BIG LAW LEADERS PERPETUATING MISTAKES

In January 2014, the annual Georgetown/Peer Monitor “Report on the State of the Legal Market” urged law firm leaders to shun a “growth for growth’s sake” strategy. The year 2013 had been a record-setter in law firm mergers; lateral partner acquisitions were the centerpiece of what many big law firm leaders passed off as a “strategic plan.”

The Report offered this damning observation:

“In our view, much of the growth that has characterized the legal market in recent years… masks a bigger problem — the continuing failure of most firms to focus on strategic issues that are more important for their long-term success than the number of lawyers or offices they may have.”

Since then, the situation has deteriorated.

The Destabilizing Lateral Hiring Frenzy Continues

In 2015, there were more lateral moves in big law firms than at any time since 2009. Morgan, Lewis & Bockius’s mass hiring of 300 former Bingham Mccutcheon partners contributed significantly to the total, but the continuing lateral frenzy is evident. Was the 2014 Georgetown/Peer Monitor wrong? Has aggressive inorganic growth become a winning strategy?

The answers are No and No.

Those answers are not news, but a recent ALM Legal Intelligence analysis suggests that they still are correct. As MP McQueen reports in the February issue of The American Lawyer, “[The] study of 50 National Law Journal 350 firms conducted with Group Dewey Consulting of Davis, California, and released in November found that 30 percent of lateral partner hires delivered less than half their promised book of business after a complete year.”

The co-author of the report notes that lateral hiring is “the top growth strategy for many firms today but there is an incredible lack of empirical evidence as to whether laterals are achieving their promise.”

It’s actually worse than that. The evidence suggests that most lateral hires are disappointments to the firms that acquire them.

Cognitive Dissonance

The survey reported that 96 percent of respondents said that “hiring lateral lawyers with a client following” was “very important” or “moderately important” to their revenue growth strategy. In other words, virtually all firms continue to defy the Georgetown/Peer Monitor Report’s 2014 admonition.

But the survey respondents also said that only 49 percent of lateral hires delivered at least 75 percent of expected client billings. The other 50 percent did worse. Almost one-third of laterals delivered less than half of what they’d promised. And remember, those are anonymous, unaudited responses from the leaders who brought those laterals into the firm. The reality is far worse than they admit.

Likewise, as I’ve written previously, managing partners responding to the Hildebrandt/Citi 2015 Client Advisory’s confidential survey admitted that only about half of their lateral partners were break-even at best. As the Client Advisory reported:

“For all the popularity of growth through laterals, the success rate of a firm’s lateral strategy can be quite low. For the past few years, we have asked leaders of large firms to quantify the rate of success of the laterals they hired over the past five years. Each year, the proportion of laterals who they would describe as being above ‘break even’, by their own definition, has fallen. In 2014, the number was just 54 percent of laterals who had joined their firms during 2009-2013.” (Emphasis supplied)

That’s down from two years ago when managing partners self-reported to Citi/Hildebrandt a self-defined break-even or better rate of 60 percent.  At alarming speed, most big law leaders are running their firms backwards.

Costly Mistakes

The cultural impact of aggressive inorganic growth is not susceptible to measurement, so it gets ignored in the prevailing law-firm-as-a-business model. But there are plenty of recent examples of the potentially catastrophic costs. Just look at Howrey, Dewey, and Bingham McCutchen — three recent collapses on the heels of stunning lateral growth spurts.

“Nonsense,” big law leaders are telling themselves. “We’re not like those failed firms. They had unique problems. We’re special.” Sure you are. Things look great until it becomes apparent only too late that current partner profits are the only glue holding partners together. If money lured laterals into your firm, someone else’s more reliable money can lure them away.

But even in the not-so-long run, top-line growth through misguided lateral hiring produces bottom-line shrinkage. Laterals are expensive on the front end. On the back end, it can take years for the failure of financial expectations to become apparent. The ALI study estimates that lateral hiring misfires can reduce law firm profit margins by as much as 3 percent and profits per equity partner by 6 percent.

Why?

If lateral hiring is bad, why are so many firms committed to it as a growth strategy. One answer is that it’s not always bad. Some of my best friends are laterals. Their moves benefitted them and their new firms. In every one of those cases, culture was at least as important as money to the partners’ decisions to relocate and their new firms’ desire to recruit them.

