Friday, October 06, 2006

Grab and Leave

This post has nothing to do with (now former) Congressman Mark Foley. Rather, it deals with the conclusions of a report, When Knowledge Is an Asset: Explaining the Organizational Structure of Large Law Firms, by James B. Rebitzer and Lowell J. Taylor. They conclude that:
From the property rights perspective, large law firms are poorly suited to sustaining employment relationships because they have no enforceable means of controlling the firm's key knowledge asset—client relationships. The up-or-out partnership systems that have evolved over time in these firms offer an awkward but workable resolution to this problem. By restricting partnership size to maximize surplus per partner and by making senior attorneys residual claimants, law firms limit the opportunity for sub-groups of partners to grab and leave with the firm's clients. This action, however, creates additional demand for inexperienced associates who serve as (imperfect) substitutes for their more experienced counterparts. The result is that more associates are hired than can be promoted into a stable partnership. Those associates who do not succeed outgoing partners will be dismissed before they acquire sufficient client knowledge to themselves pose a threat of grabbing and leaving. That law firms find it worthwhile to commit to the costly practice of firing qualified attorneys in order to retain control over client relationships points to the general importance of control over assets in more conventional employment relationships.
The authors study available data to determine whether the data can justify alternative theories, such as the "dual incentive" theory. "According to this [theory], law firms create incentives for associates to invest in firm specific skills by promising a valuable promotion to some or all of the associates who undertake the investments. It is difficult, however, for outsiders to monitor whether the associates have actually met the firm's requirements. This gives the employer an incentive to cheat the associate by denying promotion even when the associate has performed as the firm desires. Since the employees anticipate cheating by the firm, no investments in firm specific human capital are made."

Ultimately, they reject the dual incentive theory because the alternative "grab and leave" "model predicts that large law firms, with long-standing relationships to important corporate clients, would implement a kind of legal production technology that would keep non-partners at arms-length from clients." The authors' examination of the increasing amount of time attorneys spend on client contact as they move up the seniority ladder leads them to conclude that the grab and leave model is in operation at large firms.

Hat Tip: Docuticker.

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