DANGEROUS ADVICE FOR LAW FIRM LEADERS

During the past 25 years, law firm management consulting has grown from cottage industry to big business. In a recent Am Law Daily article, “What Critics of Lateral Hiring Get Wrong,” Brad Hildebrandt, one of its pioneers, provides a comforting message to his constituents:

“Large law firms are weathering the storm of the past five years and continue to transform their businesses to operate with efficiency and agility amid a new set of client expectations.”

Hildebrandt v. Altman Weil

Hildebrandt correctly notes that painting all large firms with a single brush is a mistake. But his general description of most firms today is at odds with the results of Altman Weil’s recent survey, “2014: Law Firms in Transition.” The summary of responses from 803 law firm leaders (including 42 percent of the nation’s largest 350 firms) offers these highlights:

– “The Survey shows clear consensus among law firm leaders on the changing nature of the legal market…. [But] law firms are proceeding without an apparent sense of urgency.”

– “Less than half of the law firms surveyed are responding to the pressures of the current market by significantly changing elements of their traditional business model.”

– “Most firms are not making current investments in a future they acknowledge will be different – and different in seemingly predictable ways.”

– “Only 5.3 percent of firms are routinely looking farther than five years out in their planning.”

Altman Weil’s conclusions comport with its October 2013 Chief Legal Officer Survey. When clients rated outside law firms’ seriousness about changing legal service delivery models to provide greater value, the median score was three out of ten — for the fifth straight year.

Hildebrandt v. Georgetown/Thomson Reuters Peer Monitor and Henderson

So what are most big firms doing? Growth through aggressive lateral hiring. Hildebrandt responds to “academics, journalists, former practicing attorneys, and countless legal bloggers” who question that strategy. Count me among them.

Acquiring a well-vetted lateral partner to fill a specific strategic need is wise. But trouble arises when laterals become little more than portable books of business whose principal purpose is to enhance an acquiring firm’s top line revenues.

“Growth for growth’s sake is not a viable strategy in today’s market,” the 2014 Georgetown/Thomson Reuters Peer Monitor Report on the State of the Legal Market observes. Nevertheless, the report notes, most firms are pursuing exactly that approach: “[Growth] masks a bigger problem — the continuing failure of most firms to focus on strategic issues that are more important….”

Professor William Henderson has done extensive empirical work on this subject. “Is Reliance on Lateral Hiring Destabilizing Law Firms?” concludes: “[T]he data is telling us that for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits.”

Hildebrandt v. Citi/Hildebrandt

Big law partners acknowledge the truth behind Henderson’s data. According to the 2014 Citi/Hildebrandt Client Advisory, only 57 percent of law firm leaders describe their lateral recruits during 2008-2012 as successful, down from 60 percent last year. If those responsible for their firms’ aggressive lateral hiring strategies acknowledge an almost 50 percent failure rate, imagine how much worse the reality must be. Nevertheless, the lateral hiring frenzy continues, often to the detriment of institutional morale and firm culture.

With respect to culture and morale, Hildebrandt rejects the claim that lateral partner hiring crowds out homegrown associate talent. But the 2013 Citi/Hildebrandt Client Advisory suggests that it does: Comparing “the percentages of new equity partners attributable to lateral hires vs. internal promotions in 2007…with percentages in 2011 reveals a marked shift in favor of laterals” — a 21 percent decrease in associate promotions versus a 10 percent increase in lateral partner additions.

Nevertheless, Hildebrandt offers this assessment:

“In the six years prior to the recession, many firms admitted far too many partners—some into equity partnership, many into income partnership. A driving factor in the number of partners in the lateral marketplace is that firms are coming to grips with the mistakes of the past. Lax admissions standards have been a far greater issue than mistakes made on laterals.”

When I read that passage, it seemed familiar. In fact, Chapter 5 of my latest book, The Lawyer Bubble – A Profession in Crisisopens with this quotation:

“The real problem of the 1980s was the lax admission standards of associates of all firms to partnerships. The way to fix that now is to make it harder to become a partner. The associate track is longer and more difficult.”

Those were Brad Hildebrandt’s words in September 1996. (“The NLJ 250 Annual Survey of the Nation’s Largest Law Firms: A Special Supplement — More Lawyers Than Ever In 250 Largest Firms,” National Law Journal)

“Fool Me Once, Shame On You…”

Evidently, most firms followed Hildebrandt’s advice in the 1990s because the overall leverage ratio in big law firms has doubled since then. His recent suggestion that “lax admission standards” caused firms to make “far too many” equity partners during the six years prior to the Great Recession of 2008-2009 is particularly puzzling. In the May 2008 issue of American Lawyer, Aric Press noted that during the “Law Firm Golden Age” from 2003 to 2007, “Partners reaped the benefits of hard work — and of pulling up the ladder behind them. Stoking these gains has been a dramatic slowdown in the naming of new equity partners.”

Meanwhile, the swelling ranks of income partners reflect a different strategy: using the non-equity partner tier as a profit center. The strategy is misguided, but pursuing it has been intentional, not a “mistake.” (Take a look at the American Lawyer article, “Crazy Like a Fox,” by Edwin Reeser and Patrick McKenna.)

Even so, Hildebrandt’s words reassure firms that are recruiting laterals for all the wrong reasons and/or tightening the equity partner admission screws. Tough love might better serve the profession.

THE ILLUSION OF LEISURE TIME

Back in January, newspaper headlines reported a dramatic development in investment banking. Bank of America Merrill Lynch and others announced a reprieve from 80-hour workweeks.

According to the New York TimesGoldman Sachs “instructed junior bankers to stay out of the office on Saturdays.” A Goldman task force recommended that analysts be able to take weekends off whenever possible. Likewise, JP Morgan Chase gave its analysts the option of taking one protected weekend — Saturday and Sunday — each month.

“It’s a generational shift,” a former analyst at Bank of America Merrill Lynch told the Times in January. “Does it really make sense for me to do something I really don’t love and don’t really care about, working 90 hours a week? It really doesn’t make sense. Banks are starting to realize that.”

The Fine Print

There was only one problem with the noble rhetoric that accompanied such trailblazing initiatives: At most of these places, individual employee workloads didn’t change. Recently, one analyst complained to the Times that taking advantage of the new JP Morgan Chase “protected weekend” policy requires an employee to schedule it four weeks in advance.

Likewise, a junior banker at Deutsche Bank commented on the net effect of taking Saturdays off: “If you have 80 hours of work to do in a week, you’re going to have 80 hours of work to do in a week, regardless of whether you’re working Saturdays or not. That work is going to be pushed to Sundays or Friday nights.”

How About Lawyers?

An online comment to the recent Times article observed:

“I work for a major NY law firm. I have worked every day since New Year’s Eve, and billed over 900 hours in 3 months. Setting aside one day a week as ‘sacred’ would be nice, but as these bankers point out, the workload just shifts to other days. The attrition and burnout rate is insane but as long as law school and MBAs cost $100K+, there will be people to fill these roles.”

As the legal profession morphed from a profession to a business, managing partners in many big law firms have become investment banker wannabes. In light of the financial sector’s contribution to the country’s most recent economic collapse, one might reasonably ask why that is still true. The answer is money.

To that end, law firms adopted investment banking-type metrics to maximize partner profits. For example, leverage is the numerical ratio of the firm’s non-owners (consisting of associates, counsel, and income partners) to its owners (equity partners). Goldman Sachs has always had relatively few partners and a stunning leverage ratio.

As most big law firms have played follow-the-investment-banking-leader, overall leverage for the Am Law 50 has doubled since 1985 — from 1.76 to 3.52. In other words, it’s twice as difficult to become an equity partner as it was for those who now run such places. Are their children that much less qualified than they were?

Billables

Likewise, law firms use another business-type metric — billable hours — as a measure of productivity. But billables aren’t an output; they’re an input to achieve client results. Adding time to complete a project without regard to its impact on the outcome is anathema to any consideration of true productivity. A firm’s billable hours might reveal something about utilization, but that’s about it.

Imposing mandatory minimum billables as a prerequisite for an associate’s bonus does accomplishes this feat: Early in his or her career, every young attorney begins to live with the enduring ethical conflict that Scott Turow wrote about seven years ago in “The Billable Hour Must Die.” Specifically, the billable hour fee system pits an attorney’s financial self-interest against the client’s.

The Unmeasured Costs

Using billables as a distorted gauge of productivity also eats away at lawyers’ lives. Economists analyzing the enormous gains in worker productivity since the 1990s cite technology as a key contributor. But they ignore an insidious aspect of that surge: Technology has facilitated a massive conversion of leisure time to working hours — after dinner, after the kids are in bed, weekends, and while on what some people still call a vacation, but isn’t.

Here’s one way to test that hypothesis: The next time you’re away from the office, see how long you can go without checking your smartphone. Now imagine a time when that technological marvel didn’t exist. Welcome to 1998.

When you return to 2014, read messages, and return missed calls, be sure to bill the time.

LESSONS FROM THE BUSINESS WORLD

The current issue of the Harvard Business Review has an article that every big law leader should read, “Manage Your Work, Manage Your Life,” by Boris Groysberg and Robin Abrahams. Unfortunately, few law firm managing partners will bother.

It’s not that big law leaders are averse to thinking about their firms in business terms. To the contrary, the legal profession has imported business-type concepts to create the currently prevailing model. Running firms to maximize simple metrics — billables, leverage ratios, and hourly rates — has made many equity partners rich.

The downside is that the myopic focus on near-term revenue growth and current profits comes at a price that most leaders prefer to ignore. Values that can be difficult to quantify often get sacrificed. One example is the loss of balance between an individual’s professional and personal life.

Looking at the same things differently

The HBR article contradicts a popular narrative, namely, that balancing professional and personal demands requires constant juggling. Over a five-year period, the authors surveyed more than 4,000 executives on how they reconciled their personal and professional lives. The results produced a simple recommendation: Rather than juggling to achieve “work-life balance,” treat each — work and life — with the same level of focused determination.

The most successful and satisfied executives (they’re not mutually exclusive descriptors) make deliberate choices about what to pursue in each realm as opportunities present themselves. In other words, they think about life as it unfolds.

According to the authors, the executives’ stories “reflect five main themes: defining success for yourself, managing technology, building support networks at work and home, traveling or relocating selectively, and collaborating with your [home] partner.”

Professional success

Defining professional success is the key foundational step and not everyone agrees on its elements. That’s no surprise.

But some gender distinctions are fascinating. For example, 46 percent of women equated professional success with “individual achievement,” compared to only 24 percent of men. Likewise, more women than men (33 percent v. 21 percent) defined success as “making a difference.” The gender gap was even greater for those defining success as “respect from others” (25 percent of women v. 7 of percent men) and “passion for the work” (21 percent of women v. 5 percent of men). (Respondents could choose more than one element in defining success, so the totals exceed 100 percent.)

On the other hand, more men than women thought that success was “ongoing learning and development and challenges” (24 percent of men v. 13 percent of women), “organizational achievement” (22 percent v. 13 percent), “enjoying work on a daily basis” (14 percent v. 8 percent). More men also saw success in financial terms (16 percent) than did women (4 percent).

Personal success

For men and women, the most widely reported definition of personal success was “rewarding relationships” (59 percent of men; 46 percent of women). (Surprised that more men than women picked that one?) Most other definitions revealed few gender-based differences (“happiness/enjoyment,” “work/life balance,” “a life of meaning/feeling no regrets”).

But big gender gaps again emerged for those defining personal success as “learning and developing” and “financial success.” In fact, zero women equated “financial success” with personal success, but 12 percent of men did.

Putting it all together

After defining success, the next steps seem pretty obvious: master technology, develop support networks, move when necessary, and make life a joint venture with your partner if you have one. But few law firm leaders create a climate that encourages such behavior. Short-term profits flow more readily from environments that a recent Wall Street Journal headline captured: “When The Boss Works Long Hours, Do We All Have To?” In most big law firms, the short answer is yes, even if the boss doesn’t.

In general, the HBR strategy amounts to tackling life outside your career with the same dedication and focus that you apply to your day job.

A few examples:

Are you becoming a prisoner of technology that facilitates 24/7 access to you? Then occasionally turn it off and spend real time with the people around you.

Are you concerned that you’re missing too many family dinners? Then treat them with the same level of importance that you attach to a client meeting.

These and other ideas aren’t excuses to become a slacker. After all, the interview respondents are high-powered business executives. Rather, they comprise a way to anticipate and preempt problems. As one survey respondent said, people tend to ignore work/life balance until “something is wrong. But,” the authors continue, “that kind of disregard is a choice, and not a wise one. Since when do smart executives assume that everything will work out just fine? If that approach makes no sense in the boardroom or on the factory floor, it makes no sense in one’s personal life.”

That’s seems obvious. But try telling it to managing partners in big law firms who are urging younger colleagues to get their hours up.

Here’s a thought: maybe attorneys should record how they spend their hours at home, too.

A STORIED LATERAL HIRE

“Are Laterals Killing Your Firm?” is the provocative title of The American Lawyer‘s February issue. The centerpiece is a thoughtful article, “Of Partners and Peacocks,” by Bill Henderson, professor at Indiana University Maurer School of Law and Director of the Center on the Global Legal Profession, and Christopher Zorn, professor of political science, sociology, crime, law, and justice at Penn State University.

Henderson and Zorn conclude that “for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits.” As I observed in last week’s post, most big law managing partners have conceded as much in anonymous surveys. Even so, the drumbeat of lateral hiring to achieve top line revenue growth persists, even in the face of dubious bottom line results.

A timely topic

One lateral hire outcome became particularly fascinating this week. On the way out of the top spot at DLA Piper is global co-chair Tony Angel. You might remember him from one of my earlier articles, “The Ultimate Lateral Hire.”

