From Pyramid to Diamond: The De-leveraging of the law firm model

Since the advent of the traditional law firm operating model pioneered by Cravath, Swain & Moore in the early 20th century, law firms primarily made money by leveraging the work of associates billed on an hourly rate basis. The graphical representation of the law firm operating model became known as a pyramid. When the economic downturn hit five years ago, law firms began to shift their operating model by dramatically downsizing the number of associates on the lower end of the pyramid.

According to ALM Legal Intelligence, since 2008 the number of associates in the 250 largest law firms has diminished by more than 7000 people. This downsizing has created the new law firm operating model of the 21st century, one based on flexibility and new staffing strategies, and has changed the shape of the graphical representation from a pyramid to a diamond.

The reasoning behind this is fairly simple. As the economy worsened, clients scrutinized their legal spend more carefully, determining they no longer wanted to pay high hourly rates for work performed by less experienced and less efficient junior associates. However, clients still perceived value in that work being performed at that rate by partners. Thus, a major trend toward the deleveraging of the law firm began.

“Life after Leverage: New Models of Law Firm Staffing,” the ALM Legal Intelligence survey report published in November of 2011, shows that the trend of deleveraging led to two interesting developments: a significant uptick in outsourcing to legal process providers and to staffing firms, and an increased emphasis on performance metrics.

Dealing with Providing More for Less

ALM found that partners now shoulder a heavier workload due to the decrease of associates, but firms also employ a variety of methods to increase staffing efficiency for clients and maintain profitability. For example, 52 percent of those surveyed indicated they would be increasing staff levels of paralegals in their practice area. The survey also indicated that firms intend to rely more heavily on outsourcing uncomplicated tasks to legal process outsourcing providers. Such tasks include document review, contract review and other tasks traditional performed by entry-level associates.

For more complex tasks, laws firms—as well as corporate counsel—are engaging staffing firms to provide highly-qualified attorneys on a project by project basis. ALM’s survey indicated that tasks previously considered to be solely in the domain of law firms, like merger and acquisition advisory work, are now being performed by staffing firms as the law firm operating model further transforms.

Measuring Performance through Evaluations

The billable hour used to be the measuring stick for determining performance in a law firm, but with increased client scrutiny, firms need to find new ways to determine efficacy. “[F]irms are emphasizing business development skills and industry experience through more frequent evaluations,” according to the ALM press release about the Legal Intelligence survey report.

Exacting systems for evaluations are becoming the norm in the majority of surveyed law firms: 64 percent indicated such systems were now in place in their firms. Whether these evaluation methods will improve performance is still in question. Thirty-five percent of those surveyed said it had, whereas 34 percent said it had not made a measurable difference.

The press release also suggests that “[l]aw firms may need to link pay to job performance before performance improves further. Fifty-four percent of respondents said it was the most important way to retain staff and remain competitive.”

In total, this survey underlines the importance of agility and accountability in the new model of the law firm. No longer is it possible to simply follow the Cravath operating model and achieve success. Law firms need to strategically evaluate their position in the marketplace, exceed clients’ expectations and transform their employee performance evaluation system to not only survive but thrive in the years ahead.