Friday, December 08, 2006 7:38 AM
Something I have heard said many times over the years is that at their heart, law firms are businesses...but unlike any business you have ever seen.
With this in mind, I wanted to point out an interesting post from the Wall Street Journal Law Blog yesterday, A New Take on the Law Firm Model?:
Big law firms can be harsh places. Associates with stellar resumes can toil for years, doing mostly good work, and still not make partner. And for those unlucky masses, there’s typically no consolation prize: it’s time to pack up the office and look for other work. Why do firms cling to the “up or out” system for associates?
Two economists, James Rebitzer and Lowell Taylor, recently set out to answer that question. Their findings, recorded in a Wall Street Journal interview, Guarding the Jewels, and a working paper, When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms [or in pdf], offer some insight into the whys and hows of the law firm organizational model. As an aside, while the tone of the article is fairly skewed towards larger law firms, anecdotally speaking, I think a similar model exists at many mid-size to small law firms.
Wall Street Journal: You've developed a new model that explains why law firms have such severe labor practices, one that allows only a small portion of associates to ultimately become partners. Can you give me the condensed version of your theory?
James B. Rebitzer: The one-sentence summary of the model is when knowledge assets are very valuable, the structure of the organization is going to adapt to try and take advantage.
What's special about the law firm and makes the problem acute . . . is that because there aren't physical assets that bind the firm you have to find other ways to keep the firm together.
A solution that seems to be pretty effective and pretty stable, when people can walk out of the firm with valuable assets, is to try and take the returns and [distribute them among] a relatively small number of people. And that's the key to the model.
The economists also speculate that beyond the lack of physical assets, and the difficulties in maintaining controls over the firms main intangible asset, the knowledge of it lawyers, are compounded by the clients which are more focused on hiring a particular lawyer than a law firm.
And it may be that in accounting services, the reputation of competency and incorruptibility rests more with the firm itself rather than with an individual accountant. In other words, you might remember the lawyer who won a big case for you more than you would an accountant who helped you balance your books. You'd perhaps be more inclined to give your legal work to a great lawyer who left his firm than you would give your accounting work to a great accountant who left a big firm.
On this point (which they admit is speculative), I think they are partly right. To be sure, star power exists among lawyers. Especially in the litigation and corporate areas, clients may seek out individual attorneys with a proven track record rather than reviewing a number of law firms for the work. Conversely, in transactional work with smaller dollar values at issue, evaluating firms more so than individual lawyers may occur with more frequency. And, the rumblings being heard about offshoring more routine legal-oriented work to low cost provider countries has its grounding in the idea of firm over individual lawyer. In the end, however, age-old concepts, like relationships, networks, trust and confidence are probably just as important today as they were one hundred years ago.
Perhaps more importantly, the application of economic theory to professional partnerships like law firms is a worthwhile endeavor for anyone working within, selling to, or otherwise dealing with the legal vertical. For example, understanding these theories may assist in overcoming challenges like instituting successful knowledge management and customer relationship management systems.
I don't want this post to get too lengthy, so I will leave it at that for now (but this topic is worth revisiting, for sure). For those interested in more, I highly recommend reading the Wall Street Journal article, blog post and working paper noted (links shown above). Whether you agree or not, you will come away with some food for thought.