The American Lawyer 2012 Lateral Report identified Angel as one of the top lateral hires of the year — “a typically bold and iconoclastic play by DLA. For a firm to bring in a former managing partner from another firm is rare,” Am Law Daily reporter Chris Johnson wrote in March 2012. According to the article, the 59-year-old Angel was to receive $3 million a year for a three-year term.

With great fanfare, DLA touted its coup. “He’s got great values and he believes in what we’re trying to do and he shares our view of what’s going on in the world,” boasted then co-chair Frank Burch.

At the time, DLA’s press release was equally effusive: “Tony will work with the senior leadership on the refinement and execution of DLA Piper’s global strategy with a principal focus on improving financial performance and developing capability in key markets.”

Predictably, law firm management consultants also praised the move:  “It’s hard to get a guy that talented. There just aren’t that many people out there who have done what he has done,” said Peter Zeughauser. Legal headhunter Jack Zaremski called it a “brave move” that “might very well pay off.”

On second thought…

The current publicity surrounding Angel’s transition is decidedly more subdued. According to a recent Am Law article, Angel and his fellow outgoing global co-chair, Lee Miller, “will remain with the firm in a senior advisory capacity, the details of which will be worked out later this year.”

Two years, plus another 10 months as a lame duck, is a remarkably short period to occupy the top spot of any big firm. Only those who work at DLA Piper can say whether Angel’s brief reign was a success (and why it’s over so soon). Not all of them are likely to provide the same answer.

Separating winners from losers

In 2008, more than three years before Angel’s arrival, the firm’s non-equity partners found themselves on the receiving end of requests for capital contributions. According to Legal Week, “275 partners contributed up to $150,000 each to join the equity.” The move was “intended to motivate partners by granting them a direct share of the firm’s profits, as well as an equal vote in the firm’s decisions.” But it also helped “DLA reduce its bank debt.”

That equitization trend continued during Angel’s tenure. In 2012, the firm’s non-U.S. business reportedly added capital totaling 30 million pounds Sterling “as a result of the move to an all-equity partnership structure.” Again according to Legal Week, the firm’s non-equity partners in the UK, Europe, and Asia Pacific paid on average 61,000 pounds Sterling each to join the equity.”

Perhaps most new equity partners discovered that their mandatory bets became winners. After all, gross profits and average profits for the DLA Piper verein went up in 2012. Then again, averages don’t mean much when the distribution is skewed. According to a Wall Street Journal article three years ago, the internal top-to-bottom spread within DLA Piper was already nine-to-one.

Anyone looking beyond short-term dollars and willing to consider things that matter in the long run could consult associate satisfaction rankings for cultural clues. In the 2013 Am Law Survey of Midlevel Associate Satisfaction, DLA Piper dropped from #53 to #77 (out of 134 firms). That’s still above the firm’s #99 ranking in 2011.

The more things change

Management changes are always about the future. It’s not clear how, if at all, incoming co-chair Roger Meltzer’s vision for DLA Piper diverges from Angel’s. Age differences certainly don’t explain the transition; both men are around 60. Likewise, both have business orientations. Meltzer practices corporate and securities law; Angel joined DLA Piper after serving as executive managing director of Standard & Poor’s in London.

Maybe it’s irrelevant, but Meltzer and Angel also have this in common: Both are high-powered lateral hires. Angel parachuted in from Standard & Poor’s in 2011; Meltzer left Cahill, Gordon & Reindel to join DLA Piper in 2007. It makes you wonder where these guys and DLA Piper will be a few years from now.

BIG LAW LEADERS “GET IT”? SERIOUSLY?

biglaw-450

This article won the “Big Law Pick of the Week.” BigLaw‘s weekly newsletter reaches the world’s largest law firms and the corporate counsel who hire them.

The concluding lines of this year’s Client Advisory from Hildebrandt/Citi are defensive, if not petulant:

“Unlike the commentary of many observers of the legal profession suggesting that today’s senior management do not ‘get it,’ we believe the large law firms today have every capability to adjust to the changing market….”

That nifty non sequitur is also a rhetorical sleight of hand. Having “every capability to adjust” is not the same as actually adjusting. The suggestion that today’s senior law firm leaders “get it” implies that they are responding in healthy and productive ways to a period of dramatic change.

Well, most of them aren’t. Instead, they’re maximizing current income at great expense to the future of their institutions. But don’t take my word for it; take theirs.

Facts get in the way

Consider the dominant big firm strategy: lateral hiring and mergers to achieve top line revenue growth. In Citi’s 2012 Law Firm Leaders Survey, senior leaders self-reported that only 60 percent of their laterals were above “break even.” For 2013, the rate dropped to 57 percent. As for mergers, anyone who thinks bigger is always better should look at the decline in operating margins that has followed most recent big firm combinations. That phenomenon is called diseconomies of scale.

Moreover, even the self-reported “success rate” is inflated. It takes years to determine the true financial impact of a lateral hire, so most managing partners touting those efforts actually have no idea whether their recent acquisitions will benefit their firms’ bottom lines. In fact, if leaders already admit to mediocre results for the laterals they personally sponsored, imagine how much worse the reality must be.

Beyond the numbers

Notwithstanding previous failures on a massive scale, managing partners are still pursuing growth for the sake of growth. Unfortunately, it can be a loser in ways that go far beyond mere financial losses. The negative impact on a firm’s culture, morale, and long-term institutional stability can be devastating.

For example, the 2013 Hildebrandt/Citi Client Advisory reported that between 2007 and 2011, law firms increased the number of lateral partners by 10 percent. Meanwhile, homegrown promotions to partner during the period dropped by 21 percent. That trend is undermining already low associate morale.

The lateral hiring frenzy has demoralized partners, too. A loss of community afflicts partnerships of people who don’t know each other. That’s one reason that forty percent of respondents to Altman Weil’s May 2013 survey of firm leaders said their partners’ morale was lower than it was at the beginning of 2008.

Another reason for diminished partner morale is the way lateral hiring has contributed to higher internal equity partner compensation spreads. Bidding to attract so-called rainmakers has pushed the high end of the range up. So have existing partners who threaten to test the lateral market. In that zero sum game of dividing the partnership pie, the bottom end of the range has moved down. (For an example, take a look at James B. Stewart’s New York Times profile of a former Dewey & LeBoeuf partner who reportedly earned $350,000 while his “protector” earned $8 million.)

More collateral damage ignored

Accompanying the lateral hiring frenzy and short-term metrics that drive the prevailing big firm business model are destructive client silos. More than 70 percent of law firm leaders responding to the Altman Weil survey said that older partners were hanging on too long. In the process, they’re hoarding clients, billings, and opportunities in ways that block the transition of firm business to younger lawyers.

But leadership’s response to this problem is perverse: 80 percent of managing partners admit that they plan to continue tightening equity partner admission standards.

The ongoing failure of leadership also reveals itself in managing partners’ overall agendas. When asked to prioritize goals for their firms, they placed “client value” number eight — behind (1) increasing revenue, (2), generating new business, (3) growth, (4) profitability, (5) management change, (6) cost management, and (7) attracting talent.

Closer to the mark

In contrast to the Hildebrandt/Citi 2014 Client Advisory, the Georgetown Law Center/Peer Monitor 2014 Report on the State of the Legal Profession concludes that most law firm leaders don’t “get it” at all:

“[G]rowth for growth’s sake is not a viable strategy in today’s legal market…Strategy should drive growth and not the other way around. In our view, much of the growth that has characterized the legal market in recent years fails to conform to this simple rule and frankly 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 have.”

The report explains that, in an effort to justify the counterproductive urge to grow, “law firm leaders feel constrained to articulate some kind of strategic vision…and the message that we need to ‘build a bigger boat’ is more politically palatable than a message that we need to fundamentally change the way we do our work.”

Similarly, the author of the 2013 Altman Weil survey, Thomas Clay, says that too many firms are “almost operating like Corporate America…managing the firm quarter-to-quarter by earnings per share.” That shortsighted approach is “not taking the long view about things like truly changing the way you do things to improve client value and things of that nature.”

Even clients recognize that most outside law firms aren’t adapting to new realities. An October 2013 Altman Weil Survey asked chief legal officers to evaluate the seriousness of their outside law firms in changing the legal service delivery model to provide greater value. On a scale from zero (not at all serious) to ten (doing everything they can), “for the fifth year, the median was a dismal ’3.’”

Perhaps the authors of the Hilebrandt/Citi 2014 Client Advisory actually believe that most of their big law managing partner constituents “get it.” No one else does.

ART, LIFE, AND THE GOOD WIFE

The writers of the hit television series, The Good Wife, are onto something. Recently, Alicia Florrick and several senior associates left Lockhart & Gardner to form a new firm. They took a big client with them.

Art imitates life

One scene in particular is a reminder that fiction can reveal profound truth. Sitting in his office, Will Gardner concludes that Florrick and other former colleagues betrayed him just by leaving. He resolves that he’s going to get even by making his firm the biggest in the country: “I’m going to destroy the competition.”

Gardner wasn’t looking for a few talented attorneys who would serve particular client needs while enhancing the culture of his institution. He wasn’t seeking to shore up an area of lost expertise. He wasn’t even pursuing growth because it would benefit his firm financially. Rather, he wanted to preside over a big firm that would be significant – even intimidating – solely because of its bigness.

He instructed fellow partners to target rainmakers at other firms as potential lateral hires, announced the opening of a New York, and rolled out the firm’s new logo — “LG.” He wanted growth for the sake of growth. No other plan. No strategic vision. No institutional mission beyond getting bigger.

Real-life managing partners wouldn’t be so stupid, right?

Many large law firms are making news with their efforts to grow. This phenomenon is somewhat perplexing because law firm management consultants have reported for a long time that there are no economies of scale in the practice of law. In fact, they say, maintaining the infrastructure necessary to support growth pushes the bottom line the wrong way.

But in today’s no-growth era, many managing partners worry more about the top line. They want to acquire books of business through aggressive lateral hiring of other firms’ rainmakers and, in some cases, the ultimate lateral event – merger with another firm.

A path to where, exactly?

For the profession overall, the lateral hiring/merger craze is a zero-sum game. For individual firms asserting that clients somehow drive the process, it’s dubious at best.

“I’m pretty skeptical about the value these big mergers give to clients,” IBM’s general counsel, Robert Weber, said recently. “I don’t know why it’s better to use a bigger firm.” And that’s from a guy who spent 30 years at Jones Day — one of the biggest law firms in the country — before joining IBM seven years ago.

In The Good Wife, creating a big firm is part of Will Gardner’s personal vendetta. In the real world, vindictiveness isn’t the reason that most managing partners build bigger firms. But personal ego is often part of the equation. Many leaders see themselves as modern-day versions of Alexander the Great. The desire to stand atop an empire is irresistible.

In the coming weeks, Gardner will probably press ahead to create a large enterprise where name recognition alone confers an illusory prestige. Even if his fellow partners are inclined to question or, God forbid, disagree, they won’t speak up.

If Alicia Florrick were still there, she might have had the courage to challenge him. After all, she and Will had a steamy affair and her husband is now Illinois Governor-elect. But Alicia is gone and Will rules his firm with an iron fist, bare and unadorned with a velvet glove. At Lockhart & Gardner — as at many big firms – dissent is not a cherished partnership value.

There’s one more interesting aspect of Gardner’s battle cry. He hasn’t learned from his mistakes. In season two, Lockhart & Gardner merged with Derrick Bond’s Washington, DC firm. The clash of cultures and personalities nearly destroyed Gardner’s firm. Like all talented lawyers possessing the skill to distinguish away adverse precedent that doesn’t suit their current views, Gardner must think that this time will be different.

Luckily for him, Lockhart & Gardner is fictional. Notwithstanding his poor leadership decisions, the writers can craft a story line that will keep him and his firm going until the show’s ratings fall. Some real law firms won’t be as fortunate.

Failure of Leadership

The American Lawyer’s annual leaders survey reveals that most law firm managing partners are living in denial. When the changing world intrudes in ways that they can no longer ignore, another psychological state — cognitive dissonance — sets in as they try simultaneously to hold contradictory ideas in their heads. As a consequence, what is happening today at the top of most big firms is the antithesis of leadership.

Denial

In the Am Law leaders survey, 70 percent of respondents said that the sluggish demand for legal services in 2013 would continue through 2014. That’s not surprising. In 2012, only a fourth quarter surge saved many firms from the abyss. The unusual circumstances producing that phenomenon aren’t present this year.

If 2014 will be more of the same as firms compete for business in a zero-sum game, how do individual managing partners size up their situations? Unrealistically. Two-thirds of the 105 leaders responding to the survey of Am Law 200 firms were “somewhat optimistic” about the prospects for their firms in 2014. Another ten percent were “very optimistic.”

More than 80 percent expect profits per partner to grow in 2014 — and one-fourth of those expect growth to exceed five percent. They’ll use the same old model — 98 percent expect billable hour increases, even though three-fourths of respondents said their realization rates for 2013 are 90% or worse. They also said that only 18 percent of their matters include an alternative fee arrangement.

Cognitive dissonance

They can’t all be right about 2014 — for which an overwhelming majority say that “things will be tough for almost everyone else, but my firm will thrive.” More importantly, most of them won’t be right. So what are today’s leaders doing to prepare their firms for more of the harsh reality that they’ve already experienced for the past several years? Not much.

A staggering 85 percent of managing partners said they were somewhat worried (61 percent) or very worried (24 percent) about partners who are not billing enough hours. Almost 70 percent are concerned that some partners are staying on too long before retirement.

An Altman Weil Survey found similar results last summer. Seventy percent of law firm leaders said that older partners were hanging on too long. In the process, they are hoarding clients, billings, and opportunities in ways that impede the transition of firm business to younger lawyers. Yet the drive to maximize short-term profits led 80 percent of firm leaders to admit that they planned to respond to current pressures by tightening equity partner admission standards. Pulling up the ladder on the next generation is not the way to motivate the young talent needed to solve the transition problem.

