Law Firms Research Paper

1. The Evolution Of The Large Law Firm: From Cravathism To Megalawyering

The American law firm of Cravath, Swaine, and Moore is widely credited with creating the blueprint for the modern large law firm in the first decade of the twentieth century. The ‘Cravath System’ consists of four interrelated practices. First, lawyers, typically called ‘associates,’ are hired directly out of law school, paid a fixed salary, and required to work exclusively for the firm. Second, these new recruits are hired for a probationary period during which they are trained by the senior lawyers in the firm, called ‘partners,’ to handle matters of increasing responsibility for the firm’s clients. Third, at the end of the probationary period, the partners select only the best associates for promotion to partnership, requiring those who are not selected to leave the firm. Finally, partners share in both the firms’ profits and management, including, most importantly, the selection of new partners (Swaine 1946).

Firms patterned on the Cravath model grew dramatically in size and geographic scope from 1960 to the end of the twentieth century. In 1960, there were 38 US law firms with more than 50 lawyers, with the largest consisting of 125 attorneys (Smigel 1969). Forty years later, there were 250 law firms in the USA with more than 100 lawyers, with several exceeding 1,000 attorneys (National Law Journal 1999). In 1960, virtually all firms consisted of a single office. By 2000, most large firms had multiple offices, with many practicing in several jurisdictions. In 1960, only a handful of US firms had foreign offices. Forty years later, foreign offices of the top 250 American law firms were located in 72 foreign cities and employed almost 5,000 US and foreign lawyers.

During this same period, ‘megafirms’ (Galanter and Palay 1991) patterned on the Cravath model began to emerge in the UK, Europe, Asia, and other commercial centers. England was the first to develop comparable firms to those found in the USA (Flood 1989). By the end of the century, these firms were among the largest and most globalized firms in the world. Lawyers in the Netherlands (Blankenburg and Bruinsma 1994), Germany (Gerber 1999), Spain (Stewart 1991), Canada (Arthurs et al. 1988), Australia (Galanter and Palay 1991), China (Alford 1995), and Venezuala (Perez Perdomo 1988) have also developed their own versions of the large law firm. Although the structure and culture of these firms reflect important national and regional differences (Trubek et al. 1994), the Cravath System continues to exert a powerful influence on the development of large law firms around the world. As a result, theories about how US law firms are structured are likely to have important implications for firms in other countries that are patterned on the American model.

2. Explaining Law Firm Growth

Theorists offer three related explanations for law firm growth: tournament theory, portfolio theory, and demand theory. Although each theory highlights important truths, none captures the dynamic interaction between markets, institutions, and lawyer entrepreneurship that has fueled the expanding market for corporate legal services.

2.1 The Tournament Of Lawyers

Tournament theory posits that law firms must promote a fixed percentage of their entering associates to partnership in order to overcome the mutual monitoring problems of partners and associates inherent in the Cravath System (Galanter and Palay 1991). Partners, on this view, must protect their human capital (i.e., reputation, skill, and relationships with clients) from associates who might be tempted to damage partners by shirking on their assignments or grabbing the firm’s clients and leaving. Associates, on the other hand, must protect themselves against partners who appropriate their hard work during the probationary period only to renege on their promise to promote those who perform well to partnership. Promoting a fixed percentage of every entering class of associates to partnership, tournament theorists assert, solves both problems by giving associates the incentive to maximize their chances for one of these prized slots by working hard with relatively little supervision, and at the same time providing associates with an objective measure (the number of associates promoted to partnership in any given class) of whether the partners are keeping their promise to reward the best associates. Since firms must hire at least one new associate for every new partner they promote (to leverage the new partner’s human capital), tournament theorists conclude that the Cravath System’s ‘promotion-to-partner tournament’ creates an internal growth engine that causes firms to grow exponentially in size.

Tournament theory contributes to understanding—but does not fully explain—the growth of large law firms. For the reasons outlined in Sect. 3.3, the internal labor markets of large law firms are not structured as rank order tournaments. Although the competition for partnership continues to play an important role in these institutions, two aspects of contemporary law firms limit its usefulness as an explanatory variable in law firm growth. First, many associates joining large law firms at the beginning of the twenty-first century have no intention of staying long enough to become partners in the firm (Wilkins and Gulati 1998). Second, rather than growing primarily by promoting associates who begin their careers with the firm, many of the largest and most successful law firms have grown through lateral hiring of senior associates and partners and by mergers with other firms (Johnson 1991). Each of these developments demonstrates that something other than the quest for promotion is driving law firm growth.

