November 17, 2005
A Rust Belt Economy for Lawyers
Posted by Bill Henderson

During the past year, I have been developing a large data set on the Am Law 200—i.e., the 200 largest U.S. law firms based on annual revenues. My research contains several discrete strands, including an examination of the economic geography of large corporate law firms.

Here are some interesting factoids on law firm growth:

  • Between 1993 and 2003, the number of lawyers working at Am Law 200 firms increased from 54,520 to 99,105 (+81.8 percent), which is great news for law students interested in high salaries.
  • New York City added nearly 10,000 Am Law 200 lawyers during this period (11,290 to 21,210; +87.9 percent). In absolute numbers, D.C. came in second (8,596 to 13,512, +57.2 percent).
  • The remaining top 10 domestic markets—in order of size: Chicago, L.A.,San Francisco, Boston, Philadelphia, Atlanta, Houston, and Dallas—increased from 20,973 to 34,561 (+64.8 percent).
  • The number of foreign Am Law 200 lawyers exploded (2,061 to 9,969; +383.7 percent), with London leading the way.

The missing market segment is non-Top 10 domestic locations (“Regional Market”). Between 1993 and 2003, the number of Am Law 200 lawyers in the Regional Market grew from 11,600 to 19,853 (+71.1 percent). However, the growth was very uneven. Consider the growth patterns of four “Old Economy” cities in the Regional Market, all with one or more Am Law 200 headquarters.

                     Chg. Lawyers     % Growth     New Offices
    Cleveland MSA      96             13%                 -1
    Detroit MSA          95             17%                  2
    Indianapolis MSA  176             42%                  0
    Milwaukee MSA     78             14%                  0

(Note: Detroit's two new offices were in Ann Arbor.) Now consider the growth in four “New Economy” cities in the Regional Market:

                     Chg. Lawyers     % Growth New Offices
    Austin MSA         428             185%              6
    Charlotte MSA     481           1266%             10
    Miami MSA          546             103%              9
    San Diego MSA    613             142%             14

I am originally from Cleveland. Andy Morriss, who is on the faculty at Case Law, told me that a prominent Cleveland politician suggested to him that the city’s “national law firms” [there were six Am Law 200 firms at the time] could be an important driver of the city’s economy in the years to come. Perhaps growth in corporate lawyers requires growth in local industries; I know a few Cleveland lawyers whose primary job is to sell off the assets of "legacy" industrial companies.

Yet, these statistics also suggest that graduates of regional law schools in struggling legal markets will face stiff competition for coveted big firm jobs. In a recent paper for the Indiana Law Rankings Symposium (I am estopped from providing the SSRN link), Andy and I showed that the growth of high-end corporate law jobs (i.e., Am Law 200) has a significant effect on the market for high LSAT students. In other words, when choosing among schools in Tiers 2 through 4, students with marginally higher LSAT scores will often trade down in USN&WR rankings in order to attend a school that feeds into a vibrant legal market. Hence, the median LSAT scores for non-elite schools in major legal markets are trending upward.

The law firms data suggests lots of other interesting trends, but I don’t think most people realize how the decline of the industrial Midwest has impacted the market for lawyers and law students.

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Comments (14)

1. Posted by Scott Moss on November 18, 2005 @ 7:29 | Permalink

What I wonder is why corporate clients in big cities (e.g., NY, Chicago, LA) don't hire firms in second-tier cities (e.g., Milwaukee, where I am) for certain kinds of work, e.g. (just some examples from my field, employment law): drafting a noncompetition agreement; discrimination policy/compliance review, harassment procedures, and employee training. Some of that is federal law that a good Milwaukee firm would know as well as a good NY firm; other of it (e.g., noncompetition agreements) is state law but not terribly complicated state law.

In short, if Milwaukee firms are short of work, the gap between their hourly rates and those of NY would become even wider. It seems to make little sense for a NY-based company to pay 50-80% higher hourly rates just to have a hometown firm do the same work an out-of-town firm could do.

Does anyone know if this is happening? I haven't heard of it happening, but I'm not that deep into the loop on such matters....


2. Posted by William Henderson on November 18, 2005 @ 7:39 | Permalink

Scott,

That really is the puzzle of my project -- where is the labor arbitrage? There is a literature on agglomeration economy that might explain some of these papers (e.g., what accounts for industries saying in high-cost areas like Silicon Valley). Perhaps young associates prefer the big city for (a) lifestyle reasons or (b) superior outplacement options.