Morale

All of this may be working well for some partners at the top of what remains a leveraged pyramid business model. But even among the partners, all is not well. The Altman Weil Survey reported that 40 percent of law firm leaders thought partner morale was lower than it had been in 2008. In other words, deequitizations and partnership purges during the Great Recession haven’t produced greater happiness in the survivor cohort.

The Am Law Survey confirms that this downward trend continues. In 2012, 63 percent of managing partners characterized the morale of their partners as “somewhat optimistic.” In 2013, it dropped to 56 percent — near the 2009 nadir of 54 percent.

Leadership lemmings

Every survey reveals that most big firm leaders have their eyes on a single mission: growth. Whether through aggressive lateral hiring or mergers and acquisitions, some managing partners are cobbling together entities that aren’t really law firm partnerships. They’ve forgotten that a sense of community and common purpose is essential to maintaining organizational morale. They’ve also forgotten that no law firm is better than the quality of its people.

Most leaders also acknowledge that a myopic growth strategy imposes significant financial and other costs on their institutions — overpaying for so-called rainmakers who are less than advertised; sacrificing the stability that comes from a cohesive culture in exchange for current top line revenues; incentivizing partners to hoard clients because billings determine compensation and client silos facilitate lateral exits; discouraging the development of talent that should comprise the future of the firm.

As managing partners build empires that they hope will be too big to fail, they might spend a little time considering whether their denial and cognitive dissonance are producing entities that are too big to succeed.

THE NEWEST BIG LAW PARTNERS SPEAK

A recent survey of associates who became partners in their Am Law 200 firms between 2010 and 2013 produced some startling results. The headline in The American Lawyer proclaims that new partners “feel well-prepped and well-paid.” But other conclusions are troubling.

More than half (59 percent) of the 469 attorneys responding to the survey were non-equity partners. That’s significant because for them the real hurdle has yet to come. Most won’t advance to equity partnership in their firms. But even the combined results paint an unattractive portrait of the prevailing big law firm business model.

Lateral progress

It should surprise no one that institutional loyalty continues to suffer as the leveraged big law pyramid continues to depend on staggering associate attrition rates. According to the survey, almost half of new partners said that “making partner is nearly impossible.”

It’s toughest for home grown talent. Forty-seven percent of new partners switched firms before their promotions, most within the previous four years. An earlier survey of 50 Am Law 200 firms made the point even more dramatically: 59 percent of those who made partner in 2013 began their careers elsewhere. Long ago, a lot of older partners became wise to this gambit. They learned to hoard opportunities and preserve client silos as the way to move up and/or acquire tickets into the lucrative lateral partner market.

Somewhat paradoxically in light of their lateral paths into the partnership, 90 percent of new partners thought that commitment to their firms was of great or some importance as a factor in their promotion to partner. Yet almost 60 percent said that, since making partner, their commitment to the firm had decreased or only stayed the same.

Why don’t they feel like winners?

More than 80 percent of respondents thought that the “ability to develop and cultivate new clients” was “of great or some importance” in their promotion to partner. Yet more than half of new partners said that they received no formal training in business development.

Other results also suggest that a big law partnership has become an increasingly mixed bag. Almost eight out of ten said their business development efforts had increased since making partner. How did they make room for those activities in their already full workdays as “on-track-for-partner associates”? Eighty-three percent reported that time with their family “had decreased or stayed the same.” More than half said that control of their schedules had decreased or stayed the same. Making partner doesn’t seem to help attorneys achieve the kind of autonomy that contributes to career satisfaction and overall happiness.

The meaning of it all

More than 60 percent of new partners were satisfied or very satisfied with their compensation. Maybe money alone will continue to draw the best law graduates into big firms. A more important question is whether they will stay.

Most partners running today’s big firms assume that every associate has the same ambition that they had: to become an equity partner. Meanwhile, they’ve been pulling up the ladder on the next generation. Leverage ratios in big firms have doubled since 1985; making equity partner is now twice as difficult as it was then. Does anyone really believe that the current generation of young attorneys contains only half the talent of its predecessors?

The law is a service business. People are its only stock in trade. For today’s leaders who fail to retain and nurture young lawyers, the future of their institutions will become grim indeed. As that unfortunate story unfolds, they will have only themselves to blame. Then again, if these aging senior partners’ temporal scopes extend only to the day they retire, perhaps they don’t care.

AS CLIENTS SPEAK, WHO’S LISTENING?

Many big law firms pursue a path of mindless growth through mergers and lateral hiring, but few managing partners seem to question the wisdom of that strategy. Growth for its own sake gets protective cover in false rhetoric about serving clients. But contrary data continue to accumulate on the subject of what clients really want.

Challenging traditional views

Two recent articles ought to send a chill down the spine of big law partners everywhere. The first is a recent article for the Harvard Business Review Blog, “Why the Law Firm Pedigree May Be a Thing of the Past,” by Dina Wang and Firoz Dattu.

As the title suggests, the authors argue that clients are increasingly searching for value and efficiency at the expense of big law firms that rely on their brand alone to attract and retain business at premium rates. Insofar as the authors believe that truly elite law firms may be in mortal danger, I think they overstate their case. The most sophisticated clients with the most complex problems will continue to seek top legal talent. Much of that talent will reside in elite firms that will retain their stature, provided they create environments that appeal to the best young lawyers.

But it’s more difficult to quibble with the authors’ survey of general counsel at 88 major companies. In matters that were high-stakes (but not necessarily bet-the-company), 74 percent were less likely to use an Am Law 20 or Magic Circle firm than a less-pedigreed firm, provided they achieved legal cost savings of at least 30 percent. (The article suggests that the actual cost savings in such situations could exceed 60 percent.)

Follow the money

Now couple that finding with these recent Counsel-Link survey results:

“Among the firms with 201-500 lawyers, referred to as ‘Large Enough’ firms in this report, the share of U.S. legal fees paid by clients has grown from 18% three years ago (July 1, 2009 – June 30, 2010) to 22% in the trailing 12 months that ended June 30, 2013.”

Who’s lunch are the “Large Enough” firms eating? The megafirms’:

“Simultaneously, the share of U.S. legal fees paid by clients with more than 750 lawyers, the ‘Largest 50,’ has gone in the opposite direction — from 26% to 20% over the same period.”

The shift is even more dramatic in higher fee legal work: “‘Large Enough’ firms have almost doubled the share of high fee litigation matters — those matters generating outside counsel fees totaling $1 million or more (High Fee Work). ‘Large Enough’ firms grew their portion of U.S. High Fee Work from 22% three years ago to 41% in the trailing 12 months.”

Disruption as a powerful market force

How are the “Large Enough” firms doing it? Here’s a partial answer: “‘Large Enough’ firms billed nearly twice as much under alternative fee arrangements as did the ‘Largest 50′ firms over the trailing 12 months.”

None of this should come as a surprise. For years, law firm management consultants have been saying that there are no economies of scale in the practice of law once a firm reaches about 100 attorneys. In fact, maintaining the infrastructure to support continuous expansion at the largest firms actually produces diseconomies.

Embedded interests die hard

Firms engaged in aggressive lateral hiring and law firm mergers might be adding top line revenues, but most are also adding disproportionately more costs. According to the 2013 Hildebrandt Consulting Client Advisory, 60 percent of law firm managing partners said (in an anonymous survey) that their lateral hires had been financial successes. If 40 percent are willing to admit to deploying a strategy that is “break even at best,” imagine how worse the reality must be.

Perhaps the accumulating intelligence about clients’ actual desires and the true costs (both financial and cultural) of a growth strategy will cause some managing partners pursuing that strategy to pause. Maybe they’ll reconsider the construction of global behemoths that serve their own egos but little else. Don’t count on it.

ANOTHER BIG LAW FIRM COMBO?

You might think that the leaders of SNR Denton would pause to take a breath after completing the firm’s March 2013 merger with Paris-based Salans and Canadian-based Fraser Milner Casgrain. But according to published reports, almost immediately after closing the Salans/FMC deal to become a 2,700-lawyer mega-verein, Dentons began discussions to add yet another contingent — McKenna Long & Aldridge and its more than 500 attorneys.

As I wrote almost a year ago, the leaders of what had been SNR Denton boasted that they had used no strategic legal consultants or advisers in the process that led to its French-Canadian three-way. But they did have “branding and advertising advisers” who recommended the entity’s new name, Dentons.

I don’t know if Dentons’ leadership is getting advice on its current potential merger, but if it goes through, the McKenna Long & Aldridge brand seems likely to disappear — as did Sonnenschein’s, Salans’, and Fraser Milner Casgrain’s. Then again, the Luce Forward Hamilton & Scripps brand disappeared after its 2012 merger with McKenna Long.

The venerable McKenna Long brand won’t be the only casualty. The combined firm would have two offices (each with a significant number of lawyers) in five cities: Washington, Los Angeles, San Francisco, New York, and Brussels. In touting the prospect of creating the world’s third’s largest law firm of more than 3,100 attorneys, no one is estimating the number of likely near-term departures.

Who is being served? Clients?

The rhetoric accompanying most big law firm combinations is usually the same. In response to inquiries about its discussions with McKenna Long, Dentons issued this statement: “Since creating Dentons earlier this year, we have been very clear in our determination to always deepen our capabilities to serve clients in the U.S. and around the world.”

But clients aren’t asking their outside law firms to join with other firms. In fact, most clients understand that no single firm (or collection of firms in a verein) could or should house every attorney most appropriate for their needs throughout the country, much less the world.

Who is being served? Partners of the merging firms?

Perhaps the prospect of financial gain for individual partners underlies the Dentons/McKenna Long discussions. For the Dentons partners who haven’t yet lived through a full year since the Salans/FMC combination, that suggestion seems like a triumph of hope over what is, at best, profound uncertainty.

Maybe the myth that economies of scale accompany the growth of law firms is driving this deal and others that have preceded it recently. But according to law firm management consultants Altman Weil, getting bigger doesn’t make law firms more efficient. It usually works the other way.

On the McKenna Long side, the financial motivation is even less evident. According to the 2013 Am Law rankings, the firm had 2012 average partner profits greater than SNR Denton’s ($930,000 for McKenna Long v. $785,000 for SNR Denton prior to the Salans/FMC merger), along with a better profit margin (26 percent v. 22 percent).

Maybe McKenna Long partners are relying on the verein structure of the combination to preserve their relatively superior economic position. After all, individual firms in a verein retain their financial independence. But as Edwin B. Reeser and Martin J. Foley suggest in their recent article on undisclosed fee-sharing agreements, that structure could also be creating thorny ethical complications when client referrals across member firms within a verein become factors in compensating partners.

Who is being served? Empire builders

For many big firm leaders, growth has become a stand-alone strategic objective. How many of them remember Steven Kumble’s similar view?

Kumble presided over an explosive expansion that, by 1986, made Finley Kumble the second largest firm in the world. As Kumble erected his firm’s global platform from 1977 to 1986, a fellow partner asked him why his goal wasn’t to create the best firm, rather than the biggest one.

Kumble replied, “When you’re the biggest, everyone will think we’re the best.”

He was wrong. As Finley Kumble became one of the biggest firms, no one ever thought it was the best. Through acquisitions of other firms and aggressive lateral hiring of rainmaker partners, Kumble promoted a culture in which money became the glue that held things together — until it didn’t.

In December 1987, Finley Kumble dissolved and its brand became a symbol of monumental law firm failure.

ARE LAWYERS BECOMING HAPPIER?

A recent scholarly study and the 2013 Am Law Midlevel Associates Survey together pose an intriguing question: Is the legal profession becoming happier? If so, that would be a welcome development.

Perhaps the answer is yes and I should take partial credit, at least for improved associate morale in some big firms. After all, for years I’ve been writing and speaking about the extent to which the profession has evolved in ways that undermine attorney well being, especially in large firms. Since the publication of my book, The Lawyer Bubble, many managing partners have invited me to address their partnership meetings on that subject. But before getting too carried away, let’s take a closer look.

No Buyer’s Remorse!

In “Buyers’ Remorse? An Empirical Assessment of the Desirability of a Lawyer Career,” Professors Ronit Dinovitzer (University of Toronto), Bryant Garth (University of California, Irvine – School of Law), and Joyce S. Sterling (University of Denver Strum College of Law) analyzed data from the After the JD project. It tracks about 4,500 lawyers from the class of 2000 who responded to questions in 2003, 2007, and 2012.

Among other things, the authors conclude that “the evidence of mass buyer’s remorse [over getting a legal degree] is thin at best.” (p. 3) I’m not convinced.

First, a new lawyer entering the market in 2000 has enjoyed better times for the profession than graduates of the last several years. That doesn’t render data from the class of 2000 meaningless, but a study based on the experience of those attorneys shouldn’t become a headline-grabber that unduly influences anyone considering a legal career today.

Second, the authors rely only on responses that attorneys provided in 2007. The answers they gave in 2012 are “currently being cleaned and readied for analysis” (p. 5), so the authors didn’t use them. What was the rush to get to print with 2007 data? Why not wait and use the 2012 results to see whether accelerating law firm trends since 2007 affected responses from even the comparatively lucky class of 2000.

(For more on those trends, including partner de-equitizations, salary reductions for non-equity partners, and the environment that has accompanied the accelerating drive to increase short-term profits, read Edwin Reeser’s excellent two-part article in the ABA Journal.)

More on the Data

In the end, After the JD is a useful source of information. But it’s an overstatement to argue, as Dinovitzer et al. assert, “the data from the AJD project are the best (and almost only) data available on the issues currently being debated.” (p. 5)

In fact, there have been dozens of studies on attorney satisfaction, including an October 2007 ABA survey in which six out of ten attorneys who have been practicing 10 years or more said they would not recommend a legal career to a young person. And that was prior to the Great Recession.

