ALONG CAME LAW FIRM MANAGEMENT CONSULTANTS

In the final analysis, Biglaw leaders have only themselves to blame, but they didn’t stumble into the world of misguided metrics on their own. They paid outside experts to guide the way — and they’re still doing it.

Thirty years ago, few undergraduates went to law school because they thought that a legal career would make them rich. For example, most students at Harvard with that ambition were on the other side of the Charles getting MBAs; the river formed a kind of natural barrier. The law was something special — a noble profession — or so most of us believed.

Particularly in large firms, nobility has yielded to business school-type metrics that focus on short-term profits-per-partner. The resulting impact on the internal fabric of such firms is depicted in my legal thriller, The Partnership (http://www.amazon.com/Partnership-Novel-Steven-J-Harper/dp/0984369104/ref=sr_1_1?ie=UTF8&s=books&qid=1273000077&sr=1-1) But other collateral damage includes the decline of mentoring that produced great lawyers in my baby boomer generation. (See my article, “Where Have All The Mentors Gone?” - http://amlawdaily.typepad.com/amlawdaily/2010/07/harpermentors.html).

Among the reactions to my mentoring observations was this:

“I am particularly intrigued by your reference to the role modern legal consulting firms have played in the demise of law as a profession. This is worthy of a blog post in and of itself and I look forward to it.”

I discussed this subject in an earlier post, but it’s worth another look.

Hildebrandt Baker Robbins is the successor to Hildebrandt, Inc., one of the early pioneers in what became a cottage industry: law firm management consulting. The company’s 2010 Client Advisory includes this line:

“In our view, one of the serious misuses of metrics in the past few years has been the overreliance on profits per equity partner as the defining index of a firm’s value and quality.”  (http://www.hildebrandt.com/2010ClientAdvisory)

Really? Who encouraged the use of this ubiquitous metric on which Hildebrandt has now soured? As Dana Carvey’s church lady character might say, “Could it be….Hildebrandt?”

Of course, it wasn’t alone. When The American Lawyer published its first ranking of the Am Law 50  (now  grown to 100) in 1985, what was once off limits in polite company – how much money a person made — became an open and notorious measuring stick of law firm performance: average profits per partner. Greed became respectable as inherently competitive firm leaders began teaching to the Am Law test so they could gain or retain position in its annual listing.

When the 1990-1991 recession rattled a much smaller version of what is now called biglaw, the National Law Journal’s annual survey of the largest 250 firms in 1991 quoted Bradford Hildebrandt, who 16 years earlier had founded the company bearing his name:

“In most firms, current management has never operated within a recession and didn’t know how to deal with it…” (“The NLJ 250: Annual Survey of the Nation’s Largest Law Firms — Overview — The Boom Abates,” The National Law Journal, September 30, 1991 (Vol. 14, No. 4))

So who could save us from ourselves? As they watched profits slide, worried law firm leaders turned to Hildebrandt and other experts who could assist in bringing business school principles and MBA-type metrics to their big firms. By 1996, Mr. Hildebrandt himself had diagnosed the situation and offered his remedy in that year’s NLJ 250 issue:

“The real problem of the 1980s was the lax admissions standards of associates of all firms to partnership. The way to fix that now is to make it harder to become a partner. The associate track is longer and more difficult, and you have a very big movement to two-tiered structured partnership.” (“The NLJ 250 Annual Survey of the Nation’s Largest Law Firms: A Special Supplement — More Lawyers Than Ever In 250 Largest Firms,” The National Law Journal, September 30, 1996 (Vol. 19, No. 5))

With such cheerleaders at their sides, senior partners focused on the three legs supporting the PEP (profits per equity partner) stool: billings, billable hours, and associate/partner leverage ratios.

Hourly rates marched skyward — even during recessions — increasing an average of 6% to 8% annually from 1998 to 2007. Billable hours targets likewise rose. Yet talented attorneys who would have advanced to equity partner a decade earlier received their walking papers as firms increased leverage ratios, which doubled between 1985 and 2010 for the Am Law 50. (http://amlawdaily.typepad.com/amlawdaily/2010/05/classof1985.html) With a few sharp turns of the costs screw, the game was won.

