The graphic above tells a simple, painful, and important story about the U.S. legal profession that we can’t afford to ignore.  The graphic compares the receipts of U.S. law firms in 2007 and 2012 based on “class of customer” data from the Economic Census, the U.S. Census Bureau’s official five-year measure of American business.  Although total law firm receipts increased from $225 billion to $246 billion, receipts from individuals declined by almost $7 billion. That’s a staggering sum.

Ordinarily, with such a large and sudden drop (10.2%), I worry about data quality.  Yet, these data appear to be continuations of trend lines that are several decades old.  Further, recent data published by Clio, the cloud-based practice management and time-keeping system used by a large number of solo and small firm lawyers, reveal that the economics of small firm practice are under severe stress.

As a society and a profession, we are heading to a place that none of us wants to go. Our biggest risk factor is failing to acknowledge the full magnitude of the problem.

The two hemispheres of practice

The structural significance of lawyers’ clientele — individuals versus organizations — was first noted by Jack Heinz and Edward Laumann in Chicago Lawyers: The Social Structure of the Bar (1982) (popularly known as Chicago Lawyers I).

Based on a randomized sample of 800 Chicago lawyers, Heinz and Laumann observed that lawyers tend to serve either individuals or organizations, but seldom both.  Further, type of client was strongly correlated with lawyer income, ethnicity, religious background, law school attended, home address, work address, and bar association membership.  “Only in the most formal senses, then, do the two types of lawyers constitute one profession” (p. 384).  This was the basis for their famous two-hemisphere theory of the legal profession. See also Deborah J. Merritt, Two Hemispheres, Law School Cafe, May 2, 2015.

Twenty years later, Heinz, Laumann and other researchers replicated the study based on a sample drawn in 1995.  See Heinz et al., Urban Lawyers: The New Structure of the Bar (2005) (Chicago Lawyers II).  One of their key findings was a dramatic surge of prosperity within the organizational sphere, with real incomes of large firm lawyers and in-house counsel nearly doubling.  Conversely, among solo practitioners, who disproportionately served individual clients, incomes fell from $99,159 (in 1995 dollars) to $55,000. By 1995, 32% of solo practitioners were working a second job compared to only 2% in 1975.

These are startling and sober statistics generated by careful social scientists. These findings are also 23 years old.

From stagnation to decline

The Chicago Lawyers I and II studies reveal stagnation taking hold within the PeopleLaw sector. Yet, more recently, we’ve moved beyond stagnation to a period of actual decline.  I do not use these words lightly. Yet this is the picture that emerges when the graphic above, which reflects U.S. Census Bureau data from 2007 and 2012, is combined with findings from Clio’s 2017 Legal Trends Report.

Clio is a cloud-based practice management and time-keeping system that has obtained enormous traction with solo and small firm lawyers. The 2017 Legal Trends Report is based on anonymized 2016 data from more than 60,000 U.S. timekeepers.

  • The total sample covers 1,026,000 matters, 10,981,000 hours, and $2.6 billion in billings.
  • Approximately 84% of matters are billed by the hour.
  • The average hourly rate for a lawyer is $260.
  • The average matter garnered slightly less than $2,500 in fees, with traffic offenses the lowest average (~$700) and personal injury the highest (~$3,300).

Yet, what is most striking about the Clio Report is that the average lawyer is billing only 2.3 hours per day.  Of that total, 82% is actually invoiced to the client; and only 86% of invoiced fees are collected. This translates into $422/day per lawyer ($260 x 2.6 x 82% x 86%), or $105,000 in gross receipts over a 50-week year. This is a sum that needs to cover office overhead, healthcare, retirement, malpractice insurance, marketing, and taxes, etc.  And note, these are averages, not the bottom decile or quartile. Further, these are lawyers at firms that have invested in practice management software.

Of the remaining 6 hours in the workday, lawyers are spending 48% of their time on administrative tasks (e.g., generating bills, configuring technology, client collections) and 33% on business development.  The report notes that lawyers spend roughly the same amount of time looking for legal work as they do performing legal work (p. 13).

The danger of not saying the obvious

In Post 006, I reported on statistics from The Landscape of Civil Litigation in State Courts report published by the National Center for State Courts (NCSC). The most startling statistic among many is that 76% of cases involve at least one party who is self-represented. The Report frankly states:

The picture of civil litigation that emerges from the Landscape dataset confirms the longstanding criticism that the civil justice system takes too long and costs too much.  As a result, many litigants with meritorious claims and defenses are effectively denied access to justice in state courts because it is not economically feasible to litigate those cases (p. v).

