The Looming Associate Crisis

An associate recruitment and retention crisis is looming for which there are no easy solutions. Law schools continue to graduate roughly 40,000 students a year, as they have over the last 20 years. The AmLaw 200 law firms have been steadily hiring an average of 4%+ more associates each year, resulting last year in a typical incoming associate class of 50. That means that AmLaw 200 firms now hire about 10,000 new associates a year, or about 50% of the graduates from the top 100 (hardly the Ivy League elite) of the nation's 200 law schools.

Seen from another perspective, the top 20 law firms in the country need to hire at least 2100 graduates this year, while only 1400 or so students will graduate in the top 20% of the top 20 law schools.

And the number of associates these firms will be trying to hire is likely to continue to climb. Already this year, firms are starting to announce double-digit increases in summer hiring ' 35% at Skadden, Arps, Slate, Meagher & Flom LLP, 20% at Kirkland & Ellis LLP, and 14% at DLA Piper. And the competition from hedge funds and investment banks offering attractive alternatives is increasing.

Given these statistics, unless the law business tanks, not far along the horizon must be a point where nearly every associate in the top half of every law school, whatever the law school, has several high-dollar offers to choose from. Which means many firms will be left with fewer incoming associates than they want, or certainly fewer of the caliber they are seeking.

On top of that, astronomically high and climbing attrition rates mean that firms are at the same time trying to hire associates to replace those still-young lawyers who are leaving every year, whether to go to other firms, in-house, or to entirely different fields. An ABA's Young Lawyers Study found that 65% of associates said they were considering switching to nonlawyering jobs within the next two years. Even those attorneys that firms are hiring laterally, to replace the departed, are themselves leaving at astonishing rates, faster than the homegrown associates.

The Starting Salary Piece

As day follows night, associate salaries are rising. Entering associates this year are earning $160,000 before bonuses at the largest law firms across the country (essentially the same that federal district judges make), thanks to Simpson Thatcher & Bartlett LLP's opening volley. Starting salaries (not including bonuses) at firms of 500+ lawyers are thus up 130% since 1994, with the annual rate of increase averaging more than 10% ' significantly above both the rates at firms of other sizes and the average for all firms (6%). And with each new class' salary increase, the salaries of associate classes up the ladder must also be increased.

The Profitability Piece

One estimate is that this year's salary bump will result in an average hit to partners in big firms in the range of $40,000-70,000 per partner. The conjecture is that Simpson Thatcher, which started the latest round of raises, will pay approximately 2% of net profits, or $8 million, to fund the raises up the ladder, resulting in a reduction in each partner's profits of around $50,000.

But that is hardly where the impact on profitability stops. Before this year, associates were usually not profitable until their third or fourth year. Higher salaries stretch that time out even further. With average associate attrition rates at big firms pushing above 20% annually, culminating in 78% of associates (100% of minorities) leaving by their fifth year, firms have less and less time to recoup their initial recruiting/training/salary/ overhead investments in associates, let alone realize a significant profit.

The graph showing the curves of how long it takes to realize a profit on associates and of how long those associates are likely to stay would make it clear that these two lines are perilously close. Associates who used to make for good document review/bill plumping fodder are starting to look more like loss leaders in the business of finding good lawyers who will actually stay.

What's to Be Done?

The traditional solutions are few and running out of steam.

As always, billable rates can be raised, banking on good evidence that at least some clients will pay whatever they must to get the best legal advice. And certainly many firms' rates continue to go up. But there will always be clients insisting that their rates be reduced or hours written off, while others may simply go elsewhere. And the higher the rates, the more looking clients are apt to do.

Firms can also try to recoup salary increases by raising billable hour requirements. But given the current associate attitude ' the most recent ABA study found that 84% of associates would rather give up more money proportionately in order to work a little less ' ratcheting up billing requirements runs the risk of ratcheting up attrition rates as well.

There are a few ways to enlarge the number of available recruits. More new law schools could open, and existing law schools could expand the size of their classes. However, law school applications have been declining by ever-larger percentages each year since 2004. Opening more law school spaces to a less elite group of applicants may not produce the quality graduates law firms are looking for.

Another tack to expand the number of possible recruits is to continue courting associates who have left, in hopes of eventually luring them back, an approach that has produced results for accounting firms and an increasing number of law firms.

Otherwise, firm recruiters may have to become modern conjurers, ranging broader among law schools and deeper into classes, looking for the proverbial gem in the rough. That may require more sophisticated approaches than the part-time hiring partner has historically come up with.

