Law firm economics often confuse legal professionals because they have very few ways of getting the information necessary to understand them fully. Firms certainly do not tell their associates how the economics of their business work -- many do not even tell their partners. This is something that is rarely, if ever, taught in law school. Despite the drought of information, to succeed in a law firm environment, you must have a good understanding of many of the unspoken rules that govern law firm economics.
There are several different models that law firms follow. The purpose of this article is to explore the common economic model that governs large and midsized firms at the law clerk, associate, and partner level. The purpose of this article is not to explore how the staffing of paralegals and legal secretaries works inside law firms-which is a separate topic entirely. I should note that this is not a pleasant article for me to write because much of what it says is a critique of the legal profession. Nevertheless, you cannot ignore the truth, and you will have a difficult time succeeding at a high level inside a law firm unless you understand its economic model.
The Importance of the Billable Hour to Law Firm Economics
It is important to be aware that most large and midsized law firms are run to be profit centers and make as much money as possible. In this regard, the way firms make money through their arrangements with clients must be understood. There are many different sorts of billing arrangements, from a fixed fee to contingency. Nevertheless, in almost all cases, large to midsized law firms prefer thebillable hour approach.
Historically, law firms billed clients by what they perceived as the "value" of the work they were doing. Occasionally, firms would quote a fee upfront, and that would be what they charged. In still other instances, after a case, apartner in a law firm might even look at the size of the file they and their associates had worked on and tell their secretary something to the effect of: "That feels like about a $2,000 file. Send them a bill for that."
There was a time when the billing done by attorneys was not based on the billable hour. Not too long ago (within the past 40 years), a gradual transition occurred to lawyers basing the value of their time this way.
In the nineteenth and early twentieth centuries, lawyers routinely billed their clients relatively standard fees based upon their experience performing a particular service. For example, a simple will might cost $50 at the turn of the century; an uncontested divorce, $200; and, a house closing, $100. Some clients, however, complained that such fixed rates led to price-fixing and extraordinarily high hourly rates for some lawyers. For their part, lawyers responded with the Br'er Rabbit defense. "Please, oh, please," they pleaded, "don't throw us into that briar patch of hourly rates. Oh noooo!" Citing the concern over price-fixing charges, they agreed to hourly rates as a standard for the industry and touted it as a consumer protection measure.
~Donald E. deKieffer, How Lawyers Screw Their Clients, p.28
Because of this sweeping change, the legal landscape has been altered quite dramatically. Today, the economic engine inside most firms is based on the billable hour.
As an aside, I can tell you that I am not sure if this was the best move. In my position as a legal recruiter and having spent the past several years talking to countless attorneys daily, I do not think I have ever encountered a single situation where an attorney was told they bill too much-or that they worked too much time on a single project. Conversely, I have come across countless examples of the reverse occurring. Compensation and even many hiring and firing decisions inside most law firms are now based more on production than the value produced for the client.
Law firms are rarely guilty of padding their bills, and their associates work on various matters. I have never heard of an episode of this occurring. However, firms do as institutions push both their associates andpartners to pay their bills. Since the client is being charged based on the billable hour, the client will receive an accurate bill for hours reported by the attorneys who worked on a given matter. Whether or not this bill accurately reflects the amount of time necessary to complete a given task is another story.
The point of this discussion is that once you are inside a law firm, you must understand the importance of the billable hour in the law firm's profitability and the law firm's personal evaluation of you. As will be explained below, the significance of the billable hour will be different at each point in your legal career.
The Economic Significance of Various Seniority Levels Inside a Law Firm
Most American law firms are set up in the same way. First, the firm will generally have a few law clerks who are law students or young lawyers awaitingbar results. In large law firms, most law clerks are called summer associates. Second, the law firm will have junior, mid-level, and senior associates. Third, the firm will have attorneys at a counsel level and partners. There may also be levels of partners, such as income partners and equity partners. At each stage of seniority within a law firm, your value will change, and the economic expectations the law firm has of you will change.
