Analyzing Moody's New Report On Law Schools

Earlier this week, Moody's Investors Service issued a report entitled Law Schools Challenged to Adapt to Fundamental Changes in the Legal Industry.  They offer three crucial take-aways:

1. "Fundamental shift in the legal industry contributes to shrinking applicant pool and heightened competition."
2. "New tuition pricing strategies [read: transparent price cuts and discounting] provide short term solutions but don't alter cost structure."
3. "Business model changes will be essential for long-term sustainability, particularly for standalone law schools and those without strong brands."

I found a few of their comments particularly interesting.  First, Moody's is not completelysold on what they note is the Brooklyn/LaVerne/Penn State/Iowa approach: the use of transparent price cuts and discounting as a survival strategy.  They worry both that  the price cuts could tamp down revenue too much and that there are serious reputational dangers to cost cutting.  "Many students still associate price with quality."  

Perhaps this is a virtue of the Penn State "scholarship" strategy - as compared to the Brooklyn/LaVerne/Iowa sticker cut strategy.  In any case, I think that price cuts at public (or apparently public) schools like Iowa and Penn State are less dangerous reputationally because  many consumers may associate low price with generous legislators - rather than poor quality.

I also appreciated the fact that, unlike the WSJ,  they ignored outside ranking organizations and instead clustered law schools into four groups, based on job placement.  For this purpose, Moody's used the number of students in JD or JD advantage jobs, full or part-time, long or short-term.  (We can infer they included school-funded positions.)    Using this method,  the top quartile of schools (including all the super-elites) placed at least  84.1% of grads; the second quartile placed between 78% and 84%; the third quartile placed between 71% and 77%; and the lowest quartile placed less than 71% of graduates.  

Finally, the report points out what we already know: standalones are under extra pressure.  Moody's has downgraded Vermont and New York Law in the last year.  It suggests that these (and other schools) will need to diversify offerings.  It also notes that new partnerships and affiliations are on the rise.  Thus we have been treated to the WMU Thomas M. Cooley Law School.  Moody's points out that large, wealthy schools can "withstand enrollment challenges for a much longer period" - but does not opine on the bigger question: what will the smaller, poorer universities do?

The most important aspect of this report is that it will land on the desks of these university presidents who will now approach their law school problem with a fresh,  objective analysis.  I wonder what a similar Moody's report will look like five years from now.

Update: I have posted the list of schools in the first quartile here and the second through fourth quartiles here.

H/T WSJ Law Blog.

Comments

[Ben Barros]

Thanks for the various pointers so far - I'll take a look at them. Anon, I'm used to being trolled in anonymous internet comments, but are you really doubting that legal employment has been cyclical in the past? I don't know anyone who has practiced for more than five years who doubts that. The open question is whether this downturn is different from previous ones, and whether there are structural issues at work. I suggest no, other people suggest yes. But I don't know of anyone who seriously doubts that the cycles exist.

I'm going off the grid for a day or so, so if anyone cares I'm not just ignoring subsequent comments.

[Milan]

Two comments.

If the baseline is 2002-2007, then, yes, we are unlikely to see those days again anytime soon. But BigLaw's gains during those years were inflated by the massive real estate bubble. Low single digit growth has historically been the norm. What Moody's calls a fundamental shift might more accurately be characterized as a market correction.

I've read Prof. Burke's excellent article referenced by Prof. Tamanaha, and among its interesting findings are that the displacement in the entry-level market was caused almost entirely by BigLaw's struggles and that BigLaw hiring increased substantially in 2012. I don't think that the article can be read to support the view that the legal sector in general is experiencing a fundamental shift although Prof. Burke does point to a number of challenges facing BigLaw that make a return to the glory days of 2002-2007 unlikely.

[Former Editor]

Milan,

I somehow missed Prof. Tamahana's post earlier, and Burke's article as a result, but you are right that it is quite informative. I'd disagree with your reading that the article cannot support that there has been a fundamental shift in the legal sector. According to Burke, BigLaw was supporting 10-20% of the hiring market, Biglaw's contraction is due to structural concerns, and that the contraction will persist for many years to come. Maybe "fundamental shift" is a slight overstatement, but a structural change resulting in a long term contraction of 10-20% of the hiring in an industry is certainly a pretty darn significant shift.

