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The “Blue Ocean” for Law Schools

During the five years of the decline in JD applications, law schools have moved from self-defense to increased innovation and even restructuring. Within this emerging paradigm, Andy Morriss’ Liberty Forum essay offers some reason for optimism.

Originally, when JD applications shrank and criticism grew, and the JD job market declined, law schools defended their traditional student-value proposition.

Faced with media criticism—not all of which was well-informed—law schools mostly stood by their customary curriculum and pedagogy. Some bloggers blamed the academy’s problems on the non-prestige schools, which amounted to an even stronger defense of the status quo. When even President Obama weighed in, to recommend that the JD be reduced to just two years of study, law schools essentially were left to defend two-thirds of what we do and who we are.

The law school defense, however, was unheeded by those considering a legal education. JD applications have now fallen to 40-year lows. We have come to acknowledge that the multiple-year historic downturn represents the “new normal.”

Now comes Dean Morriss to offer some new thinking about this state of affairs. He opines that hope lies ahead. To his credit, rather than blindly praising the traditional model, or out of institutional self-interest, advocating a specific new model, Morriss is objective about the market and legal education’s strengths and weaknesses. He’s more an economist, interested in data, than a philosopher.

His overriding admissions metric—that law schools today are recruiting the same number of applicants as were recruited back in 1974—is a compelling starting point for his essay. There are 204 American Bar Association-approved law schools today, 50 more than than there were 40 years ago, with a comparable applicant pool. There are many more seats today than interested students.

It may seem obvious, but is worth describing, why the JD decline has so heavily affected law schools. I will first put Morriss’ starting point into the context of law school business modeling.

The traditional law school business model has suffered from the absence of diversified revenue sources from which to operate. Most schools were doing just fine as JD-providers when their degree was in great demand. As with non-educational enterprises during the good times, there was no urgency to expanding what they did.

Importantly, law schools function more like mini-colleges than university departments; their autonomy and operational completeness come from having separate ABA accreditation. As such, law schools need not only an educational mission, but a business model to support their infrastructure.

Any business plan that depends on one “product”—here, the traditional JD—will falter or fail when the market demand for the product is cut in half. If a literature department loses students, the chair can reduce her variable expenses or decide not to fill a staff position when it becomes vacant. Literature departments don’t have their own libraries, IT services, admissions offices, advancement offices, academic support, or career services operations. Law schools, on the other hand, must fund all of that infrastructure. If a law school’s JD population is smaller by 40 or 50 percent, or even just 20 percent, the school faces trouble.

JD tuition has been the primary, if not the dominating or even exclusive, revenue source for the vast majority of law schools. As with a law firm that loses a major client’s work, or a farmer whose primary crop falls out of favor with dietary trends, the traditional law school strategy of adding JD seats and increasing JD tuition well beyond the Consumer Price Index does not work when market demand crashes.

This dilemma is faced by private and public law schools alike. At private universities, not only has JD tuition supported law school operations, but the law schools have historically been charged “overhead” by the parent institution–an amount exceeding the value of the central services provided. This surplus has helped universities fund other departments (like literature). Campuses set tuition higher for the JD degree, adding to the amount that is over-headed, on the backs of law students.

When I handled the finances portion of about 15 ABA site inspections, more than once I heard CFOs on tax-exempt campuses refer to law schools as “cash cows.” It’s a fact that non-state law schools historically have run surpluses, whatever the school’s tax status.

At public law schools, in periods when state governments slashed higher education budgets, JD tuition became the dominant revenue stream that it was at private schools. Tuition increases on law students replaced subsidies from taxpayers. In the past, the tax shortfalls were cyclical, but today state budgets cuts for higher education are permanent.

Rankings-conscious state schools, like their non-state counterparts, started discounting the heightened tuition for students with the highest admissions predictors. To offset these discounts, schools set their JD sticker price even higher for the rest of the student body; the tuition increase added to the burden of lower income students and hurt student diversity.

When the traditional application base fell precipitously for all law schools, admissions committees had the option to enroll lower-predictor JD students than they had admitted before. But the national rankings got in the way of that strategy. Enrolling lower LSAT and UGPA students, as Morriss points out, hurts a law school’s ranking in one of the key metrics that it can control.

Since the ABA and U.S. News and World Report rankings count predictors only for first-year JD students, the phenomenon of admitting large numbers of transfer students took hold. Schools could retain an exclusive, if smaller, first year class if they could backfill their budgets with the tuition paid by second- and third-year students. Yet as JD applications plummeted further, even the transfer student strategy had limits. In states like Ohio and North Carolina, with nearly 10 schools each, there simply weren’t enough JD applications to go around. To be sure, lower-predictor first-year students can succeed as law students, but they require additional academic support and faculty mentoring.

