The Leaning Tower of Biglaw

pyramid scheme capstone small.jpgJonathan Glater’s article in the New York Times this morning is just further evidence that the pyramid scheme of major law firms is starting to show its age. Yesterday, the New York Lawyer (subscription) took more direct aim at the weak foundation of the Biglaw business model:

Over the last couple decades, high leverage–the practice of having each equity partner supported by three or more associates or income partners–was accepted as a basic tenet of profitability. A firm billed out these junior lawyers at significantly more than it paid them, often getting billings that were triple the lawyer’s salary. It seemed like a sure-fire way to make money. But high turnover and rocketing salaries ate into profit margins. Now, the whole pyramid model is looking fragile.

And it shouldn’t come as a shock that the pressure weighing down on the business model is coming from partners desperate to hang on to every penny of profit. It is clients that ultimately control the purse strings.

More detail after the jump.

Clients are putting incredible pressure on firms to control costs:

Susan Hackett, general counsel of the Association of Corporate Counsel, is another. “I don’t have a problem with the $1,000-an-hour lawyer, but the $350-an-hour junior associate isn’t worth it,” she says.

But whenever the economy slows, there are calls to change the nature of Biglaw billing. Will this current crisis produce lasting changes? According to the New York Law Journal, Milbank doesn’t think so:

The model still has its believers. Leverage is “very good in very good economic times and not good in bad economies,” says Mel Immergut, chairman of Milbank, Tweed, Hadley & McCloy. When the economy comes back, he expects firms such as Milbank that do “high-end, complex work” will benefit.

I believe we can distill that statement to the very simple business idea that firms can fire associates when demand is low, and hire more associates when demand picks up. Nobody is really worried about the “supply” of willing attorneys.

Nor should they be. There simply aren’t a lot of six figure jobs available to people right out of school.

You don’t need slave labor to build a pyramid, you just need a labor force with no better option.

Work Like an Egyptian [New York Law Journal] (subscription)

Billable Hours Giving Ground at Law Firms [New York Times]

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