Balkinization  

Sunday, February 04, 2007

Associates of the World, Unite!

David Luban

A few days ago, Brian posted here on the subject of the economics of corporate law firms. Sandy Levinson responded:


One may be averse to applying Marxist analysis these days, but I think the relationship between young associates and their partners is precisely what Marx analyzed as expropriation by bosses of the surplus value generated by their workers. It's hard to feel much sympathy for a "working class" making $160,000/year, but, presumably, they’re generating much more than that in fees that are appropriated by the partners, since, even at $800/hour, the partners can't generate enough billable hours to add up to their million dollar income.

I’d like to expand on Sandy’s comment; I’ve thought for years that large law firms might be one of the handful of venues in which volume 1 of Capital applies in almost pure form.

With overhead, an associate costs a law firm about double her salary. So, a first-year associate at a blue-chip law firm who makes $150,000 costs the firm $300,000. On average, first-year associates’ billing rate is in the $200/hour vicinity (higher in the major law firms). Thus the associate must bill 1,500 hours simply to pay for herself. Because not every hour can be billed, that is about 1,800 hours of actual work, or 36 hours per week over a 50-week work-year – six hours a day, six days a week. This is what, in volume 1 of Capital, Marx called the paid part of the laborer’s day: the part of the day in which the worker recoups the price of her labor-power or, in Marx’s terms, reproduces her labor-power.

The rest of the day is the "unpaid labor" generating the surplus-value that the partners appropriate. Remember, each additional billable hour over and above the paid part of the day nets $200 to the partners. An associate billing 2,200 hours a year is billing 44 hours a week (and working 53), yielding 8 hours a week of surplus labor, or $1,600 to the partners each week: $80,000 each year. If the associate goes up to 2,500 billable hours a year, she is billing 50 hours a week (and working 60), yielding fourteen hours of surplus labor, or $2,800 to the partners. Each year, that’s $140,000 of profits to the partner per associate, as compared to $80,000 if the associate works "only" 53 hours a week. So, the partner stands to profit an extra $60,000 annually by inducing the associate to up her hours from 8.8 hours a day, six days a week, to 10 hours a day, six days a week.

Next, consider how leveraged the partnership is (that is, the associate-to-partner ratio). Obviously, it is risky to take on an extra first-year associate, who costs $300,000 for the year; but, if you have enough clients to generate the work, you stand to gain between $80,000 and $140,000 a year (more, if you can get the associate to go up to 12 hours a day or to work on Sundays) by risking the investment on the extra associate. The most prominent and profitable firms are also the most leveraged: their prominence brings in the clients, and their leverage brings in the profits. Depending on whether the associates bill 2,200 or 2,500 hours per year, four-to-one leverage yields each partner between $320,000 and $560,000, over and above what the partner brings in through her own billings.

Of course, the profits per partner depend on maintaining a high associate-to-partner ratio. That gives the firm a strong inducement to make it very hard to become a partner. The higher the firm’s leverage, the more intense the competition between the associates for partnership. Profits per partner and competitiveness among associates rise and fall together.

The easiest way for associates to compete with each other is by lengthening their work-day, in an arms race that challenges what the human body and soul can bear. Ten hours a day, six days a week? Why not twelve hours, seven days a week? Why not fourteen? This is great for the partners, who (remember) net $200 for each additional hour an associate bills. Furthermore, if the associate is doing more demanding work, for wealthier clients, the firm can bill the associate’s time at a higher rate than the baseline of $200 per hour.

However, the quality of the associate’s work will not necessarily enhance her chances to make partner, because regardless of the absolute quality of the work, the partnership needs to winnow out associates in order to maintain the leverage on which per-partner profits depend. In a law firm leveraged four-to-one, three out of every four associates must fail to make partner, regardless of their lawyerly excellence in absolute terms. (All of this was explained years ago in Marc Galanter’s and Thomas Palay’s path-breaking Tournament of Lawyers.)

The result is just what Karl Marx predicts: the "capitalist" (here, the law partner) has an overwhelming incentive to intensify and lengthen the associate’s work day, and put more competitive stress on the associate.