The results were mixed. For equity partners in the Am Law 100, average profits soared to more than $1 million annually — and rose during the Great Recession. Yet today, attorneys in big firms have become the law’s most dissatisfied workers – even though lawyers as a group were already leading most occupations in that unpleasant race.

The law firm as collection of men and women bound together in common pursuit of a noble profession yielded to an MBA mentality that relied on business school metrics to produce more dollars — the new measure of individual status and firm success. Valued partners who wouldn’t have considered leaving in earlier times began to follow the money — eroding concepts of loyalty and shared mission that created a firm’s identity over generations.

Oh, what a mistake, Hildebrandt now urges — not unlike Harvard’s new business school dean who looks hopefully (but in vain) to the law as an alternative model that might restore integrity to that world. (See my earlier article, “The MBA Mentality Rethnks Itself?” — http://amlawdaily.typepad.com/amlawdaily/2010/05/harper1.html)

What does Hildebrandt now propose to replace profits per equity partner as the key measure of overall firm performance? Profits per employee. But it simultaneously suggests that client satisfaction ratings should replace billable hours while employee satisfaction ratings supplant leverage.

Is your head spinning over the interplay among these complicated and confusing new metrics? Hildebrandt has the answer:

“As always, we stand ready to assist our clients in negotiating through these new and uncertain waters.”

How comforting.

THE INTRACTABLE BILLABLE HOUR

It’s been heralded as a revolutionary development, but it’s a red herring.

Drinker Biddle recently announced the appointment of a new Chief Value Officer. (http://www.law.com/jsp/article.jsp?id=1202466268769) According to one report, it’s the product of the Association of Corporate Counsel’s Value Challenge Initiative encouraging firms to look beyond the billable hour model and focus on efficiency, alternative fee arrangements, and leaner staffing.

A law firm management consultant called the move “brilliant…a real culture shift…a business model shift.”

Oh, please. This supposedly breakthrough position hasn’t even gone to a lawyer, much less a firm leader. Over the past decade, Drinker’s new CVO has been a law firm marketing director for four different law firms.

How can such a person bring about the end of the billable hour? She can’t and she won’t. But it’s not her fault.

With every recession, the billable hour takes another public relations hit and law firm leaders scramble to appear responsive. Regularly over the past 20 years, optimists have declared its imminent demise. Clients detest its perverse rewards for inefficiency; associates crumble under the pressure of ever-increasing annual requirements. Even perceptive biglaw partners acknowledge the toll it has taken on the culture of their firms and the nature of the profession.

Yet it survives because it has powerful defenders, including the Supreme Court’s conservative five-man majority. Yes, the obstacles facing those seeking better days are that formidable.

The lawyers in Perdue v. Kenny A sued on behalf of children in Georgia’s state-run foster care program. After eight years, the trial court awarded attorneys fees under the federal statute permitting winning plaintiffs to recover from the losers in such cases. In its April 2010 ruling, the Supreme Court adopted a rule that, ultimately, will reduce that monetary award by several million dollars. (http://www.supremecourt.gov/opinions/09pdf/08-970.pdf)

Writing for the majority, Justice Alito took offense at the suggestion that the prevailing civil rights lawyers should “earn as much as the attorneys at some of the richest law firms in the country.” I guess he thinks that’s a bad thing.

Importantly, the Court rejected the argument “that departures from hourly billing are becoming more common.” It noted that “if hourly billing becomes unusual, an alternative to the lodestar method [hours worked times billing rate] may have to be found. However, neither the respondents nor their amici contend that that day has arrived.”

But now how will that day ever arrive? In 1983, the Court first adopted the lodestar calculation as a useful starting point for fee awards. Now, its first significant ruling on the issue in almost 30 years has stripped away almost everything but the lodestar in determing a lawyer’s appropriate compensation level.

Where’s the room for practitioners to experiment away from hourly billing? Nowhere to be found in the majority opinion. In fact, the Court’s analysis extends beyond civil rights cases to “virtually identical language in many of the federal fee-shifting statutes.” It will influence any federal court evaluating any kind of fee request – fee-shifting or not, including bankruptcy petitions. State courts will continue to use the lodestar approach in probate, divorce, and other proceedings.

