Profit pressures have squeezed the Big Law pyramid into a diamond. Can it last?
4:28 pm, December 20th, 2013
It’s well-known that the number of associates at the bottom of the large law-firm pyramid has been shrinking relative to equity partners at the top ever since the recession began.
But the market for law firm associates actually peaked much earlier—25 years ago, according to research from Indiana University law professor Bill Henderson, who studies the business side of the legal profession. In 1988, more than 60 percent of lawyers in the nation’s largest 250 law firms were associates.
The percentage of associates at NLJ 250 firms has been declining relative to the percentage of partners ever since, Henderson found when he and his colleague Evan Parker-Stephen of Lawyer Metrics looked at NLJ data on partners and associates going back to 1978.
Summer associate hiring at the 600 large firms listed in the NALP directory shrank by half between 2002 and 2012. By 2012, associates made up only about 42 percent of the lawyers at NLJ 250 firms.
That does not mean the percentage of partner-owners relative to lawyer-employees has increased at large firms. Just the opposite, because firms have expanded the number of lawyer-employees who are not partnership-track associates.
“The pyramid structure is a simple, familiar and useful way to communicate the business logic of the large law firm. Yet, because of slow, gradual change within the market, the pyramid model is no longer an accurate description of reality. The data are telling us that we have moved on to something else,” Henderson writes.
That something else is a diamond-shaped model.
“A firm with a diamond structure has a relatively small number of entry-level associates, a growing bulge in the non-equity and counsel ranks, a sizable but largely invisible group of permanent staff attorneys, and a proportionately smaller equity class of partners who grow and control valuable client relationships,” he writes.
The shift from a pyramid to a diamond business model has been part of the discussion of the changes in Big Law since the recession.
“Yet as we now know, the decline in associate leverage is part of a larger structural shift. Remarkably, during the 1990s and early to mid-2000s, when large law firms were frenetically hiring entry-level associates and increasing salaries from $95,000 to $125,000 to $160,000, the relative importance of law firm associates was actually going down. A more significant factor in Big Law [profit] growth was the retention of mid-career lawyers—those with 10-plus years of experience—without making them owners.”
Henderson questions the diamond model’s viability in the long term. It has allowed equity partners at large firms to continue reaping large profits in the short term, he acknowledges. But what happens a generation down the road?
“The Diamond model is unlikely to be a long-term replacement for the traditional associate-partner pyramid. Rather, it is at best a way station toward a new model that delivers better, faster and cheaper legal products and services,” Henderson writes.
Rather than shed any light on what the new model might look like, Henderson gestures toward the past. His advice to Big Law leaders is to hire more young associates, then train and mentor them so that they have the experience and expertise to handle complex legal matters cost-effectively.
That is the way to the future, he writes, not shifting the emphasis to lower-status lawyer-employees who generate revenue for the firm and profit for the owners but cannot replace experienced partners in the quality of the work they do.