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Tuesday, November 24, 2009

Connecting the Dots

"Connecting the dots," is a weighty metaphor. Oliver Stone abused the concept. The National Commission on Terrorist Attacks Upon the United States, emphasized the gravity of doing so competently.

With the information that comes to us in our profession, floods over the transom, we need to take shortcuts. I rely on the pithy e-mail that lands regularly in my in-box from the ABA Journal Weekly for basic updates on the profession. (If I have time for fun, I will read Above the Law as my news aggregator.)

ABA Journal Weekly forces itself on me on my iPhone quite frequently, though I would never unsubscribe to the update.

This week, the top four ABA Journal Weekly "stories of the week" were independently ho-hum unsurprising. Connecting the dots, a broader picture emerges that illuminates the legal industry structure. (Note: Though I use the term industry interchangeably with profession here, I recognize there is a difference.)

Again, on their own, no a-ha moments from each "story of the week," but taken together, I think we can see where this movie heads more clearly every day. 

Or maybe we connect the dots differently?  Here are the top four stories, and I will say nothing earth-shattering about them standing alone.

1) LSAT-Test-Takers Jump by Nearly 20%; Should They Consider the Alternatives?

  • Answer: What are the alternatives? Taking the MCAT or GRE?  Backpack through Europe with an anemic dollar on Mom and Dad's account? (Not an option for most.)

2) 64% of Law Departments Have or Will Implement Rate Freezes, Survey Says

  • This is an easy thing for law departments to say in a survey. They would certainly like to freeze rates in a tough economy and a potentially deflationary environment. Do firms have the market power to prevent it?  No freeze would be permanent with a dramatic economic uptick. But why should we assume that dramatic uptick is coming soon- or (shock) EVER?

3) Several States Move Closer to National Bar Exam

  • I have no doubt that in some jurisdictions this might upgrade the quality of legal representation, diversifying representation options and enhancing price competition.  No doubt this competition will extend to price and breadth of choice.  This would benefit the legal consumer and might be laudable.

4) Levi's is Paying Orrick a Flat Fee to Handle All But Its IP Work.

  • Is the death of the billable hour inevitable?  Nancy Rapoport thinks so. So does Doug McCollum of American Lawyer. Other smart industry observers agree, but commercial traditions die hard.  They die faster in dire times.

See after the jump for my version of connect-the-dots.

I can't leave out this article, although it did not appear in my daily digest:

Law Firm Price Wars Break Out as Some Try 'Loss Leader' Bids for Work.

This is nothing new as a tactic. I recommend the whole piece to those who are interested. But the piece is worth excerpting for these purposes, (my emphasis added):

Legal business consultant Jim Hassett writes that he learned of the price wars when he decided to throw in a “loss leader” question in an alternative-fee survey of AmLaw 100 firms. He included the question on just 15 surveys, and all 15 firms responded that they had seen the price wars, he writes on his blog.

Hassett asked this question:

“There is a lot of price pressure these days, and some say it is leading firms to bid on projects as loss leaders in a way that is not sustainable. Have you seen any examples of this?”

Hassett was astounded by the unanimous response. “I have never heard 15 lawyers agree on anything else before this,” he wrote.

One firm manager told of hearing stories about “well-established New York firms” telling clients they will not be underbid.  [DF: This exactly mirrors the TV ad of a local car dealership.] ...

Some respondents said law firms were likely cutting prices to keep people busy, or possibly because they don’t know what they are doing. [DF: I constantly do things because I don't know what I'm doing. Can I throw stones? What the heck, why not.] ...

“And there are really only two or three answers as to why they [lowered prices / gave away services],” the manager said. “One is a loss leader. The second is sheer stupidity. And the third is a willingness to take an extraordinary risk.”

You would have to be pretty thick to see that these developments taken together are troubling for those who care about the profession.

1)  On its face, the structural imbalance in the labor market for college graduates will encourage more applicants to law schools, as the LSAT numbers indicate. Law schools, being stuck for revenue in the current financial crisis, might be tantalizingly tempted to stuff their classes, US News be damned.