Now before defensive academics pull out their knives, let me state clearly that I’m not suggesting that the ABA’s online survey of 800 lawyers is somehow superior to the obviously more comprehensive After the JD project. It’s not. But contrary to the authors’ assertion, AJD is far from the only data available on the issues currently being debated.”

For example, Professor Jerome A. Organ (University of St Thomas School of Law) recently published a compilation of 28 attorney surveys taken between 1984 and 2007. Rates of satisfied attorneys ranged from a low of 59 percent (South Carolina – 2008) to a high of 93 percent (Minnesota – 1987). The latest national study on Organ’s list (ABA/NALP – 2007) reported a satisfaction rate of 76 percent. (He excluded the ABA’s reported 55 percent satisfaction rate in 2007 because it “was not a random sample of attorneys.” n. 144.)

The Am Law Survey

Meanwhile, Am Law’s annual Midlevel Associates Survey of third-, fourth-, and fifth-year associates reported record high levels of associate satisfaction. Are their lives improving?

Anecdotal evidence of another possibility comes from an observed shift in attitudes among students in my undergraduate and law classes over the past several years. Many members of the youngest generation of lawyers (and would-be lawyers) are so concerned about finding jobs that they are now equating satisfaction with getting and keeping one long enough to repay their staggering student loans. That might explain why the same Am Law survey found that only 10 percent of men and 6.5 percent of women saw themselves as equity partners at their current firms in five years.

Now What?

Even so, inquiries that I receive from law firm managing partners provide more anecdotal proof that some firms have decided to value associate morale. The question is whether firm leaders will have the courage to push positive change into the very heart of the prevailing big law firm business model.

On that front, the news is less encouraging. In March 2013, Forbes reported on a “Career Bliss” survey of 65,000 employees that ranked “law firm associate” first on the list of “Unhappiest Jobs in America.” Likewise, in a recent Altman Weil Flash Survey, 40 percent of managing partners reported that partner morale at their firms in 2013 was lower than at the beginning of 2008 (pre-recession).

The Bottom Line

In the end, Dinovitzer et al. seem encouraged that “the overall trend is that more than three-quarters of respondents, irrespective of debt, express extreme or moderate satisfaction with the decision to become a lawyer.”

That’s supposed to be good news. But there are more than 1.2 million attorneys in the U.S.. Even a 75 to 80 percent satisfaction rate leaves more than 200,000 lawyers with what sure looks like buyer’s remorse.

The profession can do better than a “C.”

LATEST SYMPTOMS OF AN AILING PROFESSION

Together, three recent stories capture much of what ails the legal profession: 1) law schools continue to produce way too many lawyers for the number of anticipated jobs requiring a JD degree; 2) future attorneys incur staggering debt for a three-year degree that can and should be obtainable in two; and 3) many senior partners in big law firms at the pinnacle of the profession have lost an appreciation for their good fortune and a sense of perspective that comes with it.

The End of Lawyers?

The first story reports a continuing drop in the number of law school applicants — more than 30 percent since 2010! Could this be the beginning of what one law professor has predicted will be an actual shortage of lawyers by 2016?

No.

Using 2010 as a baseline against which to measure the comparative decline in applications is misleading. The Great Recession produced a surge of 2009-2010 applicants seeking a three-year reprieve from an impossible job market. At that time, law school still looked like a safe bet, largely because deans could tout 93 percent employment rates without disclosing which of their graduates held jobs that were short-term, part-time, school-funded, or didn’t require a legal degree.

Another fact is more salient: Overall acceptance rates have increased dramatically. In 2003, about half of the 98,000 applicants were admitted. In 2012, law schools took 75 percent of the 68,000 applicants. Bottom line: prior to the Great Recession, first-year enrollment totaled about 49,000; in 2012, it was 44,500. That drop is certainly affecting some law schools. But the overall decline is not as dramatic as the hyperbolic headlines. If first-year enrollment ever falls below 30,000 and stays there for a few years, that will be newsworthy.

What Are Students Getting For Their Money?

Meanwhile, President Obama weighed in on the subject of eliminating the third year of law school. It’s been a great idea for a long time. Of course, the third year will survive the President’s criticism because it accounts for one-third of law school tuition revenues. Such a central component of the law school business model won’t die easily.

Some members of the legal academy defend the third year of formal legal education as necessary for increasingly complex times. That argument may prove too much. After the first year teaches prospective attorneys to think like lawyers and the second year covers basic substantive legal areas, the most relevant legal training occurs outside the classroom under the tutelage of practicing lawyers. Many attorneys develop specialties, but that doesn’t result from taking one or two advanced courses during the third year of law school.

Deans can pass blame for the enduring third year onto the ABA. It has long been a victim of regulatory capture by the institutions it’s supposed to be supervising for the well being of all attorneys and the profession. The vast majority of states require graduation from an ABA-accredited law school and the ABA’s rules insist on course work that requires three academic years to complete. That’s why the few schools that offer accelerated two-year JDs are simply cramming three years of credits into two calendar years.

Moreover, the accelerated programs rarely reduce the cost of law school. Most of the schools offering accelerated programs charge the same total tuition as their traditional three-year programs.

Meanwhile, At Big Firms…

A final story is developing over financial reports concerning the overall performance of big law firms in 2013: Revenues are flat; demand is down. Partner profits might not rise this year!

Where you stand depends on where you sit, I suppose. But what does it say about the most lucrative segment of the profession when law firm management consultants can induce panic at the prospect that average equity partner profits might remain steady or — perish the thought — drop to still-astounding six- or seven-figure levels that seemed remarkably good less than a decade ago?

I think it suggests that too many partners have forgotten why they went to law school in the first place. Very few became attorneys because they thought it would make them rich. But they’ve grown accustomed to that pleasant surprise.

Maybe the next generation will do better.

RECENT APPEARANCES

July 5: Bloomberg Surveillance TV: “Lawyers Are Feeling the Painhttp://www.bloomberg.com/video/lawyers-are-feeling-the-pain-JRX5tQUjStSDZGInHgvgPA.html

June 26: WGN radio: “Crossing Hoffa“: http://wgnradio.com/2013/06/26/crossing-hoffa/

June 25: PBS’s Nightly Business Report: “Legal Profession Facing Changeshttp://nbr.com/2013/06/25/legal-profession-facing-changes-professor/

THE TRUE COST OF THE WEIL LAYOFFS

The Wall Street Journal describes the layoffs of 60 lawyers and 110 staff as “the starkest sign yet that the legal industry continues to struggle after the recession.” But who, exactly, is struggling?

Not the owners of the business. The overall average profits for equity partners in the Am Law 100 reached record levels in 2012. Even during the darkest days of the Great Recession in 2008, PPP for that group remained comfortably above $1.2 million before resuming the climb toward almost $1.5 million last year.

Not equity partners at Weil, Gotshal & Manges, who earned a reported average PPP of $2.2 million in 2012, according the the American Lawyer.

So Who Suffers?

One group of victims consists of 60 young people who had done everything right until everything went wrong for them on June 24. They’re intelligent, ambitious, and hard-working. Exemplary performance in high school earned them places in good colleges where they graduated at the top of their classes. They attended excellent law schools and excelled, even as the competition got tougher.

All of those accomplishments landed them great jobs. In the midst of a dismal legal job market, they went to work at one of the nation’s most prestigious law firms. Making more than $160,000 a year, many believed that soon they might throw off the yoke of six-figure student loan debt.

Now, they’re unemployed.

Another group of victims consists of 110 staffers who also got the boot. According to the NY Times, approximately half of them were secretaries. These behind-the-scenes workers often go unappreciated by lawyers who mistakenly take all of the credit for their own success.

A third group is a reported 10 percent of partners, many of whom who will suffer compensation cuts of “hundreds of thousands of dollars,” according to the NY Times.

“It’s All About the Future”

Announcing the layoffs, executive partner Barry Wolf described the move as “about the future of the firm and strategically positioning us for the next five years.” But layoffs aren’t about weeding out associates who don’t measure up to the rigorous quality standards necessary for equity partnerships. They’re about matching supply (of associates) with demand (for legal work) according to undisclosed criteria.

In fact, it seems a bit strange to talk about a firm positioning itself for the future while simultaneously dropping a morale bomb on its associates (and some partners) during the height of the summer program. The best and the brightest young prospects are working in big firms where luring that talent into the firms is a top priority. Bad public relations from a high-profile layoff can have a chilling effect that outlasts a single news cycle.

And what is that future going to look like? Will Weil be hiring any new associates over the next 12 months? Or 18 months? Or even 24 months? If so, I know 60 candidates with big firm experience (at Weil) who may be interested.

There is no shortage of current students who will continue to seek high-paying jobs at Weil, Gotshal & Manges. But what if negative publicity dissuades those few with the rare qualities necessary to become superstar partners from even signing up for on-campus interviews? By its very nature, such longer-run damage is impossible to know, much less measure.

Big Law’s Cheerleaders Applaud the Move

Law firm management consultants applauded Weil’s move. That’s not surprising because they have been central players in the profession’s transformation to just another business. They consistently endorse businesslike steps to maximize short-term profits. They expect other firms to follow Weil’s lead, and perhaps some will. Law firm consultant Peter Zeughauser said, “Weil is a bellwether firm and this will be a real wake up call.”

The etymology of bellwether may be relevant. In the mid-15th century, a bell was hung on a wether, a castrated ram that led a domesticated flock. In that way, the noise from the bellwether made it possible to hear the flock coming before anyone saw it.

In an informal Am Law survey, other firm leaders have distanced themselves from Weil. Before following that lead ram, perhaps they’re giving some thought to where it is going.

ANOTHER COMMENDABLE CONDUCT AWARD

Big law bankruptcy attorneys may have finally killed their golden goose. We’ll never know if less hubris and more thought might have prevented the U.S. Trustee from releasing new attorney compensation guidelines that surely have prominent members of that bar squirming. Those guidelines earn my latest “Commendable Conduct Award.” Starting November 1, we’ll see how many judges have the courage to apply them.

Restraint in the race to $1,000 an hour billing rates to maximize short-term profits might have served practitioners better in the long run. Likewise, more discretion in responding to media inquiries about the lucrative bankruptcy law world might have been wiser than Weil, Gotshal & Manges partner Harvey Miller’s stunning comment to the Wall Street Journal in 2011: “The underlying principle is, if you can get it, get it.”

Flying Under the Radar

The bankruptcy practice in big firms is unique because there’s no real client putting the usual counter-pressure on attorneys seeking to enhance their personal wealth. It’s the billable hour regime at its worst.

Outside bankruptcy, corporate clients everywhere are pushing back on big law firms’ hourly rate increases, refusing to pay for high-priced first-year associates, demanding budgets, scrutinizing attorney activities, and generally seeking greater economy in the delivery of outside legal services. Bankruptcy attorneys have little comparable accountability. They simply set their rates, decide what tasks to perform, and assign manpower as they see fit.

Hello and Good-bye

Unlike corporate clients who dangle the prospect of long-term relationships and future business to encourage their outside attorneys to be more efficient, bankruptcy practitioners have a series of one-shot engagements. When the current proceeding is over, their bankruptcy “client” of the moment disappears, never to return.

Bankruptcy petitions are also vehicles for law firm oligopolists to share pricing information. When most senior big firm bankruptcy partners request $1,000 an hour, it becomes the reasonable and customary rate. But even more remarkable are the $400 an hour and up rates that they can often get for junior associates — the same ones who add so little value that real clients refuse to pay for them at all.

Theoretical Oversight

The U.S. Trustee reviews fee petitions. But to date, those efforts have amounted to quibbling over obviously suspect expenses, such as $500 hotel rooms when cheaper accommodations were available or taking limos when taxis were a reasonable alternative.

Likewise, attorneys representing competing interests in the bankrupt’s estate — creditors, for example — can object to the fees of other attorneys in the proceeding. But none has any incentive to rock the lucrative hourly rate boat in which they all sit. Bankruptcy judges have the final word on attorneys’ fees petitions and they routinely rubber-stamp them.

Now It’s Becoming Real

When the U.S. Trustee first proposed the new guidelines, big firm bankruptcy lawyers throughout the country united in opposition. The most strident objections were to the idea that firms should reveal hourly rates for comparable non-bankruptcy associates and partners working for real clients.

Were firms worried about providing data that would allow the U.S. Trustee and supervising courts to compare hourly rates sought in bankruptcy with those resulting from a market that is at least somewhat more competitive? Soon, we’ll find out.

The new forms accompanying the guidelines require, among other things, that firms reveal the “blended hourly rates” of their personnel in 10 different categories ranging from equity partners to paralegals. In addition to the blended rates sought in the fee petition, firms also must disclose their firmwide (or, in some cases, office wide) blended rates for each category.

A Step on the Road to Transparency

The new guidelines aren’t perfect and attorneys will manipulate them. Budgets are optional. Hourly “step rate” increases are automatic as attorneys gain seniority. Attorney categories are too broad, with a single category for all equity partners and with associates grouped into categories covering three years. An especially large loophole allows firms to report either the “billed” or “collected” comparable hourly rate. (Real clients request discounts from standard hourly rates, and they often get them.)

Even so, the U.S. Trustee deserves credit for moving a dark corner of the profession from opacity to translucence. Free market devotees — of which big law has many — should embrace the changes. So far, big firm partners have resisted them vehemently.

The governing principle for too much of the large law firm world has become “if you can get it, get it.” Perhaps many of those espousing that view are about to “get it” in a much different way than they have in the past.

PROOF OF THE PROFESSION’S CRISIS

biglaw-450

This article won the “Big Law Pick of the Week.” BigLaw‘s weekly newsletter reaches the world’s largest law firms and the general counsel who hire them.

