Retention rates: pressure group
28 May 2013 | By Christian Metcalfe, Becky Waller-Davies
The trainee intake model has reached critical point with shrinking business opportunities compounded by high training costs
A law firm partnership is the longed-for destination of many ambitious law students. However, 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 has been blown apart in the current stormy market in which legal businesses are operating. So what are the alternatives law firms are looking at and how might they affect you?
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 will not pay for work they can do themselves. That strain is now being placed on the war chests that fund the battle for fresh talent - not only among the law firms themselves but also between the great ships of the legal industry and other professional service firms.
Firms gain commercial advantage by recruiting the top students but to do so traditionally means recruiting trainees four years in advance of qualification - a factor that not only forces firms to bamboozle campuses during law fair season but 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.
The cost is spread over the years but is nevertheless a whopping amount - when grants, salary, graduate recruitment, marketing and partner time are all taken into account, recruiting and training one person can cost some £175,000. It isn’t just jelly babies, stress balls and free pens that firms have to shell out for when enticing the best and brightest.
When deciding whether to make that investment, firms look at each department in each office rather than taking a whole-firm view. Graduate recruitment meetings with department heads ahead of every intake then try to assess how many trainees will be needed to fuel that department.
Factors that will be evaluated include taking a whole-firm view, examining the department as a standalone generator of revenue and whether there is enough work to keep more junior staff busy.
In firm versus department dynamics, individual departments take precedence. Even if a firm is not doing well or there is a recruitment freeze, if a team is particularly busy and is lacking junior resource they will get permission internally to take a trainee.
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 legal recruitment consultancy Laurence 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 newly-qualified lawyers [NQs]. I’ve seen that before - teams could be better at planning.”
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,” says 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,” says 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? Put starkly, is it safe for firms to assume the status quo will continue, particularly with regard to this spring’s retention figures? And where does that leave those looking to get into these firms?
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.
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.
Clifford Chance recently confirmed 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 following dire results in the previous year, 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.
Supply and demand
Do these drops indicate that the big firms’ demand 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?
CMS graduate recruitment partner Simon Pilcher says these are questions 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 BLP 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. “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 it structures its 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.”
This view is supported by Oliver Cook, consultant at recruiters 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 only 1,000 hours a year, which is £100k a year. The £40-50k salary then only leaves £50k and that revenue per lawyer is frankly not enough to take on trainees when you take into account the cost of each trainee.”
So 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 average trainee hours were less than 1,200 or 1,250 we’d question if we have the numbers right,” says Wood. “If you have someone on a six-month stretch who hits a quiet spot you take it in the round, but if it’s a pattern across the intake you question the numbers.”
But Lynne McCarroll, director at recruiters GMK Legal, 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.”
So what might firms do to smooth things out in these choppy waters? Raid other firms for associate hires, 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.”
Cutting trainee intakes drastically is unlikely to find favour with those that remember the recession of the late 1980s and early 1990s, when law 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.”
Scott Gibson, partner at recruiters Edwards Gibson, says the fear for firms 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”.
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 adds.
“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.”
So the consensus is that there is unlikely to be a dramatic change in trainee numbers but rather a gradual downwards 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.
As trainee numbers fall, the role of paralegals will increase, 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.
What does this all mean for those yet to get a foot on the ladder? BLP managing partner Neville Eisenberg says: “I would probably be thinking a bit more widely about career opportunities than the traditional model, which was to get a traineeship with the best firm you can find then hopefully go through associate ranks to become a partner. There are going to be a richer set of choices that aspiring lawyers have to make in the future about how their career unfolds.”
An even bigger issue that could be lurking iceberg-like beneath the water is one close to the hearts of all firms - that of succession to the partnership.
While lawyers currently at the two to six years’ post-qualification 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 redundant in the capital markets and finance practices 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 a look-out?
“They are still keeping their heads in the sand - and for good reason,” 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, would you captain the ship if there’s no ladder to the top?