But that doesn’t account for firms that continue to pursue aggressive inorganic growth as an unrestrained strategic policy. When the odds of success are no greater than the flip of a coin, confirmation bias displaces judgment that should be a key attribute of true leadership.

That leads to another explanation for the continuing lateral hiring frenzy: The opposite of leadership. Most managing partners relish the creation of ever-expanding empires over which they can preside. Having made more than enough money to feed their families for generations, now they’re feeding their egos.

Unfortunately, those appetites can be insatiable.

ANOTHER SHOT AT STUDENT LOAN DEBT

A recent Department of Education initiative has not attracted the public attention that it deserves. But it could have important implications for the federal loans that fuel higher education, including law schools. The Department seeks to create a framework for dealing with the thousands of students who recently filed “defense of repayment” claims.

The Wall Street Journal’s recent summary of the program could strike fear in the hearts of many law school deans and university administrators:

“In the past six months, 7,500 borrowers owing approximately $164 million have applied to have their student debt expunged under an obscure federal law that had been applied in only three instances before last year. The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as lying about their graduates’ earnings.”

But it could get even worse for the schools, as the Journal explains:

“Last week, the department began a months-long negotiation with representatives, schools and lenders to set clear rules, including when the department can go after institutions to claw back tuition money funded by student loans.”

Will the Department’s latest effort to impose meaningful accountability on institutions of higher education fare any better than predecessor techniques that have failed? There have been too many of those.

Lawsuits Haven’t Worked

Law schools have become poster children for the accountability problem and ineffectual efforts to solve it. In 2012 some recent alumni sued their law schools, but they didn’t get very far. The vast majority of courts threw out claims that the schools had misrepresented graduates’ employment opportunities. The winners on motions to dismiss or summary judgment included Thomas M. Cooley (now Western Michigan University Cooley School of Law), Florida Coastal, New York Law School (not to be confused with NYU), DePaul, IIT Chicago-Kent, and John Marshall (Chicago), among others.

Judge Melvin Schweitzer’s March 21, 2012 ruling in favor or New York Law School set a tone that other courts followed: Prospective students “seriously considering law school are a sophisticated subset of education consumers…” In other words, they should have known better. That might be true today, but at the time Judge Schweitzer wrote his opinion, he was wrong. So were the courts who followed his rationale to reach similar results. At a minimum, there were serious factual disputes concerning his conclusory assessment of an entire cohort of prelaw students.

In particular, the plaintiffs in the New York Law School case graduated between 2005 and 2010. Back in 2002 through 2007 — when those undergraduates were contemplating law school — NYLS claimed a 90 to 92 percent employment rate for its most recent graduating classes. But that stratospheric number resulted only because all law schools counted any job for purposes of classifying a graduate as “employed.” A part-time worker in a temporary non-JD-required position counted the same as an assistant U.S. attorney or a first-year associate in a big firm. Only after 2011 did the ABA finally require schools to provide meaningful data about their recent graduates’ actual employment results.

A notable exception to the dismissal of the cases against the law schools was one of the first-filed actions, Alaburda v. Thomas Jefferson School of Law, which is set for trial in March 2016. In that case, Judge Joel Pressman correctly found that a jury should decide the clearly disputed issues of fact. He got it right, but he’s an outlier.

The ABA and the AALS Haven’t Helped

Anyone expecting the profession to put its own house in order continues to wait. The changes requiring greater law school transparency in employment outcomes came about only because the public outcry became overwhelming and Congress threatened to involve itself. When political opposites such as Senators Dianne Feinstein (D-CA) and Chuck Grassley (R-IA) agree to gang up on you, it’s time to wake up.

Since then, the organization has returned to form as a model of regulatory capture. Twice in the last four years, it has punted on the problem of marginal law schools that survive on student loan debt. School that would have closed long ago if forced to operate in a real market continue to exist only because the legal education market is dysfunctional. That is, the suppliers — law schools — have no accountability for their product — far too many graduates who are unable to obtain full-time long-term JD-required employment after incurring the six-figure debt for their degrees.

And while we’re on the subject of regulatory capture, the current president of the AALS has now declared that there is no crisis in legal education. Her interview produced an article titled, “As Law Professors Convene, New Leader Looks to Unite the Profession.” Why all law schools should unite to protect marginal bottom-feeders exploiting the next generation of students remains a question that no one in the academic world is willing to ask, much less answer.

