Until the recent global financial crisis, elite law firms had been growing in size and number of offices for decades, both in the United States and across the world. Accordingly, the reasons behind law firm growth have fascinated legal scholars as well as social scientists studying the legal profession. Many theories have been formulated and tested by empirical research. Burk and McGowan’s article not only provides an excellent summary of these competing theories, but also proposes two new perspectives, namely, (1) relational capital and internal referral network; and, (2) technological innovation and transaction cost. Both are familiar theories in other research areas but neither had been applied to explain the growth of law firms.
In this essay, Burk and McGowan examine the evolution of large law firms in America from the late nineteenth century to the 2008 economic recession. Until the 1960s, most elite law firms have had a simple “partner-associate” two-tier structure following the Cravath System, which emphasized the long-term training of associates, the “up or out” rule of promotion, and the lockstep system for partners. Lateral hiring of partners were rare. As a result, firm growth was steady, featuring what Galanter and Palay have called law firms’ “internal growth engine.” From the 1970s to the mid-2000s, however, law firm growth entered an “explosive” era – the growth rate of elite firms jumped from 5% per year to 8% or more (p. 11). By the mid-1980s, the number of American law firms with more than a hundred lawyers had increased from a dozen to more than 250. The growth in size was accompanied by the expansion of geographic locations and lateral mobility. By 1988, over a quarter of the 500 largest American law firms had acquired more than half of their partners laterally. The lateral movement of associates had also become more frequent. As a result, the Cravath System was significantly eroded. Meanwhile, the formal structure of large law firms had become more complex – two-tier partnership was more commonly adopted, with an increasing proportion of non-equity partners and a higher leverage (i.e., associate-partner ratio) in most firms. Continue reading "Big and Innovative? The Future of Law Firms (Not Only the American Ones)"