Compensation Expense, Large Firms and Small, Tobacco and Peanuts

Domino EffectIn any kind of organization, staff must be sized to fit the workload. In law firms, personnel expense is far and away the largest expense and not overstaffing is critical to efficiency.

The market for lawyers was crazy for a while. Every law firm everywhere sought to “differentiate” itself by having the “best lawyers” and delivering the highest quality. And demand exceeded supply. Prices went crazy.

Now, the supply of lawyers is generally agreed to exceed the demand for their services – by a lot.  And now, new echelons of legal services providers no longer bother to claim that they have the “best” lawyers. They achieve the quality that’s needed for the work they do (i) by doing just one thing, or (ii) by outsourcing to low cost vendors, or (iii) with machines. In many cases, sophisticated clients are making the decision that they don’t need “the best” for every legal task.

Legacy, full-service law firms have responded to all this with reductions in force and, in many cases, by lowering compensation. The process is ragged. Some big firms have reduced forces but increased compensation. Many smaller firms are finding opportunities in clients’ disaffection with Big Law.

But, all the instruments agree: there are more lawyers than there is work for them to do. This is a fact that cannot be avoided.

For associates at legacy business law firms, this means there are fewer jobs and often at lower salaries.

In many firms partners have been — what’s the word? — retired, laid off, de-equitized?  Work is down at all levels and simply lowering the compensation of unproductive partners does not fix the problem. Even partners whose compensation is low continue to take up space (expensive square feet); they are inefficient marshals of work (they turn to work that junior lawyers should be doing); and they are diversions. In large firms intent on profits, this might be an intractable problem and the only solution may be to eliminate those partners.

In smaller firms, unproductive partners present mostly the same problems as in larger firms – but the fixes can be different. In fact, how a firm manages the challenge of sizing its partnership to the demand for its services defines the firm and its understanding of itself. A firm that concludes that short-term efficiency and productivity is required to keep a seat in the partnership, is saying to itself, in effect, that productive partners should go to other firms when they have opportunities to make more money somewhere else.

Big law firms are long since committed to this logic. Not so, the smaller ones.


Tobacco plant

peanut vine 2

Peanut vine

Make no mistake: declines in work and unproductive partners are a big problem in any firm — large or small. In many cases, the right fix, even in a small firm, may be to lop off an unprofitable lawyer – like tops and suckers off tobacco plants. But in mid-sized firms the logic is rarely that simple. Almost always there are better solutions.

This much is clear: in small firms and large, problems get better when they are candidly acknowledged and addressed. But mid-sized firms are more like peanut vines than tobacco plants. They must be cultivated differently.

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