No wonder associates bail out as soon as they can. Yet this has bad effects on the law firms: after all, they invest a lot of money training associates, and the high turnover rate is wasteful in both human and economic terms. The firms are hemorrhaging young people. (There’s a hemorrhage at the other end as well, as large firms force many partners out in their early 50s because their billing rate is too high, and the firm would rather dump them than adjust their rate downward, due to the pressure that would put on its entire rate-structure. But that’s another story for another post.) In human terms, higher turnover means lower interpersonal loyalty at large firms, which goes with lower collegiality, greater alienation, greater temptation to commodify intrafirm professional relationships, more emphasis on the bottom line, greater incentive to intensify and lengthen associate’s work days, and – therefore – higher turnover. It’s a vicious spiral, and thoughtful law partners have lamented it for years without having any idea how to stop it.

Couldn't the partners simply settle for less money? The problem is that then higher-paying firms will lure away the firm's stars -- their rainmakers and the rainmakers' clients -- and the firm is likely to collapse. Marx understood this, too; he thought it was fatuous to suppose that exploitation, together with the intensification and lengthening of the work day, could be ended if only individual capitalists were "less greedy." Few non-Marxist economists would disagree.

Furthermore, as Galanter and Palay explain, there is another good reason why firms emphasize profits over other values. Suppose that every lawyer in a firm is asked to rank-order the top ten things he or she values about the job. Some emphasize the money; some, interesting clients; some, the opportunity for pro bono; some, flexible and humane hours; some, an interesting practice area; some, the opportunity to live abroad; some, avoiding lots of travel; some, great colleagues. And so on. Money might not be at the top of the list for many lawyers in the firm (maybe not for any); but money will almost always be among the top three or four. More importantly, money may be the only thing that is in the top three for every single lawyer in the firm. That makes money the easiest thing to coordinate on. The larger the firm, the harder it is to customize a package for each lawyer, and the more likely it is that every lawyer will confront more or less the same package. You will simply not be offered the option of less money and more collegiality; the high-money-low-other-stuff package becomes the off-the-rack choice for everyone.

The big, unanswered question: how long can a system with these characteristics maintain itself? Indefinitely? Of course, Marx would have said that the point isn't to analyze the world; the point is to change it.

Comments:

For so long as money is your only goal as an associate and a partner, these law giant corporate law firms are actually very efficient. If you want an actual life, you have the choice never get on the hamster wheel to begin with and simply live with a nice middle class income.

In one of the larger construction defect cases in which I was involved a couple years back, a couple of the large construction firms brought in their NYC counsel for a week worth of depositions. One of the witnesses cancelled out in the middle of the week and some of the associate attorneys simply took off to go skiing. After all, what is the use of having depositions in Vail, CO unless you can go skiing. The 80 hour a week NYC associates were amazed that we Colorado attorneys could just take off. Apparently, they are always on the clock.

Money is not everything folks. Indeed, if you live in one of those high cost east or west coast cities, the big associate money doesn't go very far at all.

My solo firm probably nets about 2/3 of a NYC associate's pay.

However, I work 50 hours to their 80.

Unless I have a court date, I can take off nearly any time I want.

They work in a small office inside some glass tower with no windows. I look at Pikes Peak from my office.

I pay 2/3 of their taxes on that income.

My house costs 1/3 per square foot of their digs.

My commute is 4 minutes to their hour or so.

My state law school loan is 1/4 of their "elite school" loans.

The Marxian perspective assumes that drone workers have no alternative. In fact, you do in this wonderfully free country.
 

I have a relative who works in labor who has actually talked about trying to unionize associates. That seems impossible though. I can't think of a less promising group of employers to try to unionize.

The reason people take these jobs from the top law schools is, as much as the salary and prestige, that they are the easiest jobs to get. By far. It seems to be noticeably harder to find a public interest law job that pays $35-40K, or a gov't job that pays a bit more, than a firm job. And even smaller firms with more sane hours--those jobs may exist but they're harder to find, and much more likely to be a field where everyone wants 3-5 years of experience and a degree from a fancy school is not considered a substitute.

The other thing about salary is that it's reliable: it's NOT acceptable for an employer to misrepresent your salary. It is considered acceptable to make misrepresentations about quality-of-life factors--or it's a don't-ask-don't-tell situation where it's considered poor form to make inquiries like that, whereas they'll tell you upfront about salary.