1. The Law Clerk
Most organized law firms have law clerks. Law clerks are typically called summer associates in larger law firms; however, many large law firms employ clerks during the school year. The law clerk typically makes anything from nothing in smaller firms to a weekly salary that can be over $2,000/week in some larger firms.
From the law firm's perspective, the purpose of the law clerk position is to allow the law firm to do recruiting while simultaneously having the opportunity to "try before they buy." Law firms will generally use law clerks for tasks that are not necessarily profitable for the firm but usually helpful. For example, you may use a law clerk for research that the firm needs to be done on an important matter. You may also use a law clerk during the summer or school year for mundane tasks that the firm does not want its associates working on.
One of the largest points of thesummer associate and law clerk program, though, may be somewhat unspoken. I would argue that these programs exist because law firms need to evaluate whether young lawyers can play the economic game inside of a law firm.
A couple of years ago, I received a telephone call from a law clerk inside a large Manhattan law firm who had just received their first review from their summer law firm. The law firm was unusually harsh on this law clerk and made several trivial comments about her attitude, drive, and focus. In fact, the law firm said so many negative things I asked the law clerk to stop talking after five minutes. It was clear she would not get an offer to join the firm following the summer if she continued this way.
"How many hours did you bill?" I asked.
"I have been billing about 35 hours per week," she said.
In my position, I learn to recognize the warning signs and had some very brief advice for this law clerk. I asked her a few brief questions about how assignments were handed out and then offered the following advice:
"Get all the work assignments you can that are not billable to firm clients. The reason you want these is that you do not want to be unethical. Then, for every nonbillable assignment you get, work like there is no tomorrow—Bill at least 70 hours a week for the next five weeks of your summer. Work weekends and whenever you get a chance. That is all you need to do."
At the end of the summer, out of the 18 law clerks in her class, she was one of five to get an offer. The firm's praise of her at the end of the summer was glowing and extraordinarily strong.
This is, of course, an unfortunate commentary on the status of the American legal profession. In virtually every case where I have counseled an attorney in serious trouble with their law firm, I have found that a large portion of the reason they are having trouble has to do with how hard they are perceived to be working, the number of hours they are billing and-by extension-the amount of money the law firm is making off them. This is something law firms take very seriously. In only one instance out of the 100+ placements I have personally made over the past three years, has one of my candidates ever been fired. When I spoke to the firm about why the associate was being fired, one of the first things they complained about was that the associate frequently left the firm before 5:30 pm. I did not need to hear much more.
Many associates inside law firms often find themselves in a position to claim that they do not have enough work and that partners are not assigning work to them. When questioned closely, I often find that these same associates are often perceived as not working hard enough (i.e., billing enough hours) on their partners' assignments. Because partners are individually and as a group compensated based on the amount of work the associates they assign work to do, many partners would rather assign work to an associate who is going to work extremely hard on something and bill many hours-rather than an associate who will figure out a way to get the work done quickly and just as effectively.
Whether one calls this a conspiracy or something else, in several companies, associates are expected to bill the maximum amount of time they can to given projects, whether it is warranted or not. This is reinforced through bonuses given to the hardest working associates (those who bill the most hours) and in other more subtle ways (such as not assigning work to associates who will not bill many hours). As an attorneyworking inside a law firm, you choose a better legal career where a large portion of your perceived value to the firm comes through how many hours you bill and not necessarily your legal skill.
2. The Junior Associates
One of the most basic rules of law firms is that, often, nothing is as it seems. This is especially true with the junior associate. Law firms love to tell them that they are unprofitable and that the firm does not make money off of them. In some respects, this is true. However, the real fact is that they are profitable but not as profitable as senior or mid-level associates.