The incentive to steepen grading curves to encourage lower-performing students to consider other options could be weighed against financial and future applicant-recruiting considerations for the school.  (One hopes that integrity would carry the day.) Even if the economy recovers, all new student entrants will be at a classic labor-supply disadvantage. Will law schools need to adapt to help place these students? Is the Carnegie Report the answer to placing these students? It depends on whether schools in geographic markets universally adopt it.  If they do, the students aren't differentiated anyway. (Not to debate the merits of the Carnegie Report.) With downward pressure on starting salaries, as Above the Law commenters are quick to point out, how long will it be before schools are compelled to lower tuition (on net)? This is not a healthy dynamic for our avocation as professors, but why should we be immune to market changes?  Will we have to teach more and be paid less? The ivory tower can indeed be stormed.

2) The rate freeze trend elicited from the survey is a natural response to demand depression. One can attribute some of this to the notion that many companies increasingly consider legal services to be a commodity and care much less about relationships than in days yore. Especially when the CFO breathes down the GC's neck about the legal "cost center."  The dot connection?  This development undercuts the employment financial prospects of the entering students.  Across the board, firms are going to have to set the market rate lower for junior associates (should they hire them at all.)  The fact that more graduates will be knocking on doors won't help them find remunerative opportunities.

3) The national bar exam. This reminds me of the proposal to let people buy health insurance across state lines. I am not sure how the health insurance proposal would practically work, (perhaps the subject of another post) but advocates say it will lower costs through competition.  So would facilitating the provision of legal services across state line.  This will be beneficial especially for retail consumers of legal services who live near state borders. It may also help law students, as the article points out, benefit from mobility in finding work. The dot connection? The latter may be a short-term justification that in the end, kills wages and legal-services pricing.  Again, though, maybe lower pricing is laudable.  Maybe this change makes legal services more accessible.

4) Flat fees. Any change in fee structure initiated by the buyer must be viewed with suspicion by the seller of services. Obviously the buyer is trying to save money. Maybe it's ultimately the best way to do things, but the net outcome for all involved is highly uncertain. The dot connection is clear.

Do we see the connections between the dots of these top stories?  The supply problems are severe, yet more capacity than ever is coming into the pipeline.  The legal profession is a burning building and people considering the profession are running in, not for rescue purposes, but because they think the burning building is safer than the alternative.  Maybe waiting out the job market for three-years in school is a rational response?  (Forgive the burning house metaphor.) Pricing is under pressure and the consequences may be permanent or long-term. New lawyers will have trouble making it.  What's gonna give?

I think we all know what is going on, though, though we may strongly disgree about pieces of this. What are we going to do about this problem?  Is there a problem or is this a hiccup?  What are our moral obligations to the profession, to clients, and to those entering what truly can be a noble field?

I have some guesses, but I'll save them for another post.  And thank you, ABA Weekly. I will always read your emails- and your articles when I have time.

Posted by David Friedman on November 24, 2009 at 09:45 AM | Permalink


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Amazing post. It's refreshing to see that someone is willing to acknowledge the elephant in the room. Students view education as consumers now more than ever before, and, faced with a choice between (1) going to law school for three years, probably amassing debt at hovers around $100K (and cannot be discharged in bankruptcy), based on the possibility of a fat salary at a law firm (which is only likely for the top-10 percent), or (2) spending those same three years in menial jobs with much less debt, some may choose option (2). Rather than the burning building analogy, I would liken the current state of legal education to a house of cards, and each person is gingerly adding and subtracting cards. Remember that "Brady Bunch" episode where there was a competition between the boys and the girls, and the winners got to keep the stamp books? In the perfect "Brady" world, everybody won. In this case, the jury is out.

Posted by: Gidget | Nov 24, 2009 2:58:26 PM

Great post. I'd like to say that law schools will respond responsibly, but their past track record isn't too good. They can't even be trusted to post accurate information on job outcomes, let alone pass up revenue opportunities. I predict they'll do everything possible to extract revenue from the increased demand for law school. Over the 20 or 30 year time horizon, though, I see students figuring out that law school is an extremely risky financial move. It is already and the dots suggest it will be more so. The internet is already helping students get more accurate information than law school career offices give out.

Posted by: anon | Nov 24, 2009 11:55:21 AM

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