Law firm strategies for human capital: Past, present, future

• DOI: https://doi.org/10.1108/S1059-4337(2010)0000052006
• Date: 24 September 2010
• Pages: 73-106
• Published date: 24 September 2010
• Author: William D. Henderson

LAW FIRM STRATEGIES FOR

HUMAN CAPITAL: PAST,

PRESENT, FUTURE

William D. Henderson

ABSTRACT

Over the last several decades, virtually all large U.S. law firms have

adopted a human capital strategy that emphasizes academic performance

and the prestige of the law school attended. Although this focus is rooted

more in tradition than in hard empirical evidence that it produces a

competitive advantage, the question has long been irrelevant for most

law firms because of the perennial rise in profits. If the model is not

broken, the adage runs, why fix it? Drawing upon extensive historical and

contemporaneous evidence, this essay argues that the limitations of the

traditional credentials-based model have been masked by a steady

multidecade surge in the demand for corporate legal services. Further,

various data and trendlines suggest that the growth in demand for

corporate legal services is beginning to flatten out. In the coming years,

many large corporate law firms will be in the unfamiliar position of

competing over market share. Unlike the relative calm and prosperity

of the prior era, their survival will likely depend upon a human capital

strategy that asks and answers several basic empirical questions regarding

the selection and development of lawyers.

Special Issue: Law Firms, Legal Culture, and Legal Practice

Studies in Law, Politics, and Society, Volume 52, 73–106

Copyright r2010 by Emerald Group Publishing Limited

All rights of reproduction in any form reserved

ISSN: 1059-4337/doi:10.1108/S1059-4337(2010)0000052006

73

1. INTRODUCTION

Large corporate law firms are in the business of selling legal expertise to

clients, usually by the hour and preferably at a premium price. Without

high-quality lawyers, these organizations have nothing to sell. Therefore, it

stands to reason that law firms operating in a highly competitive market

would seek to answer the most fundamental questions at the heart of their

business: Who succeeds at our firm? Why do they succeed? What traits

do they share in common? Can we recruit and develop more of these

individuals? What are the characteristics of lawyers who prioritize building

the organization rather than maximizing their personal income? Unless a

firm has a realistic grasp of these human capital issues – which go to the very

heart its business – it cannot make intelligent trade-offs. Such a firm thus

becomes susceptible to paying too much for the wrong input or ignoring the

right input available at a bargain price.

In my study of this market over the last several years, I have observed a

remarkable indifference to these questions. Indeed, the vast majority

of large firms appear to follow a near identical model based upon the

same narrow tranche of information: limit the hiring pool to the most

academically qualified graduates from the most prestigious law schools and

offer jobs to those who can make contact with the softball questions tossed

during the interview process.

1

In more recent years, the search for legal

talent has been extended to lateral partners who have substantial, portable

books of business (Henderson & Bierman, 2009). But whether the focus is

on partners, associates, or something in between, the entire human capital

model boils down to a crude system of selection.

What accounts for the reluctance of so many law firms to experiment and

innovate when it comes to the most important element of their business

model? One explanation is that, until now, virtually all firms were making a

lot of money using a tried-and-true system. Thus, there was a reasonable

suspicion that any so-called innovations might backfire with junior lawyers

or clients. Some industry insiders believe that the deep recession of 2008 and

2009 has provided a catalyst for ending the uniformity in business strategies

(e.g., Hildebrandt, 2009), and there is evidence to support this position.

Numerous brand name firms have recently retreated from the $160,000

starting pay scale, abandoned associate lockstep, implemented early career

apprenticeship models, and/or shifted a greater proportion of work to lower

paid, nonpartnership track staff attorneys.

Yet, as noted by some commentators (e.g., Press, 2009), because supply

and demand now favors employers, the current economic cycle also

WILLIAM D. HENDERSON74

provides a strong temptation to double down on the traditional hiring

criteria. Firms can now limit their recruitment to law review editors and

judicial clerks from the nation’s most elite law schools, which bolsters firms’

own image of eliteness and quality. This type of response leaves intact the

core features of the traditional corporate law firm recruitment process.

Despite this doubling down, there is substantial evidence that a human

capital strategy based upon elite credentials can no longer be counted upon

to deliver a competitive advantage. It is not that elite law school graduates

lack the requisite talent to become exceptional lawyers. Rather, the

convergence of so many firms on an elite credentials strategy ensures that

the price of that talent will be excessive relative to its value to corporate

clients (Henderson, 2008). In short, the spread between wholesale and retail

price for junior lawyers – long the cornerstone of law firm profitability

(Nelson, 1988, pp. 75–76) – is steadily evaporating.

These changes are driven by clients who have become skeptical of the

value provided by the high-leverage partner–associate model. Sophisticated

clients remain willing to pay a substantial price premium for the time of

expert, service-oriented partners. But they are increasingly reluctant to pay

for the time – and, by extension, the education and training – of nonexpert

junior lawyers.

2

This unbundling of services disrupts both the firms’ reliance

on leverage as a means of boosting profits and – more troubling for long-

term profits – the production of the next generation of expert lawyers with

strong client-relationship skills. These dynamics are placing pressure on the

current large law firm sector, especially those firms with expensive multi-

office overhead (see, e.g., Marek, 2009). During the short-to-medium term,

some firms may fare well by recruiting lateral partners with large books of

business. But from an industry perspective, the convergence on a lateral

strategy does nothing to solve the longer term problem of developing a

cost-effective human capital strategy for training the next generation of

senior-level lawyers.

These structural changes represent significant challenges for existing

firms. They also represent opportunities for legal service organizations not

wedded to the status quo. In this essay, I argue that the U.S. corporate law

sector is poised to undergo a major paradigm shift that will tear down

existing hierarchies and create new ones, both among law firms and within

legal education.

3

This core transformation will rationalize the ‘‘input’’ side

of the professional legal services model by (a) developing a more data-driven

understanding of how lawyers and law firms add value to business clientele –

that is, answering, in a serious way, the very questions I posed in the first

paragraph of this chapter – and (b) capitalizing on these findings through

Law Firm Strategies for Human Capital 75