I'd also note that Burke does not ascribe the expected continued contraction to the popping of the real estate bubble. Rather the paper assumes that some equivalent type of work will eventually replace the securities work that vanished when the bubble popped(see FN. 112) and that Biglaw hiring will remain stagnant anyway.

[Barry]

EIC: "Barry - I'll just quote myself from above "in inflation adjusted 2009 dollars.""

Non sequitor.

[Barry]

Ben ,you've asked for evidence, and have received it (to others - it will be entertaining to watch Ben do the denialist shuffle).

Now, it's your turn:

I for one have seen zero support for the 'JD Advantage' jobs being jobs where having a JD is an advantage. That means causality.

[Barry]

Ben: "...but are you really doubting that legal employment has been cyclical in the past?"

Please stop strawmanning. Nobody is denying the cyclic nature of the economy.

I have not seen any 'cyclist' show any evidence that what we are going through now has precedent in the last fifty years. That means jobs:grads ratios, proportions of various job types, and salaries:tuition ratios.

[Barry]

From the original article: "For this purpose, Moody's used the number of students in JD or JD advantage jobs, full or part-time, long or short-term. (We can infer they included school-funded positions.) "

A temp, part-time, school-funded position counts the same as a well-paid, permanent, full-time position?

[Barry]

Milan: "Prof. Burke does point to a number of challenges facing BigLaw that make a return to the glory days of 2002-2007 unlikely."

Ben, how was your school doing in those 'glory days'? Did your school publish employment stats which counted everybody, and salary stats which counted only the good jobs?

Back then, before our five-years-and-counting 'crisis', was your law school financially justifiable for a majority of the grads?

[dupednontraditional]

I have my own opinion on the (not)value of a "JD Advantage" position, because I am "living the dream", currently.

Yes, yes, yes, anecdotes are not data; I know. Suffice it to say that my personal testimony is that my prior STEM career (emphasis on the "E"), without law school debt, was much more remunerative and had a much more visibile future overall than my current situation at T-plus nine years after law school, with significant law school debt. Hindsight is 20/20, especially where fabricated law school statistics are concerned.

Not that vast majority of the Law School establishment cares, of course. It's much more fun to argue over the statistical minutiae of people's aggregate lives than to listen to what real, live people have to say...the latter are more easily ignored/dismissed, while the advantage of numbers is that they don't "talk back," of course.

Oh well, Caveat Emptor, and sign up the 0Ls, post-haste! This champagne fountain won't pay for itself, you know.

[Ben Barros]

Back on the grid. Thanks for the pointers. I don't find any of them to be particularly compelling, but I'll address that in a post at some point after I'm done grading.

Barry, this is just like the last time you accused me of rebutting a strawman. I was responding to someone who was challenging my assertion that legal hiring is cyclical.

[anon]

No, Ben. I didn't challenge your assertion that legal hiring is cyclical. That is a strawman.

I asked you to provide a quick cite to a study that shows that legal hiring, in toto, has invariably and reliably mirrored the ups and downs in GDP, or any other macro economic stat.

Just one, please. If this is so self-evident and invariably true (including the last, say, 50 years), it should be very easy to support your assertion.

[anon]

After Ben easily and decisively shows his claimed correlation between macro economics - growth rates, GDP, etc., e.g., "the economy" - and legal hiring over the past fifty or so years, we need to ask a further question.

As Noam Scheiber, a senior editor at The New Republic, has written, there is folly in believing "someone [who] points to history and insists the future will look pretty similar."

As Noam states: "Historical arguments tend to be right up until the moment they’re not. ... You’ve got to look at the reasons why the patterns existed."

Well said.

So, first Ben, please show the claimed pattern. Again, easy, right? Then, do we have your word for it that nothing has changed to disrupt the pattern (that is, if you can show it), e.g., that circumstances have not changed enough to call into question any of your surmises about the past and predictions based thereon?

[Barry]

Seconding this, Ben, and moreso. You have to show that the current situation is within the norms for cyclic behavior. And as I have said, that includes jobs:grads and salaries:tuition.

[Barry]

EIC: "Jilly - I see no reason to care more about the legal field's "relative worth to the overall economy" than about actual spending on legal services."

The point is that a 1.4% growth rate is rather poor; small productivity improvements can make that a declining labor market.