Pressure group: analysis on retention rates

The trainee intake model has reached critical point with shrinking business opportunities compounded by high training costs

The course charted from trainee to partner has never been more fraught with obstacles. The ladder that once took an army of fresh-faced gung-ho graduates to the heights of mega-billing City partnership been blown apart in this stormy market. So what are the alternatives?

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In a weak economy all businesses are under pressure to cut costs and law firms are no different – clients want to pay less, there is less scope to charge high rates for drudge work, staff are expensive, permanent staff are difficult to get rid of and clients won’t pay for work they can do themselves. That strain is now being placed on legal firms’ war chests that fund the battle for fresh talent – not only among themselves but also between the great ships of the legal industry and other professional service firms.

Carrying the weight

Firms gain commercial advantage by recruiting the top talent but to do so traditionally means recruiting trainees four years in advance of qualification – a factor that throws up difficulties in these belt-tightening times.

Not only does each intake represent a leap of faith by a firm in an unprecedentedly unpredictable market but also a huge financial investment. This is spread over the years but is nevertheless a whopping amount – recruiting and training a trainee can cost, when grants, salary, graduate recruitment, marketing and partner time are all taken into account, some £175,000.

Having faith that the numbers will continue to perform and allow firms to recoup their trainee investment, should mean that firms keep a vigilant eye on their charts and measure the depths of the legal market, doing all they can to make a forecast in each department.

“I know they say they do, but I don’t think most law firms plan two years ahead,” says Guy Adams, director of private practice at Lawrence Simons. “Some teams are guilty of not looking beyond the next six months and end up not taking on trainees, then six months later they go to the market and hire NQs. I’ve seen that before – teams could be better at planning.”

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Does the size of the trainee intake affect how much forward planning needs to take place?

“We take 12 to 15 trainees each year,” says Jonathan Wood, training principal at Weil Gotshal & Manges, “but I think if you are taking 90 or 100 a year you need to apply a bit more science to what you require and you’ll probably spend time with individual groups, looking at projected growth and what their expected intake requirements will be, and do the maths from there.”

Osborne Clarke, which takes around 20 trainees each year, works on the basis that “we hire as many people as we eventually want to take on; we are not working on the basis of hiring 20 to then take on 10 at NQ level,” according to training principal Nick Johnson. “We make a big investment, like every other law firm. Most firms would say that it’s their approach. It’s just not worthwhile to play the numbers game because the cost of bringing somebody through is prohibitive.”

The wisdom behind firms’ investment is not a straight correlation between revenue and trainee numbers. It is more nuanced than that.

“Revenue increases are taken into account, obviously,” adds Johnson, “but some revenue increases would be coming in that are higher end, in terms of the lawyers who are generating those increases. There may be particular areas of the practice that are generating lots of growth, but those could be areas in which there are not massive opportunities at the more junior end. Or it could be the other way round – it could be that a 3 per cent increase in revenue means you need a 10 per cent increase in trainees.

“You have to try to scratch the surface of the figures but it’s difficult to do that level of planning when you’re recruiting four years ahead – you always have to caveat everything against that.”

This begs the question – with the legal market in the middle of a recession and undergoing immense structural change, how wise is it to continue to hire tens of trainees each year nearly half a decade ahead of when they will start turning a profit? Starkly put, is it safe for firms to assume the status quo will continue, particularly with regard to this spring’s retention figures?

Down market

Looking at the top 20 UK firms with a spring intake, an average of 78 per cent of NQ lawyers have been kept on this year, 8 per cent down on the equivalent intake last year and 3 per cent lower than last autumn’s qualifying round at those firms.

Of 474 trainees at the firms, 370 have been kept on – down on the total of 361 out of 432 NQs kept on across the same group in spring 2012.

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Of the magic circle, only Clifford Chance went against the downward trend after seeing retention figures for spring 2013 grow by 6 per cent to 82 per cent, keeping on 54 out of 66 NQs – up from a retention rate of 76 per cent at the same time last year and 77 per cent in autumn 2012.

The magic circle firm recently confirmed that it is reducing the target number of graduate trainees across its 2015 intake , with the new annual figure set at 100, down from a target of 120 in recent years.