Though I guess most associates work at the firms they end up for a summer and see what they're getting into.
 

for once, i agree with mr. depalma.

i worked for several years in lower manhattan as a partner at what is considered a mid-sized firm for the type of litigation we did. my pay package was based entirely from year to year on a combination of the firm's total billings and my own, with the bottom line being whatever the lesser figure came out to be from a formula that nobody ever really seemed to understand.

the end result was that we worked ridiulous hours to reach an entirely unreachable billing goal. there were very few friendships within the firm. i can think of only two partners over the entire ten years i was at this firm i ever saw socially outside of the firm. the only person i keep in regular touch with since i left is my old secretary. collegiality was non-existent.

i walked away from my partnership to a small private practice out of the back of my house. my income is down. so is my blood pressure. when i want to take off a day i do. my wife and i make it a point to take at least one long weekend a month. i would like to think that my quality of life has increased exponentially, as has my health.

the only way the spiral gets broken is when those at these high falootin' white shoe firms figure out that they can easily live on $900,000 a year instead of a million. there's more to life than squeezing every last nickel out of it.
 

this strikes me as.... off. isn't the argument sandy's making that the associates are doing work that's in fact worth more to the firm than what they're billed, which the partners are skimming off in one form or another?

the shadow hours worked is only a contributing factor -- it seems to me that by far the more significant issue is that the associates are in fact doing some of the partner's work in one form or another. for example, the tradeoff between the time it takes to write a good memo and the time it takes to read it is pretty enormous.

your analysis strikes me as implausible -- you're proposing that entry-level workers are being paid literally twice their actual worth.
 

Are businesses and law firms irrational in overvaluing the rainmaker, and if so why. Arguably the rainmaker’s position in the law firm is analogous to that of an advertising agency for any large corporation. In a normal competitive market there is downward pressure being placed on an advertising agency due to competition from other firms, if an agency’s fees become excessive then the company can hire another ad agency without a significant loss in client base.

The market for legal services is not a normal competitive market because there are restrictions on solicitation and marketing of legal services. In the absence of a true competitive market, the law firm must rely on personal relationships between rainmakers and businessmen as a substitute for normal marketing. Law firms cannot change rainmakers the way companies change advertising agencies without a loss in client base. Rainmakers are thus placed in a special position in the legal services industry allowing them to charge excessive rents. The real way to change this market failure is to liberalize the restrictions on the soliciting and marketing of legal services and thereby destroy the leverage that rainmakers have in the legal market.
 

This analysis seems to miss the fairly obvious point that associates can bill $200+/hour only by virtue of being embedded in the firm context. Without the mentoring, rainmaking, and instiutitonal support of partners, no associate could possibly justify to a client billing at these rates.

I doubt that most 1st year grads could earn anywhere close to $160K as solo practicioners. Firms aren't just appropriating their labor; they are providing an opportunity for both training and value maximaztion.

David seems to think partners are obligated to provide such services for free. I think the market is doing fine in this particular respect. If associates don't like the big-law lifesyle or think they are getting shafted, they are sophisticated players who are fully able to explore a variety of other options, as Bart has pointed out.
 

The money earned by associates isn't being "expropriated"; it is, in brief, going to the rainmakers in the firm, who are a subset of the partners. (A "service partner" at most biglaw firms might be paid $400,000 to $600,000 of the $1 million in billable time that he or she works.) The associates, and most of the partners, are people who are very good at taking tests (e.g., LSATs or law school exams) in a highly-structured environment, but business demands a lot more than that in the way of inter-personal skills, dealmaking etc. The rainmakers are the people who supply those skills, and, like any sales force, they will only work if they are given a portion of the revenues.

I tell all my associate and service partner friends, when they complain: Forget the law--if you are willing to do sales work, you can double your salary right now. All financial institutions (e.g., brokerage houses, investment banks)pay immense sums to people with fancy degrees who are willing to do sales, but they find few takers, because most of the people who graduate from Yale and Harvard don't have the personality to enjoy that type of work.
 

