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The Cravath System and the Demise of Large Firm Business as We Know It

Professor Bill Henderson of the Empirical Legal Studies Blog has opened an interesting discussion with his recent analysis of the bimodal distribution of law firm starting salaries.  Essentially, Henderson's salary charts reflect the current "winner take all" nature of the law firm marketplace, with a small percentage of talent collecting enormous salaries.  While this type of distribution is typical for industries like professional sports or celebrity entertainment, Henderson says that he's never seen this type of distribution for "a normal labor market involving tens of thousands of people and not just a handful of superstars."

But what's more interesting is Henderson's observation that law firms still have no interest in deviating from "the Cravath model" of paying top dollar for elite grads, even where they lack the mix of business to support it.  Henderson's research shows that:

Partners in marquee practices like white collar crime, securities enforcement, M&A, private equity, emerging markets, and intellectual property litigation are disproportionately moving upstream to more profitable firms. Partners specializing in regulatory compliance, real estate, public finance, project finance, and trust & estates are disproportionately moving downstream....In the long-run, firms without an optimal mix of premium practice areas will have a hard time sticking with the Cravath system.  Increasingly, corporate clients are refusing to have their cases staffed by expensive first- or second-year associates who don't know very much and tend to leave.  Hence, the training the clients are allegedly paying for has little or no future payoff.   

In other words, for many large law firms, the wheels of their hallowed business model are falling off.  During this period of denial, every firm's short term strategy is to work harder, promote fewer lawyers to equity partner, and de-equitize as needed.

Bruce MacEwen offers this take on Henderson's data:

The bimodal distribution of starting lawyer salaries is not, economically speaking, an equilibrium condition. It will change.

The last great associate salary spike, from $125Kto $160K, took place roughly 18 months ago when times were flush. Even then, some firms began panting at the effort to keep up. (Recall that the instigator of that spike was Simpson Thacher, which didn't have to raise its resting pulse to manage the spike.)

The next spike—I won't predict when it will be but I will predict it will be to $200K—will leave a lot of firms crying "Uncle." They will stop struggling to keep up with the receding red lights moving on down the highway. And it will be economically rational, geographically defensible, and culturally unifying.

At the end of the day, perhaps it's not discontent with the lack of meaningful work or work/life balance that will bring change to -- or the demise of -- the current large firm business model. Yet again, it's the economy, stupid.

Posted by Carolyn Elefant on July 21, 2008 at 04:16 PM | Permalink | Comments (0)


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