Andrew’s line of reasoning explaining the ratio at which firms bill clients to the salary they pay associates definitely makes sense.

But I also wanted to point out that U.S. firms’ use of lawyers from India or anywhere else does not necessarily mean that employment rates for new associates will decline or real wages will fall. Outsourcing is not just a one way transfer of resources, and it could ultimately increase demand for U.S. trained lawyers.

I agree with Eben that the nature of the work U.S. associates will be required to do will change. Greater specialization and higher level lawyering skills might be rewarded, whereas the domestic demand for those performing more basic tasks could fall. But shouldn’t this make associate’s jobs more interesting?

-- EdwardNewton - 28 Jan 2008

(4): shared and reliable clients (who consolidate legal services into one firm, and stay for the long term) --> a free client base for associates to pass through: As a result of (2) and (3), will clients become more mobile, preferring less to consolidate, in one place, all their legal problems for all time?

I talked about this issue with a Partner at a major New York firm on Friday. It was quite interesting. He talked about two major changes his firm was working on in order to compete moving forward.

1. They are vastly increasing the firm's practice areas, seeking to be a full-service firm. They are looking to decrease their total number of clients, but increase the amount of work they do for each client.

2. They are literally licking their chops in anticipation of opening up an office or two in India. This firm has a huge presence in Asia and the partner spoke about how, in Asia, they are able to bill out at the same rates they do in the United States and pay their attorneys similar salaries. He spoke of India as a totally different place where they couldn't bill out at a similar rate, but didn't have to pay their attorneys nearly as much. He likened the offshoring of the firm's "grunt work" to the offshoring of Dell's tech support.

Finally, I think it will be the large firms that are spearheading this development. It takes a lot of capital and connections to set up shop internationally. Those firms with experience in the international arena will be much better positioned to move into India than will the small regional firms. While the smaller firms may farm work out through an intermediary, they will be much less likely to employ full-time staff across the globe than the Jones Days of the world.

-- AdamCarlis - 28 Jan 2008

Edward's right that state bars are barriers to entry that raise legal fees, but that doesn't explain the disparity between the client's bill and the associate's salary. I don't see any explanation aside from "market forces" (like the ones I describe above).

So why shouldn't new market forces restructure the firms? It's circular reasoning to say "because firms ignore competitive pressures." Change is driven by customers. Globalization is giving them more attractive alternatives to doing business in America. Securities litigation won't be so rich when companies list in Europe to avoid our accounting rules. M&A's will heat up in countries that compete for corporations by lowering the corporate income tax. When manufacturers target consumers in China or India, to save on discovery and products liability class-actions, our politicians will protect their taxes by lowering the the costs of doing business in America. The costs of compliance and litigation are low-hanging fruit.

Gideon points out that outsourcing will be led by "smaller firms trying to save money to compete and from American corporations looking to shave costs in their legal departments." If so, the smaller firms that steal market share from the old big firms will BECOME the new big firms.

Our preference for "old big firms" is another market force that keeps firms afloat, lowering our salary by lowering the supply curve. That's OUR reluctance to change. (Eben, you like?) If Ivy League law schools don't teach us any differently, won't the "old big firms" stay on top? No: those "new big firms" will just be led by the lawyers from "second tier" schools. I make a similar argument in the last paragraph of the [revised and summarized] DeathofGiantFirms.

-- AndrewGradman - 27 Jan 2008

I tend to agree with Edward that law firms will be slow to outsource jobs/restructure their businesses – for better or worse the legal profession is slow to alter the way its does anything. Companies in other business areas are quick to lay-off employees during a market downturn. It hardly makes a splash in the news when an investment bank or hospital decides to lay-off a few hundred employees, but when a law firm decides to lay-off a few dozen employees it comes as a more of a shock (as were the recent Cadwalader layoffs).

I think that if legal services are going to be outsourced in any large amount it will come not from the giant law firms, but from smaller firms trying to save money to compete and from American corporations looking to shave costs in their legal departments. It seems more likely that corporations would outsource their legal needs to Indian lawyers (a practice that can be kept relatively quiet if they choose), than would a firm who must protect their reputation as a reliable source of guidance to remain competitive – not to say that the legal services provided in India would be of a lower quality, but if a firm is going to bill at a ridiculous level, image is everything.