These associates are one of the most important components of the law firm's economic engine. There are several reasons for this; however, the main reason for this is that clients do not have an excellent understanding of the law firm's economic engine. Whether the clients are large or small, they look at the bills that law firms send out. Let me share with you the billing rates of a particular firm that I am somewhat familiar with:
Law Clerk (Summer Associate) - $140/hour
1st Year - $170/hour
2nd Year - $215/hour
3rd Year - $265/hour
4th Year - $310/hour
Partner - $400+/hour
A partner can do most legal assignments for clients much faster in most law firms than the junior associate could. In fact, I dare say that, in many cases, a junior associate could work on a certain matter for one or two days that a partner could figure out in 15 to 20 minutes. If you are an associate with more than one year of experience in a large law firm, you should know this. You have undoubtedly seen numerous associates in your own firm work several hours more than they would need to on an existing task.
In some respects, then, law firms' employing of junior associates would not make much sense. Every year large crops of junior associates are hired by law firms all over the United States to begin work on important legal matters for the firm's clients. These associates need a great deal of training to become effective at their work. However, these associates are an excellent source of profit for law firms.
In thinking about the above billing rates, you need to consider it from the law firm's perspective and the client. I personally hire attorneys all the time for the companies I work for. When you hire an attorney, you generally work directly with a partner who will figure out the "most efficient way" to get the work done for you. Early on in your various legal matters can be researched and analyzed. The partner likely already understands these issues; however, he or she will generally say something like this to the client:
"Before we figure out what we are going to do, it would be best to get the answers to the following questions …. I could work on it, but my billing rate is quite high. I would recommend that I ask junior associate X to do the work. Their billing rate is almost ½ of what mine is, and …."
The work is then handed off to a junior associate. The junior associate knows that they are valued by their firm based on their individual productivity (i.e., how many hours they bill). They have every incentive to work just as hard as they can and bill as many hours as they can on the project. The partner can then do more interesting work, and rest assured that they will give as many hours as possible to the task, and the bill increases. None of this is to say anything dishonest is occurring; however, on many levels, it could be conceived as such:
- The junior associate may be asked to research questions which the partner does not really need to know the answers to;
- The junior associate may not have highly developed research skills and will spend more time than necessary on the project;
- The associate will be under the belief (in most law firms) that the memo they produce for the partner will need to be 100% flawless in its language and grammar and may spend 2-3 times longer just perfecting the memo's syntax rather than simply giving the partner the answer;
- Upon answering the question, the partner may think of new issues they want the associate to explore.
This sort of conversation repeats itself all over the United States, probably thousands of times a day. The economics of the junior associate make a tremendous amount of sense from the law firm's perspective-especially if the junior associate is playing the game (and if they have a steep learning curve with each assignment, they are, almost by definition, going to be playing the game). The amount of work the junior associate may do on a given project is nothing short of extraordinary. However, the junior associate can make the partner look like the "good one," because their billing rates are lower. In addition, the junior associate will spend far more time than necessary on most projects and, therefore, actually end up making the law firm more money. In the process, the law firm can train the junior associate on the client's dime.
I want to assure you that many law firms do not necessarily follow this model or approve it. Nevertheless, this is the norm at most law firms, and the ability to marshal large platoons of junior associates on various projects can be quite profitable to law firms.
3. The Mid-Level Associates
After getting between 2 and 3 years of experience, an associate becomes a mid-level associate. If you speak with junior associate(s) from toplaw schools working in major law firms throughout the United States, they will often say things like, "I am just doing this for a year or two." One reason for this statement is that they see so many of their fellow associates leaving for legal careers outside of the law once they become mid-level associates. Many of these attorneys leave because once they are mid-level associates, they are under the firm's microscope and have entered a world where they are actually beginning to be expected to do the work of competent lawyers. The midlevel associate is also at a level where they cannot fool either the client or the law firm with their legal skills developed during their time as a junior associate. By this time, the midlevel associate is expected to be a highly developed billing machine, relate to clients, and do good law firms' work.