Inevitably, the entering JD classes at most law schools shrank. They shrank much more than the cost-cutting that was available in budgets made up of mostly fixed costs. On the traditional law school profit-and-loss calculation, if JD revenue was significantly down on the top line, and 80 to 90 percent of expenses were fixed, the bottom line could not look good.

Apart from JD revenue, have there been other resources available to law schools? First, occasionally, law schools have sought federal grants. But federal grants do not really help a law school’s operating budget, since the federal funding is earmarked for special purposes. It doesn’t fill a budget gap. A federal grant can help establish something new or expanded at a law school, but most federal grants are short-term. They are seed money. After a few years, even terrific new programs place new demands on budgets.

Secondly, fundraising can augment a law school budget. Unrestricted gifts, however, normally are small. It is work- and staff-intensive to raise sufficient unrestricted gifts to plug budget gaps. Large, endowed gifts take a lot of a dean’s time, but they are restricted in usage and limited to spending a small percentage of interest income. (For example, a $1 million chair endowment may generate just $50,000 in spendable income toward a senior professor’s salary, benefits, and support. At least until an endowment has time to grow through investments and compound interest, it would take five or six $1million endowed chairs fully to support one chair-holder. (Benefits that correspond to a salary source must also be paid from that source.)

Framed in this way, the JD-dominated law school model should not give Morriss or anyone great hope, with JD applications cut in half. We can refer to the prevailing law school model as a classic “red ocean” strategy, in which all the sharks circle the same fish: In our context, 50 additional schools troll the 1974 volume of JD applications. Even if JD applications eventually increase, as Morriss points out, the decrease in graduating high school students will throw cold water on any recovery. (See W. Chan Kim and Renée Mauborgne’s 2005 book, Blue Ocean Strategy.)

Morriss is, nevertheless, optimistic about the future of legal education. He thinks the crisis will increase competition among schools, rendering three improvements: lower tuition; increased attention to educational quality; and more diverse legal education methodologies.

He is right that increased competition already has lowered tuition, including through discounted tuition and tuition guarantees to students. That trend will help with student debt. Yet if law schools reduce the pricing point of their primary product, it will take more, not fewer, students to meet budget. Lower tuition will not, in isolation, help law schools to survive.

The ABA is encouraging more legal education innovation. Its Section of Legal Education has the right leader in Barry Courier to support innovation; he is a former dean of an online law school. The recent ABA variance granted to William Mitchell for a hybrid program is the most significant, if not radical, experiment ever approved by the ABA.

It may be self-serving for me to say so, given my current vocation, but high-quality online education will play a more essential role in the future of legal education than Morriss indicates. Disruptive technologies can drive badly-needed new JD and non-JD revenue streams; technology can customize education for the needs of particular JDs, LLMs, and JMs; and online education can make legal education more inclusive and diverse. Trolling the seas for non-JDs can represent a “blue ocean” strategy for law schools. When I deaned, our online LLM programs provided significant revenues for the JD program. Rather than threaten our mission, online education enhanced what we did. Whether filling budget gaps or contributing new dollars, the blue ocean of non-JD revenue represents the kind of optimism Morriss foresees. (Again, see Kim and Mauborgne.)

New revenue programs, however, should do more than just put non-JD students into JD courses. Non-JD programs should meet the needs and goals of the specific masters students. Inclusivity and customization are hallmarks of online delivery platforms.

Finally, drawing upon previous scholarship, Morriss forecasts future law schools playing different roles: academic, mass market, specialty, and alternative legal services.

A focus on mission differentiation was needed even before the downturn. Homogeneous missions is linked to the lack of revenue diversification described above. The ABA must take some responsibility for the overlapping missions and curricula of law schools; even newer schools feel the pressure to conform to standards that will ensure their accreditation. By the time it is granted, there are institutional legacies that impede innovation and mission differentiation. ABA variances are not granted often, and when they are, they are restricted in scope; the variance process has lacked transparency.

Online education could play an inclusive “mass-market” role without hurting scholarship-oriented faculties. Indeed, different faculties, utilizing different or blended platforms, may do their jobs even better if they can focus on what they do best. Mission differentiation would diversify the JDs they award. In the new environment, part of a school’s brand should include subject-matter differentiation, and specialization is critical to driving non-JD revenues with LLM and Masters programs.

Perhaps the most unique new role for law schools will be to train non-JD legal professionals, such as Washington’s Limited Legal Technicians. LLTs are the legal profession’s counterpart to the medical profession’s nurse practitioners or physician assistants. The growth of non-lawyer professionals seems inevitable in satisfying the legal needs of people of modest income and of small businesses. Law schools can diversify their own revenue streams with LLT education and, in so doing, can partner with the profession in widening the access to justice.

Like Dean Morriss, I am an optimist about legal education. Yet its business model must evolve beyond campus JD programs. Legal education must diversify and update its educational “products” in scope and innovative delivery. Mission differentiation, specialization, student-centeredness, inclusivity, and creativity will be essential elements in the recovery and prosperity of the legal academy.

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