Several large firms have in the past few years either established or expanded in-house top-level talent management programs to professionalize recruiting and retention efforts. Baker & McKenzie LLP created a global director of talent management in 2005 who bolstered the firm's mentoring and coaching efforts. Greenberg Traurig, LLP hired its first chief recruitment officer in 2004 and has improved its associate retention by 15%.

Understanding your firm well enough to know what attributes in associates are likely to produce a good fit is a promising strategy, both for purposes of sorting through the lower-than-top-10% graduates and also for keeping those you hire. Google, which doubles its workforce every year, takes this approach successfully, with a less than 4% attrition rate. Large accounting firms are making impressive strides in raising retention through initiatives that provide extensive support for and job profiles tailored to their young professionals. But law firms, as usual, are reluctant to be in the legal vanguard ('You mean no one else is doing this?') by hiring based on anything other than GPA. Nor do most firms make use of the kinds of traditional surveys/assessments that corporations have taken advantage of for years to make sure young professionals are placed in the right positions within the organization. Perhaps, given the circumstances, a cadre of innovative, forward-looking firms will start to change that.

Medium and smaller law firms may change recruitment strategies altogether. Some have already publicly declared themselves to be out of the business of hiring first-year associates, like Philadelphia's Kleinbard Bell & Brecker LLP, or recruiting at national law schools, like Pittsburgh-based Tucker Arensberg, P.C. Instead, these firms can court those associates after they've spent a few years at larger firms willing to finance their training.

Radical Solutions

What ultimately may have to change is the current law firm business model, and possibly in several respects. What has been a lucrative model ' worker bees who 24/7 churn out profits for partners, toiling to prove that they too should become one of the select few ' may simply not interest many Gen X and Yers. Although some law firms seem to be window dressing the old model with 'cultural' bells and whistles, such as fancy marketing material with heartfelt testimonials, hot chocolate on cold Fridays at Skadden Arps, and 'thank yous' from Sullivan & Cromwell LLP partners, the bottom line remains the same.

Other firms are significantly re-jiggering what it is to be a partner and whether lawyers even need to be one in order to stay over the long haul. One-third of the UK 100 law firms, facing attrition rates similar to those in the United States, have over the last few years introduced non-partner career tracks, based on feedback that partnership and its lifestyle has lost its allure. Firms in the United States have embraced differing definitions of partnership, including non-equity partnership and, in some cases, flex-time partnership. Weil, Gotshal & Manges LLP, certainly once one of the firms known for its brutal hours, announced this year the creation of a new 'flex-time' partnership category for 'partners making a long-term career choice to work on a flexible schedule.'

However, firms that want to concede lower billable requirements and more flexible work schedules may be facing a very hard sell: a concomitant reduction in the high profitability that equity partners have long enjoyed. Partner profits have grown almost twice as much as associate salaries over the last decade. On one hand, that may mean there is room for partners to absorb some of the resultant financial hit. On the other hand, the prospect of losing the ever-increasing compensation that partners are used to, not to mention the prestige that goes with those incomes, is sure to set off fireworks. It amounts to a tectonic shift in distributing firm profits. Nonetheless, while certainly an unwelcome blow to existing partners, lower partner profits could be a development which, given the work/life style tradeoffs, future partners will find quite acceptable, even attractive.

Even more radical is the possibility that law firms will change their unit of sale from time to valued expertise or will even no longer provide legal services on a 1:1 basis. Those sorts of changes in business model would dramatically reshape the demand for both associates and more senior lawyers.

Mark Chandler, senior vice president and general counsel at Cisco, provoked a firestorm in the legal commentary universe recently by predicting that big firms will go the way of dinosaurs unless they are business-minded and nimble enough to respond to corporate needs to streamline and reduce legal costs. To that end, Cisco is pioneering fixed-fee arrangements for everything from individual patent registrations to a year's worth of U.S. commercial litigation.

Going even further out, if shared knowledge networks are developed to provide online access to much of the technical information law firms currently produce, firms may one day find that their services lie at the extremes of legal advice: inputting and verifying statutory, regulatory, and case data and best practices contracts and forms on one end, while being counselors of last resort on the gnarliest legal questions on the other end. The number and attributes of associates that firms would need in that scenario is likely to differ wildly from the current situation.

What is certain is that the next few years will see law firms going further and further a field from their traditional pack strategies in order to address the looming associate recruitment and retention crisis in new and it is hoped more successful ways.

Ronda Muir is a senior consultant with Robin Rolfe Resources. She can be reached at 201-461-6630, [email protected] or through www.LawPeopleBlog.com.

