The elastic tournament: a second transformation of the big law firm.

• Author: Galanter, Marc

INTRODUCTION I. AN UPDATED TOURNAMENT: A NEW MODEL OF LARGE LAW FIRM GROWTH II. REVIEWING THE EVIDENCE OF A SECOND TRANSFORMATION A. Firm Size, Geography, and Competition B. Tier Structure and the Tournament C. Partner Mobility D. The Emerging Equilibrium III. IMPLICATIONS FOR THE LEGAL PROFESSION A. Decline of Large Firms as Exemplars of Legal Ethics B. Challenges for Racial and Gender Diversity 1. Minority Lawyers 2. Female Lawyers C. Millennial Lawyers and the New Lifestyle Firm CONCLUSION INTRODUCTION

Periodically law students, faculty, and practitioners come together to reflect on the issues and problems affecting the legal profession. We welcome the opportunity to take part in this discussion under the auspices of the Stanford Center on Ethics. One way to organize this discussion is to focus on lawyers' practice settings. According to the most recent edition of The Lawyer Statistical Report, (1) which contains data for the year 2000, 672,901 lawyers (74%) worked in private practice. Of these lawyers, slightly less than half (324,903) worked as sole practitioners (but there is clear evidence that this portion is shrinking). (2) Among the remaining 347,998 private practice lawyers in the United States, slightly more than a quarter (95,892) worked in law firms with 101 or more attorneys. In total, large law firm lawyers comprised 10.5% of the U.S. legal profession. Yet this is the fastest-growing, most prosperous, and most dynamic sector of the profession. If the recent past is a reliable guide, the institution of the large law firm--its power, influence, and prestige--will once again be a dominant theme in this discussion. (3)

More than in earlier times, however, this emphasis may be especially justified. Over the last three decades, an increasing proportion of law school graduates are beginning their careers in large law firms. (4) Based on the size of the 2007 summer-associate classes, The American Lawyer magazine estimates that the nation's two hundred largest law firms (based on revenue) are set to hire ten thousand entering associates during the fall of 2008. (5) "That astonishing number," observes editor-in-chief Aric Press, "equals about one-quarter of all the students who will graduate from U.S. law schools next year. To put it another way, the top 20 law schools will only produce about 6,500 graduates." (6) Because virtually all large law firms still aspire to some variant of the original "Cravath system," in which the firm establishes its brand by hiring only the best students from the best law schools and providing them with the best training, (7) the laws of supply and demand dictate that thousands of entry-level associates now command the princely sum of $160,000 per year. (8) By extension, elite and semi-elite law schools are able to take a proportionate share through ever-higher tuition (and corresponding debt loads), without "billing" any additional hours or changing the way they (we) teach. (9)

The partner-owners of large law firms have also benefited, at least financially. A persistent multidecade surge in demand for corporate legal services, (10) has given partners in large law firms dramatic gains in their compensation, especially in comparison to their counterparts in small and solo practice. (11) Nonetheless, because of the relentless pace of modern large law firm practice, there are few (if any) partners who regard the present as a golden era of professional felicity. In a recent column in the alumni magazine, Larry Kramer, the dean of Stanford Law School, reviewed the many changes in large law firm practice, including soaring billable hour expectations, the resistance of clients to paying for associate training, the explosion of lateral hiring, unprecedented associate attrition, and a diminution in the sense of firm culture and community. (12) Kramer then queries, "Does anyone actually want this? The lawyers, managing partners, and general counsels I meet are deeply concerned about what's happening. Yet they feel unable to stop it, powerless to resist the stifling market forces that drive their decisions." (13)

In light of the disproportionate sway and influence of large law firms--and a widespread perception among law students, faculty, and practitioners that we are being pulled into new and uncharted territory--the time is ripe for an updated and more contemporary account of the modern large law firm. Drawing on recent empirical evidence, we observe that the well-known "promotion-to-partner tournament" remains a core feature of large U.S. law firms. (14) However, the new model, which we dub the "elastic tournament," involves a different set of ground rules and ultimately includes a much larger (and mostly older) set of players in more roles. Moreover, until a large law firm lawyer renounces any interest in prerogatives of ownership (e.g., a claim on residual profits, a voice in firm management), the duration of the tournament can now be expected to last one's entire career. In short, the only finish line is death or retirement.