Someone should remind law firm leaders that the Fifth Amendment protection against self-incrimination isn’t just for clients. It can work for them, too. The latest Altman-Weil survey of firm leaders is proof of widespread management incompetence, stupidity, and worse.

The survey went to the chairs or managing partners of 791 firms with 50 or more lawyers. Firms with more than 250 lawyers (that is, mostly Am Law 200 firms) had a much higher response rate (42 percent) than smaller firms (26 percent). In other words, the survey results tilt toward big law firm attitudes.

The troubling big picture

The Am Law Daily’s summary includes comments from the survey’s author, Thomas Clay, who said that too many firms are “almost operating like Corporate America…managing the firm quarter-to-quarter by earnings per share.” That shortsighted approach is “not taking the long view about things like truly changing the way you do things to improve client value and things of that nature.”

For example, 95 percent of respondents view increased pricing competition as an ongoing trend, and 80 percent expect shifts to non-hourly billing structures. But only 29 percent have made significant changes to their own pricing practices in the wake of the recession.

Group stupidity

It gets worse. When asked to identify their greatest challenges over the next 24 months, the item that managers cite most often is “increasing revenue.” The rest of the list is, in order: new business, growth, profitability, management transition, cost management, and attracting talent. If you’re wondering where clients fit — other than as a source of revenue and profits in items one, two, and three — “client value” finished eighth.

Long-term thinking? Forget it. The client silo mentality and resulting culture of short-termism are widespread and deep. Almost 30 percent of law firm leaders say their firms lack adequate mid-level partners to whom they could transition clients. In another set of responses, they reveal why: 78 percent say that “senior partners don’t want to retire”; 73 percent admit that “senior partners don’t want to forfeit current compensation by transitioning client work.”

Lateral incompetence

Meanwhile, lateral hiring remains the prevailing strategy to achieve growth. Ninety percent of respondents plan to hire laterals in 2013; more than 60 percent seek entire practice groups. For firms of more than 250 lawyers, the numbers are even more startling: 100 percent plan to acquire laterals; 92 percent plan to acquire groups.

How much time do lateral partners get to prove their worth? Almost 60 percent of responding firm leaders say two years or more; 30 percent don’t set a time frame.

What happens when laterals don’t meet the expectations that brought them into the firm? Two-thirds of firm leaders said that they “sometimes, rarely or never” tell unproductive lateral hires to leave.

Institutional ineptitude

Almost 40 percent of respondents say their partners’ morale is lower compared to the beginning of 2008. And those partners survived the purges of 2009 and beyond.

If you’re looking for contributors to declining morale, try these. Seventy-two percent of firm leaders report that fewer equity partners will be a permanent trend going forward. Three-fourths have either tightened their standards or take them more seriously. Meanwhile, 92 percent of responding two-tier firms don’t have an up-or-out policy as non-equity partner profit centers grow.

To summarize:

Managing partners know that change is coming and clients are demanding it, but firms aren’t revisiting their basic strategies or business models.

Growth and profits finish far ahead of enhancing client value as most law firm leaders’ top concerns.

Leaders view aggressive lateral hiring as critical to law firm growth, but when laterals don’t produce, most firms don’t do much about it.

Succession planning is problematic because senior partners don’t want to relinquish compensation that is tied to their client billings.

As senior leaders continue to pull up the equity partner ladder on the next generation, morale plummets and managing partners worry about the absence of mid-level talent to serve clients in the future.

Taking all of this together, psychologists would call it a severe case of cognitive dissonance — simultaneously holding contradictory thoughts in your head. Those who assert that most big firms are resilient and face no life-threatening problems are wrong. A crisis of leadership is already upon us as lot of supposedly smart people continue to do some really dumb things. Don’t take my word for it; they’re outing themselves.

UGLINESS INSIDE THE AM LAW 100 – PART 2

Part I of this series considered the possibility that a key metric — average partner profits — has lost much of its value in describing anything meaningful about big law firms. In eat-what-you-kill firms, the explosive growth of top-to-bottom spreads within equity partnerships has skewed the distribution of income away from the bell-shaped curve that underpins the statistical validity of any average.

Part II considers the implications.

Searching for explanations beyond the obvious

In recent years, equity partners at the top of most big firms have engineered a massive redistribution of incomes in their favor. Why? The next time a senior partner talks about holding the line on equity partner headcount or reducing entry-level partner compensation as a way to strengthen the partnership, consider the source and scrutinize the claim.

One popular assertion is that the high end of the internal equity partner income gap attracts lateral partners. In fact, some firms boast about their large spreads because they hope it will entice laterals. But Professor William Henderson’s recent analysis demonstrates that lateral hiring typically doesn’t enhance a firm’s profits. Sometimes selective lateral hiring works. But infrequent success doesn’t make aggressive and indiscriminate lateral hiring to enhance top line revenues a wise business plan.

According to Citi’s 2012 Law Firm Leaders Survey, even law firm managing partners acknowledge that, financially, almost half of all lateral hires are no better than a break-even proposition. If leaders are willing to admit that an ongoing strategy has a failure rate approaching 50 percent, imagine how bad the reality must actually be. Even worse, the non-financial implications for the acquiring firm’s culture can be devastating — but there’s no metric for assessing those untoward consequences.

A related argument is that without the high end of the range, legacy partners will leave. Firm leaders should consider resisting such threats. Even if such partners aren’t bluffing, it may be wiser to let them go.

“We’re helping young attorneys and building a future”

Other supposed benefits to recruiting rainmakers at the high end of a firm’s internal partner income distribution are the supposedly new opportunities that they can provide to younger attorneys. But the 2013 Client Advisory from Citi Private Bank-Hildebrandt Consulting shows that lateral partner hiring comes at the expense of associate promotions from within. Homegrown talent is losing the equity partner race to outsiders.

In a similar attempt to spin another current trend as beneficial to young lawyers, some managing partners assert that lower equity partner compensation levels lower the bar for admission, making equity status easier to attain. Someone under consideration for promotion can more persuasively make the business case (i.e., that potential partner’s client billings) required for equity participation.

Such sophistry assumes that an economic test makes any sense for most young partners in today’s big firms. In fact, it never did. But now the prevailing model incentivizes senior partners to hoard billings, preserve their own positions, and build client silos — just in case they someday find themselves searching for a better deal elsewhere in the overheated lateral market.

Finally, senior leaders urge that current growth strategies will better position their firms for the future. Such appealing rhetoric is difficult to reconcile with many partners’ contradictory behavior: guarding client silos, pulling up the equity partner ladder, reducing entry level partner compensation, and making it increasingly difficult for home-grown talent ever to reach the rarified profit participation levels of today’s managing partners.

Broader implications of short-term greed

In his latest book, Tomorrow’s Lawyers, Richard Susskind wrote that most law firm leaders he meets “have only a few years left to serve and hope they can hold out until retirement… Operating as managers rather than leaders, they are more focused on short-term profitability than long-term strategic health.”

Viewed through that lens, the annual Am Law 100 rankings make greed respectable while masking insidious internal equity partner compensation gaps that benefit a relatively few. Annual increases in average partner profits imply the presence of sound leadership and a firm’s financial success. But an undisclosed metric — growing internal inequality — may actually portend failure.

Don’t take my word for it. Ask lawyers from what was once Dewey & LeBoeuf and a host of other recent fatalities. Their average partner profits looked pretty good — all the way to the end.

UGLINESS INSIDE THE AM LAW 100 — PART I

Every spring, the eyes of big firm attorneys everywhere turn to the American Lawyer rankings — the Am Law 100 – and the contest surrounding its key metric: average profits per equity partner (PPP). But if the goal is to obtain meaningful insight into a firm’s culture, financial strength or profitability for most of its partners, those focusing on PPP are looking at the wrong ball.

Start with the basics

For years, firms have been increasing their PPP by reducing the number of equity partners. American Lawyer reports that cutbacks in equity partners, when done correctly, are “a solid management technique, not financial chicanery.” But as firms are now executing the strategy, it looks more like throwing furniture into the fireplace to keep the equity house warm.

Since 1985, the average leverage ratio (of all attorneys to equity partners) for the Am Law 50 has doubled from 1.76 to more than 3.5. It’s now twice as difficult to become an equity partner as it was when today’s senior partners entered that club. Between 1999 and 2009, the ranks of Am Law 100 non-equity partners grew threefold; the number of equity partners increased by less than one-third.

Arithmetic did the rest: average partner profits for the Am Law 50 soared from $300,000 in 1985 ($650,000 in today’s dollars) to more than $1.7 million in 2012.

The beat goes on

Perhaps it’s not financial chicanery, but many firms admit that they’re still turning the screws on equity partner head count as a way to increase PPP. According to the American Lawyer’s most recent Law Firm Leaders’ Survey, 45 percent of respondent firms de-equitized partners in 2012 and 46 percent planned to do so in 2013.

But even when year-to-year equity headcount remains flat, as it did this year, that nominal result masks a destabilizing trend: the growing concentration of income and power at the top. In fact, it is undermining the very validity of the PPP metric itself.

An unpublished metric more important than PPP

The internal top-to-bottom spread within the equity ranks of most firms doesn’t appear in the Am Law survey or anywhere else, but it should, along with the distribution of partners at various data points. As meaningful metrics, they’re far more important than PPP.

Even as overall leverage ratios have increased dramatically, the internal gap within equity partnerships has skyrocketed. A few firms adhere to lock-step equity partner compensation within a narrow overall range (3-to-1 or 4-to-1). But most have adopted higher spreads. In its 2012 financial statement, K&L Gates disclosed an 8-to-1 gap – up from 6-to-1 in 2011. Dewey & LeBoeuf’s range exceeded 20-to-1.

This growing internal gap undermines the informational value of PPP. In any statistical analysis, an average is meaningful if the underlying sample is distributed normally (i.e., along a bell-shaped curve where the average is the peak). But the distribution of incomes within most big firm equity partnerships bears no resemblance to such a curve.

Cultural consequences

Rules governing statistical validity have real world implications. Growing internal income spreads render even nominally stable equity partner head counts misleading. Lower minimum profit participation levels make room for more equity partner bodies, but what results over time is Dewey & LeBoeuf’s “barbell” system. A handful of rainmakers dominates one side of the barbell; many more so-called service partners populate the other — and they rarely advance very far.

As Edwin B. Reeser and Patrick J. McKenna wrote last year, in Am Law 200 firms, “Typically, two-thirds of the equity partners earn less, and some perhaps only half, of the average PPP.” Statisticians know that for such a skewed distribution, the arithmetic average conveys little that is useful about the underlying population from which it is drawn.

Why it matters

For firms that don’t have lock-step partner compensation, the PPP metric doesn’t reveal very much. For example, consider a firm with two partners and an 8-to-1 equity partner spread. If Partner A earns $4 million and Partner B earns $500,000, average PPP is $2.25 million — a number that doesn’t describe either partner’s situation or the stability of the firm itself. But the underlying details say quite a bit about the culture of that partnership.

Firms with the courage to do so would follow the lead of K&L Gates and disclose what that firm calls its “compression ratio” and then take it a step farther: reveal their internal income distributions as well. But such revelations might lead to uncomfortable conversations about why, especially during the last decade, managing partners have engineered explosive increases in internal equity partner income gaps.

A future post will consider that topic. It’s not pretty.

WHY THE BILLABLE HOUR ENDURES

Last month, I wrote a New York Times op-ed discussing the billable hour regime and its unfortunate consequences for the legal profession. The piece generated a lot of response, most of which supported my themes. Readers generally agreed that the system rewards unproductive behavior, invites abuse, and pits attorneys’ financial self-interest against their clients’ goals.

Defending the billable hour

Even so, the Times published a responsive letter to the editor from the general counsel of Veolia Transportation — “the largest private sector operator of multiple modes of transit in North America,” according to its website – who defended hourly billing. He noted that alternatives to the billable hour “have not caught on because they do not allow the client the same opportunity to see the work as it is being done, evaluate its worth, and challenge when appropriate the relationship of time, task and cost.”

Theoretically, he has a point. In fact, the billable hour system arose from a desire for greater transparency. Before it gained widespread use, clients typically received a bill that included a single line: “For services rendered.” When today’s senior partners entered the profession, firms kept track of their time but didn’t impose mandatory minimum billable hour requirements. In fact, a 1958 ABA pamphlet recommended that attorneys maintain better time records and strive to bill clients 1,300 hours a year.

Unfortunately, transparency gave way to short-term profit-maximizing behavior that distorted the billable hour into an internal law firm measure of “productivity.” Quantity of time billed became more important than the quality or effectiveness of effort expended. Today’s required annual minimum hours typically run close to 2,000 — and most associates understand that enhancing their prospects for advancement requires many more.

Transparency yields to abuse

In theory, Veolia’s general counsel is correct about the billable hour’s transparency. But in practice, few clients are well-positioned to challenge “the relationship of time, task and cost.” For a complex case, what motions should be filed and how much time should their preparation take? How many witness depositions are needed? And of what length? What’s the right level of staffing to maximize the chances for success?

Some in-house counsel possess the sophistication to provide meaningful answers to these and other questions that underlie any effort to assess the relationship of hourly fees to “time, task and cost.” But most don’t. They trust their lawyers to do the right thing under an incentive structure that pushes those lawyers in the opposite direction.

Bankruptcy as a poster child

Embarrassing reports of billing deceit are rare. But the real problem isn’t such well-publicized abuses. Rather, it’s the cultural impact of the incentive structure. In most large law firms, one practice area is particularly revealing: big bankruptcy cases.

Large numbers of bodies billed at enormous hourly rates get thrown into such matters. All of the activity shows up in detailed time records accompanying massive fee petitions that courts routinely approve. Like the U.S. Trustee’s office that also reviews such filings, courts lack the resources to provide meaningful scrutiny of “time, task and cost.”