As a result, lawyers maximizing their chances for court approval of their fees will adhere to hourly billing. Innovators experiment at their peril because, depending on the type of matter, they risk not getting paid. The Supreme Court’s imprimatur on the billable hour regime creates a perpetual loop that won’t help the profession jettison it.

But here’s the really bad news. Even if: 1) clients succeed in their current efforts to promote alternative fee arrangements in purely private matters, and 2) the Supreme Court revises its position somewhere down the road, the worst aspects of the billable hour system will continue to haunt biglaw.

Here’s why. Accounting for the time that lawyers and other billers work during the day is firmly embedded into firms’ data collection systems. Those systems won’t disappear; neither will the resulting internal reports used to conduct annual reviews. Freeing clients of the billable hour yoke won’t change lawyers’ lives — unless it makes them worse.

It’s already happening. Even today, a client’s agreement to a fixed fee arrangement doesn’t relieve the attorneys working on the matter from logging their time. The fact that a special fee client doesn’t get an hourly rate-based bill doesn’t matter to  reviewers. For them, the relevant metric remains the total number of hours spent serving firm clients. It’s a common denominator used to compare and evaluate associates (and partners).

So even when their time doesn’t result in a direct client charge at an hourly rate, attorneys continue to feel the heat of the billable time metric: “Keep your hours up.”

In fact, another metric – client billings — can make some  alternative fee regimes even worse. Senior partners compare time actually spent on fixed fee matters to budgets they developed when negotiating the arrangements in the first place. When an associate or younger partner’s actual time exceeds what the senior partner had assumed, the junior attorneys sometimes feel pressure to record less time, appear more efficient, and render the matter more profitable.

In other words, eliminating hourly fees can cause younger attorneys to work more hours than they report to the system.

How will a real Chief Value Officer handle that one? Not in a way that makes affected lawyers feel better. After all, there’s still no metric for attorney well-being.

BLAGO, CLEMENS, AND LAWYERS

Advising a client to do something he or she wants to do is easy. Giving  counsel that contradicts a professed desire is a lot tougher.

When Ed Genson, one of Chicago’s top criminal defense lawyers, resigned his representation of Rod Blagojevich in January 2009, he said:

“I have been practicing law for 44 years. I never require a client to do what I say, but I do require them to at least listen to what I say…I intend to withdraw as counsel in this case. And I wish the governor good luck and Godspeed.”  ( http://www.nbcchicago.com/news/local-beat/genson-quits-blagojevich-criminal-case-012309.html#ixzz0x9jPaEpt)

At the time, Blago had just begun what became his protracted media blitz. He hadn’t yet learned the self-described lesson of his sobering guilty verdict: “I talk too much.”  Although Genson didn’t elaborate on the reasons for abandoning his leading role as defense counsel in a high-profile case, it’s fair to assume that his inability to prevent Rod from using  television, radio, and a book tour to proclaim his innocence was an important factor.

Uncontrollable clients get their lawyers and themselves into trouble. I sometimes brought clients back to reality with a simple statement: “People brighter than you are in prisons all over America because they thought they were too smart to get caught.”

Which takes us to Roger Clemens. When persuasion alone doesn’t deter a self-destructive client, a lawyer’s options are limited. Sometimes a threatened resignation reins them in; at other times, even following through on the threat doesn’t.

Then again, there’s the possibility that the attorney blew it. I can’t say that Clemens’s lawyers gave him bad advice because, like the rest of us, I’ll never know what that advice was. But the chronology of the events leading to his recent indictment for lying to Congress raises interesting questions.

The story began in December 2007, when former Senator George Mitchell released his report about the widespread use of illegal, performance-enhancing drugs. Clemens and fellow Yankees pitcher Andy Pettitte were the most prominent of the implicated players. Pettitte eventually admitted taking HGH while recovering from an injury.

On a January 6, 2008 episode of 60 Minutes, Clemens steadfastly denied the claims. At the same moment, his lawyers were filing a defamation suit against the trainer who’d provided Mitchell with the incriminating testimony.