I really do not think the law firm analysis fits the Marxian mold. First, as another commentator has noted the associates income is far in excess of the paycheck. Just the human capital developed and exposure to profitable opportunties are probably in excess of the salary. Marx certainty did not envision the workers of today becoming the "partners" of tomorrow. Indeed the whole notion is of one class exploiting another. In the law firm, you have members of the same class with some paying their dues in order to enjoy gains in the future. Not many workers in the Marxian model are involved in profit sharing in the form of year end bonuses. I'd say the proper analogy is to a fraternity -- brothers and pledges but really all one group or privileged people.
 

There's an issue in the Marxist perspective taht might be going unnoticed here. One of the reasons why Marx condemned capitalism was because the worker never felt that his work was an extension of his self in at least two respects. First, the kinds of monotonous mindless work that conventionally characterizes the factory wasn't permitting the worker to project his identity, his creativity into the work. Second, even those workers who created beauitful products (like a Steinway, for example) never felt that it belonged to him, even though he himself had created it.

Do both conditions apply for law firm associates? I would say probably yes for the first and definitely yes for the second. The whole issue of whether associates are being cheated out of their rightful share of the profits seems to me slightly misplaced. Look at law professors: they (or, if you wish, I) work ALL THE TIME. Yet we're never given a "share of the profits" in terms of the tuition that's collected. If I teach the largest section in professional responsibility at my sch (which I did last semester), I'm still paid the same. Or, I teach the smallest seminar at the sch (which I did my first semester), I'm still paid the same. But I hardly feel like Marx's awful proletariat. And I think that's because my work--my lesson plans and my articles--are creative and meaningful exercises for me. I don't know whether my teaching or my writing is especially good, but I do know that they are a creative extension of my identity and that I more or less possess them all to myself, without having my school or publishers claim exclusive rights to them.

Does this make sense?
 

Some firms are very up front about these economics. Cravath, for example, tells its incoming summer associate class that at best one of the 80 in the class will make partner, and that's they way it is planned. The consolation prize, however, is that Cravath wants to place the other 79 in positions where they will be clients of Cravath. The subtext is that the better and harder you work, the better non-firm job you'll land via the graces of a grateful firm.

All of this raises the question of why most law firms bill on an hourly basis. Many attorneys do a lot of work that is not essential for the ultimate task just because they can and it is billable. Curiously, the firm with the highest profits per partner, Wachtell, Lipton, is also among the least leveraged--it has an associate:partner ratio of under 2:1. Wachtell, though, often does not bill by hour--it bills by flat fee or percentage of transaction for many of its M&A and other corporate deals. (So does Cravath and Sullivan & Cromwell. I'm sure that other firms do too, but I don't think they do so as often or as easily.) The flat rate billing creates an incentive to minimize hours worked and to minimize staffing on deals (which increases hours for those on deals). Percentage compensation doesn't affect hours so obviously as I can tell.
 

(1)Despite its charms, this analysis unfortunately separates corporate lawyers from all other professionals suffering under post-fordist production methods. I would like corporate associates to see their fates linked to, for example, those of underfunded public defenders who are assigned more cases than they can competently handle and must work unreasonably long hours. Although he doesn't make this point, Robert Dingwall has written well on how various types of professionals work has been reorganized by economizing production methods.

(2) John and Jeff's comments above point to phenomena that are more linked to the particular situation of corporate associates and which, I think, are best exemplified by forced retirements in one's fifties about which Marc Galanter has written. Corporate associates are increasingly deing deprived of a career that develops "judgment." As such, their work increasingly resembles the alienation of "species-being" discussed by the early Marx. I addressed some of these issues in "'Proletarianizing' Lives: Researching Careers," 33 Law & Society Review 703 (1999).
 

1. In arriving at the 2x salary figure, are all firm admin costs divided up over associates, or only "associate-related" admin costs divided up over associates? If the former, it is another form of transfer up. Some firms hire "young partners" for exactly this reason - to spread the admin costs across more partners.

2. Hiring associates who earn 2x salary but few excess hours above that is in itself is a benefit where there is excess capacity (e.g., inflexible costs like empty office space, etc.) for the same reason, it makes the sunk cost of capital productive during periods of "lull" and available for busy periods.
 

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