These changes are driven by a confluence of factors, including firm size, geographic dispersion, client demands, lower information costs via technology, and shifting generational tastes. (15) Yet, the fundamental economic reality that underlies this transformation is the inability of large law firms to underwrite a prize of partnership that includes both long-term financial security and eventual repose. (16) At the same time that large law firms have grown to truly behemoth proportions, aided in part by a large cadre of professional lawyer-managers, the locus of firm control has shifted to an inner core of "partners with power" (17) who may or may not be strongly wedded to the firm. (18) Large law firms that refuse to privilege these partners inevitably run the risk of large-scale defection and implosion. (19)

This Article is organized in three parts. In Part I, we discuss the key features of the new "elastic" tournament model. In Part II, we assess the accuracy of the elastic tournament model by reviewing the empirical evidence. In the process, we note the emergence of a separating dynamic in which large general service law firms without an optimal mix of lucrative practice specialties will soon be vanquished in the salary wars. (20) We speculate that these less-endowed firms may form the basis for new and distinct second tier of large law firms that will compete on the basis of specialized service and price rather than elite lawyer credentials. Finally, in Part III, we consider three implications of our model: (a) with reduced risk sharing among partners, large law firm lawyers will be less independent of their clients and thus less reliable exemplars of professional ethics; (b) the atomistic ethos of modern large firm practice is likely to hinder the profession's aspiration to gender and racial parity at the partnership level; and (c) the new generation of "millennial" lawyers will get their wish of greater work-life balance (21) in exchange for an expanded array of "off track" career options. Nonetheless, similar to earlier generations, (22) we suspect that a large number of the best and brightest will continue to be drawn into the tournament by the money and status that come with making partner.

1. AN UPDATED TOURNAMENT: A NEW MODEL OF LARGE LAW FIRM GROWTH

   The promotion-to-partner tournament has been a defining feature of large corporate law firms since their emergence on the legal scene in the late nineteenth century. (23) The basic scheme of the tournament was that lawyers blessed with more work than they could personally handle would recruit highly qualified but inexperienced young graduates of the newly flourishing law schools, which were displacing "reading law" as the preferred entryway to the profession. The partners would hire these young lawyers to work on the cases of the firm, a manifestation of the human capital of the senior lawyers, under the supervision of those seniors. After an extended probationary period marked by increasing responsibility, the most proficient of these associates (as they came to be called in the early twentieth century) would, be taken into the partnership. Under the "up or out" principle, the others departed and were replaced by new recruits. Promotion marked the point at which the young lawyer had accumulated more human capital than could be combined with his own labor. So when an associate was taken into the partnership, the firm needed not only to replace him, but also to add sufficient labor power to utilize the additional increment of human capital. In this scheme the partnerships of successful firms, consisting of those who won the tournament, would grow gradually over time. Growth was internal, generated by the tournament. Apart from the departure of associates who did not become partners, there was virtually no lateral movement in or out of the firm. Partners enjoyed a kind of tenure and remained with their firms for the course of their working lives. The successful tournament firm can be schematically represented as an inverted funnel.

   [FIGURE 1 OMITTED]

   With minor variations, this was the shape of virtually all large American law firms providing legal services for organizational clients over the course of the last century. These firms grew over time; their style of work became the industry standard for provision of complex and continuing legal services. (24) The tournament firm successfully adapted to changes in technology, to a great enlargement in scale, and to diversification of its personnel. (25) And after World War II, and especially toward the end of the century, it became a model adopted in many countries around the world. (26) It is widely viewed as a successful and stable form. (27) For most of its inhabitants and spectators it has been naturalized; it is the unsurprising and expected form of organizing legal work.

   As firms grew and their surroundings changed, firms underwent a...