-- GideonHart - 26 Jan 2008

I tend to agree with Edward that law firms will be slow to outsource jobs/restructure their businesses – for better or worse the legal profession is slow to alter the way its does anything. Companies in other business areas are quick to lay-off employees during a market downturn. It hardly makes a splash in the news when an investment bank or hospital decides to lay-off a few hundred employees, but when a law firm decides to lay-off a few dozen employees it comes as a more of a shock (as were the recent Cadwalader layoffs).

I think that if legal services are going to be outsourced in any large amount it will come not from the giant law firms, but from smaller firms trying to save money to compete and from American corporations looking to shave costs in their legal departments. It seems more likely that corporations would outsource their legal needs to Indian lawyers (a practice that can be kept relatively quiet if they choose), than would a firm who must protect their reputation as a reliable source of guidance to remain competitive – not to say that the legal services provided in India would be of a lower quality, but if a firm is going to bill at a ridiculous level, image is everything.

-- GideonHart - 26 Jan 2008

I must admit that I am somewhat skeptical about the extent and speed at which Eben believes legal work will be transferred to India. It’s not that I think his argument doesn’t make sense (employing equally skilled lower wage workers reduces costs and increases profits), it’s just that I don’t think that law firms operate in a very competitive market.

From my relatively uninformed and obviously biased perspective, I think the U.S. law firms basically exhibit cartel-like behavior. The ABA makes becoming a lawyer extremely expensive: an undergraduate degree, 3 years of law school, being admitted to the bar, for instance. By limiting the number of lawyers, the price for their services is artificially inflated. That’s why legal advice is prohibitively expensive for most people.

Firms also bill clients several times the amount they pay out in associate salary. I think someone in class mentioned a 5:1 ratio. Such margins would be unsustainable in a competitive environment. In addition, there is virtually no price competition between firms. That’s why every firm in New York pays $160K for a 1st year associate.

It’s my impression that firms don’t respond to market pressures very aggressively. I would bet they will be slow to outsource, just as they were slow to introduce alternative work arrangements.

-- EdwardNewton - 26 Jan 2008

Cartelization drives up prices a great deal. 5:1 would be unsustainable if firms had to compete harder for clients (lowering the bill), or if they had to compete harder for associates (raising their salaries). But it's in the right ballpark if the firm adds that much value to a lone associate's work.

The bill:salary at firms gets driven up by the economies of scale (or is it scope?) that firms create:
(1) shared legal support (including paralegals, associates, subscriptions and management) --> lower overhead per attorney.
(2) shared legal knowledge (larger firm size --> more fertile network to cross-pollinate ideas & more giants' shoulders to stand on)
(3) shared reputation (which, to those clients paying for black-box legal services, is the total value a lawyer's work)
(4) shared and reliable clients (who consolidate legal services into one firm, and stay for the long term) --> a free client base for associates to pass through

(A) Technology and globalization will change the nature of our clients.
(B) These forces, and new political pressures, will change their legal questions (our work).
(C) These forces, and their effect on our work, will therefore change the structure of our firms.

RE (1): Legal support will get hardest hit: paralegals, then Wexis, then associates. Associates altogether will add less value per partner. The pyramid will TAPER. But each associate will add more value per partner; and firms, with fewer associates, will need to lower associate attrition to replace the same number of partners. Will each associate be paid more?
RE (2): Will lawyers' knowledge become more freely available, so that other lawyers can benefit from it without compensating them? I assume this cross-pollination is most implicated by Eben's vision for the future of intellectual property.
RE(3): Will the available lawyers' knowledge become more publicly understandable, so that clients can benefit from it without compensating them? Will clients have fewer black-box legal problems, lowering the value of lawyers' reputations? (black-box = not of easily measurable value.)
RE (4): As a result of (2) and (3), will clients become more mobile, preferring less to consolidate, in one place, all their legal problems for all time?

-- AndrewGradman - 26 Jan 2008

Some comments/observations that tie into some of what you are discussing:

(1) The bigger the client, the more likely the client will simultaneously use several of the top firms in a given community, divvying up the work by practice area. This way, if and when litigation time comes, the bigger firms with the most litigation expertise will already represent them and can't represent the other side. A combination of disablement and utilization going on here.

(2) Some practice areas are highly sensitive to political swings. It is always a strength for these practice areas to have several Repub and Dem attorneys on the rolls who are savvy about political connections.

This may sound crass the way I've presented it, but I'm trying to be candid here. Think about these angles, because in one way or another, chances are they will impact you.

-- BarbPitman - 26 Jan 2008

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