Now Comes the Fun Part

Ignoring problems does not make them go away. As the profession refuses to acknowledge a bad situation, it loses the opportunity to influence the discussion. Which takes us to the recent Department of Education activity relating to criteria for applying the burgeoning volume of “defense of repayment” applications.

Special interests are likely to resist meaningful change. From institutions of higher education to debt collectors who have made student loan debt collection a multi-billion dollar business, lobbyists will swamp the process. Still, attention seems assured for marginal schools exploiting a dysfunctional market. That’s a good thing.

As the disinfecting qualities of sunlight intensify, someday the ABA and the AALS may realize that an old adage is apt: If you’re not part of the solution, you’re part of the problem. Perhaps another round of bipartisan congressional interest will help them see the light.

A FIRM TO WATCH

Something worth watching could be happening at King & Wood Mallesons, one of the world’s largest law firms. It has an interesting history, a challenging present and, perhaps, an even more challenging future.

Past

Beijing-based King & Wood came into existence in 1993. If you look for photos or other information about either name partner, you won’t find them. Neither person ever existed. China doesn’t have U.S.-type ethics rules requiring that law firms carry the names of lawyers who work there (or did before retirement or death). The distinctly non-Chinese names are a branding exercise aimed at reaching a global audience.

In 2012, King & Wood merged with Australian-based Mallesons Stephen Jacques. In 2013, it added London-based SJ Berwin and now has 2,700 lawyers scattered across 30 offices around the world. It operates as a verein, meaning that the constituent firms are legally separate and don’t share profits. (Whether any verein is a real law firm is a subject for another day.)

Present

In July 2015, King & Wood Malleson’s Europe and the Middle East announced “rocketing” results.  Profits per equity partner had soared by 39 percent. During the year, the firm hired 15 lateral partners, including attorneys from Fried Frank, Linklaters, and Eversheds.

As London-based (and newly named) managing partner William Boss boasted, “This is an exciting time for our region….”

Maybe a bit too exciting, even for Boss.

Two days later, The Lawyer offered a potentially relevant footnote to the “rocketing” 39 percent jump in partner profits reported only two days earlier: “A number of insiders have questioned the large jump in PEP, attributing the growth to an exceptionally big and anomalous recovery for the firm on one piece of litigation.”

At about the same time, the firm revealed that it had completed its “partnership review” resulting in an almost 10 percent reduction in its London office equity ranks, according to The Lawyer. In addition, the firm lost some “big hitters.”

On January 15, 2016, William Boss resigned as managing partner — more than a year before his term was set to expire in May 2017. The firm said that he would remain in the position until April while the search for his replacement occurred.

Future

On January 20, The Lawyer reported that the firm had “launched a review of its capital contributions structure in order to ease cashflow, stop repeated delays to profit distributions and stem the flow of exits by ‘frustrated’ partners.”

What does that mean? Time will tell. But story in The Lawyer included these nuggets:

— “A number of sources close to KWM have accused the firm of withholding profit distributions over the last five years in order to keep up with tax bills, leading to a raft of senior exits last year.”

— “One source close to KWM said the firm had ‘only just’ paid out the full distributions due in August 2015, having previously paid just half the money owed in that quarter. Another said they had only been paid 25 per cent of their distributions for 2014/15, despite it being nine months into the financial year.”

— “Complaints about delayed profit payments follow a good year financially for the firm in the UK, Europe and Middle East, adding to the frustration of a number of partners, a source said. ‘It’s been a so-called record year for the firm but partners just aren’t getting paid,’ they added.”

— “The review could see its UK partners being asked to pay higher contributions to the firm in return for more units in the LLP.”

If the last item comes to pass, partners who write checks to the firm might want to understand exactly what they are buying and why.

THE CRISIS IN LEGAL EDUCATION IS OVER!

[NOTE: The trade paperback edition of my book, The Lawyer Bubble – A Profession in Crisis (Basic Books) — complete with an extensive new AFTERWORD — will be released on March 8, 2016. That’s just in time to put in proper perspective the latest annual rankings from U.S. News & World Report (law schools in mid-March) and Am Law (big firms on May 1). The paperback is now available for pre-order at Amazon and Barnes & Noble. Now on to today’s post…]

Wishful thinking is never a sound strategy for success.