These are not the conclusions of a fringe group. The NCSC’s research agenda is set in collaboration with the Conference of Chief Justices and the Conference of State Court Administrators. This is the body formed at the urging of Chief Justice Warren Burger.

I’ll now state an obvious truth:  Our legal system as it pertains to ordinary people is unraveling.  Hundreds of millions of people can’t afford to hire a lawyer to solve their legal problems. As a result, they go it alone or give up altogether.  In turn, as the PeopleLaw sector shrinks, a large number of lawyers are under tremendous economic stress.  No amount of tinkering at the edges is going to fix or reverse these trends. Instead, we need a series of fundamental redesigns.

This needs to be said clearly and emphatically. This is because the collective and societal solution to the declining PeopleLaw sector is not for lawyers and legal education to pivot toward corporate clients who can still pay the freight, though this is undoubtedly the direction of drift if we fail to forcefully acknowledge the woeful imbalance of our current legal system.

Redesign or failure

As a law professor, I support innovations that make legal problem-solving more cost-effective.  Indeed, that is the purpose of Legal Evolution. See Post 001 (discussing the problem and consequences of lagging legal productivity).  In the segment of the bar that serves corporations, there is tremendous momentum building to make this happen, primarily because corporations feel an urgency to find cost-effective ways to manage the relentless rising tide of legal complexity.  This is what is driving the legal operations movement. Yet, I’m confidence that very few lawyers want to live in a society where corporate efficiency has become our primary goal. There has to be something more.

As Gillian Hadfield wrote in her recent book, Rules for a Flat World (2017), “People who feel as though the rules don’t care about them don’t care about the rules” (p. 79). The withering of the PeopleLaw sector is moving us closer to a place we don’t want to go.  We have entered a period where we are either going to redesign our legal institutions or they will fail. It’s time for lawyers and legal educators to find creative ways to restore the balance. Step one is acknowledging the magnitude of the problem.

lawgraduates006The ABA just released 10-months out employment data for the class of 2016.  The percentages of grads employed in full-time/long term Bar Passage Required and JD Advantage jobs is up (72.5% compared to 70.1% in 2015).  However, the total number of these jobs is down (28,029 to 26,923).

Is this good news for law schools?

Not really.  The employment percentage is up only because the number of law grads is dropping faster than the number of jobs. But both numbers — grads (supply) and jobs (demand) — are declining. A true recovery would show the opposite.

A 28% Drop in the Number of Law Grads

The graph above reveals a dramatic drop in the number of law grads.  The green bars reflect historical data.   The orange bars are projections for the next three years based on incoming 1L classes that have already enrolled. (Based on a 10-year historical average, 90.1% of entering 1Ls receive a JD three years later.)  Between 2013 and 2019, the size of graduating classes will drop 28.0%.

This may be the bottom of the trough, as the number of projected graduates is essentially identical for ’18 and ’19 (33,667 versus 33,658).  Yet, it would be mistake to assume that things are headed back to normal.  We have to go back to 1978 to find graduating classes this small.  At that time, the US population totaled 223 million.  Since then, we’ve added another 100 million people.

A population gain that large should translate into a lot more divorces, wills, contract disputes, DUIs, and personal injury claims, etc. And likely it has.  But it may be the case that a growing proportion of these legal problems cannot be cost-effectively solved by lawyers (more on this below).

The Old Era of Bad Employment Data

94percent2010USNAs the job market collapsed in ’08-’09, law schools came under intense pressure to provide higher quality employment data. At the time, the only metric collected by the ABA was employment 9 months after graduation. Yet, the definition of “employed” did not distinguish between jobs that were legal versus non-legal, or full-time versus part-time or temporary.  Because US News used this metric in its ranking formula, it became normal for schools to aggressively count all jobs regardless of quality.

In the 2010 US News rankings, the median employed-at-9-months figure was a remarkable 94.4%.  In contrast, NALP data published in the spring of 2010 showed only 82.0% of law grads obtaining either Bar Passage Required or JD Preferred jobs. Terms of use with member law schools prohibited NALP from reporting school level data. But obviously the numbers weren’t adding up.