By the way, the PPP of firms with high concentrations of lawyers in NYC are off-the-charts high. It is not just a billing rate differential. Again, I agree with you. There seems to be a clear arbitrage opportunity. The trends seem counter-intuitive.


3. Posted by Kaimi on November 18, 2005 @ 8:00 | Permalink

Good question on arbitrage. I don't know the answer, but a few possibilities come to mind.

First, there is a real start-up cost for a firm accepting business. Partner talks to client; partner talks to other partners; firm does a conflicts check; partner sits down with associates and briefs them -- all before any actual work gets done on the case. And then five associates all sit down and read through the pleadings and the case files and the correspondence.

That's a pretty high start-up cost. It seems that that cost couls eat in to the arbitrage opportunities.

Second, you've got supervision and quality control problems, particularly post-Sarbanes. Does my New York firm really _trust_ the Milwaukee firm to do things right? If a Milwaukee associate screws up, am I on the hook in New York for malpractice? Will my client fire me?

(N.B. I worked on a deal where the other side -- a top New York firm that you have definitely heard of -- farmed out the diligence to a regional firm (that you've also heard of). The regional firm completely blew the diligence, missing several key things. Big NY firm wa very embarrassed. They had to sit through a conference call where their client blasted them. Blame went straight to the NY firm.)

Third is the feast-or-famine nature of the game. I don't know that a good Milwaukee firm has the capacity to dish out 10,000 hours one month and none the next. If I'm sure that I'm going to be getting good work from a good Milwaukee firm with a strong reputation -- Foley or Quarles or whatnot -- then maybe I do this. But I'm not sure the best firms have that kind of stop-and-go capability.

Fourth, I worry about client poaching. If they like the work my Milwaukee firm did, maybe they move that work to that firm permanently.

Fifth, I worry about big-picture issues. Can a law firm provide better service if it has more of a client's business? Maybe.

Six, do clients really want this? Or are they buying the Cravath or S&C name, as a protection?

Just a few thoughts.

And yes, some of these points are definitely undercut by the fact that for a big discovery or diligence, all of the firms (including the NY white shoe firms) are going to let the doc review be done by contract attorneys who are hired from a temp agency.


4. Posted by Bill Sjostrom on November 18, 2005 @ 8:33 | Permalink

I spent a couple of years in house at a corporation in a second-tier city. We used NYC counsel on a number of matters that could have been handled equally well, if not better, by local counsel, and the bills would have been at least 50% less. One of the underlying reasons we did not push to switch to local counsel was risk aversion. If management was OK paying for NYC counsel, we in the legal department perceived only a downside to switching. Specifically, if we switched and things did not turn out favorably, we felt we would suffer the wrath for not using NYC counsel. Whereas, if we used NYC counsel and things did not turn out favorably, we would not be blamed--even the "best" law firms sometimes get bad outcomes.


5. Posted by Scott Moss on November 18, 2005 @ 8:41 | Permalink

All very good points. I'd note that some of these reasons (why, say, NY companies don't use Milwaukee firms) are within the definition of traditional rational choice econ, e.g.: information costs; risk-aversion; and, I'd add, the principal-agent problem of fearing that if you're the VP who hired a Milwaukee firm taht turns out to be awful, you pay a high personal price. Others are rationality-based but not nto welfare-maximizing, e.g., NY firms protecting their turf.

Still other reasons, however, are not terribly rational. The self-serving NY-centrism of many NY lawyers and businessfolk is probably a big reason. I got a lot of snickers from NY'ers when I mentioned that I was moving to Milwaukee; it was as if I said I'm moving to Wyoming, as far as they were concerned.

I don't know if LA and Chicago are similar, but many in NY irrationally refuse to concede that cities outside NY may have numerous very good lawyers. You'd think that the ability to save 40% on your legal bills would drive that kind of irrationality out of the market... but as many of us have come to believe, profit opportunity just won't drive out all inefficiencies. Maybe it'll happen in the long run, e.g., when my 6-month-old daughter Piper becomes managing partner of Moss Foley & Lardner. I guess as long as it happens in the long run, the market is wonderful, right?


6. Posted by William Henderson on November 18, 2005 @ 8:48 | Permalink

Wow, these comments are simply outstanding. When I finally draft the economic geography paper, I will make all of you famous in a footnote. Great, insightful observations! Thanks.


7. Posted by Scott Moss on November 18, 2005 @ 8:48 | Permalink

Sorry, I shouldn't have implied that the principal-agent observation was my own -- it clearly was offered by Bill S in the prior comment.


