Strategy

Losing their briefs

Young lawyers once had big pay and big perks. Now they have big headaches. Law's golden age is over.

A scene from Boston Legal

For a few dizzying weeks in the fall of 2006, Travis Allan was courted by some of Manhattan’s most prestigious corporate law firms. On three occasions, the then-23-year-old was flown to New York, put up in four-star hotels and treated to so much fine dining that he has a tough time recalling specifics. (“I’m not a foodie,” he says.) As a second-year law student at the University of Toronto, he was primarily drawn to New York by the “opportunity to grow as a lawyer.” But, he confesses, “It’s really fun to be wined and dined, especially when you’re really young. … I would be lying if I said that I wasn’t impressed.” The real wooing, however, didn’t take place until a few months later when, as one of about 100 summer associates at Manhattan-based Skadden, Arps, Slate, Meagher & Flom, Allan was regaled with long lunches, fancy dinners, Yankee games and a private cocktail party at the Museum of Modern Art.

Though Allan insists the events were mainly about building camaraderie, they also served another purpose. “Many of the top firms tried to do one or two really noteworthy things that other people working for other firms would hear about,” he says. “There was definitely an element of one-upmanship.” It was, after all, the height of the real-estate boom, and the major New York firms needed a continuous supply of young associates to process the billion-dollar deals they were handling. So fierce was the competition that starting salaries reached $160,000 per year — more than double what a law grad could earn working for Canada’s top firms on Bay Street. The steep pay, of course, often came with long hours, high stress and limited job satisfaction. Nonetheless, when Allan graduated from U of T in 2008, nearly 15% went to work in New York.

But beneath the gilt of Manhattan’s mega firms, the industry’s footings were coming loose. Well before Allan made his entree into the centre of the corporate law universe, the good times had begun to fade; clients were starting to take a closer look at their legal expenses, reining in fees and outsourcing work overseas. When the financial sector collapsed, these cracks spread like spiderwebs through the foundations of the major corporate law firms known as Big Law. The firms largely ignored the warning signs and continued to expand in numbers, salaries and perks. “Just like [in] the real estate industry, legal prices started to fall, and just like the real estate industry wasn’t prepared for the bust, the [legal] profession wasn’t prepared for that bust,” says Jerry Kowalski, a New York lawyer and senior principal of the legal consulting firm Kowalski & Associates. “The [financial] collapse not only collapsed the whole investment banking community and much of the global economy,” says Kowalski, “it really laid waste to big chunks of the legal profession.”

As major corporate law firms in New York and London — which had been the primary beneficiaries of the boom — began laying off hundreds of lawyers and legal staff, observers began to suspect that the cutbacks were a result of something more profound than the recession. More than 40 years of exponential growth had created “a kind of Big Law bubble,” says Larry Ribstein, a law professor at the University of Illinois and author of a recent paper entitled The Death of Big Law. When the economy crashed, he says, cash-strapped clients woke up to the fact that many mega firms had become over-leveraged and overpriced — a realization that has prompted the biggest industry upheaval in decades. “After that trigger was pulled, I’m not sure that things are ever going to go back to where they were,” says Ribstein.

While the shakeup may have originated in the world’s major financial centres, the ripple effects will be far-reaching. In the U.S., The New York Times reports that since 2008 some 15,000 Big Law jobs have disappeared, putting downward pressure on smaller markets and intensifying competition for an already scarce number of positions. The consequence: a growing cohort of highly indebted, woefully underemployed law school graduates. (In response to the dismal job market, two New York law schools recently announced that they will cut admissions this fall.) Though in Canada “the boom wasn’t as high and the fall wasn’t as deep,” says John Ohnjec, division director of the recruitment firm Robert Half Legal, “there is a glut of highly qualified people” here, too. On Bay Street, fewer articling students are offered jobs, and firms have trimmed lawyers and legal staff. All of which has injected uncertainty into an industry long known for its job security and high pay. You can forget about making it big in New York. After a half-century in the sun, the golden age for lawyers, it seems, is over.

The common perception of corporate attorneys, popularized by shows like L.A. Law and Damages, is of powerful, well-paid professionals jockeying for the brass ring of partnership in major corporate firms. But this trope, however cemented in the minds of ambitious liberal arts students looking for a real job, is the product of a relatively recent phenomenon. “[Lawyers] have lived through a highly blessed period, and as a result, it seemed like normal, like what they’re entitled to,” says William Henderson, an Indiana University law professor and expert in the history of the legal-services industry.

The seeds of this “blessed period” were sown after the Second World War, when the rapid expansion of big business and the rise of the regulatory state produced a significant discrepancy in supply and demand. At the time, says Henderson, the vast majority of lawyers were generalists who earned a very modest living: in 1948, 70% of lawyers in private practice in the U.S. were solo practitioners; the big bucks, meanwhile, were limited to the precious few who attended a handful of national law schools and landed at a corporate firm in a city like Detroit, where the auto industry required a high degree of legal sophistication. But as demand grew, the larger firms seized upon a rare opportunity. With clients footing the bill through higher legal fees, corporate firms began adding an ever-expanding number of junior lawyers (known as associates) to their ranks, and training them to become deep specialists in everything from tax law to mergers and acquisitions. Before long, the firm’s main revenue driver was hours billed by associates, who funnelled profits to a small number of partners at the top of a pyramid. The result: greater efficiency and value for customers; for law firms, meanwhile, a stable model for exponential growth.