“I don’t see legal education as being in crisis at all,” said Kellye Testy, the new president of the Association of American Law Schools and dean of the University of Washington Law School. She made the observation on January 5, 2016 — the eve of the nation’s largest gathering of law professors.

Perhaps her declaration made attendees more comfortable. Unfortunately, it’s not true.

The Trend! The Trend!

Law deans and professors cite the dramatic declines in applicants since 2010 as proof of law school market self-correction. Dean Testy echoed that approach: “I think there is a steadying out now after quite a crash in the number of students our schools are admitting….”

Two points about that comment. First, the decline in the number of applicants since 2010 is real, but that year may not be the best baseline from which to measure the significance of the drop in subsequent years. From 2005 to 2008, the number of applicants was already declining — from 99,000 to 83,000. But the Great Recession reversed that downward trend — moving the number back up to 88,000 by 2010 as many undergraduates viewed law school as a place to wait for three years while the economy improved.

Viewed over the entire decade that began in 2005, the “drop” since 2010 was from a temporarily inflated level. If the roughly four percent annual reduction that occurred from 2005 to 2008 had continued without interruption to 2014, the result would have been about 65,000 applicants for the fall of 2014, compared to the actual number of 56,000. That difference of 9,000 applicants doesn’t look like a “crash.”

A More Troubling Trend

Second and more importantly, many law schools solved their reduced applicant pool problem by increasing admission rates. Overall, law schools admitted almost 80 percent of applicants for the fall of 2014. Compare that to 2005 when the admission rate was only 59 percent.

During the same period, the number of applicants dropped by 40,000, but the number of admissions declined by only 12,000. Countering the impact of fewer applicants to keep tuition revenues flowing meant lowering admission standards. The ripple effects are now showing up in declining bar passage rates for first-time takers.

Student Enlightenment Interrupted

Transparency has given students access to data that should produce wiser decisions. Until the current application cycle, better information was contributing to the recent decline in the number of law school applicants. But the relentless promotional efforts of law school faculty and administrators may be interrupting that trend. Compared to last year, the number of applicants is up.

But law schools aren’t solely to blame. Responsibility for persistently dubious decisions also rests on those making them. A December 22 article in The Wall Street Journal, “U.S. Helps Shaky Colleges Cope with Bad Student Loans, includes this unfortunate example:

“Anthony C. Johns, 32 years old, regrets accumulating $40,000 in debt while attending Texas College, a private college in Tyler. He says he graduated in 2007 with an English degree but couldn’t land a full-time job.

“‘I think I applied for everything on CareerBuilder from teaching to banking,’ says Mr. Johns, who has defaulted on his Texas College loans. ‘Default was very embarrassing.’ Since then, he has enrolled in law school and borrowed $30,000 to pay for his first year.'”

The emphasis is mine.

The Biggest Problems Remain

According to LinkedIn, someone named Anthony C. Johns graduated from Texas College in 2007 and is currently a student at the Charlotte School of Law. That’s one of the Infilaw consortium of three for-profit law schools — Charlotte, Arizona Summit, and Florida Coastal. Owned by private equity interests, the Infilaw schools — like many others — survive only because unrestricted federal student loans come with no mechanism that holds schools accountable for graduates’ poor employment outcomes.

Ten months after graduation, Charlotte School of Law’s full-time long-term bar passage-required placement rate for 2014 graduates was 34 percent. The average law school loan debt of its 2014 graduates was $140,000. If Anthony Johns regretted accumulating $40,000 in college debt, wait until he’s taken a retrospective look at law school.

You Be The Judge

Perhaps Dean Testy is right and there is no crisis in legal education. Or perhaps it depends on the definition of crisis and how to measure it. When a problem gets personal, it feels different.

Since 2011 when the ABA first required law schools to report the types of employment their graduates obtained, over 40 percent of all graduates have been unable to find full-time long-term employment requiring bar passage within ten months of receiving their degrees.

Now let’s make those numbers a bit more personal. Saddled with six-figure law school debt, many recent law graduates might consider crisis exactly the right word to describe their situation. Where you stand depends on where you sit.

MY DAUGHTER NEVER GIVES UP

Those who have been following my personal health challenge over the past year might find my daughter’s most recent appearance on KTVU in San Francisco interesting. Here’s the link: https://www.youtube.com/watch?v=cUm2FZMYF1U&feature=youtu.be&app=desktop

And yes, we are still working on the book documenting my family’s journey with me through our dysfunctional medical system.

