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New Associates Recruitment Needs a Structural Fix

Friday, August 28, 2009 at 01:24 PM EDT

by Ashish Nanda

The new associate recruitment market is broken. But small changes are not going to address its underlying problems. The market needs a structural fix.

Most law firms make new associate offers to students who have undergone summer internships at their firms. The market for summer internships is a bilateral matching market, in which law firms rank the candidates they interview and the candidates rank firms with which they wish to intern. The bilateral labor market clears in a decentralized manner. Law firms choose schools from which to interview, interested students at those schools apply to particular law firms, the interviewing law firms offer summer internship positions to specific students, and the students decide whether to accept the internship offers.

This decentralized clearing of the labor market leads to predictable inefficiencies. First, the likelihood of inefficient matches increases. A law firm waits for a first-ranked candidate to make up their mind before making an offer to a second-ranked candidate. The higher-ranked candidate chooses to intern with another law firm. By the time the uncertainty resolves, the second-ranked candidate, who would have preferred to intern the law firm but was unwilling to risk waiting, has accepted an internship offer from another firm that was lower in their preference ranking. With the second-ranked candidate no longer available, the law firm has to choose a lower-ranked candidate to fill the spot. The same phenomenon occurs on the other side of the market, with a candidate wait-listed by a first-ranked law firm risking that foregoing a second-ranked firm could leave them without internship offers from either. Concern about inefficient matches leads candidates to hoard internship offers. A candidate might have received an excellent offer, but there might be two other firms higher in their ranking that they want to wait for before accepting the offer. Conversely, the same concern causes law firms to make exploding offers. A law firm might push a candidate to decide very soon after making an internship offer.

Second, because law firms are competing for a limited pool of preferred candidates and law school students are competing for a limited pool of prestigious law firms, the job market “unravels.” A second tier law firm tries to preempt first-tier law firms by approaching students earlier and make them a time-bound offer. Some of the students, uncertain that they will be offered internships by the first-tier firms, will accept the offer. Recognizing that second tier firms are preempting them, the first tier firms also move their recruitment dates earlier. This only give further impetus to “entrepreneurial” second tier firms to move just a little earlier in the recruitment cycle. Conversely, a second tier law school opens its campus recruitment window just a little before a first-tier law school, hoping to encourage law firms to make more internship offers to its students than they would otherwise. Some of the law firms, uncertain about their yield at first-tier law schools, increase recruitment at schools that offer them an earlier recruitment window. Recognizing that second tier law schools are preempting them, first tier law schools also move up their recruitment window, only encouraging some of the second-tier law schools to move still earlier.

The consequence is that recruitments occur considerably before jobs are available. Already, in the market for new associates, recruitments are done primarily when students are being interviewed for their summer placements at the end of the second year. The campus interview dates for these summer placements have been “unraveling” up the academic calendar, such that they now occur at the start of the second year. Thus, law firms are interviewing candidates almost two years before their jobs begin.

The market failures associated with decentralized clearing cause three problems. Law firms have to recruit based on limited information, early recruitments make the labor market inflexible, and summer internships lose meaning.

Law firms have limited information on students when they have to recruit them. The students have been through only one year of graduate school. Many of them have no full-time work experience. Other than the specific interviews, law firms extrapolate the candidates’ abilities principally from two sources of information: reputation of the law school in which the students are enrolled and first year law school grades. Since these are exceedingly important determinants of where the students will get their first jobs, both the law school admission and the first year academic experience become even more stressful and meaning-laden for law students. Over the next two years of law school education, students will learn their strengths and weaknesses, interests and passions. They are unable to use that learning in making their job choice. Instead, because students know where they will go almost two years before their law school ends, effort to maintain high academic standards and attention to second and third year courses decline. Nor do law firms benefit from more information about the students’ performance, strengths, and interests in the different aspects of law.