As the job market continued to stagnate, law schools got hammered in the press and blogosphere for publishing unreliable, self-serving data.  Former students and alumni filed lawsuits against more than a dozen ABA accredited law schools alleging various theories of consumer fraud.  Industrious law students at Vanderbilt Law used the bully pulpit of the Internet to create Law School Transparency (LST) and demand that law schools release more granular information on employment. And eventually it worked.

The New Era of Data Transparency

The ABA Section on Legal Education and Admissions to the Bar responded to the public pressure by agreeing to collect, publish, and periodically audit granular information on employment outcomes. That information can now be readily downloaded from an online database.  Several other outlets now incorporate these data into online tools to improve decision making for prospective law students. See, e.g., Law School Transparency (LST)AccessLex Institute (Analytix), Educating Tomorrow’s Lawyers (ELT), Above the Law (ATL).

The chart below reflects employment outcomes (i.e., demand for new law graduates) since the ABA stepped into its new role as collector and disseminator of high-quality market information.

ABAjobs2011_16

The key takeaway is that the entry-level market for law grads remains very soft.   Of the six reporting years, 2016 had the fewest number of FTLT Bar Passage Required or JD Advantage jobs. The numbers look better when they are expressed as a percentage of total class size, as in the table below:

2011 2012 2013 2014 2015 2016
63.0% 65.7% 67.1% 71.1% 70.1% 72.5%

Yet this trend is moving up only because we are at a 40-year low in the number of law grads. See Green/Orange chart above.  Enrollments are down because entry-level employment for law grads is down.  That’s the impact of the new era of transparency.

When will law school enrollments increase?  When there is a surge in high quality employment for law grads. It’s just that simple.  Legal education now operates in a real market.

Legal Problems and Legal Productivity

I created Legal Evolution because I became convinced that the biggest problem facing the legal profession and legal education was stagnant legal productivity.  Stagnant productivity is bad because it means that solving legal problems is becoming, in a relative sense, more expensive over time.  Thus, as practical matter, fewer people and businesses can afford to hire a lawyer to solve a legal problem.  Those are the economic forces driving the green/orange chart above.

The problem of legal productivity will be recurring theme here.  But a brief, concrete illustration is especially helpful for this post, as there is a systemic breakdown occurring in the practice of law.  This is a substantial root cause of underemployed law grads, flagging starting salaries, and lower law school enrollments.

The NCSC Landscape Report

NCSC_landscapeThe illustration comes from the The Landscape of Civil Litigation in State Courts, a 2015 study published by the National Center for State Courts (NCSC). The study compiled data from over 925,000 cases disposed of in state courts in ten large counties that encompass major U.S. cities (Chicago, Cleveland, Honolulu, Houston, Indianapolis, Miami, Phoenix,  Pittsburgh, and San Jose).  The sample was constructed so that it would be representative of the nation based on geography. The NCSC also wanted a mix of general and limited jurisdiction courts.

Below is Table 6, which breaks down the judgment size for the 227,812 cases that resulted in judgments exceeding $0.

Judgment amounts

Remarkably, the median judgment was for $2,441, increasing to $5,595 for matters in general jurisdiction courts. These small sums make it very difficult for lawyers to ethically serve clients and also earn a living.  Thus, perhaps it is not surprising that only 24% of cases had the benefit of attorney representation on both sides of the dispute.  Stated in the alternative, 3/4 of cases involve a party that is going it alone without a lawyer.

The Landscape report acknowledges the sharp divergence between “Justice (with a capital J)” and what actually goes on in state court. The only way to fix it, the report concludes, is through “dramatic changes in court operations … to control costs, reduce delays, and improve litigant’s experiences with the civil justice system” (p. 38).  The problem of affordable legal solutions is so big that non-lawyer entrepreneurs are engineering their business models around Rules 5.4 and 5.5 to access the market opportunity.  In the mean time, the organized bar — judges, lawyers and legal educators — wonder why our numbers are falling.

Related Post:  A Measure of Overcapacity in Legal Education (002)

What’s next?  See Units of Analysis and Adopter Types (007)

A lot. The trend is large and longstanding.  Over the last two decades, the number of lawyers working in corporations has more than tripled, growing from 34,750 in 1997 to 105,310 in 2016. The chart above shows the trendlines.

Most people working in the legal industry know that in-house legal departments have been growing, but has there been an accurate sense of the magnitude — 7.5x faster than law firms over the last 20 years?