Petitions seeking hourly rates of $700 for associates and $1,000 for partners routinely go unchallenged, as do the listed activities that consume these attorneys’ time. Last year, when the U.S. Trustee proposed that firms disclose whether they charge higher hourly rates for the same attorneys performing non-bankruptcy work, the profession united in opposition.

The moral

The billable hour regime endures because, like the general counsel of Veolia, clients think they have it under control. But that requires a leap of faith as outside lawyers resolve the ongoing dilemma of a system that pits fiduciary responsibility to a client against the attorneys’ financial self-interest. With law firms obsessing over current year profits and partners seeking to maximize personal books of business to preserve their own positions in an eat-what-you-kill world of frenetic lateral partner movement, that dilemma becomes profound.

As for the billable hour’s impact on other aspects of the profession’s culture, another Times letter to the editor offered this: “Appearing before St. Peter, a young law firm associate asked why he was being taken at age 29. Taken aback, St. Peter said the associate’s billable hours made the associate appear to be 95.”

THE LAWYER BUBBLE — Early Reviews and Upcoming Events

The New York Times published my op-ed, “The Tyranny of the Billable Hour,” tackling the larger implications of the recent DLA Piper hourly billing controversy.

And there’s this from Bloomberg Business Week: “Big Law Firms Are in ‘Crisis.’ Retired Lawyer Says.”

In related news, with the release of my new book, The Lawyer Bubble – A Profession in Crisis, my weekly posts will give way (temporarily) to a growing calendar of events, including:

TUESDAY, APRIL 2, 2013, 10:00 am to 11:00 am (CDT)
Illinois Public Media
“Focus” with Jim Meadows
WILL-AM – 580 (listen online at http://will.illinois.edu/focus)

TUESDAY, APRIL 2, 2013, 1:00 pm to 2:00 pm (CDT)
“Think” with Krys Boyd
KERA – Public Media for North Texas – 90.1 FM (online at http://www.kera.org/think/)

THURSDAY, APRIL 4, 2013, 11:00 am to Noon (EDT)
Washington, DC
The Diane Rehm Show
WAMU (88.5 FM in DC area) and NPR

FRIDAY, APRIL 5, 2013, 10:45 am to 11:00 am (EDT)
New York City
The Brian Lehrer Show
WNYC/NPR (93.9 FM/820 AM in NYC area)
(http://www.wnyc.org/shows/bl/)

SATURDAY, APRIL 6, 2013, Noon (EDT)
New Hampshire Public Radio
“Word of Mouth” with Virginia Prescott
WEVO – 89.1 FM in Concord; available online at http://nhpr.org/post/lawyer-bubble)

WEDNESDAY, APRIL 10, 2013, 8:00 am to 9:00 am (CDT)
The Joy Cardin Show
Wisconsin Public Radio (available online at http://www.wpr.org/cardin/)

FRIDAY, APRIL 12, 2013
The Shrinking Pyramid: Implications for Law Practice and the Legal Profession” — Panel discussion
Georgetown University Law Center
Center for the Study of the Legal Profession
600 New Jersey Avenue NW
Location: Gewirz – 12th floor
Washington, D.C.

TUESDAY, APRIL 23, 2013, 7:00 pm (CDT) (C-SPAN 2 is tentatively planning to cover this event)
The Book Stall at Chestnut Court
811 Elm Street
Winnetka, IL

Here are some early reviews:

The Lawyer Bubble is an important book, carefully researched, cogently argued and compellingly written. It demonstrates how two honorable callings – legal education and the practice of law – have become, far too often, unscrupulous rackets.”
—Scott Turow, author of Presumed Innocent and other novel

“Harper is a seasoned insider unafraid to say what many other lawyers in his position might…written with keen insight and scathing accusations…. Harper brings his analytical and persuasive abilities to bear in a highly entertaining and riveting narrative…. The Lawyer Bubbleis recommended reading for anyone working in a law related field. And for law school students—especially prospective ones—it really should be required reading.”
New York Journal of Books

“Anyone looking into a career in law would be well advised to read this thoroughly eye-opening warning.”
Booklist, starred review

“[Harper] is perfectly positioned to reflect on alarming developments that have brought the legal profession to a most unfortunate place…. Essential reading for anyone contemplating a legal career.”
—Kirkus Reviews

“[Harper] burns his bridges in this scathing indictment of law schools and big law firms…. his insights and admonitions are consistently on point.”
—Publishers Weekly

“Imagine that the elite lawyers of BigLaw and the legal academy were put on trial for their alleged negligence and failed stewardship. Imagine further that the State had at its disposal one of the nation’s most tenacious trial lawyers to doggedly build a complete factual record and then argue the case. The result would be The Lawyer Bubble. If I were counsel to the elite lawyers of BigLaw and the legal academy, I would advise my clients to settle the case.”
—William D. Henderson, Director of the Center on the Global Legal Profession and Professor at the Indiana University Maurer School of Law

“With wit and insight,The Lawyer Bubble offers a compelling portrait of the growing crisis in legal education and the practice of law. This book is essential reading for anyone concerned about the profession or contemplating a legal career.”
—Deborah L. Rhode, Professor of Law and Director of the Center on the Legal Profession, Stanford University

“This is a fine and important book, thoughtful and beautifully written. It makes the case – in a responsible and sober tone – that we are producing far too many lawyers for far too small a segment of American society. It is a must-read for leaders of law firms, law schools, and the bar, as the legal profession continues its wrenching transition from a profession into just another business.”
—Daniel S. Bowling III, Senior Lecturing Fellow, Duke Law School

“In this superb book, Steven Harper documents, ties together and suggests remedies for the deceit that motivates expanding law school enrollment in the face of a shrinking job market, the gaming of law school rankings and the pernicious effect of greed on the leadership of many of our nation’s leading law firms. The lessons he draws are symptomatic, and go well beyond the documented particulars.”
—Robert Helman, Partner and former Chairman (1984-98), Mayer Brown LLP; Lecturer, University of Chicago Law School

“Every sentient lawyer realizes that the legal profession is in crisis, but nobody explains the extent of the problem as well as Steven Harper. Fortunately, he also proposes some solutions – so there is still room for hope. This is an essential book.”
—Steven Lubet, author of Fugitive Justice and Lawyers’ Poker

“Steven Harper’s The Lawyer Bubble is an expression of tough love for the law, law firms and the people who work in them. The clear message is take control of your destiny and your firm to avoid the serious jeopardy that confronts far too many firms today. Whether you are a partner, associate, or law student, you should read this compassionate and forceful work.”
—Edwin B. Reeser, Former managing partner, author, and consultant on law practice management

“Harper chronicles the disruption of his once-genteel profession with considerable sadness, and places the blame squarely at the wing-tipped feet of two breeds of scoundrel: law school deans, and executive committees that have run big law firms …” –”Bar Examined” – Book Review in The Washington Monthly (March/April 2013)

SOMEBODY’S CHILD

Nine years ago, Senator Rob Portman (R-Ohio) supported a constitutional amendment banning same-sex marriage. Now he wants Congress to repeal the provisions of the Defense of Marriage Act that deny federal recognition to such marriages. Apparently, his reversal on this issue began two years ago when his college freshman son told Portman and his wife that he was gay.

Plenty of prominent national figures have similarly changed their views. The tide of history seems overwhelming, even to conservative commentator George Will. Others can debate whether Portman and those who have announced newly acquired positions favoring gay rights are courageous, hypocrites, opportunists, or something else.

For me, the more important point is that his own child’s connection to the issue caused Portman to think differently about it. Applied to lawyers, the question become simple:

What if the profession’s influential players treated the young people pursuing a legal career as their own children?

Portman’s explanation

In 2011, Portman knew that his son was gay when 100 law graduates walked out of his commencement address at the University of Michigan.

“But you know,” he told CNN recently, “what happened to me is really personal. I mean, I hadn’t thought a lot about this issue. Again, my focus has been on other issues over my public policy career.”

His key phrases are pregnant with larger implications: “[W]hat happened to me is really personal….I hadn’t thought a lot about this issue.”

Start with law school deans

As the lawyer bubble grew over the past decade, some deans and university administrators might have behaved differently if a “really personal” dimension required them to think “a lot” about their approaches. Perhaps they would have jettisoned a myopic focus on maximizing their law school rankings and revenues.

At a minimum, most deans probably would have disclosed earlier than 2012 that fewer than half of recent graduates had long-term full-time jobs requiring a legal degree. It seems unlikely that, year after year, they would have told their own kids that those employment rates exceeded 90 percent. Perhaps, too, deans would have resisted rather than embraced skyrocketing tuition increases that have produced six-figure non-dischargeable educational debt for 85 percent of today’s youngest attorneys.

Then consider big firm senior partners

At the economic pinnacle of the profession, big firms have become a particular source of not only attorney wealth, but also career dissatisfaction. In substantial part, both phenomena happened — and continue to happen — because managing partners have obsessed over short-term metrics aimed at maximizing current year profits and mindless growth.

For example, the billable hour is the bane of every lawyer’s (and most clients’) existence, but it’s lucrative for equity partners. If senior partners found themselves pushing their own kids to increase their hours as a way to boost those partners’ already astonishing profits, maybe they’d rethink the worst consequences of a destructive regime.

Similarly, the average attorney-to-equity partner leverage ratio for the Am Law 100 has doubled since 1985 (from 1.75 to 3.5). Perhaps managing partners wouldn’t have been so quick to pull up the ladder on lawyers who sat at their Thanksgiving tables every year, alongside those managing partners’ grandchildren who accompanied them. Not every young associate in a big firm should advance to equity partner. But offering a 5 to 10 percent chance of success following 7 to 12 years of hard work isn’t a motivator. It invites new attorneys to prepare for failure.

Finally, compared to the stability of a functional family, the current big law firm lateral partner hiring frenzy adopts the equivalent of periodic divorce as a cultural norm. Pursued as a growth strategy, it destroys institutional continuity, cohesion, community, and morale. Ironically, according to Professor William Henderson’s recent American Lawyer article “Playing Not to Lose,” it offers little or no net economic value in return.

Adopting a family outlook or a parental perspective isn’t a foolproof cure for what ails the legal profession. Indeed, running law schools and big firms according to the Lannister family’s values (“The Game of Thrones”) — or those of Don Corleone’s (“The Godfather”) — might not change things very much at all.

It’s also worth remembering that Oedipus was somebody’s child, too.

FROM CRAVATH TO CHASE TO CADWALADER

James Woolery is on the move again. We’ve never met, but I’m beginning to feel as if I know the guy.

Woolery first appeared in my June 3, 2010 post about a policy change at Cravath, Swaine & Moore. The Wall Street Journal featured the then-41-year-old Cravath partner in an article about the firm’s plan to allow lawyers in their 30s and 40s to “make a name for themselves” by taking the lead on client deals. Historically, the WSJ reported, Cravath had reserved that role for partners in their 50s.

Six months later, I wrote about Woolery’s departure from Cravath to become co-head of JP Morgan Chase’s North American mergers and acquisitions group. He told the New York Times that he’d developed a business development focus and the Chase opportunity allowed him to build on those skills. So much for practicing law.

Now, two years after joining Chase, Woolery has become the first firmwide deputy chair of Cadwalader, Wickersham & Taft — a new position apparently created specially for its prominent lateral hire. The Wall Street Journal suggested that the move “is a big personal bet for Mr. Woolery. He is jumping back to the legal industry when it is still struggling with a shortage of work, and he is leaving J.P.Morgan just as mergers are showing new signs of life.”

Regardless of the particular reasons for Woolery’s various moves, the contrast between where he started (Cravath) and where he has now ended (Cadwalader) is remarkable.

Cravath

Whatever else people may think of Cravath, it has an unrivaled reputation for attracting first-rate attorneys. It is also a partnership in the truest sense of that concept: A single tier with a lock-step compensation system that resists an undue emphasis on short-term thinking. The Cravath model promotes longer run values, such as institutional stability.

For example, a lateral hiring frenzy pervades big law, but it’s a relatively rare event at Cravath. The firm focuses on developing talent internally. Its attorneys work hard, run a challenging gauntlet to equity partnership, and reap rich rewards for success.

In May 2007, an American Lawyer interviewer asked Cravath’s then-presiding partner Evan R. Chesler whether partners would stick around if the firm made less money. “I don’t know the answer to that,” he said. “I think there is more glue than just money.”

Cadwalader

Cravath’s ethos wouldn’t appeal to attorneys drawn to Cadwalader’s culture. In the mid-1990s, Cadwalader began moving aggressively toward what its new chairman Robert O. Link Jr. called a meritocracy. Others call it “eat-what-you-kill.”

In a February 2007 interview with the American Lawyer, Link expressed an attitude about firm culture that differed dramatically from Chesler’s. “Everyone should wake up in the morning and feel a little vulnerable,” he said.

Link meant it. In 1995, the 268-lawyer Cadwalader firm’s two-tier partnership had 76 equity partners, giving it a leverage ratio of three-and-a-half. By 2005, the firm had nearly doubled in size, but it had only 75 equity partners. Its leverage ratio of seven far exceeded that of all other Am Law 100 firms.

Cadwalader’s asset-backed structured finance practice fueled much of its growth. By 2007, it had 645 lawyers and a stunning leverage ratio of eight-and-a-half. But when the residential housing market cratered and took asset-back structured finance legal work with it, the firm’s fortunes slid badly.

By the end of 2012, Cadwalader had 435 lawyers — down more than 200 from five years earlier. Only 55 of them were equity partners — down 20 from 2007. The good news for the survivors was that by 2012, average equity partner profits had recovered almost completely to their 2007 all-time high of $2.7 million.

