As we have spoken to the leaders of law firms about their health of their businesses and their outlook on the future, we have uncovered the emergence of two very distinct strategies for success. These strategic trends are creating a serious dilemma and even an identity crisis for the many mainstream law firms, that cannot adopt them.
The first group we have looked at are what we are calling “Pacesetters”. Pacesetter firms, which includes the Magic Circle firms and many American legal firms with a London presence, have taken the traditional service delivery model for law firms and put it on steroids.
The Pacesetter firms are focused on generating the greatest possible revenue as quickly as possible. They typically demand that associates generate between 2,000 - 2,500 chargeable hours a year. Clearly, this is incompatible with any reasonable definition of work/life balance.
The Pacesetters’ attitude to recruitment and retention could be described as “Up or Out”. Associates accept the long hours and the high demand/high stress culture or find somewhere else to work. Clearly, there is no suggestion of a work/life balance and it is open to debate where wellbeing fits into this model. The Pacesetters offer high levels of pay and promotions to sweeten the deal for the associates. There is little expectation that new talent will necessarily stay for long, and a tacit understanding on both sides that there are partner slots available for only a small number of associates, so that the majority will not make it. It is common for associates to work for a Pacesetter firm for a few years before moving to another type of firm.
At the other end of the spectrum are what we have chosen to call the “Career” firms. These firms are characterised by their focus on long-term, sustainable growth and success. These firms are usually smaller, in size and billings, but still profitable and healthy.
They are attracting staff by offering a sustainable work/life balance and with a culture that supports long-term wellbeing. These firms typically expect 1,200 to 1,400 chargeable hours a year from staff. They also tend to be more flexible when it comes to remote and agile working. Clearly, the purely financial rewards are smaller compared to other types of firms. There is, however, an expectation that associates will stay for extended periods and build careers. Here, partners are more candid “if somebody comes in asking why they’re not paid like the American firms – I point to the difference in their billable hours and say if they want to work like that, they are welcome to go there, but that’s not what our firm does”.
These ‘Career’ firms may find that their ‘proposition’ is more successful at attracting talent in the aftermath of the pandemic and the shift of focus to wellbeing and job satisfaction over financial rewards. It is also worth noting that by choosing not to compete on salary alone, the ‘Career’ firms may avoid some, if not all, of the rising costs of recruiting and retaining talent.
Stuck between the Pacesetter and the Career firms are what we are calling the “Mainstream” firms. These firms do not have such clear defining characteristics and we think that may reflect the challenge they face when it comes to evolving their service delivery models and their ‘proposition’ to staff and potential recruits.
The Mainstream firms are stuck between two threats when it comes to what they can offer staff and prospective associates. They are finding it hard to compete with the Pacesetter firms on purely financial rewards. On purely financial rewards - they simply cannot afford to pay the same salaries as often.
On the other hand, the Mainstream firms are not offering the same focus on work/life balance and wellbeing as the Career Firms. They have developed and enhanced the support they offer staff on wellbeing as a result of the pandemic, but they still have a focus on chargeable hours and are little more traditional when it comes to remote and flexible working. These firms may well expect more than 1,600 chargeable hours per annum from associates.
There is an anecdote that emerged from our interviews that demonstrates the dilemma these mainstream firms face. A firm increased pay for associates by 20% in order to encourage them to stay with the firm. This appeared to be a recognition of the trend towards higher salaries. However, within a matter of weeks, the same firm then increased the number of expected chargeable hours by a similar proportion. The final outcome was really a shift towards the Pacesetter model that left associates feeling unhappy.
One of the biggest risks here, is failing to communicate and recognise that the cost of an associate has changed. Firms and associates are trapped in a cycle; associates are unhappy, so demand more money. The firm raises salaries, but also raises hours to match, which increases pressure on associates. They then face a stark choice; leave to join a Pacesetter firm with slightly higher hours but much higher rewards or join a Career firm with significantly lower billing pressure, better work/life balance but less financial reward.
The issue of attrition highlights why this is a real threat to many firms. For the Pacesetter firms, there is an “up or out” culture. Associates leaving is an essential part of the model as there were not partnership spaces available for all the associates.
At the other extreme, Career firms are retaining their associates and reported very low attrition. They are supportive of a variety of career choices. Part time, job share, pausing a career at a stage, not having to either progress or to leave the firm.
It is Mainstream firms who are reporting the highest attrition. Some associates are leaving for the higher pay and higher hours available at Pacesetter firms while others decided to slow down, trading lower pay for better work/life balance by moving to a Career firm.
Law firms will need to continue evolving what they offer associates to effectively recruit and retain talent.
For the Pacesetter firms, their current model relies on Private Equity and other high end work continuing to pay for the client service and high pressure work they provide. There is currently still a huge amount of ‘dry powder’ the funds that Private Equity firms globally have still to invest, but inflation and rising interest rates or a recession could change that.
The Career firms seem to have found a sustainable model but it is perhaps not for everyone. Many ambitious associates and partners may find that these firms are not rewarding enough financially. Boards can feel they are ‘hostages’ to the rain-maker partners who demand higher growth and PEP or threaten to leave. This situation will feel familiar to many. Many acknowledged this situation, with one having the courage to call the bluff of the rainmaker…who ended up staying. The Career firms will also need to keep an eye on both their profitability and the impact of economic downturn.
The Mainstream firms face the biggest challenge. They need to define and communicate a compelling offer to current and prospective associates. They cannot compete purely on financial rewards because the Pacesetters can and will pay more. Mainstream firm will also struggle to compete on non-financial benefits as they are being outflanked by the Career firms.
Some are already focusing on what they can offer to set them apart – for example, a focus on the professional development and training that they can “offer”. International opportunities, secondment relationships and alternative career paths are all carrots that could enhance their offer to staff. They work with a broad range of clients and are usually large enough to offer professional development through learning on the job and working with partners, something that should appeal to younger recruits. Pacesetters are, candidly, more focussed on chargeable hours, while Career firms may simply not be able to offer the same range of clients and work.
The next 12 to 24 months will be critical. We will have to watch to see which way Mainstream firms go and which ones are able to find service delivery models that are attractive to prospective associates.
If you would like to discuss this report further or any wider sector issues, please contact us.