“BRIDGEGATE” TAKES A STRANGE TURN

Chief Justice John Roberts’ annual report on the state the federal judiciary reminds lawyers of their obligations to “avoid antagonistic tactics, wasteful procedural maneuvering, and teetering brinksmanship.” I wonder what he thinks of the “tactics, maneuvering, and brinksmanship” surrounding the latest chapter of “Bridgegate.”

Four Days in September

In 2013, the mayor of Fort Lee, New Jersey refused to endorse Governor Chris Christie’s re-election campaign. In apparent retribution, Christie’s deputy chief of staff Bridget Anne Kelly sent an email to David Wildstein, Christie’s appointee at the Port Authority of New York and New Jersey.

“Time for some traffic problems in Fort Lee,” Kelly wrote on August 13.

“Got it,” Wildstein replied.

On Friday, September 7, Wildstein followed-up: “I will call you Monday AM to let you know how Fort Lee goes.”

Everyone knows how Fort Lee went on Monday, September 10. The Port Authority closed two of three local access lanes on the upper level of the George Washington Bridge. Four days of gridlock near the town continued until September 13, when the Authority’s executive director (a Governor Andrew Cuomo appointee) ordered the lanes reopened.

Getting Ahead of One Story

Several months later, the Kelly-Wildstein emails surfaced. Immediately, Republican presidential hopeful Christie did the fashionable thing: nip a growing scandal in the bud by hiring a respected outside lawyer to conduct an internal investigation. He chose Randy Mastro, former chief of staff to New York City Mayor Rudy Giuliani. According to the firm’s website, Mastro is a partner and member of the management and executive committees at Gibson, Dunn & Crutcher, current winner of The American Lawyer’s biennial “Litigation Department of the Year” contest.

Christie promised that Mastro would “bring an outside, third-party perspective to the situation” with a “thorough” and “efficient” internal investigation. Gibson Dunn certainly had the firepower to accomplish that mission. Its Bridgegate team included five former federal prosecutors with “experience in internal investigations and criminal cases.” The state of New Jersey picked up Gibson Dunn’s tab. For the first three weeks of work, it charged $1.1 million.

Just two months after the investigation began, Mastro released Gibson Dunn’s final report and provided final witness summaries to the U.S. attorney and the New Jersey Legislative Select Committee on Investigations. The report exonerated Christie.

The New York Times described the ensuing press conference: “The former federal prosecutor who led the internal inquiry, Randy M. Mastro, frequently sounded like a defense lawyer making his case to a jury. He referred to Ms. Kelly as a liar, cast doubt on the credibility of the mayor of Hoboken, who accused the Christie administration of political intimidation, and slipped into lawyerly exhortations to the ‘ladies and gentlemen’ sitting before him.”

While Creating Another Story

On May 1, 2015, Wildstein agreed to plead guilty and cooperate with the government’s prosecution of Kelly and Port Authority deputy executive director William Baroni, Jr., both of whom were indicted. On May 27, lawyers for Kelly and Baroni sought court permission to issue subpoenas to Gibson Dunn for any notes, transcripts, and records that the firm had in connection with its investigation and report. Over Gibson Dunn’s objection, the court granted the motion.

After the subpoenas went out, Gibson Dunn objected again. It also responded that no such notes or recordings existed — none — and moved to quash the subpoenas as moot.

Defendants’ exasperated lawyers complained, “Gibson Dunn claims that it billed New Jersey taxpayers nearly $10 million but not a single lawyer took a single note during 75 interviews in the most high-profile political case in recent years.” (The court noted that the actual amount billed seemed to be about $8 million.)

The Court Was Not Amused

On December 16, 2015, Judge Susan Wigenton — a George W. Bush appointee — sympathized with the defendants’ frustration. She also explained what troubled her about Gibson Dunn’s position.

“Attorneys are trained to scrupulously document information when conducting internal investigations, including taking and preserving contemporaneous notes of witness interviews,” the court wrote in a ten-page opinion. “In the past, Gibson Dunn has done exactly that.”

But not for Bridgegate. Judge Wigenton chided the firm for “intentionally changing its approach in this investigation.” In particular, the affidavit of Gibson Dunn partner Alexander Southwell confirmed, “[W[itness interviews were summarized electronically by one attorney and then edited electronically into a single electronic file.”

