The Looming Associate Crisis and What It Means for Your Firm
There is an associate recruitment and retention crisis looming for which there are no easy solutions.
Supply and Demand
Law schools continue to graduate 40,000 students a year, as they have for the last 20 plus years. The AmLaw 200 law firms have been steadily hiring an average of 4%+ more associates each year, resulting last year in an average incoming associate class of 50. That means that AmLaw 200 firms now hire about 10,000 new associates a year, or about 50% of the graduates from the top 100 (hardly the Ivy League elite) of the nation's 200 law schools.
Every year the number of associates those firms will be trying to hire will be higher. And the competition from hedge funds and investment banks offering attractive alternatives will increase. Not far along the horizon is a point when nearly every associate in the top half of every law school, whatever the law school, is likely to have several high-dollar offers to choose from. Which means many firms will be left with fewer incoming associates than they want, or certainly fewer of the caliber they are seeking.
The Starting Salary Piece
As day follows night, associate salaries are rising. Entering associates are now earning $160,000 before bonuses at the largest law firms across the country (essentially the same that federal district judges make), thanks to Simpson Thatcher’s opening volley. Starting salaries (not including bonuses) at firms of 500+ lawyers are thus up 130% since 1994, with the annual rate of increase averaging more than 10%--significantly above both the rates at firms of other sizes and the average for all firms (6%). And with each new class's salary increase, the salaries of associate classes up the ladder must also be increased.
The Profitability Piece
One estimate is that this year's salary bump will result in an average hit to partners in big firms in the range of $40-70,000 per partner. But that is hardly where the impact on profitability stops. Until this year, associates were usually not profitable until their third or fourth year. Higher salaries stretch that time out even further. With average associate attrition rates at big firms pushing above 20% annually, culminating in 78% of associates leaving by their fifth year, firms have less and less time to recoup their initial recruiting/training/salary/overhead investments in associates, let alone realize a significant profit.
The graph showing the curves of how long it takes to realize a profit on associates and how long they are likely to stay make it clear that these two lines are coming perilously close. What used to make for good document review/bill plumping fodder may start looking more like loss leaders in the business of looking for good lawyers who will actually stay. It has already been noted that we have reached a state where partners often bill more hours than their associates. How does it feel to be working for those you supervise?
What's to Be Done?
The traditional solutions are few and running out of steam.
As always, billable rates can be raised, banking on good evidence that at least some clients will pay whatever they have to to get the best legal advice. But there will be some clients insisting that their rates be reduced or hours written off while others may simply leave.
You can try to recoup salary increases by raising billable hour requirements. But given the current associate sentiment about billing, ratcheting requirements up runs the risk of ratcheting up attrition rates as well. See our February 14, 2007 entry "What All That Money Is Buying You."
Recruiters may have to become modern conjurers, ranging broader among law schools and deeper down classes, looking for the proverbial gem in the rough. Medium and smaller law firms may have to change recruitment strategies altogether. Some have already publicly declared themselves to be out of the business of hiring first-year associates, like Philadelphia's Kleinbard Bell & Brecker, or recruiting at national law schools, like Pittsburgh-based Tucker Arensberg. Instead, they will wait for those associates to come to their firms after they've spent a few years at larger firms willing to bear the cost of training them.
The dire truth is that what ultimately may have to change is the current law firm structure, and possibly in several respects. See our upcoming entry "Leaving Behind the Medieval Model." And the fallout may include the hardest pill to swallow: a reduction in the high profitability that partners have long enjoyed. See our upcoming entry "The End of Profitability As We Know It?"
There are ways to read your firm's tea leaves and then progress toward a new vision, cognizant of the prevailing hiring and retention realities. Is your firm taking the steps necessary to survive the looming associate crisis?