Meanwhile, the U.S. House Committee on Oversight and Government Reform continued its investigation into the matter. A week after Clemens’s 60 Minutes appearance, noted trial lawyer Rusty Hardin released this statement:

“I want to make very clear that there has been absolutely no change in Roger’s willingness and indeed desire to testify under oath before Congress in a public hearing at a date of the Oversight Committee’s choosing. Any suggestion that he or we are having any second thoughts about that is absolutely false.”  (http://sports.espn.go.com/mlb/news/story?id=3194113)

House Committee Chairman Waxman later took Hardin’s comments a step farther, saying that he and the ranking Republican had decided that no public hearing was needed because prior depositions would suffice.

“[T]he only reason we had the hearing was because Roger Clemens and his lawyers insisted on it,” Waxman said. “Roger Clemens’s lawyers told us he wanted the opportunity to make his case in public.”  (http://www.nytimes.com/2008/02/15/sports/baseball/15clemens.html )

In its totality, Clemens’s strategy was the litigation equivalent of “shock-and-awe” warfare.

When it became clear that the hearing had gone badly for Clemens, Hardin called Waxman’s statements “unbelievable, disingenuous and outrageous.” But according to the same Times article, “Once the depositions were taken…the Clemens side felt it had no choice but to proceed, fearing that the committee would use the depositions to produce a hostile written report. ‘We wanted this out in the open,’ Hardin said.” So Waxman appears to have the better of the “whose bad idea was this anyway?” argument.

In any event, this much is certain: Clemens didn’t have to: 1) appear on 60 Minutes; 2) file a defamation lawsuit on the Sunday evening that the show aired (or ever); or 3) tell Congress anything (unless it first chose to grant him immunity).

So what do Clemens and his lawyers have to show for their efforts?    

In February 2009, a judge dismissed most of Clemens’ defemation claims against his former trainer. The Fifth Circuit Court of Appeals affirmed on August 12, 2010. The public has long forgotten about the Mitchell Report, but Clemens himself remains headline news. One of the great pitchers of all time now faces unpleasant proceedings that could culminate in a prison sentence.

I assume that his capable attorneys explained how high-profile politicians and celebrities consistently fail to learn the most important lesson of Richard Nixon’s shame. He resigned the Presidency over obstruction of justice charges stemming from a subsequent cover-up – not the original sin of breaking into Democratic National Committee headquarters at the Watergate. It’s rarely the underlying offense that creates the biggest problem. It’s what people say and do in its aftermath.

I also assume that Clemens’s lawyers were counseling him to keep his mouth shut and his profile low at every stage of that evolving circus. But the record on that is ambiguous, at best.

Blago is right that the jury failed to reach a verdict on 23 of the 24 counts against him. Whether he sought to exchange a Senate seat for campaign contributions will be decided another day. But unless an appeallate court reverses, he’ll go to jail for lying when the government asked him about his practices.

With the former governor back on the road again — and on the way to The Daily Show, among others — I’ll bet Ed Genson has lost little sleep over his wise decision to cut his former client loose.

I suspect that Clemens’s lawyers don’t think they have that option.

OUTSOURCING: THE BEGINNING OF A NEW AND IMPROVED BIGLAW BUSINESS MODEL?

If you’re a new law school graduate looking for work, or an equity partner seeking to profit this year (and maybe next) from the leverage that high-priced associates add to your firm’s bottom line, outsourcing sounds like a bad idea. But for those concerned about the long-run psychological well-being of the profession, the implications are more ambiguous.

It’s not novel. Throughout corporate America, outsourcing has been an important profit-maximizing technique for a long time. Lawyers have made a lot of money assisting clients in the development and implementation of such strategies. The resulting loss of American jobs has been sold as a necessary price paid to remain competitive in the world economy.

Such cost-minimization makes sense where protocols can assure a quality finished product. But when lead turns up in the paint on children’s toys from China, well…. 