It took a fair about of time to pull these data from the Bureau of Labor Statistics and put them into the right format to generate the above chart. Yet, the chart itself raises more questions than it answers.

  • Why are corporations in-sourcing a non-core function? During this same period, outsourcing of various business processes has been growing.  Why is legal treated differently?
  • How long into the future will this trend continue? What might curtail this trend?
  • What are the age demographics of in-house legal departments compared to law firms? Law firms are graying. Will in-house departments avoid this same problem, or will it hit over the next 5 to 15 years?

The orange “in-house line” is so far above the other two sectors that is obscures another unexpected finding.  Since the mid-2000s, government has been growing faster than law firms – what’s causing this rise?  Either the government’s been on stealth hiring binge, or law firm hiring has flattened out in a way that cannot be characterized as cyclical.

Subsequent posts will return to these questions.  Before doing that, however, I want to time build out a simple theoretical framework that we can apply to legal industry data. This framework in rooted in diffusion theory.

What’s next?  See What is the Rogers Diffusion Curve? (004)

Between 1971 and 2010, the average entering 1L class at an ABA-accredited law school was 246 students with a very narrow band of fluctuation. The high-water mark was 262 in 2010. Every year since 2012 has set a new historical low. As the chart above shows, the average has tumbled by a staggering 31%.

When I made these calculations, the decades-long stability of entering 1L class sizes grabbed my attention. Economic downturns, shifts in the legal landscape, and even the fallout of ’08 didn’t initially deter enrollment. Yet, what was changing in the background throughout this period was the total number of ABA-accredited law schools. Here is the data in ten-year increments:

  • 147 in 1971
  • 172 in 1981 (+24)
  • 176 in 1991 (+4)
  • 184 in 2001 (+8)
  • 201 in 2011. (+17)

The peak for ABA-accredited law schools was 204 in 2014, though mergers and closures have reduced the number back to 201 in 2016.

Imagine if a hotel, airline, or restaurant experienced a 31% decline in the number of paid customers.  The price competition for marketshare would be disastrous, leading to industry consolidation that would improve pricing power.  Higher education is different, however, in a way that complicates the analysis. Specifically:

  • The biggest cost-driver in higher ed is labor. Because of the extensive protections on professor tenure, most of these labor costs are fixed rather than variable costs.
  • Universities have little experience with shutdowns or reductions in force; further, such actions would likely create severe cultural turmoil.
  • Unlike in private industry, there is no well-established playbook for divesting, acquiring, and merging academic units across universities.

How does the overcapacity resolve itself?

This is conjecture on my part, but based on the analysis above, I think we will see a few more law school closures, but not nearly as many as the grim economics might suggest.  Why? Some law schools have responded to the applicant downturn by creating new non-JD programs. Law bears on virtually all realms of human activity – bringing about the opportunity to create one-year Masters degrees, which appear to have significant demand, particularly in large urban centers.  Other schools are specializing in online education. To the extent such programs are successful, they will be copied by other law schools in different regions.

Will the overcapacity be resolved by a boom in demand for legal services?

This is unlikely.  The sharp decline in law school applicants was due to extensive media and blogosphere coverage of the entry-level meltdown.  This commenced in 2010.   Markets are driven by information.  Over the last few years, the public information on the legal job market became much better.

Also, there is a strong argument to be made that the downturn in the entry level jobs is due to structural factors.  For example, we know from the data presented in Post 003 that for 20 years corporations have been moving lower-level work in-house. In most cases, the workforce has been law firm associates willing to step off partnership track. Profitability has remained high at law firms because the more complex work can’t be cost-effectively in-sourced. During the 2000s, corporate clients began exerting their market power by refusing to pay for junior associates. Not all clients applied pressure, but enough to create uncertainty and turmoil within law partnerships. The solution was to hire a lot fewer associates – something they could do because the mix of work had become more specialized and could be staffed by a mix of staff attorneys, of counsel, and non-equity partners. Because so many firms converged on this same solution, the BigLaw entry level labor market was cut in half.

If corporations are reluctant to buy associate time bundled together with skilled senior partners, the boom in demand for legal services will have to come from a different source.  I think such a demand exists, though legal education will have to retool to tap into it.  That is a topic for another day.

What’s next?  See How Much are Corporations In-Sourcing Legal Services (003)