History Rhymes

1

by Ashish Nanda

As hiring institutions competed to recruit students ahead of their competitors, the date by which assignments were finalized kept creeping forward. Recruiters and schools collectively bemoaned that positions were finalized well before completion of professional training but, despite numerous resolutions, failed to prevent the market from unraveling. Finally, with appointments being made two years before jobs began, the schools and the hiring institutions decided that the dates by which positions were finalized had to be pushed back. The way to do that would be to mandate that offers be made on a particular date and students be given a short window of time to accept or reject the offers.

Does this description appear familiar? Law firms and law schools have been fretting that, with recruitment of new associates coming primarily from the pool of 2L summer associates, and summer assignments being decided early in the Fall of the second year, new associate jobs in law firms are being decided a full two years before they begin. To counter this unraveling, a commission established by the National Association for Law Placement (NALP) proposed on 7 January that all law firms move to a common offer date in January for 2L recruiting and law students who are offered these assignments decide within 14 days.

However, the above characterization not only fits the world of law firms recruiting summer associates in 2010 but it also fits uncannily the world of hospitals recruiting medical school graduates for internships in 1946.

In the first half of the 20th century, as hospitals competed to recruit graduating medical students for internships, the date by which internships were finalized crept forward. Hospitals and medical schools collectively bemoaned that internships were finalized well before completion of medical training but, despite numerous resolutions, failed to prevent the market from unraveling. By 1944, appointments were being made two years before the internships began.

In 1945, the American Association of Medical Colleges (AAMC) resolved that scholastic transcripts and reference letters would not be released prior to the end of the junior year (a date that later was pushed further back to the senior year) and in 1946 decided that all internship offers be tendered at the same time and all acceptance or regrets be communicated within seven days. This approach succeeded in reversing the unraveling of internship appointments but the problem of mismatches in appointments became considerably worse. Students were accepting offers from less preferred hospitals only to be approached later by preferred hospitals. Hospitals were making offers to less preferred students only to discover later that they could have recruited preferred students. Despite rules allowing students a seven-day window to decide, hospitals pressed students to accept internship offers immediately after they were extended and many students reneged on their commitments.

The internship assignments date was pushed back, but mismatches became more common. As students and hospitals unable to find matches in the first round scrambled, many discovered that they had accepted poorer matches when better matches could have been made. Over the next few years, under pressure from hospitals and students that bore the pain of scrambling in subsequent rounds and the mismatches they caused, the offer acceptance window for the first round was compressed from the original seven days in 1946 to 12 hours by 1950. But mismatches continued unabated. Eventually, the medical profession recognized that this problem could only be addressed by conducting simultaneous matching of hospitals’ and students’ preferences. The centralized matching approach, introduced in 1951-52, survives to this day, with high levels of voluntary participation.

What can the legal summer associate recruitment market learn from the experiences of the medical internship recruitment market six decades before? Here are a few predictions on what is likely to happen if the NALP commission’s proposal is implemented.

Implementation of the NALP proposal might stem, and even reverse, the unraveling of the summer placement market to ever earlier dates. But it will exacerbate the problem of mismatches. The suffering caused by mismatches will lead to pressures for further change, which will make the proposed system unstable.

If law firms follow the guidelines of the proposal, the dates by which the summer associate positions are finalized will be rolled back from early Fall to the Spring term. Law firms that renege on the promise to hold back offers till the common offer date will be disciplined by law schools restricting their access to students in future placement years. The disciplining mechanism will work only if “cheating” is verifiable and market demand for summer associates is strong enough that law schools can credibly afford to bar firms from recruiting. Since both assumptions are open to question, there is a likelihood of some law firms “cheating” the guidelines. Further, even if law schools do not make formal offers and demand formal acceptances, there will be considerable room for signaling that an offer is “highly likely” and arriving at an informal arrangement that the student will accept the offer if it is made.

Law schools will not roll back their on-campus interview (OCI) dates for several reasons. First, they will want their students to have as long a recruitment window as possible. Second, they will try to attract all law firms, including those that recruit by limiting themselves to a fixed number of schools. Third, they will want to preempt (or not be preempted by) other schools in giving firms “first-look” at their students. Fourth, at least initially, they will be unsure whether law firms will follow the guidelines and hold off on making offers, formally or informally.

Given that OCI dates are front-loaded during the Fall term, law firms will prefer to conduct fly-back and follow-up interviews early during the term for three reasons. They will not want the summer associate recruiting effort to stretch over a long period of time, since an extended recruiting season is often perceived as disruptive to business. Early interviews will afford firms a longer horizon before deciding to whom to extend offers. They will want to make early impressions on students and not be preempted by potential candidates having intensive exposure to other firms much before them.

Thus, there will be a period of several months between the interviews and the placement of summer associates. The NALP proposal suggests that this is beneficial in two ways. The additional time can help students and firms to get to know one another better before committing to the placements and firms can experiment with innovative recruitment methods. But extended hiring also imposes two costs. One, students will go through a longer period of uncertainty (which includes the winter break). Two, the risk of “cheating” (early offers and commitments) increases. An extended period of uncertainty increases risk averse students’ and hiring firms’ willingness to enter into informal agreements. Hence, after an initial flurry of interviewing in the second year, law firms and students will use the “quiet period” before the formal offers are made to engage in signaling and arrive at informal arrangements.