The judge described the significance of that technique: “The practical effect of this unorthodox approach was to assure that contemporaneous notes of the witness interviews and draft summaries would not be preserved. Rather, they would be overwritten during the creation of the revised and edited final summary.”

Noting that the firm didn’t delete or shred documents, the judge observed that “the process of overwriting their witness notes and drafts of the summaries had the same effect.”

“This was a clever tactic,” Judge Wigenton continued, “but when public investigations are involved, straightforward lawyering is superior to calculated strategy. The taxpayers of the State of New Jersey paid Gibson Dunn millions of dollars to conduct a transparent and thorough investigation. What they got instead was opacity and gamesmanship.”

Gibson Dunn argued that defendants’ underlying motion was a “fishing expedition” and “a waste of time and judicial resources.” Defendants were “targeting a law firm’s work product, already knowing that most of what they seek does not exist…”

Nevertheless, what the court characterized as gamesmanship worked. The firm had no documents to produce, so the court granted Gibson Dunn’s motion to quash.

One More Thing…

The latest twist in the Bridgegate tale involves Debra Wong Yang, whom President George W. Bush appointed as U.S. attorney for the central district of California in 2002. In November 2006, Yang left the bench to become a partner at Gibson Dunn & Crutcher. The firm’s website notes that she works out of the Los Angeles office and has served as a member of the firm’s executive and management committees.

In a glowing introduction of Governor Christie as the keynote speaker at an event on June 9, 2011, Yang described him as her “very good friend” whom she had “known for ten years” — going all the way back to their time together as federal prosecutors. She said Christie was “the real deal” and “doing a remarkable job as governor.”

When Christie took the stage, he described how their families once vacationed together at the game ranch of a fellow U.S. attorney in Texas. “We are good and dear friends,” Christie said of Yang.

Fast-forward to Bridgegate

Here’s a summary of interesting events that followed:

—  According to the The New York Times’ review of Gibson Dunn billing records, two days after Christie hired the firm to investigate Bridgegate in January 2014, “Debra Wong Yang, a Gibson Dunn partner in California and a personal friend of of Mr. Christie’s, spent time in ‘meeting with client’ – Mr. Christie and his top lawyer in the governor’s office.”

— Gibson Dunn’s army of former federal prosecutors — including Yang — departed from the usual documentation process so that when the firm completed the investigation, no notes, transcripts or recordings of interviews existed beyond the final summaries provided to federal and state investigators.

— After Gibson Dunn’s report exonerated Christie, the firm continued working at taxpayer expense. According to the Times, it billed the state of New Jersey a total of $8 million from January 2014 through August 2015 “for the continuing defense of the governor.”

— Wholly apart from the dispute over what turned out to be Gibson Dunn’s non-existent internal documents relating to its investigation, on November 11, 2015 attorneys for Kelly and Baroni filed additional motions. They asked the court to direct the government to take a closer look at the adequacy of Gibson Dunn’s earlier document productions to the federal grand jury. Claiming that prosecutors should have challenged the firm’s disorganized and inadequate discovery responses, Baroni’s motion levels this accusation: “The government has given Gibson Dunn free reign to withhold and redact documents as that firm sees fit, as well as to produce documents in an abominable format.”

— Finally, according to the Timesin December 2015 Debra Wong Yang “co-hosted a $2,700-per-person fund-raiser in Los Angeles for Christie’s Republican presidential campaign.”

In an exclusive interview hours after Mastro released Gibson Dunn’s March 2014 report, the governor told ABC’s Diane Sawyer, “Sometimes people do inexplicably stupid things.”

Then again, sometimes things may not be as stupid as they first seem.

BIG LAW’S SHORT-TERMISM PROBLEM

Recently, the New York Times devoted a special section of “Dealbook” to short-termism. Big law firms made a prominent appearance in an article focusing on leadership transition. Citing statistics at the managing partner level, the Times reports that only three percent of law firm managing partners are under age 50. Twelve percent are over 70. Almost half are between 60 and 70.

The Tip of the Graying Iceberg

The core problem of transition runs deeper than a single demographic data point about the age of those at the top of the big law pyramid. The developing crisis goes far beyond the question of who the next managing partner will be.

At most firms, aging partners at all partnership levels are hanging on to clients and billings. For them, it’s a matter of survival. Except for lock-step firms, equity partners “eat what they kill” — that is, their closely guarded silos of clients and billings determine their annual compensation.