2.2 Portfolio Theory

Portfolio theory offers a potential explanation for why firms have increased their lateral hiring, particularly at the partner level. According to this view, law firms exist primarily to help lawyers manage and spread risk (Gilson and Mnookin 1985). A solo practitioner who loses her biggest client will face catastrophic consequences. A lawyer working in a law firm—particularly one that shares profits equally among the partners—is partly protected from this risk by the presence of a portfolio of firm clients. The more diversified the portfolio, the greater the protection e.g., firms can do initial public offerings when the economy is strong and bankruptcy work when the economy is weak. As a result, firms have strong incentives to grow by acquiring new partners (who bring new clients to the firm) and by developing new practice specialties.

Portfolio theory also fails to provide a full explanation for law firm growth. There has been a steady shift toward full service law firms. But this development does not appear to be fueled by the desire to minimize risk. Plaintiff’s lawyers, who in the USA receive the bulk of their income from contingent fees that are only awarded at the end of successful litigation, are subject to far more downside risk than corporate lawyers who are typically paid by the hour. Yet plaintiffs firms generally are small and comprised almost exclusively of lawyers who are doing similar work (Coffee 1986). Moreover, as firms have grown larger they have tended to switch from lock step compensation for partners to ‘eat what you kill’ arrangements that reward partners for their individual contribution to the firm’s profits. Marginal productivity compensation systems defeat the entire purpose of risk-spreading among partners.

2.3 Demand Theory

By concentrating on the internal dynamics of law firms, both tournament and portfolio theory neglect one obvious influence on the size of law firms—the demands of clients. Since 1970, there has been a tremendous increase in demand for all legal services in the USA (Sander and Williams 1989). Demand is strongest in the corporate sector, which in 1992 purchased more than $60 billion in legal services from American law firms (Galanter 1999). Law firms have obvious incentives to hire new lawyers, open new offices, and acquire new specialties to meet this demand.

Although client demand undoubtedly spurs law firm growth, it too is only a partial explanation. Demand side theories treat lawyers as passively responding to client pressure. American lawyers, however, have always played an active role in promoting the demand for their services. Thus, the lawyers who encouraged their corporate clients to use litigation as a tool for resolving business disputes are partly responsible for the increase demand for litigators. Similarly, law firms such as Skadden, Arps, Meagher, Slate and Flom, helped fuel the mergers and acquisition boom by developing new strategies for hostile takeovers. It is this entrepreneurial style of lawyering that is spreading around the world.

2.4 Toward A Dynamic Theory Of Growth

A complete theory of law firm growth must take account of the dynamic interaction among institutional structures, client demands, and lawyer entrepreneurship. Large law firms in the USA initially developed at the turn of the twentieth century as the large industrial concerns and financial institutions consolidated and formalized their power. The lawyers who sought to be the trusted advisers to these new economic enterprises adapted their practices— including developing expertise in specialties such as finance, reorganization, and antitrust, and creating internal practices (such as de facto tenure for partners, associates who owe their entire loyalty to the firm, and locating their offices in the buildings of their largest clients) that created symbiotic and durable relationships with their clients’ owners and managers. As corporations reorganized and globalized a century later, it is not surprising that the law firms that serve these multinationals followed suit, expanding in size and geographic scope to better serve the competitive needs of their clients, while at the same time driving their clients to seek out and cultivate new markets. As the revolution in information technology opens the door for new forms of industrial and financial organization, we should not be surprised to see law firms creating new products and services, including ancillary businesses or joint ventures with nonlawyers to deliver nonlegal business and consulting services, designed to persuade companies to retain law firms— as opposed to other professionals—to guide them into the new economy (National Law Journal 1992).

3. Large Law Firms And The Public Interest

In addition to explaining the growth of large law firms, the dynamic interaction between the entrepreneurial initiatives of lawyers in these institutions and the expanding demands of their corporate clients has important implications for the distribution of legal services, the integrity of the public legal framework, and the gender and racial integration of the bar.

3.1 Why The ‘Haves’ Continue To Come Out Ahead

Corporations consume an increasingly large share of the legal services produced by US lawyers (Heinz et al. 1998). As a result, individuals have a more difficult time finding advocates willing and able to protect their legal rights (Hadfield 2000). Moreover, because access to law is a relative, as well as an absolute good, the more legal resources corporate interests employ the harder it will be for individuals to challenge corporate power in those areas—tort litigation, labor negotiations, health and safety regulation—where the interests of the two kinds of clients are likely directly to conflict (Galanter 1974).

3.2 The Paradox Of Professional Independence

The American bar’s ethical rules mandate that lawyers must be both zealous advocates for the interests of their clients and officers of the legal system who uphold the public purposes of the legal framework. To fulfill these dual obligations, lawyers are expected to be independent from both the state and their clients. Large law firms have always posed a potential threat to the public responsibilities of the bar. As early as the 1930s, critics complained that the emerging ‘law factories’ threatened the profession’s independence by fostering a business perspective and an obsession with money that undermined the bar’s commitment to autonomy and public service (Berle 1933). For the next 50 years, corporate lawyers were largely successful in rebuffing these charges by pointing to the important public service performed by high profile partners in leading law firms and by asserting that lawyers in large firms maintained the highest standards of professionalism. Although law firm partners continue to assert that they are the ultimate independent professionals, studies of the actual practices of large firms underscore the degree to which corporate lawyers are increasingly beholden to the interests of their powerful clients (Nelson 1988).