Of the other top 20 firms Simmons & Simmons, Taylor Wessing and Pinsent Masons were the only ones to show rises in their spring retention figures – Simmons produced a 56 per cent increase to 81 per cent, while Taylor Wessing saw a 7 per cent uplift, to 86 per cent and Pinsents saw an 11 per cent rise to 81 per cent.

The average retention rate of 80 per cent across the four magic circle firms is slightly higher than the top 20 average, although down on the group’s average of 84 per cent recorded last spring.

Allen & Overy saw the largest decrease among magic circle firms, with retention down from 89 per cent to 70 per cent this spring.

Other firms to have posted reduced retention rates in the latest qualifying round include Berwin Leighton Paisner (BLP), which has seen rates drop from 88 per cent last spring – when it took on 15 of its 17-strong intake – to 64 per cent this year, after 14 out of 22 NQs took up positions at the firm.

CMS Cameron McKenna also saw its results dip significantly, from 84 per cent last year to 68 per cent this year, with 19 out of 28 trainees taking jobs at the firm.

Sea change?

Do these drops indicate that demand in the big firms for trainees will not be as high as in the past? Are paralegals doing the work that some of these NQs may have previously been retained for? And how will that affect the supply of future talent further up the chain?

These are questions Simon Pilcher, graduate recruitment partner at CMS, says he has grappled with, but the answers are far from clear.

“The difficulty is that those interviewed this year start with us as trainees in 2015 and do not qualify until 2017 – you can’t have sensible conversations with the various bits of the business as to what their needs will be in 2015, let alone 2017 – the answer is they don’t really know,” he says. “We want the process to be relatively scientific but it is difficult. Law firms don’t budget for what they are going to look like in three years’ time – it just doesn’t happen, partly as a consequence of the way we recruit people.

“I couldn’t say that we now recruit 60 trainees a year but next year we will recruit 42 – it simply is not like that. Most firms traditionally have a number of trainees and, all things being equal, recruit pretty much the same numbers each year.”

It is a similar number story at BLP, which consistently takes on 40 to 45 trainees each year.

“The business knows how much it takes to absorb those numbers,” asserts graduate recruitment partner Tim Smith.

However, as the retention figures show, that view has come under pressure in the downturn, with BLP seeing its historically strong retention rate suffer a significant drop.

“The transactional market is depressed and that has an effect on volumes of people you can take,” says Smith, commenting on that drop. “We can resist it to an extent by bringing people into the business in more niche areas, but sooner or later the pressure of transactional volumes on all City firms is going to affect retention rates.”

Whatever the motivations of firms, all seek to recoup their investment in trainees as soon after qualification as possible.

“Depending on the market, the firm and how they structure their pricing, if a trainee decides to leave you within a year of qualification, you probably haven’t made money out of them,” warns Adams. “But I don’t think you’ll have lost that much – you’ll probably have broken even.

“Once they have been there two or three years post-qualification, assuming they have been busy, they will have definitely made money if that firm has their pricing structure right. If they have got their rates wrong it doesn’t work.”

That is a view supported by Oliver Cook, consultant at Pure Search.

“They are making a fortune off these trainees as long as utilisation is up,” he says. “Where it gets difficult is if they are doing 1,000 hours a year, which is £100k a year. The £40-50k salary then only really leaves £50k and that revenue per lawyer is frankly not enough for firms to take on trainees when you take into account the cost of each trainee.”

There is a similar feeling in the law firms where the figures really have to stack up to justify the trainee intake.

“You’d expect a good trainee to work between 1,600 and 1,800 hours a year,” asserts Wood. “This is a standard amount. If you have 15 trainees and each of them is doing 1,000 hours it starts to be difficult to support 15. You start to think you need 10 or 12.

Where would the cut-off be?

“If trainee average hours were less than 1,200 or 1,250 we’d start to question whether we have the numbers right. If you have somebody in on a six-month stretch who happens to hit a quiet spot you take it in the round, but if it’s a pattern across the intake you question the numbers.”

Lynne McCarroll, director at GMK Legal, however, sounds a note of warning.

“[In the current market] firms are not recouping the full cost of what they spend on trainees because such a high percentage are being let go at the end of their training contracts,” she says. “If things were buoyant, firms would probably recoup their costs but at the moment trainees are not being utilised so much.”

A new course

So what can firms do to smooth things out in these choppy waters? Raid other firms for lateral hires at associate level, trim the trainee intake or increase the number of cheap paralegals manning the ship?