Now, as the  NY Times recently reported, outsourcing has pushed its nose into the biglaw tent.  (http://www.nytimes.com/2010/08/05/business/global/05legal.html) If the trend continues, what is the fate of the dominant large law firm business model that relies on associate/partner leverage as the source of equity partner wealth? (See my earlier article, “Send The Elevator Back Down” at http://amlawdaily.typepad.com/amlawdaily/2010/07/harper3071410.html)

Its days may be numbered but, then again, its days may be numbered with or without outsourcing.

As the Times article notes, outsourcing is particularly advantageous for mundane legal tasks — due diligence on corporate deals and document review for major litigation matters. What client can resist paying “one-third to one-tenth” of a big firm’s hourly rates for such work?

The challenge will be to find the limits and assure quality output. Due diligence seems unimportant until a major potential liability gets overlooked. Document review is dull, but large lawsuits have turned on an internal memo buried in a gigantic collection; a discerning eye made all the difference.

Still, it seems likely that clients will gravitate toward firms that can offer lower rates for outsourced attorneys performing necessary but non-critical work. It is equally clear that clients will continue to “pay a lot of money” to lawyers with special experience and expertise — “world-class thought leaders and the best litigators and regulatory lawyers around the world,” as one corporate leader put it in the Times.

With these trends, new law school graduates will face shrinking labor markets, especially at entry level positions in big firms. But for the fortunate few who get jobs, their work could get better as outsourced labor performs some of the menial tasks that now account for most young associates’ billable hours.

Meanwhile, senior attorneys will have new incentives to mentor proteges so they become their firms’ next generation of “world-class thought leaders.” (See my earlier article, “Where Have All The Mentors Gone?” at http://amlawdaily.typepad.com/amlawdaily/2010/07/harpermentors.html)

What will all of this mean for equity partner profits? The big firm leaders who do the right things – strict quality control of outsourced work coupled with a serious investment in the development of inside talent — will thirve as their firms deleverage. Unfortunately, others intent on maximizing short-term dollars by prolonging the lives of their leveraged business enterprises will do okay, too — at least for a while. But such a myopic focus runs enormous long-term risks for the affected institutions.

And here’s a wild card: Small and mid-sized firms with talented senior attorneys may find that these new pools of outsourced talent enable them to compete with the mega firms. Size may no longer be everything. In fact, it may not be anything at all.

If I’m correct, the resulting transformation will slow biglaw’s growth rate and, perhaps, shrink that segment of the profession. But instead of the mind-numbing tasks that are the bane of any young attorney’s biglaw existence, associates will find themselves doing work that more closely resembles what they thought being a lawyer meant when they first decided to attend law school. If that happened — and reality began to resemble expectations — lawyers as a group could become more satisfied with their jobs. The unthinkable might even happen: a slow reversal in the tide of recent surveys that consistently rank attorneys near the bottom of all occupations in career fulfillment.

Such a scenario would be an ironic turn of events. The extraordinary wealth that clients now confer on those running today’s highly leveraged big firms could be providing the impetus to upend the profession and force the emergence of a new business model in which leverage no longer mattered.

Of course, everything could careen wildly in a different direction –toward further corporatization of law firms as non-attorneys provide private investment capital, become shareholders, and complete the MBA takeover of the profession. That movement is clearly afoot in Great Britain. (See http://www.abanet.org/legaled/committees/Standards%20Review%20documents/AnthonyDavis.pdf) Once senior partners become accountable to non-attorney boards of directors, the individual autonomy that once defined being a lawyer will have disappeared.

But it doesn’t cost any more to be optimistic, does it?

ON THE BEACH

While I’m away next week, perhaps you’ll reconsider one of my earlier posts, “VACATION? WHAT’S THAT?”  (http://thebellyofthebeast.wordpress.com/2010/06/28/vacation-whats-that/))

Or, you could read my new legal thriller, The Partnership. It’s enjoying brisk sales and receiving strong reviews from lawyers and lay readers alike. (http://www.amazon.com/Partnership-Novel-Steven-J-Harper/dp/0984369104/ref=sr_1_1?ie=UTF8&s=books&qid=1273000077&sr=1-1 )

A new post will appear during the week of August 16.

MIRED IN METRICS? HAVE SOME MORE!

Once a bad situation spins out of control, is there any way to corral it? When all else fails, try making things worse.