An associate recruitment and retention crisis is looming for which there are no easy solutions. Law schools continue to graduate roughly 40,000 students a year, as they have over the last 20 years. The AmLaw 200 law firms have been steadily hiring an average of 4%+ more associates each year, resulting last year in a typical incoming associate class of 50. That means that AmLaw 200 firms now hire about 10,000 new associates a year, or about 50% of the graduates from the top 100 (hardly the Ivy League elite) of the nation's 200 law schools.

Seen from another perspective, the top 20 law firms in the country need to hire at least 2100 graduates this year, while only 1400 or so students will graduate in the top 20% of the top 20 law schools.

And the number of associates these firms will be trying to hire is likely to continue to climb. Already this year, firms are starting to announce double-digit increases in summer hiring ' 35% at Skadden, Arps, Slate, Meagher & Flom LLP, 20% at Kirkland & Ellis LLP, and 14% at DLA Piper. And the competition from hedge funds and investment banks offering attractive alternatives is increasing.

Given these statistics, unless the law business tanks, not far along the horizon must be a point where nearly every associate in the top half of every law school, whatever the law school, has several high-dollar offers to choose from. Which means many firms will be left with fewer incoming associates than they want, or certainly fewer of the caliber they are seeking.

On top of that, astronomically high and climbing attrition rates mean that firms are at the same time trying to hire associates to replace those still-young lawyers who are leaving every year, whether to go to other firms, in-house, or to entirely different fields. An ABA's Young Lawyers Study found that 65% of associates said they were considering switching to nonlawyering jobs within the next two years. Even those attorneys that firms are hiring laterally, to replace the departed, are themselves leaving at astonishing rates, faster than the homegrown associates.

The Starting Salary Piece

As day follows night, associate salaries are rising. Entering associates this year are earning $160,000 before bonuses at the largest law firms across the country (essentially the same that federal district judges make), thanks to Simpson Thatcher & Bartlett LLP's opening volley. Starting salaries (not including bonuses) at firms of 500+ lawyers are thus up 130% since 1994, with the annual rate of increase averaging more than 10% ' significantly above both the rates at firms of other sizes and the average for all firms (6%). And with each new class' salary increase, the salaries of associate classes up the ladder must also be increased.

The Profitability Piece

One estimate is that this year's salary bump will result in an average hit to partners in big firms in the range of $40,000-70,000 per partner. The conjecture is that Simpson Thatcher, which started the latest round of raises, will pay approximately 2% of net profits, or $8 million, to fund the raises up the ladder, resulting in a reduction in each partner's profits of around $50,000.

But that is hardly where the impact on profitability stops. Before this year, associates were usually not profitable until their third or fourth year. Higher salaries stretch that time out even further. With average associate attrition rates at big firms pushing above 20% annually, culminating in 78% of associates (100% of minorities) leaving by their fifth year, firms have less and less time to recoup their initial recruiting/training/salary/ overhead investments in associates, let alone realize a significant profit.

The graph showing the curves of how long it takes to realize a profit on associates and of how long those associates are likely to stay would make it clear that these two lines are perilously close. Associates who used to make for good document review/bill plumping fodder are starting to look more like loss leaders in the business of finding good lawyers who will actually stay.

What's to Be Done?

The traditional solutions are few and running out of steam.

As always, billable rates can be raised, banking on good evidence that at least some clients will pay whatever they must to get the best legal advice. And certainly many firms' rates continue to go up. But there will always be clients insisting that their rates be reduced or hours written off, while others may simply go elsewhere. And the higher the rates, the more looking clients are apt to do.

Firms can also try to recoup salary increases by raising billable hour requirements. But given the current associate attitude ' the most recent ABA study found that 84% of associates would rather give up more money proportionately in order to work a little less ' ratcheting up billing requirements runs the risk of ratcheting up attrition rates as well.

There are a few ways to enlarge the number of available recruits. More new law schools could open, and existing law schools could expand the size of their classes. However, law school applications have been declining by ever-larger percentages each year since 2004. Opening more law school spaces to a less elite group of applicants may not produce the quality graduates law firms are looking for.

Another tack to expand the number of possible recruits is to continue courting associates who have left, in hopes of eventually luring them back, an approach that has produced results for accounting firms and an increasing number of law firms.

Otherwise, firm recruiters may have to become modern conjurers, ranging broader among law schools and deeper into classes, looking for the proverbial gem in the rough. That may require more sophisticated approaches than the part-time hiring partner has historically come up with.

