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The modern law firm: not all partners are created equal, data and billings rule (wsj.com)
68 points by troydavis 67 days ago | hide | past | web | favorite | 47 comments

Isn’t any job for life basically gone now? It’s the clarion call of the millennial generation - don’t expect loyalty from any company you work with or for.

My understanding is that those with law degrees see a ton of competition in the market, because it’s such a prestigious professional calling on the order of doctors but with better work environments. Why wouldn’t it affect those at the partner level?

Call me a skeptic, because I'm a mechanic by trade who's had the same job for 15 years now.

Pay still goes up but your responsibilities change. The communication between you and the shop is still damn important. Owners of bigger shops are always convinced they can backfill you with an army of apprentices and day laborers. Smaller shops are always scared you'll bankrupt them. Trust is character, and competence, according to the business gurus.

I spend most of my days on big issues. Stripped head bolts and stuck cylinders are still a daily thing, but I also take on breaking bad news to big customers. Telling someone their fleet of aging Mac dumptrucks all need a rebuild is a big task. Explaining it in plain English is impossible for a lot of new guys.

My question is do these partners ever take on new responsibilities? Or are they just cashing a paycheck

To summarize: If you provide more value than you cost, you’re always gonna have a job.

It’s a business relationship. Ain’t nobody gonna pay you $5 if you only bring in $3. Everyone will fight to pay you $10 if you bring in $20

Not really. Almost everyone in the world is producing more than they get payed. The only way to be guaranteed a job is to provide a better productivity/wage ratio than enough of your competitors. Depending on your profession, your competition might be smaller (eg highly specialized mechanics in the area) or huge (eg all low-skilled factory workers in the world).

If you produce $5 but can't sell it for $3, is it really $5?

It depends. If I'm trying to sell an object for 5$ but can only sell it for 3, you're right, I've only produced 3$.

However, if I'm working for a company and an object I created gets sold by the company for 5$,but the company is paying me 2$ and the salesman 1$,and declaring 2$ worth of profit, then the salesman and I have obviously produced 5$ worth of value together, but were paid 3$ for our work. Any profitable company by definition does exactly this (and nominally un-profitable ones may be doing the same).

Sure. Markets work slowly and capriciously. Part of the deal of taking a salaried job is that you get a paycheck now instead of waiting until you've built something and seeing who's ready to buy it and how much. Even if in the steady state someone will definitely buy it for $5, it's nice to put bread on the table today instead of maybe in a year or two.

As with all financial transactions of the form "I'll trade your risky profit in the future for a low-risk profit now," you lose some money, and that money goes to the entity absorbing the risk for you.

If I have a Foo I can't use myself, but that will make you $5, and you only offer me $3 for it, have I made $5 or $3?

You’ve created $3 in value and the person who sells it created $2 in value. Maybe they’re managing the logistics of shipping the Foo or the storefront where a customer finds it.

If you can create it and sell it for $5 yourself then you’d do that.

Historically, partners in law firms haven’t had to add value themselves because they had junior lawyers to do that for them.

Indeed, the deeper reason for that is how law firms are only allowed to be "professional companies", no limited liability shareholders allowed. Thus the industry could never be securitized and profits sold. Instead participating in the profits requires participating in the firm, even if only in risk and name only.

This also speaks to why competition is hard to create. No outside limited liability partners means no VCes or passive investors. The closest a law firm can do is loans. Loans partners will be 100% personally liable for.

Law degrees, even from the best schools arent in finite supply like they used to be. Every lawyer now has tons of competition for a small amount of cases, which mostly just plea out these days.

There was some literature in the past showing the legal fields prices haven't been reduced to reflect the new reality of the marketplace supply as it has an insular and protective group who want to maintain an aura of "masters of some dark arts" and maintaining their "prestigious" class which is heavily self regulated. There's a lot of pressure on smaller-time lawyers not to undercut the rest of the firms.

If the prices got reduced there would be a lot more case supply to go around as lawyers would be far more accessible to the average person widening the market. It's not just going to stay the same size, just with lower rates. Instead today it's kept artificially high and while the best work is limited to a small group, while other law degree holders fade into other fields or niches.

A reduction in prices and eliminating the lawyer's false perception of exclusivity and class would also reduce the amount of people getting law degrees [1] which would offset the decline in price so it doesn't entirely cannibalize itself, still being a decent middle class job.

