TOURNAMENT OF LAWYERS: The Transformation of the Big Law Firm

By Marc Galanter and Thomas Palay

Reviewed By Jean M. H. Fergus and Colin Fergus
New York Law Journal, Tuesday, August 6, 1991

In a complex and fascinating new work, Marc Galanter and Thomas Palay, two University of Wisconsin law professors, offer insights into the nature of the big law firms that are crucial to those charged with leading them. The core of their book, Tournament of Lawyers: The Transformation of the Big Firm is an examination of one prominent feature of the big law firm: its growth. They maintain that the big law firms are structured around a "promotion-to-partnership" system, the "tournament" of the title, whose by-product is growth. Firms faced with constraints on growth are attempting to limit or slow growth without understanding the underlying transaction which called the big firm into existence. Quick fixes which include downsizing, layoffs, two-tiering and other tactics are likely to produce unforeseen, and perhaps, unwanted consequences.

Blame it all on Cravath. Or more appropriately, Paul D. Cravath, who in the earlier part of this century, refining ideas which had originated with his former partner, Walter S. Carter and others, created the structure of the modern law firm. The "Cravath System" consisted of "hiring outstanding graduates straight out of law school on an understanding that they might progress to partnership after an extended probationary period; requiring them to work for the firm only, eschewing practices of their own; paying them salaries, providing training and a graduated increase in responsibility." The steady supply of law school attorneys which, by 1910, accounted for two-thirds of those admitted to the bar, provided the labor force which was a key ingredient in this new system. Certified, but untried, these lawyers became the grist to the mill of the modern law office. By adopting this model, law firms were destined to grow.

Galanter and Palay assert that big firms grew out of the need to develop an efficient mechanism of exchange between junior attorneys with excess labor and senior attorneys with excess capital. All lawyers have "human capital"-intellect, experience, professional reputation, and client relationships. They generate income by combining this with their own labor. As lawyers' work shifted from advocacy to advice, certain lawyers were able to generate what Galanter and Palay call "surplus human capital - that is, more capital assets than they can productively use by themselves." Attorneys with surplus human capital that was capable of being shared -- more clients, potential clients and access to business that could be serviced, not only by themselves but by others -- "loaned" these assets to other lawyers who had available labor but no clients. The "promotion-to-partner tournament" offered lenders a means of protecting their assets from opportunistic conduct on the part of the borrowers and of monitoring their performance. The partnership prize was an added reward and incentive to the borrowers. Galanter and Palay note that not all excess human capital is capable of being shared. Expertise identified too closely with an individual ceases to be "shareable" and runs counter to the leverage mechanism and the capital accumulation of the firm.

From the beginning, lawyers entering the tournament know the deal. Only a few will win the contest and to do so they must meet certain tests. To motivate this bright, ambitious, and in the mid-80's, keenly sought-after group, the reward had to be significant. And it was. First prize was partnership, a status that brought with it a steadily increasing share of income unmatched in other professions (lock-step), a voice in the management of the partnership (control) and employment for life (tenure). The consolation prize was outplacement to one of a number of smaller firms or, perhaps, a position with one of the firm's corporate clients.

The tournament worked for the partners as well. Central to their success was leverage. Lawyers make money by selling their hours and can make more money by selling the hours of other attorneys as well. When at the end of the tournament, the firm promoted the winners, and replaced the losers, they brought in additional contestants to maintain the necessary leverage. The effect on growth may be seen by taking as an example a firm of 10 partners and 30 associates. This year, three associates are considered for partner, one is successful and the other two leave the firm. In order to maintain the partner associate ratio at its initial 1:3 level, the firm must hire not three associates (to replace the new partner and the two who left), but six, to keep the leverage constant in a larger partnership. However, to maintain profitability, the new partner or the firm must be able to generate surplus capital to keep him and his replacements busy. Otherwise, the partners themselves become losers in this tournament as the firm's human capital is diluted. For many firms, the warning bell has already sounded. Galanter and Palay contend that "while receipts have grown dramatically (at many firms), per-partner profits over the last 20 years have remained quite flat... This implies a significant redistribution of firm income from partners to associates."

This promotion-to-partnership structure is the "built-in-growth engine" of the modern law firm. Galanter and Palay state that once a firm adopts this structure it must grow. And grow they have. Firms have been maintaining a growth rate of 5.5 percent a year until 1970 when the rate went up to around 8 percent. And the large law firms, even with the current economic downturn, are still growing. According to the 1991 Of Counsel listing of the 500 largest law firms in the U.S., these big firms grew in 1990 at an average rate of 4.5 percent, and the larger of these at a rate of 6 percent.

Galanter and Palay argue convincingly that all big law firms are in transformation. While some big firms will continue to prosper in the "classic" promotion-to-partnership form, those who cannot manage exponential growth and overcome its constraints will adopt different strategies. These constraints on growth are both internal, including revenue or budget restrictions, maintaining quality control, adapting to new technologies, and ensuring an adequate supply of qualified associates, and external, such as changes in demand for certain types of legal services. increasing conflict issues and intensified competition for clients.

Some, which Galanter and Palay call "later big firms,'' may seek to overcome the growth imperative by tinkering with the promotion-to-partner mechanism. Such devices as two-tier partnerships, retaining the losers in the tournament as permanent associates, hiring temporary attorneys and staff attorneys, and extending the probationary period, will devalue the prize. Firms following this path must develop a different reward system to ensure performance and loyalty.

Others will seek to close the revenue gap by suppressing growth. Galanter and Palay argue that firms that try to slow or decrease growth by not making partners will significantly affect their own bottom line. Another tactic, "downsizing"' is also a form of self-sacrifice unlikely to assure a firm the competitive advantage necessary to remain in the major leagues (or to keep rainmakers whose surplus human capital might realize a higher reward at a more successful competitor).

The real issue is getting the system right. To resolve the conflict between the inherent growth imperative and the external constraints to growth, the big firms must increase their "surplus of human capital." Firms are already doing this by increasing their marketing efforts, diversification, mergers (which the authors describe as "a method of capturing labor or capital from other firms," a definition which applies equally well to lateral partner hiring), and by displacing unproductive partners which, by emphasizing a key element in the underlying transaction, reinforces the system without devaluing the prize.

Messrs. Galanter and Palay pose questions and offer some answers which are certain too change the way big firms' practice is regarded. To describe their work as challenging is something of an understatement: they at times delight, stimulate, frustrate and even depress the reader, but they never disappoint. Tournament of Lawyers is essential to the understanding of the business of the big law firms.

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