As the size of corporate law firms exploded, so did their revenues. Between 1978 and 2003, the proportion of GDP in the U.S. swallowed up by the legal-services industry quadrupled to 1.8%, from 0.4%. “This was all going to large firms,” says Henderson. “It [was] a great time to be a lawyer and a great time to run a law firm.” With the major U.S. firms counting on growth of between 5% and 10% annually, competition heated up for bright young associates, prompting major firms to extend recruitment drives to Canadian law schools. In the meantime, says Sumit Chakravorty, a director at the legal recruitment firm the Counsel Network, London’s major financial law firms began conducting cross-country Canadian tours, sopping up as many as 70 junior lawyers each year. The corporate law boom was much more conservative in Canada. Bay Street firms didn’t get as big overall or carry the same kind of associate-to-partner ratios as their Wall Street counterparts. But by the late 1990s, “hiring was just growing by leaps and bounds,” says Warren Bongard, vice-president and co-founder of the Toronto-based legal recruitment firm ZSA. “It was like the beginning of a tidal wave, and law firms just couldn’t get enough lawyers.”

This seemingly insatiable demand on the part of corporate clients and law firms inflated legal fees, starting salaries — and the price of admission to law school. Nowhere has this been more pronounced than in the U.S., where at even some of the lowest-ranked institutions, annual tuition now exceeds $35,000. “Everybody was looking forward to this big brass ring at the end of the day — getting into a large law firm and becoming partner, then earning millions of dollars a year for the rest of their lives,” says Kowalski. “Young men and women and their families would pay anything for that.” Between 1965 and 2008, the number of U.S. law schools accredited by the American Bar Association grew from 136 to 200; enrolment more than doubled, exceeding 140,000. (This is not the case in Canada, where, despite demand from prospective students, tight regulation has limited the number of law schools to 20.)

But while the promise of a lucrative career may have motivated an increasing proportion of lawyers-to-be, “it was never as sure a thing as you thought,” says Bernard Burk, an academic fellow at Stanford University’s Rock Center for Corporate Governance and co-author of a paper entitled Big But Brittle: Economic Perspectives on the Future of the Law Firm in the New Economy. Even at the height of the Big Law boom, he says, only 25% to 30% of U.S. graduates were landing high-paying jobs at large firms. Despite the rising costs of tuition, most new lawyers wound up in sectors like government or public interest, where compensation has always been much more modest. The extent of disparity was made plain just before the financial meltdown, when entry-level salary data published by the National Association for Law Placement (NALP), a U.S. professional body, revealed that close to 20% of the class of 2007 were earning $160,000, while nearly 40% were earning less than $55,000.

To Henderson, the concentration of incomes at the low-end and the “sheer madness” of the paycheques at the high-end was evidence of “a labour market clearly at a breaking point.” The day of reckoning, of course, came when the economy tanked. Suddenly, corporate clients warned they would no longer pay for first- and second-year associates to work on their files — effectively crumbling the base of the pyramid upon which U.S. Big Law had been built. “The willingness of clients to pay for the training of young lawyers disappeared,” says Kowalski. “That’s exactly the point where the bubble burst.”

On the face of it, the notion that a push back from corporate clients on hours billed by junior associates — a simple, seemingly reasonable demand — could rattle an entire industry may appear far-fetched. But much more significant than the demand itself, which appears to have been limited to U.S. Big Law, was the fundamental change it represented. “Specialty professions preserve their premium nature as long as they can. As long as the market allows for very high rates, and people value it that way, then that’s how it’s going to stay until something changes,” says Max Miller, a law professor who teaches a course on the legal marketplace at the University of Pittsburgh. “For [law], it’s the clients themselves that are getting to a point where there’s enough choices out there, and they know enough about what they need that they’re not willing to pay as much.” The result: a critical shift in power that has taken the shine off of high-priced legal services, and touched off a chain reaction that is transforming the way law firms do business.

To be sure, corporate clients will continue to pay top dollar for legal services on which their livelihood depends, such as preparing an initial public offering or securing a patent. But when it comes to more routine tasks like document review (eye-glazing stuff that had for decades landed on the desks of high-paid junior associates), the market is hot for cheaper alternatives. According to a recent article in The Economist, the legal-process outsourcing industry, which currently captures $1 billion of the $180 billion Americans spend on lawyers annually, is expanding by as much as 30% a year. Much of the outsourcing is going to India, where the time difference and low labour costs mean local attorneys can often finish the job for North American clients overnight, and for a fraction of the price. Pangea3, a legal-outsourcing firm that operates mainly out of Mumbai, lists GE, American Express and Sony among its clientele. And corporations are not alone: a survey of U.S. law-firm partners found that in the past year, more than half had outsourced document review.