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Thursday, April 05, 2012

Chancellor & Dean Frank H. Wu on The Perils of Ranking

This article is reprinted with permission from the April 4, 2012 edition of The Recorder.

The Perils of Ranking

In an effort to be perceived as the best among all, firms and law schools often lose sight of how to become better than they are, suggests UC Hastings dean, Frank H. Wu.

The other day, I was chatting with a few talented lawyers who had recently opened up a new office in town. As we discussed how the past several years had brought about profound changes within our profession, I ventured a statement with which they did not disagree. I said that if I had a dispute for, say, $100,000 — which for me would be an enormous sum of money — I was not sure I'd be able to find a good lawyer to handle it. By that, I mean that the very capable lawyers whom I would consider would charge such high billing rates that I could not expect to resolve the matter in a reasonable manner.

That problem doesn't even take into account the other party spending similarly. The ethical members of the bar might decline to represent me. They would know that they could not make the arrangement work out economically for both attorney and client.

An observer, perhaps a cynic who enjoyed the irony of a law school dean lamenting such a situation, might comment that part of the problem is law schools. They would say, "given tuition rates and accompanying debt burdens, it would be mighty difficult for a decent attorney in a major city to charge at a level that would allow ordinary folks to afford her as she struggled to pay off her own loans."

I'd like to offer a hypothesis for our consideration.

There is no specific individual at fault here; rather, this is a set of classic collective-action problems. The term refers to those dilemmas in which each person could do not only what is best for herself, but also the group, except the incentives are set up so that she cannot do it alone. If she is the only person who behaves as we all would hope each of us would, she will be punished by the eventual outcome.

The standard example of the tragedy of the commons, as it is called, is taught in the first year of law school. Each individual who owns livestock believes she should allow them to graze freely on the pasture that belongs to the public. And each person is right, more or less. But taken together, there are too many animals to be sustained on the limited resources that are available.

As a consequence, each person doing what is perfectly rational from her own perspective contributes to results that are in the aggregate disastrous. The land ends up ruined.

So too with law firms — I will turn to law schools as well. A generation ago (to be fair, perhaps two generations ago), there were many more firms that enjoyed a great reputation doing a range of interesting work.

Associates had a fair chance to become a partner. Both associates and partners made a better than middle-class living. They worked hours that allowed them to raise families.

None of this is to romanticize the past unduly. Fancy firms were open to people of only certain racial backgrounds, one gender, and not a tremendous range of socioeconomic origins. They were segregated by religion. They did not advance social change.

Yet perhaps the most important point for our purposes is that there was a prevailing culture at the majority of these establishments. Simply put, it would be unseemly to walk across the street to a competing firm, leaving behind actual friends, for a few dollars more. If one partner had a lackluster year, he would be carried for at least a bit, if not by explicit agreement then on the implicit thought that he would reciprocate eventually. You left money on the table when bargaining with peers, because that was the right thing to do and the expectation shared by all stakeholders.

There were no laws that enforced these understandings. They were just given as the norm.

Needless to say, today it is quite different in what has been dubbed a "free agent" culture. If you and I were professional partners, and I told you I had an opportunity elsewhere that would offer better compensation, you would consider me a fool for not leaving posthaste.

Clients hold beauty contests. Rainmakers with a portable book of business threaten to depart as quickly as they arrive. People who call themselves "partners" may not in fact be acquainted with one another. Their compensation varies by over an order of magnitude.

The results are well known. There are the spectacular endings of multiple firms that brought on too many lateral prospects, while dismissing entire practice groups that were profitable but not quite enough. Others leased too much prime real estate. Some made speculative bets that they could break into the handful of top firms commanding premiums for "bet the company" work.

Those who have continued to achieve material success have fared only marginally better. For there are the prestigious firms filled with smart people who have found that making partner only worsens the demands on them in an environment where each individual is judged by the ethos of "eat what you kill" and "what have you done for me lately."

These behaviors reflect normal human nature, not intentional wrongdoing. The desire to identify a culprit is misguided.

People suffer from optimism bias. Everyone believes they are among the best, because, after all, they have been told just that all along. To alleviate the pain of college graduates who were honors students finding that once in law school, half of them must be in the bottom half of the class, we inflate the grade curve to protect them with an illusion. Years later, those same people, leading profit-making firms, convince themselves by the same world view that growth will be endless and they can capture an ever-increasing share of it.

Everything depends on mutuality. In a prisoner's dilemma, another name for the collective action problem, as soon as any individual begins to behave badly, everyone else responds likewise. They have no reason to do otherwise. Together we ratchet downward in a zero-sum game, blaming one another along the way. Computer simulations that model how we react perform identically.

Law schools are identical to law firms despite the myth that academe is somehow a separate sphere. We like to blame rankings for our bad practices. But rankings only have a hold on us because we invest them with more meaning than they are worth.

Applicants want to attend "the best" school they can, mistaking a set of credentials for actual merit. They can't be faulted. Studies show that institutional rank matters for initial employment prospects.

Then schools want "the best" students they can attract. Their administrators use policies to assess them that exaggerate the predictive value of standardized test scores, along with dubious means to attract them such as scholarships that are guaranteed if a certain grade point average is maintained under a grade curve policy that ensures significant numbers of students will lose their funding. Their leaders are faced with alumni clamoring for improvement in rankings. Their graduates want their earlier investment to appreciate and so promise to support the school solely on that condition.

Thus schools, like firms, want to recruit stars. They offer renowned professors higher compensation, lighter workloads, or both.

The hidden problem is that people don't really want what they believe they want. They say, of course, they would like a school to become better. The trouble is that by trying to become better by the metrics currently used, an institution spends more money and hence charges more tuition. It concentrates, for example, on improving the reputation of faculty as scholars (not teachers), albeit by a standard that is divorced from what the bench and the bar commonly regard as useful.

None of these trends are unique to law. "Keeping up with the Joneses," in the colloquial phrase, has become the dominant attitude in all aspects of our lives. Our homes, for example, have become supersized, without making us much happier. Our forebears in this nation, and our peers around the world, lived and reside in apartments half the size of what we would accept, with more comfort than shame. In 1950, the average new house in the United States had fewer than a thousand square feet; in 2000, that figure had doubled.

I should be clear. I am all in favor of accountability, metrics, competition, and, yes, even rankings. The argument is not to give up self-interest. It is, instead, to pursue principled self-interest by perceiving the overall context.

My friends who started their firm have a model that I would bet on. They intend to deliver superior service at better rates. Law schools also should adapt. There is opportunity for those who offer innovation.

My concern is that we choose the right factors to measure and we understand in advance the consequences of the hierarchies we create. We control our circumstances much more than we imagine, as a society and as individuals.

In Practice articles inform readers on developments in substantive law, practice issues or law firm management. Contact Vitaly Gashpar with submissions or questions at vgashpar@alm.com.

Reprinted with permission from the April 4 2012 edition of The Recorder. © Copyright 2012. ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, call 415.490.1050.

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