The traditional law firm pyramid model is under pressure. Historically, to support partner salaries at the top, firms continually added increasing number of associates at the bottom. Every year, big law firms hired troops of new associates and assigned them to high-volume but relatively low skilled projects to gain experience. Although contract lawyers, or, in some cases, nonlawyers, could handle this work for a fraction of the cost, firms kept it in-house, where teams of highly educated but untrained young lawyers logged thousands of hours a year at increasingly higher hourly rates.
For a long time, big law firms raised lawyer salaries and billing rates annually, while clients absorbed the high overhead. When the recession hit, in-house legal departments needed to cut costs and called for reform at law firms. In response, BigLaw laid off associates, cancelled summer programs, deferred start dates for hires, and modified base pay and bonus structures. Many firms divided associates into tiers, hiring some on partnership track and others as permanent staff attorneys to handle more routine or low-level work.
Now, many large corporate clients refuse to pay for junior associates to learn on the job, and exclude first and second year associates from working on their matters. Consequently, law firms deleveraged, reducing the ratio of associates to partners and drastically cutting the number of entry-level hires. At the same time, the number of equity partners shrank slightly, and the ranks of counsel and nonequity partners grew. These trends are expected to continue to impact law firm staffing for the foreseeable future. Thus, the traditional pyramid structure now looks more like a diamond, with larger classes of senior associates, counsel, and nonequity partners forming the broad middle, and relatively few equity partners at the top and junior associates at the bottom.
In addition to deleveraging, law firms increasingly use contract or project lawyers and legal process outsourcing (LPO) firms to cut costs further. Several firms also built their own outsourcing “centers” in lower cost locations. So, perhaps the new law firm model really is two shapes: a diamond stacked on top of a pyramid. The diamond is comprised of the partners and associates as described above, while the supporting pyramid below includes layers of staff lawyers, paralegals, and on-shore and off-shore LPO vendors.
Traditional law firms also try to increase headcount and revenues by aggressively recruiting lateral partners with substantial client followings. Surveys show that virtually all AmLaw200 firms plan to hire laterals over the next five years. Partner candidates with large books of portable business also have high salary requirements. To meet their demands, less productive partners often are moved to lower levels of the firm structure. Consequently, enormous compensation gaps widen between the most highly compensated equity partners and lower level equity partners, with nonequity partners even farther behind.
This leads to a “core and mantle” law firm model. A small “core” of true equity partners not only attracts and controls clients and business, but also controls the firm’s management and profits. This “core” is surrounded by a “mantle” of attorneys with service roles and titles such as nonequity partner, of counsel, special counsel, staff attorney, senior attorney, permanent associate, and the like. At most firms, the mantle grows much faster than the core.
Another trend in response to the economic downturn is the exodus of partners from large traditional law firms to establish more nimble and flexible boutique law firms. Advances in technology enable attorneys at small firms to operate with the speed and quality of a big firm without the overhead of associates and administrative staff. This extreme deleveraging creates a flat firm model.
The upside of the recession for these new boutiques is lower office rents and, more importantly, a pool of unemployed talented lawyers often willing to work on a contract basis. As a result, these new firms have the luxury of hiring only experienced lawyers to create a network of specialists on call. These firms attract clients by delivering the same expertise as BigLaw but at a lower cost. They reduce expenses, slash billing rates, and offer alternative fee arrangements, while providing the same legal services their founders offered at their old firms. Clients are willing to give up retaining brand name law firms to follow brand name lawyers.
The boutique firms compete by taking advantage of the diseconomies of scale experienced by the traditional large law firms, since conflicts of interest and burdens of managing and coordinating firm functions increase in number and complexity as a firm becomes larger and more geographically dispersed. Moreover, before the legal market embraced technology and LPO’s, large or complex cases and transactions required law firms big enough to maintain cadres of attorneys and staff to handle them. But now, with clients demanding that their outside counsel use contract lawyers or less expensive third party vendors for lower level tasks anyway, it doesn’t matter whether the lawyers coordinating the case or matter are with BigLaw or a boutique.
The rise of virtual law firms takes this trend a step further, creating a network firm model. A virtual law firm doesn’t have a bricks-and-mortar office, but operates from the homes or satellite offices of its lawyers, usually delivering services to clients via technology. The virtual firms generally utilize only senior lawyers capable of working without much day-to-day supervision. Contract lawyers provide associate and practice specialty backup. Some of these firms also send contract lawyers out to handle projects at the clients’ places of business on secondment. Many clients see a benefit in having their work done by an experienced lawyer, especially at lower billing rates. The virtual model eliminates most infrastructure and overhead involved in running a traditional law firm, and leverages technology to maximize profits without sacrificing quality of service. Over time, however, virtual techniques increasingly are being adopted across the spectrum of legal service providers, which blurs the distinction between who’s a virtual law firm, and who isn’t. This continuum of providers reflects the new reality in the mode of delivery of legal services.
These changes in the law firm model don’t come easily and, for the most part, are at clients’ rather than law firms’ behest. Time will tell whether the new law firm structures merely are a temporary reflection of market cycles or a complete paradigm shift. Recent AmLaw200 surveys show that law firm leaders believe the Great Recession produced a permanent and fundamental transformation of the legal marketplace. New competitors and technologies will continue to challenge BigLaw. Some traditional large law firms will evolve to meet the demands of the new environment; others won’t and may not survive.