“From a firm perspective, organic growth is highly valued,” says Regina Chan at Pure Search. “If you have someone start as a trainee, they are bedded into the practice area and the firm culture. Lateral hires are expensive and take a lot of time, effort and resources. If you can have someone who has been with you from the beginning, it often works out better.”

A more straightforward analysis is provided by James Brewster at BCL Legal.

“Unless somebody can guarantee £250,000-£500,000 in the first year, paying for a lateral hire doesn’t make sense,” he says. “Bringing somebody more junior in is cheaper, even with training. Also, partners can mould their lawyers. There are no bad habits to iron out.”

And cutting trainee intakes drastically is unlikely to find favour with firms that have memories of the recession of the late 1980s and early 1990s, when firms reduced trainee intakes only to find themselves without the necessary crew to take advantage of the uptick in business when the market picked up.

Caution is therefore the watchword, with firms prepared to slightly adjust their trainee numbers, yet needing a lot of persuading that this is not just a market contracting for a couple of years.

“If a firm can afford to speculate on people who are high-quality when there maybe isn’t the immediate work volume there and they don’t write off that investment, they are always going to be better equipped to deal with the market when it does come back,” argues Smith, “and we are still looking at the stars of the future. Junior lawyers are not just a resource with which we service clients. It’s much more of a gamble if you haven’t trained them.”

The fear for firms, as Scott Gibson, partner at Edwards Gibson, warns, is that if they cut too far now they might end up having to overpay for junior lawyers when they become a valuable commodity “as they have repeatedly done in the past because they always cut trainees in a down market”.

But this is a consequence of the legal market’s “tendency to refer to itself”, says Mark Brandon of Motive Legal Consulting.

“If everyone suddenly reduces the qualification of litigation lawyers, a few years down the line when there is a litigation boom two to three years’ qualified litigators will be like gold dust, and that will massively hike pay rates,” he says. “This happened before the crash in finance and corporate, when you could not get mid-level corporate and finance lawyers to save your life and salaries went through the roof. There’s a degree to which the profession is almost incapable of managing future demand.”

In view of those fears the consensus is that there is unlikely to be a dramatic change in trainee numbers, but rather a gradual downward trend over the next decade.

“I don’t think any firm aspires to be at the cutting edge of reducing trainee numbers quicker than anyone else,” remarks Pilcher.

And as trainee numbers fall, the role of paralegals not only to fill the changing requirements for the more commoditised work of junior lawyers but also as an alternative cost-effective route to trainee recruitment will increase.

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Leading question

But an even bigger issue that could be lurking iceberg-like beneath the water is one close to all firms’ hearts – that of succession to the partnership.

While lawyers currently at the two to six years’ PQE level are still in demand, there is a problematic bulge in lawyers above them and nowhere for those lawyers to go – the market is difficult and partnership is a fast-retreating prospect, so these lawyers are increasingly falling off – or being thrown off – the ladder, even in core areas such as corporate and finance.

This time last year a fall in the firm’s attrition rate forced Clifford Chance to make 13 lawyers in the capital markets and finance practices redundant to make way for the latest cohort of trainees and NQs.

A similar route was followed by Addleshaw Goddard last summer when it cut around 24 fee-earners in an effort to combat low attrition among senior fee-earners. According to Addleshaws, over the past five years fee-earner numbers have dropped from 490 to 437 but the firm’s two most senior fee-earner categories – managing associate and legal director – have together increased from 100 to 173.

Firms, Gibson argues, will force these senior lawyers out.

“They need to keep dangling the carrot [of partnership] in front of those coming through, and they need them to gain transactional experience because if they don’t have it they’ll be useless when they come up towards partner level,” he says. “At some point that is going to get into the psyche of the lawyers coming through. That will take a couple of years and it may never happen – it may be the market picks up a bit and they are rescued from that dreadful scenario, but I’m not sure.”

And what are firms doing about it? Are they keeping look-out?

“They are still keeping their heads in the sand – and for good reasons,” Gibson says. “They hope the market is going to turn and when it does they will still have a good bunch of people properly motivated and who want to become partners.”

After all, who will captain the ship if there’s no ladder to the top?

