1/30/13

The Associate Investment Conundrum

Image [cc] Tim Pearce
Law firms invest in associates. That seems obvious. They bring in the best and brightest, planning to groom them into future partners. Firms spend considerable sums, investing in these assets. So for fun, let’s take this “investment” as a strategy at face value.

My recollection of the stat is that after five years only two out of ten new associates will still be at a firm. That stat alone suggests ‘investment’ may not be the right word or at a minimum, we would call this a poor investment model. Unless a firm can realize 4 times the return on the associate investments that actually stay, it will be difficult to make the ROI case. 


Perhaps equally interesting from a business perspective is the matter of what is happening to these investments. Where are they going when they leave the firm?

Obviously these trained associates become available for someone else to capitalize on. Historically this was done primarily by clients. As much as they may like to complain about paying to train first and second year associates, they seem to have no problem hiring them once they are trained. To my knowledge, not many clients hire lawyers right out of law school. Why would they? These people are not trained to practice law.

But now many others are joining in, happy to make a return off of the castaway investments of law firms. Non-firms such as Axiom, LPOs like Pangea3 and even new alternative firms such as Valorem Law Group are more than happy to cash in on these investments. Even accounting firms are hiring up trained associates. It’s my read that these new business models are dependent on this flow of trained lawyers.

And why wouldn't they take advantage of this situation? There’s a glut of these investments out in the market right now, begging to be picked up.

Enter the Conundrum: This pool will dry up … soon enough.

Although the market may currently have a glut of trained, castaway associates, firms are now hiring fewer and fewer of these investments. Not because they expect to improve their retention above the 20% number, but merely because demand for hours is down. So as the demand for castaway associates is rising, the supply is dropping. Adding fuel to this fire - law school applications are down by 30%.

So even though the market is currently over-supplied with these people, the market forces appear to be quickly correcting that imbalance. In many respects this is truly a conundrum. Trained associates are obviously a valued asset, to everyone in the market. Yet the market is seeing fit to devalue them to the point that fewer people even want to try to be one. Or at a minimum, the willingness to train them is disappearing.

As an economist, I am very curious to see how the market will respond once the pool has dried up. You would have to assume the gap will be filled since markets tend to fill a vacuum. An alternative for training these people should emerge. But here’s the real question: Who will be able to make a return on that investment? If you figure that out, give me a call. I may have a few bucks to get things started.

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3 comments:

Anonymous said...

Interesting idea. One issue I have is that if trained associates are being hired by private companies after their initial training, assuming that there is a work life of 30 years, and an attrition rate of 20%, law firm business will be down until those firm counsels retire. That does not promise much of a bounce back for law firms, or much of a return of demand, even with the decreasing supply of new associates over the next few years.

JRF said...

Alternatively, if, and it is a big if, law firms move away from the old billable hour business model, there will be a place for new lawyers. Moreover, working in a firm that utilizes value based billing, these young associates may in fact stay longer, thus improving ROI significantly.

Tony Chan said...

Years ago I worked for a company that provided "free education" or "professional development opportunities" for its employees. The conditions to receive this benefit is:
1. the employee has to stay with the company for a specified period of time after they've completed the course (in some instances a college degree), and
2. the tuition reimbursement is paid out according to the grade point they receive from taking the classes (eg. Grades A-B get 100% reimbursement, C gets 60%, D or lower 0%)

If the employee decides to leave the company before the specified period of time, he/she is required to give back the full amount or a portion of money that was invested in them, depending on how long they stay after receiving the benefit or leave before they complete the classes.

If we can find a way to measure (by billing rates) how much is invested in an associate before they jump ship, the payback strategy seems to be a fair and workable model.

 

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