Plus there will always be some cushy law gigs available, especially in corporate law, but it will be a status no longer applied to everyone with a law degree, which limits the entire market as a result.

[1] assuming we don't even further disconnect both the financial costs of an expensive education + lengthy time investments they require (aka opportunity costs) from post-graduation job prospects. Especially when compared to other degrees, industries, and alternative job training/apprenticeship opportunities.

I'd guess that if prices fell the pressure on the justice system would grow even more, and I've heard they are already stretched to breaking. So, the government is probably also against lowering prices and making "justice" more accessible.

Such an interesting, and horrible, time, when justice is de facto denied to all but the wealthiest of us. If this was explicit that would be one thing; but we still pay lip service to principles that we have long since abandoned.

My belief is that the justice system, in particular jury trials, should become shorter, more frequent and exclusively online. You should be able to file a lawsuit and have it resolved in a week.

In a self-regulating industry who would you complain to about a price-fixing cartel?

The whole profession needs to be reformed, by outsiders.

Re: footnote 1

I don’t know why you’d assume that. Looks at the education costs over the 25 years to become a social worker—-which has never been a lucrative profession.

Even if we manage to crack the nut of the law cartel, the educational cartel is of a different order. I expect no progress there, or in medicine, in my lifetime.

There might be new competition now at a certain level, but there's also the oversupply of lawyers and the continual closing of law firms all across america. Those are kind of competing stories about what is happening.

The bimodal distribution of salaries [1] might support the idea of different stories at different levels within the legal world. Note this bimodality seems to have appeared around the year 2000 [2].

[1]: https://www.nalp.org/salarydistrib

[2]: https://www.biglawinvestor.com/bimodal-salary-distribution-c...

Aren't these salaries for new grads? I wonder if the gap between the high earners and the low earners narrows with experience.

>There might be new competition now at a certain level, but there's also the oversupply of lawyers and the continual closing of law firms all across america. Those are kind of competing stories about what is happening.

Can you rephrase so I can understand what you mean?

"There might be competition on some level" BUT "there's also the oversupply of lawyers" -- that means that all the lawyers are competing with each other because there are too many. How are "the lawyers are competing" and "there is an oversupply" competing stories? An oversupply would lead to increased competition.

Sorry, messed up with a typo I couldn't edit later. There is an oversupply of lawyers and law schools and law firms have closed. Yet as the article talks about, there is the article which talks about some thriving law firms, so it's not all bad. There was also the real partners and the not-partners, some of whom might become partners, others that were just paid by the hour and would not become partners. So I was trying to say that it wasn't a clear story, some good things, but because there are fewer good jobs for lawyers (and fewer high paid partner opportunities) there's also bad stories. But I'm sorry, my comment was unclear.

Law firm partners don't work for a company, they are the company.

No surprise at all. They heydey of litigation is over -- everything settles, what doesn't goes to arbitration, and the sliver of work that doesn't go to arbitration goes to trial. In the meantime, the market is absolutely flooded with new grads who are eager to live the life. In addition, the old guard is retiring later. At the same time, there is a tremendous amount of legal work to be done in our ultra regulated economy.

The end result is pretty predictable. Salaries are abysmal. Associates compete brutally with each other to handle mind numbing hours of document review 7 days a week. Trial experience is very rare making it difficult to move up and do 'real' litigation.

I think the starting salary for an attorney fresh out of school in my city is around $40-50k, 60-80hr weeks. Hardly what most people imagine when they go to law school!

The traditional law firm pattern is that the Partners at the top are “rain makers”, and its their job to find and bring in new business. That’s it.

In the middle layer, we have Associates. The senior Associates work closest with the Partners, and supervise the junior Associates. But they’re too busy learning how to “make it rain” and supervising clueless junior Associates to do any real work.

The junior Associates do most of the real work that involves stuff where a law degree would help.

Below that, you have legal secretaries, etc...

In essence, the amount of real legal work you do goes up as you go further down the stack, but also you get lower pay. All the money the Partners make has to be paid for somehow!

In essence, it’s a Ponzi scheme. And you know who the only people are who make any real money in a Ponzi scheme, right?