Mid-level associates can be quite profitable to a law firm, as they fill a perfect niche for the law firm. First, the midlevel associate can be given assignments by partners and then even delegate this work to junior associate(s). Partners enjoy not having to deal with junior associates because they do not, for the most part, know what they are doing. If a midlevel associate is good, they will have the ability to gauge how much work the partner expects to occur by both them and the junior associate(s) on a given matter. Second, the midlevel associate is usually competent enough to get most of the work done-or figure out how to get it done - without asking a lot of questions. Third, the midlevel associate's billing rate is not as outrageous as a senior or a partner's billing rate. Therefore, they are also a good candidate for giving clients the appearance of working at a low cost (albeit, work more complicated than that typically given to a junior associate).
Most law firms have a party line that says the most profitable type of associate is the midlevel associate. A midlevel associate almost always the best candidate for legal recruiters because they offer several advantages that other types of candidates do not offer law firms. First, mid-level associates are trained and know what they are doing. Second, mid-level associates can be assigned work without threatening partners (most of the time). Third, you can hire a midlevel associate without threatening senior associates and upsetting the balance of power and appearance of upward mobility inside a firm.
Consider these hypothetical billing rates again:
Law Clerk (Summer Associate) - $140/hour
1st Year - $170/hour
2nd Year - $195/hour
3rd Year - $235/hour
4th Year - $265/hour
5th Year - $295/hour
6th Year - $325/hour
7th Year - $345/hour
Counsel - $365+/hour
Partner - $400+/hour
As you should see above, the mid-level associate's billing cluster (3rd through 5th year) does not appear nearly as threatening to the client as does thebilling ratesfor the senior associate (6 years +) or the partner. Paradoxically, the midlevel associate is also quite effective and, in many cases, almost as effective as the partner.
Consider a hypothetical $100,000 matter a partner of the firm brings in. Here is one scenario regarding how the billings may be divided up:
$15,000 = 15% Percent of Billings of Matter Generated
$30,000 = 30% Percent of Partner's Individual Billings (What the partner works on themselves)
$55,000 = 55% goes to Firm Overhead and Partnership Distributions
Under this economic model (and every firm's economic model is different for partners, but each has some similarities to the model above), the partner is compensated most highly for the matters they work on themselves. They are compensated less individually for the work that others do on their matters. Here, the partner has more incentive to work on matters themselves and bill at a higher rate than they do to have others within the firm work on a matter.
Every type of work assignment a partner gets will be different. For example, some projects may require a partner to do all of the work themselves. For the most part, though, a partner will need to give others within the firm to hold onto clients. Partners inside the legal industry are all running little individual businesses. If partners price their services too high, then clients will go elsewhere. If the partner does not price their service high enough, then the partner will lose money. The goal is to find a balance.
The utilization of midlevel associates is beneficial to clients in many cases because they will do the work more efficiently and effectively than a junior associate. Because of the mid-level associate's effectiveness, firms utilize them quite often, and in most law firms, truly little of their work needs to be written off or justified to clients because it is well done.
4. The Senior Associate
The senior associate represents a dangerous beast to most law firms. They generally haveat least six years of experience. At this level, most attorneys know exactly what they are doing on various projects. Their legal knowledge may be as good as, or at least comparable to, partners. However, there is very little demand in the marketplace for them, largely due to firm economics' operation.
Senior associates represent a problem for law firms because their bill rates will often approach a partner. Suppose their law firms require partners to bill a certain number of hours. In that case, they will be unlikely to give work to senior associates because it will cut into the partner's productivity. Unless a firm has plenty of law firms working from clients ready to pay large hourly rates, partners would rather do the work themselves than give it to a senior associate.
In the legal company environment, thesenior associates must get as many billable hours as possible to survive. For there to be much work for them, the law firm must have a lot of work billed out at high rates. Even if the firm does not, their presence creates pressure on partners to generate work to give to them. The associates that are the best at getting work will have the highest billable hours and be the most likely to survive inside the firm.