Several large firms have in the past few years either established or expanded in-house top-level talent management programs to professionalize recruiting and retention efforts. Baker & McKenzie LLP created a global director of talent management in 2005 who bolstered the firm's mentoring and coaching efforts. Greenberg Traurig, LLP hired its first chief recruitment officer in 2004 and has improved its associate retention by 15%.

Understanding your firm well enough to know what attributes in associates are likely to produce a good fit is a promising strategy, both for purposes of sorting through the lower-than-top-10% graduates and also for keeping those you hire. Google, which doubles its workforce every year, takes this approach successfully, with a less than 4% attrition rate. Large accounting firms are making impressive strides in raising retention through initiatives that provide extensive support for and job profiles tailored to their young professionals. But law firms, as usual, are reluctant to be in the legal vanguard ('You mean no one else is doing this?') by hiring based on anything other than GPA. Nor do most firms make use of the kinds of traditional surveys/assessments that corporations have taken advantage of for years to make sure young professionals are placed in the right positions within the organization. Perhaps, given the circumstances, a cadre of innovative, forward-looking firms will start to change that.

Medium and smaller law firms may change recruitment strategies altogether. Some have already publicly declared themselves to be out of the business of hiring first-year associates, like Philadelphia's Kleinbard Bell & Brecker LLP, or recruiting at national law schools, like Pittsburgh-based Tucker Arensberg, P.C. Instead, these firms can court those associates after they've spent a few years at larger firms willing to finance their training.

Radical Solutions

What ultimately may have to change is the current law firm business model, and possibly in several respects. What has been a lucrative model ' worker bees who 24/7 churn out profits for partners, toiling to prove that they too should become one of the select few ' may simply not interest many Gen X and Yers. Although some law firms seem to be window dressing the old model with 'cultural' bells and whistles, such as fancy marketing material with heartfelt testimonials, hot chocolate on cold Fridays at Skadden Arps, and 'thank yous' from Sullivan & Cromwell LLP partners, the bottom line remains the same.

Other firms are significantly re-jiggering what it is to be a partner and whether lawyers even need to be one in order to stay over the long haul. One-third of the UK 100 law firms, facing attrition rates similar to those in the United States, have over the last few years introduced non-partner career tracks, based on feedback that partnership and its lifestyle has lost its allure. Firms in the United States have embraced differing definitions of partnership, including non-equity partnership and, in some cases, flex-time partnership. Weil, Gotshal & Manges LLP, certainly once one of the firms known for its brutal hours, announced this year the creation of a new 'flex-time' partnership category for 'partners making a long-term career choice to work on a flexible schedule.'

However, firms that want to concede lower billable requirements and more flexible work schedules may be facing a very hard sell: a concomitant reduction in the high profitability that equity partners have long enjoyed. Partner profits have grown almost twice as much as associate salaries over the last decade. On one hand, that may mean there is room for partners to absorb some of the resultant financial hit. On the other hand, the prospect of losing the ever-increasing compensation that partners are used to, not to mention the prestige that goes with those incomes, is sure to set off fireworks. It amounts to a tectonic shift in distributing firm profits. Nonetheless, while certainly an unwelcome blow to existing partners, lower partner profits could be a development which, given the work/life style tradeoffs, future partners will find quite acceptable, even attractive.

Even more radical is the possibility that law firms will change their unit of sale from time to valued expertise or will even no longer provide legal services on a 1:1 basis. Those sorts of changes in business model would dramatically reshape the demand for both associates and more senior lawyers.

Mark Chandler, senior vice president and general counsel at Cisco, provoked a firestorm in the legal commentary universe recently by predicting that big firms will go the way of dinosaurs unless they are business-minded and nimble enough to respond to corporate needs to streamline and reduce legal costs. To that end, Cisco is pioneering fixed-fee arrangements for everything from individual patent registrations to a year's worth of U.S. commercial litigation.

Going even further out, if shared knowledge networks are developed to provide online access to much of the technical information law firms currently produce, firms may one day find that their services lie at the extremes of legal advice: inputting and verifying statutory, regulatory, and case data and best practices contracts and forms on one end, while being counselors of last resort on the gnarliest legal questions on the other end. The number and attributes of associates that firms would need in that scenario is likely to differ wildly from the current situation.

What is certain is that the next few years will see law firms going further and further a field from their traditional pack strategies in order to address the looming associate recruitment and retention crisis in new and it is hoped more successful ways.

Ronda Muir is a senior consultant with Robin Rolfe Resources. She can be reached at 201-461-6630, [email protected] or through www.LawPeopleBlog.com.