Recruiting two full years before jobs begin introduces rigidities in the labor market. If the economic environment changes dramatically, law firms, unable to change their new associate numbers flexibly, face a supply-demand imbalance: under-capacity if times are better than expected, overcapacity if times are worse than expected. In difficult times, they have to either renege on implicit commitments to new hires (reducing the ratio of summer candidates to whom they make job offers, postponing start dates for new hires, etc.) or force already hired junior and mid-level associates to bear the brunt of the stress caused by market softness (layoffs, moving associates off-track, etc.).

An insidious consequence of the labor market clearing well before summer internships take place is that the internships lose their value. Properly conducted, summer internships are opportunities for law firms and the prospective associates to try out one another, evaluate “softer” elements such as work environment and culture of the firm and work ethic and collegiality of the intern, and eventually to gauge the “fit” between the firm and the intern. If summer internships are conducted well, surprises are minimized when new associates join their firm. Both the firm and the new associate know what to expect of each other. If mismatches exist, they are identified during the summer internships and such internships do not conclude with job offers or acceptances.

In today’s market, summer internships do not perform this important filtering function. Since the labor market has cleared before summer internships, if a law firm chooses not to offer a position to a current intern, it likely no longer has access to second- or third- ranked choices. Those individuals would probably have been offered jobs in the firms at which they interned. Replacement hires will come from a pool of third year students composed mostly of students who were not offered jobs by (or who have not accepted jobs at) the firms with which they interned. Skeptical that it will get a better replacement hire by entering a market with a “weak” pool of candidates, a law firm will choose to extend an offer even to a less-than-ideal summer intern. Similarly, students may not be happy at the firm with which they interned but will hesitate rejecting an offer because then they will belong to a pool of students who could not or did not find a job at the law firm they interned and will be forced to recruit with the limited number of firms that have not been able to fill their seats with interns.

Summer internships then become formalities. Law firms try to not cause prospective associates to worry too much about their jobs and interns try not to create unnecessary waves to hurt their chances of being offered positions at their firms. The question of finding if the fit is right stays unaddressed.

These three problems—recruitment based on limited information, inflexible labor market, and summer internships becoming a formality—can be overcome if a significant number of law schools and law firms coordinate the recruitment process by using a centralized “matching authority.” Participating law firms interview candidates for summer placement. At these interviews, candidates and the law firms are free to discuss any aspects of the internships, including stipends, job responsibilities, and the prospect of being offered associate positions at the end of the internships. However, the law firms do not make offers directly to the students they interview, nor do the students finalize placement at the time of the interview. Instead, the law firms give to the matching authority their preference ranking of candidates along with the number of seats they have available and students give to the matching authority their preference ranking of law firms. On a preannounced “match” date, the matching authority matches the law firms against the candidates, taking in account preferences on both sides of the market.

Certain conditions must be met for centralized matching to be effective. Major law schools and law firms must sign on. Centralized matching cannot be established if there are significant institutional holdouts on either side of the market. Once major law schools and law firms have agreed to centralized matching, other schools and firms can choose to join the centralized matching regime, or, if they break free, risk signaling lower quality to the other side of the market. Breakaways can be minimized if the law schools and law firms that participate in centralized matching commit to working exclusively with, or giving priority to, counterparties (law firms or law schools) that belong to the centralized matching regime.

Finally, and importantly, the centralized matching authority must be a body that is informed by the concerns of both sides of the labor market but stands independent of both. Members of the matching authority should be respected by both law schools and law firms as committed to the profession but independent of pressures from either side of the match or loyalties to specific school or firm. The matching authority should have the right to investigate allegations of cheating and punish those who it finds to have broken the rules of the regime. It should charge a fee of member firms and a small fee of candidates requesting the match. The fee should be sufficient to ensure financial independence of the matching authority, allowing it to maintain a secretariat for informational and administrative purposes, conduct the matching process, monitor compliance to the match rules, investigate allegations of cheating, and punish those who have broken the rules.