In that culture, hoarding becomes essential to preserving annual compensation that partners come to regard as rightfully theirs — and theirs alone. Stated in language that many senior partners use in criticizing today’s young attorneys, these aging lawyers have developed a wrong-headed sense of entitlement.

The fact that they’re making far more than they dreamed of earning in law school doesn’t matter to them. Neither does the fact that they are compromising the future of their firms. But their short-term gains could become the institution’s long run catastrophe.

See the Problem

Surveys confirm that law firm leaders recognize the resulting problem. Seven years ago, Altman Weil issued the first of its annual “Law Firms in Transition” series. Since then, the survey has documented a fundamental failure of leadership on this issue.

For example, in the 2011 survey, Altman Weil asked firm leaders to name the areas in which they had the greatest concerns about their firms’ preparedness for change: “The top issue, identified by 47% of all firms, was the retirement and succession of Baby Boom lawyers in their law firms.”

In the 2012 survey, 70 percent of managing partners had “moderate” or “high” concern about client transition as senior partners retire. On a scale of one (no concern) to ten (extreme concern), the median score was seven.

In the 2013 survey, only 27 percent of managing partners reported that they had a formal succession planning process in place.

Ignore the Problem

How have these leaders responded to what they have identified for years as the most pressing long-term problem facing their firms? Poorly.

The 2015 survey observes, “In 63% of law firms, partners aged 60 or older control at least one quarter of total firm revenue, but only 31% of law firms have a formal succession planning process.”

There’s a reason that law firm leaders balk at meaningful transition planning. It requires them to accept the fact that they won’t run their firms forever. But contemplating one’s own mortality can be unpleasant.

It also requires them to rethink their missions. Leadership is not about maximizing this year’s partner profits or pursuing growth for the sake of growth to create illusory empires over which a dictator can preside. It requires a willingness to create incentive structures that encourage long-term institutional stability.

Toward that end, lofty aspirations are easier to state than to achieve. But here are a few governing principles:

— Client service should be central to everything a law firm does.

— Partner cooperation should trump partner competition.

— Clients and billings should flow seamlessly to the next generation while allowing aging partners to retain a sense of self-worth as firms encourage them to prepare for their “second acts,” whatever they may be.

— The culture of a firm should encourage partners to sacrifice some short-term financial self-interest in the effort to leave the firm better than they found it — just as their mentors did for most of them.

Become the Problem

The most creative leaders understand that all of this means thinking outside the conventional billable hour box that remains central to the short-term growth and profit-maximizing mindset. In that respect, the contrast between the absence of true leadership and clients’ desires is striking.

Since 2009, Altman Weil has done an annual survey of corporate chief legal officers, too. The survey asks the CLOs: “How serious are law firms about changing their legal service delivery model to provide greater value to clients?”

The responses are on a scale of one (not at all serious) to ten (doing everything they can), Every year since the survey began, the median score has been three. Three out of ten. Stated differently, as far as clients are concerned, their outside lawyers have little interest in responding to demands for change.

Likewise, LexisNexis/Counsel Link’s most recent semi-annual report analyzing six key metrics confirms the impact of short-termism:

— Clients want alternative fee arrangements. AFAs account for only seven percent of all billings.

— Clients want relief from high hourly rates. For the trailing 12-month period ending on June 30, 2015, big firms of more than 750 attorneys had a median partner billing rate of $711 an hour — up 6 percent from the period ending on December 31, 2014. (For firms of 501-750 lawyers the median hourly rate during the same period increased by only $5 an hour.)

The Future Is Here

As big firm leaders drag their feet, clients aren’t waiting for them. They have figured out that the biggest of big law premiums isn’t always worth it. An October 2013 study of $10 billion in client fee invoices by LexisNexis/Counsel Link concluded the “large enough” firms of 201-500 lawyers are eating into the market share of firms with more than 750 lawyers.

From 2010 to 2013, the biggest firms saw their market share drop from 26 percent to 22 percent. Meanwhile, the market share of the “large enough” firms increased from 18 to 22 percent. For high-fee matters totaling $1 million or more, the shift was even more dramatic: “large enough” firms increased their market share from 22 to 41 percent.

Anyone believing that most big law firm leaders are long-term thinkers preparing their firms for a challenging future is ignoring the actual behavior of those leaders. Most of them are focused on getting rich today. That’s not a strategy for success tomorrow.