Addleshaw Goddard: the disaggregate keeper

Two years ago, Addleshaw Goddard was one of the first firms to link disaggregation to the training and development of its lawyers by sending process-type work to its transaction services team (TST) in Manchester. It is now staffed by 72 paralegals and the work referred internally to the centre has increased by 25 per cent in the past year. It also now takes direct instructions from clients, including providing direct secondments of paralegal teams to clients having a short-term need.

“I am at the radical end of the spectrum,” says employment partner Andrew Chamberlain, who has led on the project. “Process or lower level work is a significant proportion of anything lawyers do – at least 10 per cent and probably as much as 20 per cent.”

Billed as a way of freeing trainees and associates from drudge work, when challenged Chamberlain says: “What is not to like about making sure you operate at a level right for your skill set rather than having to do stuff that doesn’t need to be done by someone at your level?

“One of the fundamental problems with the legal market,” he says, “is that typically you have had over many years highly paid and highly trained lawyers doing work that they don’t need to do but charging their typical rate for doing that work. In a nutshell that is why we are seeing the changes we are seeing.”

Other firms have already made approaches to use the TST as an alternative to an LPO, says Chamberlain who, along with former Integreon chief marketing officer Andy Loach, plans to hit a target of 10 per cent of the firms’ work being done through TST by the end of the 2014/15 financial year.

The spectre of paralegals

In a move indicative of the response further down the UK 200, in November last year Clarke Wilmott said that its trainees would in future be drawn exclusively from paralegals who had already completed their LPC, allowing the firm to not only cut trainee costs but also, with no set intake dates, allow trainees to be selected as and when needed by departments.

Clarke Willmott justifies the move as “an evolutionary step […] anyone who thinks the traditional approach is perfect or that an alternative method is in any way second-rate clearly has no idea of the pressures facing those seeking to find their way in the profession and the talent pool within the profession currently without a training contract who deserve a chance to impress within a work environment”.

Jonathan Wood, training principal at Weil Gotshal & Manges, believes firms further up the UK 200 will also consider replacing some trainees with paralegals.

“There will be firms that change on that level,” he says. “Some of the magic circle and larger firms will start to think in a more commoditised way.”

Osborne Clarke training principal Nick Johnson says his firm is looking at the paralegal market, but does not agree this will impact the trainee model further.

“I don’t think firms are looking to replace trainees with paralegals,” he says. “A fair few are looking at taking on more paralegals and others are looking at being leaner with trainee intakes, but I don’t see them as direct replacement.”

Last year The Lawyer reported that firms are expected to increase the number of paralegals they employ by 18 per cent in the next five years – a concept at the heart of the success of the London office of US litigation powerhouse Quinn Emanuel Urquhart & Sullivan, which relies on paralegals and contract lawyers for help during big cases and to keep costs down.

In 2012, for example, the firm brought in 46 paralegals just to work on the Deripaska case – more than twice the number of permanent staff in the office.

However, while litigation is the great paralegal success story, other niche areas such as tax and pensions, which require particular depth of knowledge, are unlikely in the short term to see junior lawyers displaced by paralegals.

And there is an issue over succession, adds Christopher Clarke, senior consultant at Red Law.

“What happens when the partners retire?” he asks. “You can’t have the partnership taken over by an army of paralegals – there needs to be succession planning.”

Client view: time is money

A general counsel with six major firms on their panel says: “Our main concern is to make sure that we are not funding that person’s training.

“We would expect trainees to take a reasonable amount of time on a task but if it is the first time they have done a particular task and they spend four hours on it when a more senior person would have spent half an hour, that is when we would start looking more closely at trainee time on a bill.

“We have in the past raised the point that while things need to be delegated to an effective level, we do realise that trainees are effectively learning on the job and we do not want to have to pay for that.

“The main things that trainees work on for us is on research that is not cost-effective to carry out ourselves, which could equally be done by paralegals. I think a couple of firms that we work with do have dedicated research paralegals.

“From a client point of view, there can be a blurring when it comes to trainees and paralegals.

I don’t see a lot of difference apart from the fact that a paralegal could have been in a department for a couple of years and have more knowledge and experience and perhaps be able to do something with greater efficiency.

“With regard to who should fund training, the benefit to firms is that trainees will mostly stay with them and be very profitable at the three to four years post-qualified point. They more than recover any sort of subsidy that the firm puts in and I don’t think clients should have to pay for the investment.