Differences that transcend metrics

As Cadwalader became smaller, Cravath maintained average partner profits ranging from $2.5 to $3.2 million, a leverage ratio of approximately four, and moderate growth from 412 to 476 attorneys. Even more to the point, it’s hard to imagine any circumstance short of dissolution that would cause Cravath to shed almost a third of its equity partners, as Cadwalader did from 2007 to 2012.

Back in May 2010, Woolery told the Wall Street Journal, “This is not your grandfather’s Cravath.” It’s not clear what that characterization of his former firm means or if it is correct, but offspring sometimes underestimate the value of a grandfather’s gifts. And offspring sometimes grow up to be grandparents themselves.

MORE LAW SCHOOL NON-REFORM

Every week, there’s a new proposal to reform legal education. In a recent New York Times op-ed, John J. Farmer Jr., dean of the Rutgers School of Law in Newark, offered his suggestion: two-year apprenticeships.

Most deans operate in good faith and are genuinely concerned about the current state of the profession. In fact, a core element of dean Farmer’s idea is quite sound. Hands-on training was a good idea when Clarence Darrow studied under the tutelage of a practicing attorney, and it still is. The British placement system of training contracts has kept its lawyer bubble smaller than ours.

But Darrow began his apprenticeship after one year of classes. Farmer’s suggestion of a two-year residency following three years of law school misses the mark, as do his predictions about what it would accomplish.

Problems of mysterious origin

Farmer begins where he must: a collapsing job market; law school deception in creating the oversupply of lawyers; record tuition levels and student debt. But he ignores an important question: How did those things happen? The answer: a flawed law school business model.

Consider Farmer’s point about law school deception. For years, his school joined most others in reporting 90-plus percent employment rates for the newest graduates. In the 2008 ABA Official Law School Guide, Rutgers-Newark showed a 93.3 percent employment rate; as recently as the 2012 Official Guide, it was 91.3 percent.

Starting in 2012, the ABA required schools to reveal which graduates had long-term full-time jobs requiring a legal degree. Rutgers-Newark hit the overall average for all law schools: only 56 percent for the class of 2011.

As for lawyer oversupply, Rutgers-Newark has been a continuing contributor. According to the 2008 Official Guide, Rutgers-Newark matriculated 182 full-time students from 3,010 applicants. Since then, the number of applicants has declined dramatically, but the number of enrollments hasn’t.

The 2013 Official Guide reports that Rutgers-Newark received only 2,218 applicants to its full-time program. Yet the school still matriculated 174 new students. In other words, since 2007, the number of applicants has dropped by 800 (26 percent), but first-year enrollment has declined by only eight students (4 percent).

Farmer also laments record levels of tuition and resulting student debt. The 2008 Official Guide listed Rutgers-Newark’s full-time non-resident tuition and fees at $27,976; residents paid $19,623. Today, non-resident tuition at the school exceeds $37,000 — a 33 percent jump. Resident tuition has increased by almost 30 percent and now exceeds $25,000.

Non-solutions

Ignoring the role of law schools in creating the current crisis leads Farmer to a proposal that won’t solve it. He suggests scrapping the system whereby big firms “hire graduates from a few select schools, paying them exorbitantly.” In its place, he wants a residency program that would allow law firms “to hire more lawyers, at lower rates, and give talented graduates of less prestigious institutions a chance to shine.”

During his proposed two-year apprenticeships, students would work for minimal wages (“repaying their debts could be suspended, as it is for medical residents”). At the end of the period, firms “could then select whom to keep.” For the losers in that contest, job searches would start anew.

Not gonna happen

Apart from retaining the flawed law school business model that has taken the profession to its current state, Farmer’s plan requires a remarkable leap of faith in big law firm behavior. In particular, he hopes that firms would charge lower hourly rates for new associates and, as a result, hire more of them.

Unlike many law school deans, Farmer has extensive experience as a practicing lawyer. But when he tries to predict the behavior of big law firm leaders, he enters tricky terrain.

The prevailing law firm business model perverts the definition of productivity to mean total billable hours, rather than the efficiency with which lawyer inputs produce outputs for clients. The model emphasizes the metrics of near-term profits at the expense of longer-run values. It would view reducing associate labor costs as a godsend to its bottom line, not as a reason to spread the same amount of existing work among more lawyers.

Farmer doesn’t suggest reducing tuition, enrollment, or the duration of law school itself. Such steps would challenge the law school business model directly. That’s the real lesson of dean Farmer’s op-ed: Until deans revisit their roles in creating the current mess, their proposed solutions are likely to remain wanting.

Dean Farmer suggests, “Legal education has not so much failed the profession as mirrored it.” Actually, it’s done both.

BIG LAW’S 2012 PERFORMANCE — NUMBERS AND NUANCE

Two recent reports sound a warning that most big law firm leaders should heed. One is the Georgetown Center for the Study of the Legal Profession/Thomson Reuters Peer Monitor Report on the State of the Legal Profession. The other is Citi Private Bank’s Annual Law Firm Survey.

Lessons from Dewey & LeBoeuf

The Georgetown/Thomson Reuters Report is noteworthy because, at long last, thoughtful analysts are giving Dewey & LeBoeuf’s collapse the larger context that it deserves. For the most past, today’s managing partners have persuaded themselves that Dewey’s failure resulted from a unique confluence of management missteps that they themselves could never make. But most current leaders are making them.

In particular, Dewey wasn’t an outlier; it was among the elite of the Am Law 100. The firm embodied a culmination of prevailing big law firm trends that can—and will—produce future disasters. As the Georgetown/Peer Monitor Report explains, those trends include raising the bar for promoting home-grown talent into equity partnerships while overpaying for lateral equity partner hires, increasing internal compensation spreads to create a subgroup of real players within equity partnerships, and ignoring the importance of morale and institutional loyalty to long-term stability.

Crunching the numbers

Meanwhile, Citi Private Bank’s annual full-year survey of big firms produced this upbeat headline: “Firms Posted a 4.3 Percent Rise in 2012 Profits.” But important underlying details are more troubling.

Although revenue and profits were up by 3.6 and 4.3 percent, respectively, overall demand at the 179 firms in the Citi sample grew by just 0.2 percent in 2012, expenses increased by 3.1 percent, and headcount grew more than demand. It’s a decidedly mixed bag of financial results.

In fact, Citi’s Dan DiPietro and Gretta Rusanow fear that the 2012 fourth quarter revenue surge saving many big firms “may not be sustainable.” For example, “survivorship bias” contributed to the final 2012 numbers. That is, Citi’s analysis removed Dewey & LeBoeuf’s revenue, demand, and equity partner figures from the 2011 base year because the firm disappeared in 2012. But most of Dewey’s revenue went to surviving firms, thereby artificially inflating the overall 2012 numbers. To some extent, it’s like comparing 2012′s apples to 2011′s oranges. Including Dewey’s 2011 numbers would have resulted in negative demand growth in 2012.

Citi also discussed the impact of accelerated year-end collections. They’re an annual event at most firms, but the expiring Bush-era tax cuts gave partners unique incentives to push clients for payment in December 2012. The report also mentioned a related possibility: firms may not have prepaid 2013 expenses.

A more insidious prospect goes unmentioned: some firms may have deferred expenses that were due and owing in December 2012. If the 2013 first quarter Citi report is surprisingly weak, look for a spike in expenses as a factor. Freedom to ignore generally accepted accounting principles in financial reporting gives law firms financial flexibility that can become dangerous.

Or maybe the numbers don’t matter

Transcending all of these possibilities is, perhaps, the simplest. Averages are often deceptive. For example, in a firm where the internal top-to-bottom equity partner income spread is ten-to-one or higher, average partner profits may reveal that some partners are players and most aren’t. But as an economic metric describing a typical partner in the firm, it’s useless.

Just as average profits can mask enormous differences within an equity partnership, so, too, overall average profits for the industry can hide the gap between successful firms and those struggling to survive. That means 2013 could be another year in which some Am Law 200 law firms will fail (or become absorbed in last-resort mergers).

Fragile winners

But even firms that regard themselves as financial winners in 2012 should beware. Many would do well to heed the Georgetown/Thomson Reuters caution about the loss of traditional partnership values that undermined Dewey & LeBouef. Considered from a different perspective, numbers that appear to demonstrate success can actually reveal lurking failure.

After all, as recently as the May 2011 list of the Am Law 100, Dewey was #23 in 2010 average equity partner profits ($1.8 million), #22 in gross revenue per lawyer ($910,000), and #19 on the Am Law profitability index with a profit margin of 36 percent. In February 2012, the firm made Am Law’s annual “most lateral hires” list for 2011, but no public report disclosed the firm’s staggering (but by no means unique) top-to-bottom equity partner income gap.

As a wise friend reminds me periodically, things are rarely as good as they seem — or as bad as they seem. He’s definitely right about the good part.

THE CULTURE OF CONTRADICTIONS

In an ironic twist, the latest Client Advisory from the Citi Private Bank Law Firm Group and Hildebrandt Consulting warns: “Law firms discount or ignore firm culture at their peril.” Really?

Law firm management consultants have played central roles in creating the pervasive big law firm culture. But that culture seldom includes “collegiality and a commitment to share profits in a fair and transparent manner,” which Citi and Hildebrandt now suggest are vital. For years, mostly non-lawyer consultants have encouraged managing partners to focus myopically on business school-type metrics that maximize short-term profits. The report reveals the results: the unpleasant culture of most big firms.

Determinants of culture

For example, the report notes, associate ranks have shrunk in an effort to increase their average billable hours. That’s how firms have enhanced what Hildebrandt and CIti continue to misname “productivity.” From the client’s perspective, rewarding total time spent to achieve an outcome is the opposite of true productivity.

Likewise, the report notes that along with the reduction in the percentage of associates, the percentage of income (non-equity) partners has almost doubled since 2001. Hildebrandt and Citi view this development as contributing to the squeeze on partner profits. But income partners have become profit centers for most firms. As a group, they command higher hourly rates, suffer fewer write-offs, and enjoy bigger realizations.

From the standpoint of a firm’s culture, a class of permanent income partners can be a morale buster. That’s especially true where the increase in income partners results from fewer internal promotions to equity partner. Comparing 2007 to 2011, the percentage of new equity partner promotions of home-grown talent dropped by 21 percent.

Lateral culture?

In contrast to the more daunting internal path to equity partnership, laterals have thrived and the income gap within most equity partnerships has grown dramatically. “Lateral hiring is more popular than ever,” the report observes. In contrast to the drop in internal promotions, new equity partner lateral additions increased by 10 percent from 2007 to 2011.

This intense lateral activity is stunning in light of its dubious benefits to the firms involved. The report cites Citi’s 2012 Law Firm Leaders Survey: 40 percent of respondents admitted that their lateral hires were “unsuccessful” or “break even.” The remaining 60 percent characterized the results as “successful” or “very successful,” but for two reasons, that number overstates reality.

First, it typically takes a year or more to determine the net financial impact of a lateral acquisition. Most managing partners have no idea whether the partners they’ve recruited over the past two years have produced positive or negative net economic contributions. For a tutorial on the subject, see Edwin Reeser’s thorough and thoughtful analysis, “Pricing Lateral Hires.”

Second, when is the last time you heard a managing partner of a big firm admit to a mistake of any kind, much less a big error, such as hiring someone whom he or she had previously sold to fellow partners as a superstar lateral hire? These leaders may be lying to themselves, too, but in the process, they’re creating a lateral partner bubble.

Stability?

The Hildebrandt/Citi advisory gives a nod to institutional stability, mostly by observing that it’s disappearing: “The 21-year period of 1987-2007 witnessed 18 significant law firm failures. In recent years, that rate has almost doubled, with eight significant law firms failing in the last five years.” If you count struggling firms that merged to stave off dissolution, the recent number is much higher.

In a Bloomberg interview last October, Citi’s Dan DiPietro, chairman of the bank’s law firm group, said that he maintained a “somewhat robust watch list” of firms in potential trouble, ranging from “very slight concern to oh my God!”

Cognitive dissonance

Here’s a summary:

Culture is important, but associates’ productivity is a function of the hours they bill.

Culture is important, but associates face diminishing chances that years of loyalty to a single firm will result in promotion to equity partnership.

Culture is important, but lateral hiring to achieve revenue growth has become a central business strategy for many, if not most, big firms. It has also exacerbated internal equity partner income gaps.

Culture is important and, if a firm loses it, the resulting instability may cause that firm to disappear.

As you try to reconcile these themes, you’ll understand why, as with other Hildebrandt/Citi client advisories, the report’s final line is my favorite: “As always, we stand ready to assist our clients in meeting the challenges of today’s market.”

BONUS TIME – 2012

It’s always interesting when two respected legal writers approach the same story in different ways. That happened in the coverage of recently announced associate bonuses.

Ashby Jones at the Wall Street Journal penned an article in the November 27 print edition of the paper that ran under this headline:

“Cravath Sends Cheer — Law Firm Lifts Bonuses for Some Associates as Much as 60%”

As always, Jones accurately reports what is true, namely, that Cravath, Swaine & Moore led this year’s associate bonus announcements with an increase over last year’s base bonus levels. Five paragraphs in, he acknowledges that this significant bump still leaves associates well below the 2007 pay scale. The highest associate bonuses this year are $60,000, compared to $110,000 for combined regular and special bonuses in 2007.

Meanwhile, at the New York Times…

On the same day that Ashby Jones’s article ran in the WSJ, Peter Lattman at the New York Times was a bit more circumspect. In that paper’s print edition, the bold line that ran in the middle of the story reads:

“[Cravath's] year-end awards set the bar for others, and the payouts are up a bit in 2012.”