Because of their high bill rates, most large legal companies begin feeling pressure to generate their own clients. The associate who can generate massive amounts of work-whether on their own or by being given work from partners in the firm will be the one who is seriously considered for a partner or a counsel position. If they cannot generate this work, they will be asked to leave because they will not make sense to the firm from an economic standpoint.
5. The Partner and Counsel Level Attorneys
Many partners will tell you that they wished they were associates again. The most successful partners will not. The responsibility will be to perform good legal services and generate work at the partner level, whether from other partners or outside clients. In addition to being self-sustaining, the partner is also expected to feed the economic engine of senior to junior associates with work (at the largest firms).
What The Economics of Law Clerks, Associates, and Partners Means to Your Legal Career
Your success in a law firm will be based at every single step of your legal career upon the ability to generate revenue through the billable hour. This is much harder than it may first appear.
The Law Clerk
As a law clerk or summer associate, you will be evaluated based on your work product and many other people like you. You will also be assessed on whether you show promise to work under the law firm's economic paradigm. The law clerk I have seen not get offers in my career were the associates who did not fit in under the law firm's economic model. They told partners particular work did not need to be done or did projects for the firm with little enthusiasm.
The Junior Associate
At the junior associate level, your responsibility will be to do the attorney's jobsyou are asked to do and work as hard as possible on the work you get. In most large law firms, the junior associate working ridiculous hours is something that is certainly romanticized. This is seen as such a good thing and that the culture of most law firms portrays it as such is that this is quite profitable to law firms. Law firms make a great deal of money from a junior associate toiling long hours. To succeed in a large or mid-sized firm, you are going to need to work hard.
The Mid-Level Associate
Mid-level associates are given work because (1) they are efficient and (2) they can do the work competently in most cases. While midlevel associates may be profitable to most law firms, their real value is to the client, as they can get their work done competently at a reasonable price. To succeed as a mid-level associate, you are going to need to be competent and work hard.
The Senior Associate
Senior associates must ensure they get as much work as possible to survive. The ability to get work will determine their success. Whether it comes through other lawyers in the company or generated independently, the need is the same. The same holds for partners.
Depending upon the law firm's size, the importance of the economic model remains the same: To work as much as possible. When an attorney chooses which law firm they want to work for, the most important thing they should be considering is whether they can really move up the given law firm's food chain with their given set of skills and workability. Given the economics of most law firms, this will not be possible.
From most law students' and lateral associates' perspectives, the very best firms to work for are thelargest and most prestigious law firms. Coincidentally, these are also the firms with the highest salaries and the most fleshed-out economic models. This may be the best choice for you, or it may not.
For any lawyer, the key to survival is to generate work. The work can only be generated if there is work to give. In large law firms with massive clients, they will usually have a limited amount of work to give out at the senior, counsel, and partner associate level. The amount of work available to give out will increase dramatically at the mid-level and junior associate levels. To succeed under this economic model, you need to work hard at the junior associate level. You then need to become competent at the midlevel and get as much work as possible.
The Reasons Why Attorneys Go In-House
The senior to partner and counsel level involves the ability to continue working. Because this is so difficult, it is at this point when multiple attorneys go in-house or to smaller firms. The lure of an in-house position is an escape from the competition to get work. The lure of a smaller firm is often lower billing rates—which means that clients are more willing to give the firm work that would otherwise go to larger law firms. Senior associate-level attorneys can work on matters with much lower billing rates. Another lure for them to go in-house or to a smaller company is to attract their clients with lower billing rates. At a large law firm that does work for large clients, the billing rates may be so high as to all but cancels out the idea of bringing in all but the largest clients.
You need to understand that surviving under the law firm economic model is almost entirely dependent upon your ability to continue working and working as much as possible. How you achieve, that is up to you. You will not get more work, though, unless you prove you will work hard, play the economic game and get the people with the work (whether they are other legal professionals inside your firm or outside clients) to like you and give you work.
