Friday, December 08, 2006

The nature of the (law) firm

Workplace Prof Blog describes an interesting discussion about the up-or-out rule of partnership determinations at large law firms:
The American law firm has some unusual labor practices. Junior employees, recruited and cultivated at great effort and expense to the firm, either make partner after years of hard work, or they're asked to leave -- if they haven't yet done so on their own -- at which time they're replaced by another fleet of young lawyers.

The staircase of law firm success runs up and down, but mostly down
Up to now, many economists have argued that the privileges and financial rewards of partnership drive the fearsome up-or-out competition. The quest for partnership is like an elimination tournament, the theory goes, which pushes young lawyers to invest time and energy developing valuable skills. Partners can wield the up-or-out mechanism as both carrot (i.e. "you made partner!") and stick (i.e. "you're fired!"), assuring that ambitious associates work their tails off to become productive lawyers.

But economists James Rebitzer and Lowell Taylor explain the up-or-out system differently. For them, the system is a natural solution to a property-rights problem. Law firms, in their view, contend with a constant challenge: protecting their only real assets, relationships with clients. And any dissatisfied attorney can, at least theoretically, walk away with those assets by stealing clients. That's why firms need to jettison top attorneys whom they aren't letting into the partnership.
The paper in question is James B. Rebitzer & Lowell J. Taylor, When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms, NBER (National Bureau of Economic Research) Working Paper No. 12583 (October 2006).

Insect-angiosperm coevolutionInsofar as Rebitzer and Taylor's "paper suggests a general framework for analyzing organizations where assets reside in the brains of employees," MoneyLaw is entertaining a discussion of the implications of this study for law school promotion practices. Jurisdynamics' immediate interest lies in an observation by James Rebitzer: "This form of organization . . . pretty much appeared with the rise of large corporations in the U.S. economy and with the attempts of the law firms to provide services to those large corporations." In short, modern law firms and their corporate clients arose and developed together. This is an admittedly puny story compared to that of the coevolution of insects and angiosperms. But it is our story, and those of us in the legal profession would do well to tell it in evolutionary terms.


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