New Rules Are Changing the Law School Game

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As another autumn approaches, it brings memories of the old days – three or four years ago – when recruiting law school students was a major concern for many firms. Then the Great Recession hit and firms began to lay off associates, “de-equitizing” partners, and sharply reducing on-campus recruiting. Many law students were left to wonder why they had gone $100,000 or more into debt (annual tuition at even a “mediocre” law school tops $40,000 a year) for a J.D. degree that suddenly appeared to be less valuable. A widely reprinted New York Times story earlier this year asked openly if going to law school is now “a losing game.”

Law schools have responded by pretending no problem exists. The latest American Bar Association statistics on the nation’s 200 law schools report that, in the 2009-2010 academic year, total enrollment and the number of law degrees awarded were at record highs. ¹ And new law schools continue to open their doors—there have been nine new schools in the last 10 years and five more seeking approval to open in the future.

The Student Scam

Law schools are notorious for ignoring the business realities of the profession they ostensibly serve. Law school does not teach lawyers how to effectively interact with clients, or manage their practices, or become good rainmakers. The view of law as a profession as held by many law-school academics means that programs preparing law students for the real world are trade-oriented and therefore inappropriate for law schools. Only a few schools have even a seminar or workshop on the economics of law. As a result, law-school students read about law rather than understand its realities. They are ill-equipped to understand their utility in the leverage equation for firms that hire them and even more poorly equipped to understand the necessity that they contribute to the profitability of their firms. While associates may not earn more than they cost the firm at the start of their careers, at some point that situation must change. The economics of hiring new law-school graduates can no longer be taken for granted.

Law schools are slow to wake up to reality. Perhaps the recent statistics showing a decrease in law school admissions will help. Law schools seek high rankings in the annual surveys conducted by several national publications in order to attract law school students, a challenge in today’s economy. And what do these students get for their money? There are few law schools – Harvard, Yale, Stanford, perhaps several others – that have long-term career impact over and above any particular ranking. Beyond these, what really does it matter if a potential new hire got a law degree from number 17 or number 29 on the list?

What matters most for young lawyers is the first job, not where they went to law school. If that first job is spent doing grunt work that imparts little career skill, even a Harvard graduate will have no marketable skills to impress either an employer or a client. If a graduate of a “lesser” school is fortunate enough in the first job to have a mentor who effectively teaches by example what a good lawyer should be, the resulting lessons will pay dividends for many years after law school’s lessons are forgotten. Lawyers succeed because someone sparked their success.

Something has to give when it comes to the law school game – and the giving is likely going to be on the law school side. Numbers from the Law School Admissions Council when the law school admissions process was about 90% completed showed the number of law school applicants this year is down 11.5% from a year ago to 66,876. The figure, which is a tally of applications for the fall 2011 class, is the lowest since 2001. It appears potential law school students are realizing that going six figures into debt to get a J.D. degree offering no assurance of gainful employment is not exactly a smart idea – especially for those whose main motivation to attend law school was to make the “big bucks” available rather than to pursue a legal career.

The Lateral Game

Law firms that have done so much to change the rules of the hiring game increasingly de-emphasize hiring fresh out of law school and place far greater focus on lateral hiring of experienced associates who have specifically desired skills and actual or potential books of business. This merely reflects economic reality for the considerable time that must be spent by partners to recruit and interview law school students, mentor and train new graduates into the firm culture and procedures, and absorb the cost of reduced productivity as the new graduates get up to speed. The total cost can be several hundred thousand dollars exclusive of associate salary. Not surprisingly, large-firm managing partners agree it takes, on average, from three to five years to break even on the investment in a new lawyer straight out of law school; and firms no longer want that cost.

A better solution is for firms to only hire an associate when needed, and to make the most of another firm’s investment by hiring laterally. If firms want to strengthen their performance, hiring the right lateral for the right job will create more profits. Lawyers cannot and should not remain with their firm unless it is profitable for the firm to keep them on an ongoing basis. At some point associates must earn for the firm more than they cost the firm. For lateral hires, the answer can be expressed as a simple equation showing an individual’s net profit value to the firm: Billings - [Associate's Total Compensation + Direct and Indirect Expenses] = Net Profit. Hiring laterals with an existing book of business leverages billings, decreases investment, and improves profit.

If the lateral attorney comes with a strong book of client billings, the firm gains even more financially. Adding lateral hires has another advantage with corporate clients with whom the associate has not yet worked. A lawyer with more experience can rip through the analysis and work for the client; he/she will likely be seen as preferable to a recent graduate who may have a lower rate but who will take longer to get up to speed. The client gets a skill package and experience that more than make up for the lateral’s higher billing rate.

Of course, lateral hiring over law school hiring has drawbacks if not done carefully. Expected books of new business may not materialize if clients do not follow the new hire. Dissatisfied lawyers claiming negligent misrepresentation when their lateral moves do not turn out as desired have been known to sue. Firms that entice a move may be sued by the lawyer’s previous law firm for interference with contractual relations. And if law school graduates who are members of a protected class find an ill-considered offer of employment withdrawn in favor of a lateral hire, they can sue the law firm for discrimination. Still, the risks are relatively minimal compared to the unknowns of hiring an unseasoned law school student.

The Contract Gambit

As laterals absorb the hiring opportunities, some law school graduates will try solo practice or in-house jobs with a corporate legal department. But an emerging trend is that they could work as “contract lawyers” for law firms or corporate law departments on an outsourced basis. Some outsourced legal work pays as little as $20 an hour for such tasks as document review, a drastic comedown in expectations for the new J.D but still better than no work at all. Moreover, outsourcing firms formerly sent legal work to low-cost countries like India are now creating outsourced jobs for lawyers in the United States, with work typically in the $50,000 to $80,000 range. These legal outsourcing companies are opening offices and hiring lawyers in lower-cost areas in the United States, like West Virginia and North Dakota.

Outsourced work began slowly. First, it appeared in the large firms that sought to retain the business of Corporate America by controlling costs for large document reviews that could be done better overseas with lower paid, but qualified lawyers. Then Corporate America began to go to the outsourced world directly, saving yet more money. Small firms and sole practitioners found that they could leverage technology and time differentials to transmit legal work online to India in the evening and get the results on their computer the next morning. The nature of the outsourcing industry was already changing when one major legal information company acquired a 400 lawyer outsourcing firm in India. This company is now opening an office in Texas. So outsourcing has come full circle, and the compensation (at least on average) of new and younger lawyers is flattening, if not lowering.

This again raises the question: what about law schools? Is the law school bubble of ever-rising enrollments and degrees awarded going to burst? As law schools continue to try gaming the rankings to entice more students to enroll, one must wonder. When the housing bubble burst, it was—and continues to be—the financial geniuses at the banks who were left holding the bag. Are law school administrators any smarter?

¹ http://www.americanbar.org/content/dam/aba/migrated/legaled/statistics/charts/stats_1.authcheckdam.pdf