There are law firms that get rid of the unnecessary overhead, and where you have Partners doing real legal work, but charging the same rate as the larger firms do for their junior Associates. And those Partners are still taking home a much higher percentage of what they bring in, because the firm has much lower overhead.

Those Partners choose to work this way because it gives them more control over their work-life balance. They’re done being the General Counsel of some financial services company with over 22 trillion Euros of assets under management, and want to have some time they can spend at home on occasion with their spouse and their cats. Or travel for pleasure, or any of those other things “normal” people might want to do.

Get rid of the Ponzi Scheme law firms. Find one of the smaller firms with a high concentration of very talented lawyers who don’t want to have to deal with the “big law firm” kind of shit.

> In essence, it’s a Ponzi scheme.

Calling it a ponzi scheme is a distraction to your point because you're mistaken about the essence of a ponzi scheme.

The key element of a ponzi scheme is that it captures resources primarily by in the process of new people being recruited to join. But junior associates don't need to "buy in" to a law firm when they get hired. They get paid a salary. The firm captures resources by getting paid by clients. It just seems that their salespeople are also former junior associates.

Your argument has nothing to do with ponzi schemes. It has much more to do with the efficiency of hierarchies. This point becomes more clear if you think about your use of the phrase "real legal work":

- How much code is written by the CTO of a company with 120 engineers?

- How many burgers are flipped by the owner of a restaurant with 12 locations?

- How much coal is shoveled by owner of a coal mine?

You can argue that because the manager of a mine isn't gathering resources at the coalface, he's not creating value. But that is a different argument than saying the coal mine is a ponzi scheme.

Top law firms are somewhat special, though. I agree it is not a precise fit for a ponzi scheme, but I can see where the comparison came from.

My ex worked for one of the largest law firms in the world in London. She was billed out at 200 pounds+ and hour fresh after qualifying, but her hourly salary accounting for unpaid overtime was lower than that of her secretary, because graduates to top law firms "buy in" by quietly accepting accepting working conditions that at least in the UK means meeting expected billable hours that are close to physically impossible without violating working time regulations, even after signing a "voluntary" opt out of the parts that can be opted out of.

These companies are only able to post the profits per partner they do because graduates work at well below their market hourly rate for years as a "buy in" in the hope of making it back as partner years down the line. The vast majority never make it, of course.

Someone who is capable of getting a graduate position in one of the Magic Circle firms in London for example, can earn far more per hour worked elsewhere, but at a lower yearly salary. For starters they could get a job as a secretary or other support staff in a Magic Circle firm... It takes years before the effective hourly salary of lawyers in those firms outpace the hourly rates of support staff or lawyers at many less aggressive firms.

These graduates are not directly buying in by paying the firm, but they are indirectly buying in by accepting those reduced hourly rates in the hope of that future payoff that most of them will never see.

This kind of milking salaried employees to boost payoff at the top certainly happens in other business too, but the big law firms have elevated it to an art. I've never had a tech company try to sell me on what my salary will be 10 years down the road to get me to work massive amounts of overtime, for example. Some do try to play up their expected value of stock options, though, which is somewhat similar, but where in tech it tends to be startups that can't afford to pay high salaries now, in law it tends to be the big firms that are paying out high profit shares to partners now, which feels distinctly different.

I know it’s a bit of a meme to call things a Ponzi scheme on HN, but what you’ve described isn’t even close to being a Ponzi scheme. If a big legal firm stops hiring associates, it’s not going to run out of money, it’s just going to stop growing.

It’s also not an especially accurate description of how they work. Business development takes up proportionally more time for senior partners, but you have to have a lot of other management responsibilities before billables stop mattering. Juniors will generally be more concerned utilization, but they’ll also be billing for a lot less.

Maybe he meant a Multi-Level-Marketing (MLM)?

In all fairness, big or small, that's firm hierarchy in law, finance, and accounting and control. The fairness of pay and average competency might be better in smaller ones, but it's just what it is (as unfortunate as that is). I deliberately chose a small financial consulting firm, and my experience has been really good for now, contrary to my friends', but the pay structuring is just the same everywhere.

Speaking of "clueless" - I introduced my partner, who is a lawyer, to the loser|clueless|sociopath categorisation which seems particularly useful in the legal world!

Can someone explain why those big profits don't get competed away?