Like Jones, Lattman observes that base bonus amounts are substantially higher than previously. But he correctly notes that “when spring bonuses are added to the equation, there has been little increase for Cravath’s associates over the last two years. The law firm did not award spring bonuses in 2012, but last year paid its associates a small stipend in addition to a year-end award. When 2011′s spring bonuses and year-end bonuses are added together, total bonus compensation actually exceeds this year’s level.”

Both Jones and Lattman report that Cravath had $3.1 million in average partner profits for 2011. For perspective, that’s slightly above the $3.05 average for 2006, and not all that far from the $3.3 million all-time high in 2007. Needless to say, associate bonuses haven’t enjoyed a similar recovery. But depending on what happens in the spring, they still could, which leads to a final point.

Who’s right?

The answer is Elie Mystal over at Above the Law. Mystal observes that spring bonuses more properly belong in the analysis of total compensation for the immediately preceding calendar year. That is, a bonus paid in early 2011 is really compensation for 2010.

The analysis is straightforward. Big law firms waiting for more complete information on how the fiscal year will end preserve flexibility by lowballing the November bonus numbers. Evidently, Cravath concluded that its $3.1 million average partner profits for 2011 were inadequate to justify any significant spring bonus for associates in early 2012.

The fate of the “special” bonus

The question now is whether spring bonuses are gone forever. After all, they first appeared as “special bonuses” — meaning that they came with this implied caveat: don’t build those dollars into next year’s expectations. Of course, that message has landed on deaf ears. But it gives firm leaders a way to convince themselves that it’s fair to leave associate compensation far below 2007 levels, even though average partner profits have recovered almost completely to those lofty heights. Indeed, some firms have even bested their pre-recession records.

In all of this, two things are working against associates who dream of a return to the good old days (of 2007). First, the glut of attorneys grows as the demand for new associates shrinks. Second, most law firm leaders are dealing with a revolution of rising expectations among senior equity partners. The potential loss of a rainmaker strikes fear in the hearts of many firm leaders.

But here’s a reason to hope. True visionaries seeking long-term institutional stability let such troublemakers walk. They promote cultural values that transcend the impact on the current year’s income statement. They let resulting gains in client service and attorney morale produce ample financial and non-financial rewards for all.

And all of this reveals itself in how partners at the top of a firm treat associates at the bottom — a place where too many seem to have forgotten that they themselves once stood.

A BIG LAW FIRM THREE-WAY

With Hurricane Sandy and the election dominating last week’s headlines, news of another blockbuster merger didn’t receive the attention that it deserved. Later this month, the combination of SNR Denton, the Canadian firm (Fraser, Milner & Casgrain – FMC), and Paris-based Salans will create a 2,500-attorney enterprise known as Dentons, assuming their respective partners approve the merger. The transaction merits a closer look.

Not so long ago

Twenty years ago, Elliott Portnoy graduated from Harvard Law School. In 2002, he joined Sonnenschein, Nath & Rosenthal. Prior to that, he’d headed the public policy group of Arent Fox, an Am Law 200 firm, in Washington, D.C.

In June 2006, at age 40, Portnoy became the youngest chairman in Sonnenschein’s history. At the same time, the firm released a new strategic plan whereby it would increase average equity partner profits from $800,000 to $1.4 million by 2008. That didn’t happen.

In 2007, Sonnenschein had 600 lawyers and average partner profits of $915,000, but since then it hasn’t seen profits numbers that high. Central components of its strategy have been the aggressive recruitment of lateral partners and the pruning away of others. In early 2008, 37 lawyers and 87 non-attorney employees received their walking papers. By year-end, average partner profits had dropped to $805,000. Of course, the onset of the Great Recession contributed to that decline, but many other firms weathered the storm with much less damage.

Time to merge

The 2008 drop in average partner profits didn’t seem to affect Sonnenschein’s strategic plan. Aggressive lateral hiring continued, including 100 lawyers from failing Thacher, Proffitt & Wood in December 2008. Average partner profits kept dropping — to $780,000 in 2009. The following year, 2010, brought the ultimate lateral hiring event: Sonnenschein’s merger with U.K.-based Denton, Wilde & Sapte to create a 1,200-lawyer firm.

As a Swiss verein, the two firms retained their independent financial status. But according to the Am Law Global 100, SNR Denton’s first full year as a combined entity produced overall average partner profits of $700,000 in 2011. The former Sonnenschein side of the firm reported $880,000 in average partner profits, so Portnoy heralded the merger a success and “not a destination, but a part of the journey.”

The journey continues

In 2011, SNR Denton was one of several firms exploring merger possibilities with Dewey & LeBoeuf as it careened toward disaster. According to the Wall Street Journal, Sonnenschein’s leadership had named its proposed deal “A Phoenix Rises from the Ashes” and contemplated a full-scale merger that combined all 1,000 Dewey & LeBoeuf attorneys with SNR Denton. Borrowed money would have financed the transaction — a tactic apparently drawn from the big law firm “lessons not learned” list.

Unexpected bad news may have saved SNR Denton from itself. According to the Journal, the deal was gaining momentum when it cratered after Dewey’s revelation that Manhattan district attorney Cyrus Vance, Jr. had opened a criminal investigation into Dewey.

Doubling down on a dubious approach

The journey has now led to the proposed combination of SNR Denton, FMC, and Salans. If consummated, the merger would double the size of the current SNR Denton. If the transaction goes through, what results won’t be a partnership. Whether it would become a profitable business venture for the participants is an open question.

To help answer that question, SNR Denton’s management got limited outside help. According to Portnoy and SNR Denton’s global chairman Joseph Andrew, “branding and advertising advisers” recommended a single-name moniker, Dentons. (Do they know that Dr. Dentons are children’s pajamas with feet?) But Andrew also noted that the firm used no strategic legal consultants or advisers in its process.

I don’t know if the other firms had advisers. Nor do I know if Salans had advisers in 1998, when it blazed a trail by becoming the first major law firm to complete a transatlantic merger, acquiring Christy & Viener. But that transaction didn’t turn out very well.

Maybe this time will be different. For the sake of many fine lawyers and even greater numbers of staff who are relying on management to chart a wise course for three law firms, let’s hope so. Among the most important lessons of Dewey & LeBoeuf are these: the margin for leadership error is slim and the consequences of missteps can be catastrophic.

BIG LAW FIRM MANAGEMENT PUZZLES

Last month, ALM Legal Intelligence released  “Thinking Like Your Client: Strategic Planning In Law Firms,” a curiously titled survey of Am Law 200 law firm leaders. The title is curious because the results demonstrate that most law firm managing partners are neither thinking like clients nor planning strategically for their firms’ futures.

Lateral self-delusion

The appendix of actual law firm responses from 79 out of all Am Law 200 partners is more interesting than the narrative explanations in the report. For example, one question asked them to identify their firms’ top three priorities. In order, the most frequent answers were:

Growing the firm’s revenues — 66 percent

Talent acquisition and retention — 59 percent

Improving firm profitability — 54 percent

Eighty percent said they had a strategic plan in place to address firm priorities. But other responses suggest that the plans are pretty simple: hire more lateral partners.

When asked how, as part of their strategic plans, firms were pursuing growth in the next two years, 96 percent said “acquiring laterals.” Seventy-six percent of the 75 respondents who listed this strategy said they would pursue laterals “aggressively.” More than 70 percent of respondents expect that, as a staffing category, lateral partner hires will increase over the next five years.

Yet they also acknowledge that laterals have been a mixed bag. Only 28 percent of managing partners said that their lateral strategies over the past five years have been “very effective — most laterals have been retained and contributed to business growth.” And those are just the dollar impacts. Ignored are the cultural consequences for a firm whose growth strategy depends on endless acquisition of outside talent. Nevertheless, most big firm leaders are doubling down on a dubious approach.

Is it really about the clients?

As for other half of the report’s title — “thinking like your client” — fewer than a third of respondents included “client performance management and client satisfaction measurement” as one of their top three priorities. Responses to other questions echoed that attitude. Forty-one percent admitted that they had no plan in place to build, track and measure client loyalty and satisfaction. When asked what aspect of their client relationships they would most like to change, only 21 percent said higher service levels — far behind the desire to take work from other firms and improve profitability.

When asked to identify the top three metrics they regarded as most important in managing firm performance, leaders listed a familiar trinity: firm revenue, firm profit, and profit per partner. Client retention metrics got a whopping 4 percent response, tied at the bottom of the list with “other.”

Only 18 percent use “client retention metrics” to reward partners, but more than 70 percent identified collections, firm profit, billings and client business development as the key criteria. (Apparently dollars from new clients are worth more than dollars from old ones.)

Look out for what’s next

How well is all of this working? Better for some than for others, and that will continue. When asked whether non-partner to partner leverage ratios had left their firms properly resourced to provide exceptional client service while also growing the firm business, 70 percent of law firm managers said they needed to make adjustments.

We all know which way those “adjustments” will go: in the direction of fewer equity partners. With respect to staffing categories that managing partners expect to experience the biggest decrease over the next five years, the largest plurality chose equity partners. Additionally, more than 90 percent of law firm managers said they had “unprofitable partners.” Seventy percent said that such subpar performers were at risk for de-equitization or removal.

Finally, if you’re wondering about the hourly rate regime and whether law firms can deal with any other system, consider this: When asked to compare alternative fee arrangements (AFAs) to hourly rate matters, 12 percent of firm leaders said AFAs were more profitable, 23 percent said they were less profitable, and 65 percent had no clue. How’s that for a leadership confidence builder?

Perhaps some of these managing partners have a subconscious awareness of their shortcomings. When asked to list the top three areas where their firms have a competitive advantage, only 14 percent chose “strong firm leadership.” Unfortunately, it seems clear that even that dismal number is too high.

HAPPINESS IS…CRAVATH?

Big law’s future has become big news. On September 25, The New York Times published a special section that included several articles on large firms; two are particularly interesting.

Culture Keeps Firms Together in Trying Times” discusses the handful of large firms that have shunned the widespread eat-what-you-kill approach to partner compensation. It focuses on three firms, Cravath, Swaine & Moore, Debevoise & Plimpton, and Cleary, Gottlieb, Steen & Hamilton, all of which have retained lock-step compensation systems. For any class of associates, those who survive to partner continue advancing together throughout their careers.

“The only way a partner does better is if the firm does better,” says Debevoise presiding partner Michael W. Blair describing the behavior that follows such structural incentives.

Lock-step is a sharp contrast to most other big firms, which follow what Dewey & LeBoeuf’s management called the “barbell” system: Lots of service partners on one side of the barbell balance out a handful of star partners on the other side. Then-Dewey partner Jeffrey Kessler rationalized the yawning equity partner compensation gaps that this approach creates: “The value for the stars has gone up, while the value of service partners has gone down.”

Not worth it

The Times quotes Cleary managing partner Mark Leddy’s answer to the Kesslers of the world: “People who want to be a star and make $10 million a year don’t fit in here…Breaking the lock-step system for them would be an unacceptable cost to our culture.”

Why does culture matter? There are many answers, but Major, Lindsey & Africa’s recent compensation survey may have identified an important one. Almost eighty percent of partners in lock-step compensation systems are satisfied or very satisfied with their work. A closer look at the MLA survey reveals that the combined group of satisfied and very satisfied partners is about the same for lock-step as for non-lock-step firms. But the lock-step firms’ have a big advantage in the very satisfied group — fifty-five percent compared to only twenty-six percent for non-lock-step firms.

Satisfied versus very satisfied

That leads to James B. Stewart’s observations about Cravath, where he was an associate in the 1970s. In “A Law Firm Where Money Seemed Secondary,” Stewart notes that all attorneys in his firm were intelligent, well-credentialed and hard working, but those advancing to partner had something else in common: They loved their work. It gave them a huge competitive advantage over those who didn’t. Returning to the MLA survey, I think Stewart may have captured a significant difference between the lawyers who are very satisfied and those who are merely satisfied: Attitudes about work affect performance.

Stewart also notes that “of the 20 or so associates hired each year, one or two might be chosen to be a partner.” He concludes that “over the ensuing decades, Cravath doesn’t seem to have changed much.” He’s right.

But the rest of the large law firm segment of the profession has. In fact, many have modeled themselves after the Cravath attrition-and-leverage model, but they added an unfortunate twist away from lock-step compensation: Partners eat what they kill, so every year’s compensation review is a new self-justification exercise. That incentive structure produces a much different culture; most of it is ugly and little of it enhances a firm’s long-run stability.

About the associates…

Before getting too misty-eyed over life at Cravath, it’s worth pausing on one more data point. In the most recent Am Law Survey of Midlevel Associate Satisfaction, Cravath placed 119 out of 129 firms — down from 111 in 2011. The firm has been dropping steadily on that list since 2010, when it placed 84th out of 137. (Both Cleary Gottlieb and Debevoise did much better.)

A closer analysis suggests that Cravath associates do, indeed, enjoy their work. Unfortunately, they don’t seem to enjoy it enough to offset the things that place the firm near the bottom of the satisfaction survey.

Cravath scored above the all-firm averages in work-related subcategories, including quality of work assigned, opportunities to work with partners, and level of responsibility. But it received low marks in other subcategories, including likelihood of staying two years, morale, communication about partnership prospects, and family-friendliness. Lock-step partner compensation isn’t a panacea, but imagine how much worse a place like Cravath would be without it.

Following the money

Perhaps the most telling comment about the interaction between compensation and firm culture comes from former Dewey & LeBoeuf partner Ralph Ferrara who spent twenty-three years at lock-step Debevoise before making what he describes as “an imprudent decision” in leaving: “In my heart, I never left Debevoise; it’s a place that I still love to this day.”

If the bankruptcy judge approves the proposed former partners compensation plan, Ferrara will pay almost $3.4 million to help fund repayments to Dewey’s creditors. Even so, given the amounts he reportedly made at Dewey, his move in 2005 was probably advantageous financially. I wonder if the additional money was worth it to him — and how his heirs will spend it.