Because matching is done by a centralized authority on a particular date, problems associated with decentralized matching disappear. Since matches occur at the same time [contemporaneously?], inefficient matches are avoided. If a candidate or a law firm is unable to get its first rank choice, they can seek the second rank choice before moving further down their preference ranking.

Market unraveling is prevented by the matching authority disciplining law schools or law firms that try to preempt others by encouraging or making offers ahead of the match date. Parties that break the requirement of holding back on offers can be fined or suspended from the matching regime.

Once unraveling is prevented, recruitment can be rolled back to dates closer to the summer internships. Law firms have more information on candidates. Students focus on learning in the early part of the second year, and develop a deeper appreciation of their own interests and strengths before the recruitment begins.

An additional “match date” can be established for recruitment of third-year students. The possibility of going to a third-year match will encourage law firms and summer interns to judge carefully if the fit between them is appropriate, making summer internships more useful in gauging fit.

Do sophisticated matching algorithms exist and can they work? Indeed, they exist and they work well. The most well known of these is the algorithm employed by the national medical residents matching program. Since 1952, a centralized matching bureau has annually assigned medical school graduates to their first positions. The approach has removed many of the inefficiencies cited above that plagued the labor markets for medical residents before centralized matching was introduced. The algorithm, with some modifications, remains in use to this day, with very high level of voluntary participation from both sides of the market, placing 20,000 graduating physicians in their jobs every year. Careful economic studies of the matches have demonstrated that the algorithm does not favor one side of the market over the other and allow very limited possibilities of strategic behavior by participants on either side of the market. An antitrust case, which argued that centralized matching depressed resident salaries, was dismissed by a Federal District court in August 2004. Also in 2004, the US Congress passed legislation clarifying that the matching program was a marketplace and did not violate antitrust laws. Additionally, with use, the matching algorithm has become increasingly sophisticated, allowing the matching bureau to take into account considerations such as paired geographical preferences of couples who approach the labor market at the same time.

If centralized matching is beneficial to market participants on both sides and addresses most of the problems of decentralized matching, why has such a system not emerged spontaneously? There are three reasons: concern with centralization of power, the challenge of instituting collective action, resistance to change.

Some market participants recoil from the idea of centralized matching because they conflate centralized market with centralization of power. Centralized matching does not take choice away from individual market participants. Instead, it provides a common platform for the labor market to function efficiently. In that regard, it is akin to a centralized stock exchange, which allows individuals to execute trades according to their individual preferences but within the ambit of explicit rules which increase the efficiency and robustness of trading.

Centralized matching requires collective action. Most of the major market participants have to agree to the centralized matching regime to make it work. In the absence of agreement among major market participants, even though it might be a good idea, individual market participants feel helpless to move to such a system on their own. Because of this inertia, the existing decentralized system prevails even though individual market participants have to live with its inefficiencies.

Replacing decentralized matching with centralized matching might make some members of the bodies that manage new associate recruitment—recruitment offices at law firms and placement offices at law schools—feel threatened. In centralized matching law recruitment officers do not need to sequentially negotiate with candidates and law school placement officers do not need to advise students on which offers to accept and which to defer. Instead, centralized matching focuses the attention of both set of experts on what their primary goals ought to be—law firm recruitment offices on finding, and ranking, the best candidates, and encouraging them to prioritize their firm in their preference ranking; law school placement offices on advising students on their application and interview strategy and prioritization of preferences. However, because centralized matching obviates the need for their involvement in the match process itself, individual recruitment officers or placement officers might perceive it as diminishing their roles and hence resist its introduction.

A transition to centralized matching, therefore, is unlikely to be triggered by a bottom-up process or through the initiative of individual law schools or law firms. It requires shared commitment of leaders of law schools and law firms. Centralized matching will be realized only if they concur that this approach is superior to decentralized matching and are prepared to establish a matching authority with the requisite capability and authority. Is it time to institute this much-needed radical change?