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• The dot-com boom changed everything. There was a severe
shortage of corporate lawyers in Silicon Valley in the
late 1990s as the amount of deal work exploded, with record
IPo, M&A and VC activity, as well as every other
type of deal you can imagine. At the same time, the cost
of living in the Bay Area was spiraling upward. To compound
the situation, there was an exodus of lawyers (including
myself) from top-tier law firms to grab in-house
opportunities at Internet companies, lured by potential
stock option riches as well as other factors. Firms in SF/
SV, as well as LA and other markets outside nY, decided
they needed to increase associate pay. It started incrementally,
with regional offices matching nY starting salaries
($90-95K), until the "shot heard round the legal world"
was fired in early 2000. The name Bob Gunderson became
legendary among grateful associates as his Silicon Valley
firm, Gunderson Dettmer, pushed through dramatic increases
in the entire associate pay scale, beginning with
$125K starting salaries (up from $95K the year before),
plus bonuses. The herd followed, with all of the major SF/
SV/LA firms quickly matching the new pay scale, and of
course new York couldn't allow the West Coast upstarts
to pay the highest salaries, so the Gunderson scale became
the nationwide pay scale for top-tier law firms. Who do
you supposed paid for those huge salary increases?
• Law firm overhead consists mostly of compensation.
Well, that plus expensive office space in prestigious buildings,
lavish summer associate programs, and many other
little things that generally reflect an attitude of operating
in a "costless" environment. naturally, partners weren't
about to let their profits plummet as a result of higher associate
pay. So billing rates went up and up and up, passing
on the higher cost of doing business to clients. Billing
rates roughly doubled at big SF/SV/LA firms between
2000 and 2010, for the same people doing the same work.
See my related blog post at http://bll.la/55 (itself a good
read, in my humble opinion).
• Back to Econ 101. What happens when you double the
price of something? Demand for it decreases. At the
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