This fact has important implications for the rule of law and the integrity of the public legal framework. As corporate lawyers work longer and more diligently to attract and retain corporate business, they have less time for the public service and pro bono legal work that in the past helped to mitigate the imbalance of legal resources between corporate and individual clients (Kronman 1993). More important, corporate lawyers who come to identify strongly with their clients’ interests are more likely to adopt an instrumental view of legal rules that treats regulatory constraints as little more than the probability of detection discounted by the price of enforcement (Gordon 1988). As the American savings and loan crisis in the 1990s amply demonstrates, such an approach to corporate counseling can have disastrous consequences for the public fisc in circumstances where the clients who receive this kind of instrumental advice are in a position to subvert important public regulatory protections (Wilkins 1993).

3.3 Winners And Losers In The Tournament Of Lawyers

Many who are skeptical that tournament theory explains the growth of large law firms nevertheless continue to use the tournament model to describe the internal labor markets of these institutions. The hiring, promotion, and compensation practices of law firms, however, differ from those assumed in tournament theory in four important respects (Wilkins and Gulati 1998). First, as indicated above, not everyone who ‘enters’ the tournament as an associate is competing for partnership. Second, unlike a sporting event, associates do not compete on a level playing field. Instead, the high associate-to-partner ratios of large law firms ensure that only a few associates will receive the training and mentoring that they need to develop the legal skill and business contacts that will transform them into credible partnership candidates. Third, far from being neutral umpires who seek to promote only those associates who will best serve the interests of the entire firm, partners are actively competing with each other to promote associates who will further their personal interest in servicing their own clients. Fourth, firms award partnership prizes to those they believe will be the best partners—i.e., ranking associates on the basis of their perceived ability to bring in business and other revenue generating tasks rarely performed by associates—as opposed to rewarding those who have billed the most hours or otherwise demonstrated the most loyalty in their past work for the firm.

These differences from standard tournament theory affect who is likely to succeed in a large law firm. US law firms have abandoned most of the overt discriminatory policies that until the 1960s excluded most women, racial minorities, Jews, and even many Catholics. Nevertheless, 40 years later these institutions have made only modest progress in hiring, and most especially promoting to partnership, women and racial minorities (Chambliss 2000). The real rules of the tournament of lawyers help to explain this continuing lack of progress. The well-documented tendency for people to see potential in proteges who remind them of themselves makes it more difficult for minority associates to receive scarce training and developmental opportunities from white male partners (Wilkins and Gulati 1996). Women face the additional burden of being perceived as not as committed as male associates and therefore a riskier bet for partners who want to invest their time in associates who they believe will have long-term careers with the firm (Epstein et al. 1999). And, should they surmount these barriers, women and minorities both face important obstacles to developing the kind of client relationships with major corporations that would enable them to become powerful partners in firms that are increasingly driven by the bottom line (Epstein et al. 1999, Wilkins 1999).

4. The Future Of The Large Law Firm

Large law firms face increasing competition from accounting firms, consultants, investment bankers, and technology companies. This competition is proceeding on three fronts. First, nonlegal professional service firms are forming multidisciplinary partnerships with lawyers that are capable of ‘practicing law’ and giving integrated advice at the intersection of law, business, and competitive strategy. Although prohibited in the USA, such partnerships are legal (albeit with certain restrictions) in many European countries, including France, Germany, and the Netherlands as well as in England, Canada, and Australia (New York State Bar 2000). Second, even in jurisdictions where multidisciplinary practice is prohibited, nonlegal professional service firms continue to advise corporate clients how to manage and reduce legal risk. Third, nonlegal professional service firms are increasingly competing with law firms for legal talent, both by hiring lawyers directly out of law school and raiding associates, and sometimes even partners, from large firms.

Large firms have responded to these competitive pressures by: (a) invoking professionalism norms to condemn multidisciplinary firms as unethical, (b) merging with mega law firms from other jurisdictions (or entering into global legal alliances or networks) for the purpose of creating law firms that can successfully compete with global nonlegal professional service firms, (c) creating new categories of workers (e.g., nonequity partners, senior counsels, permanent associates, and contract lawyers) to enable firms to grow and provide more services without decreasing partner profits, and (d) dramatically increasing starting salaries for entering lawyers (New York State Bar 2000). It remains to be seen whether any of these measures will be sufficient to maintain the dominant position that large law firms achieved in the twentieth century in the more competitive and knowledge-driven economy of the twenty-first century.

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