indicate.

Posted by: Paul Campos | Jul 17, 2012 3:56:09 PM

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