THe changing relationship between managers and their lawyers - businesses need to stop and think before they hire in-house counsel to replace the outside counsel they have relied upon

Business Horizons, Sept-Oct, 1990 by S.S. Samuelson

Over the past 20 years, the practice of law has changed in virtually every respect. The single most visible change has been the increase in the number of lawyers. Between 1960 and 1985, the number of lawyers in the United States more than doubled - from 285,933 to 655,191. It has been predicted that by the early 1990s, there will be more than one million attorneys - a nearly five-fold increase in roughly 30 years. The number of lawyers has increased at almost twice the rate of the general population. From 1920 to 1970, there was one lawyer for every 750 people. By 1979, there was one lawyer for every 440 people. This substantial increase in the number of lawyers has intensified competition in the legal industry.

Not only are there more lawyers competing for clients, but the structure of law firms has enhanced the competitive pressure. The major source of profitability for firms was traditionally an army of associates who received a salary equal to only a fraction of the revenues they generated. The balance went into the partners' pockets as income. Associates were willing to cooperate with this system because, in a relatively short time (six to 12 years), they had a good chance of being promoted to partnership. Once a partner, they, too, could share in the economic surplus generated by the associates. Partners grew to expect an income that was based on a ratio of at least one (and ideally more) associates to each partner. Thus, each time an associate was promoted to partnership, more new associates had to be hired, which created an enormous growth imperative. If the net income per partner was to stay constant, the firm's business had to grow geometrically. So even as firms began experiencing intense competition from the increased number of lawyers, they were pushed by an inexorable economic need to expand.

Law firms experienced increased competition not only in the sale of legal services, but also in the purchase of labor. The typical source of supply for corporate law firms - graduates of top law schools - has not increased, but the number of job openings has. In one study, law firms grew by 74 percent while enrollment at 20 leading law schools rose only 7 percent. This has led inevitably to higher prices for associates. As one lawyer put it, "Law firms are looking for new associates the way the Dallas Cowboys look for new quarterbacks" (Wall Street Journal 1989).

To confirm the reality of higher prices, one need simply consider the increase in associates' starting salaries over the last twenty years. In 1968, Cravath, Swaine & Moore, a leading New York law firm, raised its starting salary by 87 percent - from $8,000 a year to $15,000. In 1989, the starting salary in New York was $83,000, a more than tenfold increase in twenty years. In 1950, new associates in major law firms earned only slightly more than the median family income. By 1981, they were earning twice the median. Thus, the rise in the overall number of lawyers has intensified competition in the market into which firms sell, while the stability in the number of elite graduates has also increased competition in the markets from which firms purchase their supplies (associate lawyers).