The ABA recently released its report detailing just a few of the ways that U.S. News law school rankings have been counterproductive for prospective lawyers and the profession — from driving up the costs of legal education to driving down the importance of diversity.  (http://www.abanet.org/legaled/nosearch/Council2010/OpenSession2010/F.USNewsFinal%20Report.pdf)

As U.S.News now develops law firm rankings, the report concludes with an ominous warning:

“Once a single rankings system comes to dominate a particular field, it is very difficuly to displace, difficult to change and dangerous to underestimate the importance of its methodology to any school or firm that operates in the field. This, we believe, is the most important lesson from the law school experience for those law firms who may be ranked by U.S. News in the future.”

In other words, rankings sometimes function as any so-called definitive metric: They displace reasoned judgment. Independent thought becomes unnecessary because the methodology behind the metric dictates decision-makers’ actions.

Since 1985, many big firms have become living examples of the phenomenon. That year, The American Lawyer published its first-ever Am Law 50 list of the nation’s largest firms. Most firm leaders now teach to the Am Law test, annually seeking to maximize revenues and average profits per equity partner. The resulting culture of billings, billable hours, and associate/partner leverage ratios begins to explain why surveys report that large firm lawyers lead the profession in career dissatisfaction.(http://www.abajournal.com/magazine/article/pulse_of_the_legal_profession/print/) Without a metric for it, attorney well-being – and the factors contributing to it — drop out of the equation.

Courtesy of U.S. News, large firms now stand on the threshhold of more metrics. Will they make working environments of firms that have succcumbed to the profits-per-partner criterion worse?

It depends, but more of yet another bad thing — rankings – could produce something good — forcing individuals to sift through contradictory data, think for themselves, and make a real decision. But that can happen only if U.S. News produces a list of “best law firms” that bears little resemblance to the rank ordering of the Am Law 100 in average equity partner profits. Such contradictory data would confuse newly minted attorneys and force them to develop their own criteria for decision.

The American Lawyer itself provides a useful example of the possibilities. Eight years ago, it began publishing the Am Law “A-List,” which has gained limited traction as a moderating influence on the Am Law average profits-per-equity-partner metric that otherwise dominates decision-making at most big firms. The A-List’s additional considerations bear on the quality of a young lawyer’s life — associate satisfaction, diversity, and pro bono activities. The myopic focus on short-term dollars still dominates decisions in most big firms, but the A-List has joined the conversation.

What methodology will U.S. News employ in evaluating law firms? If it follows the approach of its law school ranking counterparts, many firms will game the system, just as some law schools have. (See my earlier article, “THE U.S. NEWS RANKINGS ARE OUT!” (http://thebellyofthebeast.wordpress.com/2010/04/16/the-us-news-rankings-are-out/)) But misguided and manipulatable metrics aren’t inevitable.

Talent is essential for any successful firm, large or small. Other qualities – collegiality, mentoring, community, high morale accompanying a shared sense of professional purpose – make a workplace special. Can the U.S. News find ways to measure those qualities?

That’s the challenge. But I fear that students won’t bother focusing on the U.S. News methodology or its flaws. More likely, whatever rankings emerge from the process will provide — as they have for so many deliberating the choice of a law school — an easy final answer.

Ceding such control over life’s direction to others is rarely a good idea. There is no substitute for personal  involvement in deciding the things that matter most. That means asking recruiters tough questions, scrutinizing the lives of a firm’s senior associates and partners, and finding role models who are living a life that a new attorney envisions for her- or himself.

In the end, the current large firm business model and its self-imposed associate/partner leverage ratios will continue to render success – defined as promotion to equity partnership — an elusive dream for most who seek it. For those who become dissatisfied with their jobs, time passes slowly. So everyone joining a big firm — even a person intending to remain only for the years required to repay student loans — has ample incentive to get that first big decision after law school correct.

So why would intelligent young attorneys let U.S. News’ self-proclaimed experts make it with something as silly as a ranking? Probably for the same reasons that they relied on U.S. News to make their law school decisions for them three years earlier.

Someday, maybe there will be a U.S. News formula for choosing a spouse. Then won’t life be simple?