Law firms will make offers formally on the offer date. Some of these firms would have already arrived at “informal agreements” with the students to whom they make offers. However, once the offers are made, the “offer response window” will be characterized by a period of quiet and inactivity during the first 13 days or so, followed by a mad scramble at the end as the market clears. There is no benefit to the students holding offers from deciding early during the response window. However, there are benefits from deciding later during the response window. Students can use the time to contemplate their choices carefully, gather additional information, and bargain with the offering firms on internship characteristics (time, location, department, nature of work, etc.). Consequently, very few students with offers will choose early during the window. With most choices made towards the end of the response window, the end of the offer response window will experience a scramble of market clearing activity—rejected firms rushing to fill empty slots and second choice candidates rushing to accept new offers.

The proposal, as currently phrased, is silent on how subsequent rounds of offers will be conducted. In the absence of a specific guideline on length of offer response windows for subsequent rounds, law firms will press students for immediate responses, because they will worry that waiting further might lead them to lose lower choice students to other firms. Students will accept outstanding offers out of concern that they may be shut out of the market. This will increase mismatches. Preferred firms will approach students later only to find they have already accepted positions at less preferred firms. Preferred students will become available to firms that have already chosen less preferred students because they couldn’t wait for the preferred students to decide.

Students that are highly valued by most firms (typically, students of top-ranked law schools) will benefit from the proposed system. Valued students will have the luxury of choosing over a two week window among multiple firms. (The NALP proposal recommends that students be allowed to hold up to five offers.) None of the firms that have tendered offers will want to go into the frenzy of subsequent stages, so they will court aggressively students to whom they have made offers. Thus, valued students will have considerable bargaining power versus the offering firms during the acceptance window. Firms that are highly regarded by most students (typically, firms with high Vault ratings) will also benefit from the proposed system. Most of their positions are likely to be filled in the first round. They will not have to worry about other firms “stealing” students by preempting them on interview and offer schedules.

Lower ranked students and firms will lose in the proposed system. Since each student is allowed to hold a maximum of five choices and most schools value students similarly (typically on the basis of school and grades), the first stage will be characterized by some students holding multiple offers and a fairly large number of students holding none. They will enter the market in subsequent rounds, after the preferred students have communicated their rejections. In parallel, lower ranked law firms likely will not be chosen by their first choice students. They will get most of their summer associates from subsequent rounds. Follow-on rounds will be marked by intense pressures to make offers quickly and accept offers quickly, leading to several mismatches. When markets clear, students will be saddled with suboptimal assignments and firms with suboptimal associate classes.

Lower ranked students will resent higher ranked students having the luxury to decide among multiple choices over an extended period of time while they have to respond to “exploding offers;” lower ranked firms will resent higher ranked firms that do not have to enter the frenzy of subsequent rounds. Replicating the 14 day offer response window to subsequent rounds will be very difficult, since it will stretch the decision process well into the Spring term. Moving the initial offer period earlier to give later offer rounds more time will be difficult. Multiple rounds that straddle winter holidays will cause uncertainty and distract firms from year-end business. Moving the initial offer date to early or mid Fall will to Fall will detract the very objective of the exercise, which is pushing back the decision date.

Lower ranked students and firms will press for the first round offer response window to be shortened for reasons of equity. Shortening the offer response window will reduce the asymmetry between the experiences of higher and lower ranked students and higher and lower ranked firms. But it will exacerbate, not circumvent the problem of mismatches caused by frenzied decision-making.

Faced with these challenges, how will the law firm recruitment market evolve? One pointer would be how the medical interns market evolved after AAMC’s decision in 1946 that all offers be tendered at the same time and all acceptance or regrets be communicated within seven days.

The date on which assignments were made indeed was pushed back, thanks to the proposal. However, mismatches became much more common. Once the first round assignments were made, hospitals found that, in subsequent rounds, if students took even a brief period of time before rejecting an offer, it would be too late to approach their next preferred students since they would have accepted offers elsewhere. Students found that if they dallied in accepting an offer, the hospital would move on to the next student on their list. When the dust cleared, students would find that preferred hospitals would have accepted them, had they been prepared to wait for the hospitals to work their way down their priority list, and hospitals found that preferred students would have accepted their offers had they given them some time to decide.

Under pressure from hospitals and medical schools that had to bear the aggravation of participating in subsequent rounds, the window within which students were asked to convey their first choice was compressed over the next few years. The hope was that quick decisions in early rounds would lead to smoother market clearing overall. By 1949, the window had compressed to such an extent that offers were supposed to be communicated by telegram at 12:01 am on a set date and acceptances or rejections of the offers were to be communicated by 12 noon on the same date. Even then, there were numerous complaints of hospitals pressuring students to accept outstanding offers and students pressuring hospitals to move them from alternate (waitlisted) to confirmed status. In 1950, AAMC and American Hospital Association (AHA) jointly urged hospitals and students not to contact each other during the during that 12-hour window. The scramble to arrive at internship decisions only intensified the problem of mismatches.

Eventually, the medical profession recognized that the problems of mismatches and informal pressuring to make or accept offers could only be addressed by conducting automated matching of preferences. After a trial run in 1950-51, a centralized matching approach (following the deferred match algorithm) was introduced for 1951-52. Students and hospitals would continue to exchange information as before. Students would submit a rank-order preference of hospitals and the hospitals similarly would submit a rank-order of applicants, to a central bureau, which would use this information to match students to hospitals. The procedure was voluntary: students and hospitals could choose to go through this process or seek internship appointments on their own. This centralized matching approach survives to this day, with high levels of voluntary participation.

The law firm associate recruitment market is moving in small steps along the same path that the hospital interns market followed sixty years ago. The hospital interns market experienced considerable pain in the transition from an unraveled market to a flawed and unstable common offer date market before arriving at a stable and efficient centralized market. Does the legal profession have to duplicate all the suffering that the medical profession experienced? Or, can we learn from their experiences and circumvent the intermediate step in moving to an efficient and stable labor market?

New Associates Recruitment: Bring in the Matchmaker

4

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?

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