Why don't the corporate employers of the big firms negotiate better prices?

A couple reasons:

• If you have a bet-the-company litigation matter, your GC will choose an expensive, well-known firm. They may be somewhat price-sensitive, but they will be more sensitive to picking a firm that is very prestigious. That way, if the litigation doesn't go well, the GC can say: "well, I went with [super pricey firm], so it wasn't my fault we lost!"

• Some lawyers are just better than others, and the legal profession has gatekeepers (bar associations) that prevent a flood of new entrants. Equally importantly, there is just a limited supply of (for example), battle-tested litigators with experience in a particular field. Ditto for seasoned corporate transaction attorneys who know your company's space. People pay a premium for that experience, and competitors can't pop up overnight because it takes decades to accumulate the experience.

source: I'm a former corporate lawyer

Underscoring the value of “battle-tested” lawyers is the implicit and very real factor of hidden information. These top litigators have tons of it, relationships and reputations with judges and courts, knowledge of poorly documented procedures, etc. it’s not that they’re smarter or better lawyers than anyone else, just a most protected class of people who have done it before. And the only way to be admitted to the club is to work under someone in the club. It’s protectionism through bureaucracy at its purest. The drivers of this, of course, are the judges. Who through hubris and incompetence foster these conditions. It’s not that they’re in on the game, really, it’s just that they’re dictators of their own court and have no motivation to make their courts accessible to anyone, and feel empowered to punish clients represented by attorneys that don’t know their preferred formats and fonts. It’s a silly situation that should be dealt with

That's true, some one with my level of experience in tech in say labour law can command a vastly greater salary.

Its why Cherie Blair earned 10x what her husband Tony Blair did when he was Prime Minister. Cherie Blair is an expert in complex labour law BTW.

I suspect one factor is that although corporate/commercial law firms bill huge amounts they are often a pretty small percentage of the overall transaction - so nobody really cares (people are generally motivated to make deals happen rather than making sure that the overhead for each deal is as small as possible).

I think a similar sort of thing that comes into play for Investment Banking - when the skill of the endeavor means an upside for the firm of hundreds of millions, or billions of dollars, then shopping for a low price is the last thing that you'd want to do.

Monopoly rent-seeking plays a part. To compete for many/most of these matters, one generally has to have completed an expensive three-year stent at a US law school, passed a bar exam and be in good standing in the bar of the relevant jurisdiction.

Did anyone else find this hard to read? The story jumps all over the place with no flow. The subject was interesting and I was reading it to compare to the valley VC structure and startup % ownership. I expected better from the WSJ.

It sounds like the right answer the next time VCs complain about startup salaries is to ask how much the partners at their lawyers' firms take home. Total compensation in the millions per year is pretty nuts, even if it does take ten years to get there.

Mind you, I think some of the salaries software developers get paid are nuts too. I don't feel like I'm worth $300k/year, but I hear plenty of stories of people getting more than that...

Curious - what do the people making > 300k/year do? According to GlassDoor, even in San Francisco you have to be a director or VP to get that. Even Software Architects seem to be in the $150-$250k range, and that tends to be a high-paying post on the technical side.

Salaries of $300,000 are common among the top companies, at 1-2 promotions above entry level.

See https://www.levels.fyi/charts.html

Glassdoor is not presenting correct data; AppAmaGooBookSoft pay $300k+ at the “career level” for software developers, counting base, bonus, and one year worth of their equity grants. Every engineer who is not fired will eventually reach career level.

Software engineers. But that’s $300k+ total comp, cash + bonus + stock, with a good chunk of that being stock not salary. Base salary of $300k or more is a different story.

charge more

I wonder if this will have a destabilizing effect on these "big law" firms. If you're compensated based on how much business you bill for, it's in your interest to poach from your "partners."

Those competitive pressures exist in all consulting firms. Although you might reap a short term payoff by poaching clients, you're unlikely to last long if your peers don't trust you.

Speaking as a lawyer with a lot of big law friends -

Big law firms did not need any help being destabilized already :)

(Google around and you'll see they have been going bankrupt/etc at an accelerating rate)

Something like this is just a drop in the bucket compared to the larger issues around how their client base is changing.

> compared to the larger issues around how their client base is changing.

Can you expand that on that. Very curious.

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