8. Posted by Christine on November 18, 2005 @ 9:00 | Permalink

Just a couple of comments. I've mentioned to Bill H. before that NY firms do geographically arbitrage, but in a slightly different way. They move into smaller markets, cherry pick associates by offering wages in between City X and NY, then charge clients NY rates. The overhead is much, much less, so profits are greater. NY firms did this in Houston in the mid-90s. The response was that big Houston firms raised their salaries and their billing rates. A rising tide floats all boats!

Point #2: I often heard it said at both BakerBotts and Skadden that part of the package that we offered clients was the ability to drop everything and work around-the-clock to meet a client's needs. If a partner came in and said, "What are you doing the next 72 hours?" you knew what the right answer was. I am not sure that this mentality exists in all markets (at lower billing rates/salaries).


9. Posted by Paul Stancil on November 18, 2005 @ 9:10 | Permalink

Following on to all three comments, I offer the perspective of a guy who spent seven years in an AmLaw 100 firm in a "big" market (Houston) but who is now a shareholder in a Milwaukee firm ranked 225th in the country by size (185 lawyers).

Industrial decline in the Midwest has had some impact upon the legal markets in those cities. But I'm not sure it's as simple as "fewer factories = fewer lawyers." Still, I haven't been in Milwaukee long enough to get a real feel for the past, so I'll defer to others on that score.

As for arbitrage, though: (1) there's a lot of it going on; and (2) it happens in several different forms.

Kaimi's list of concerns is a good one, and I suspect all of those issues have slowed the adoption of subcontracting strategies. But at this very moment, our 185-lawyer firm is acting as a subcontractor on behalf of two of the top 15 firms in the AmLaw 100, and one in the top 50. Each of these subcontracting jobs is pure arbitrage -- we're 30-50% cheaper than our national firm counterparts, and we're receiving rates about 30% higher than the Milwaukee standard. But we only subcontract expertise -- antitrust, school law, banking regulation -- in which we are as strong or stronger than the general contracting firm. This strategy makes sense for both firms, because they don't worry so much about subcontractor quality, and because we get to market real legal skills. Of course, one of our previous subcontracting relationships just bore the ultimate regional firm fruit -- by simply doing good work for less, we just stole a Fortune 200 client from an AmLaw 10 firm (lbeit only in one of our specialty areas of practice). I'm not sure that big firm will use us again.

But subcontracting is not the only form of arbitrage. Large regional firms like ours are noticing a definite trend -- the AmLaw 100 in particular (and to a lesser extent, the AmLaw 200) is pricing itself out of some VERY attractive work. There's still a lot of CYA in general counsel's offices, and it's sometimes hard to get a foot in the door, but there clearly seems to be a new tiering structure among American legal work, and the big boys are increasingly focusing exclusively on the new category: "super premium" work. That leaves an awful lot of "premium" work for firms like mine that can push rates 30-50% and still be significantly cheaper than our new clients' former firms. In my market, one large firm simply doesn't seem to want even publicly traded companies below a certain size as clients. We're happy to fill the gap. We're also increasingly successful in penetrating the Chicago legal market from Wisconsin, without opening a Chicago office. Technology is a HUGE part of this. Our #1 rainmaker and one of our four "national reputation" litigators lives 30 minutes south of Green Bay. Two of the three others live in Madison. But their client bases are increasingly national.

Finally, just to tweak Kaimi a bit, my own N.B.: While working for the Houston firm, we hired white shoe N.Y. firms a couple of times to do local discovery work. We had to check their work, not the other way around. And my current firm just hired a major D.C. firm (AmLaw 25) as local counsel in a case. Now THAT felt good! I sure hope they're competent.


10. Posted by Vic Fleischer on November 18, 2005 @ 12:30 | Permalink

Just to complicate matters, I'll throw out two more things. First, for many companies, e.g. an Ohio clothing company, the decision isn't just Columbus vs. NYC but Columbus vs. NYC vs. in-house. For run of the mill employment agreement work, why do you need outside counsel at all? Interestingly, I sometimes observed small city firms used as quasi-in-house counsel.

Second, litigation vs. transactional. For some transactions, esp. some financial transactions, smaller firms won't know how to do the work. It's not just knowing the "law" that matters, but understanding how the deals work and what everyone's expectations are. This is true to a lesser extent for certain kinds of litigation (e.g. white collar crime).

Cool project.

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