I’m the subject of a two-part series currently appearing in Bloomberg BNA. Here are the links:
The focus of The American Lawyer story about Richard Levin’s departure after eight years at Cravath, Swaine & Moore understates the most important point: Levin is a living example of things that his former firm, Cravath, does right. I can count at least three.
#1: Top Priority — Client Service
Cravath hired Levin, a top bankruptcy lawyer, from Skadden, Arps, Slate, Meagher & Flom on July 1, 2007. At the time, Cravath didn’t have a bankruptcy/restructuring practice. But at the beginning of the downturn that would become the Great Recession, its clients were drawn increasingly into bankruptcy proceedings.
Explaining the firm’s unusual decision to hire Levin as a lateral partner, the firm’s then-deputy presiding partner C. Allen Parker told the New York Times that “the firm was seeking to serve its clients when they found themselves as creditors. Many of Cravath’s clients have landed on creditors’ committees in prominent bankruptcy cases, he said, and the firm has helped them find another firm as bankruptcy counsel.”
In other words, Cravath sought to satisfy specific client needs, not simply recruit a lateral partner who promised to bring a book of business to the firm. The Times article continued, “While Mr. Parker does not foreclose the chance of representing debtors — which is often considered the more lucrative side of the bankruptcy practice — for now, it is an effort to serve clients who are pulled into the cases.”
#2: Mandatory Retirement Age
It seems obvious that Levin’s upcoming birthday motivated his departure to Jenner & Block. Less apparent is the wisdom behind Cravath’s mandatory retirement rule. As The American Lawyer article about his move observes:
“[A]t 64, Levin is now approaching Cravath’s mandatory retirement age. And he says he’s not ready to stop working. ’65 is the new 50,’ Levin says. ‘I’d be bored. I love what I do [and] I want to keep doing it.'”
Well, 65 is not the new 50 — and I say that from the perspective of someone who just celebrated his 61st birthday. More importantly, sophisticated clients understand that a law firm’s mandatory retirement age benefits them in the long run because it makes that firm stronger. When aging senior partners preside over an eat-what-you-kill big law compensation system, their only financial incentive is to hang on to client billings for as long as possible. It creates a bad situation that is getting worse.
Recent proof comes from the 2015 Altman Weil “Law Firms in Transition” survey responses of 320 law firm managing partners or chairs representing almost half of the Am Law 200 and NLJ 350. I’ll have more to say about other results in future posts, but for this entry, one of the authors, Eric Seeger, offered this especially pertinent conclusion about aging baby boomers:
“That group of very senior partners aren’t retiring,” he explains.
Seeger went on to explain that even if they were, younger partners are not prepared to assume client responsibilities. Why? Because older partners don’t want that to happen. According to the Altman Weil survey, only 31 percent of law firm leaders said their firms had a formal succession planning process.
At Cravath, mandatory retirement works with the firm’s lock-step compensation structure to encourage much different behavior. Aging partners confront an end date that provides them with an incentive to train junior attorneys so they can assume client responsibilities and assure an orderly intergenerational transition of the firm’s relationships. Hoarding clients and billings produces no personal financial benefit to a Cravath partner.
In contrast, hoarding is a central cultural component of eat-what-you-kill firms. Individual partners guard clients jealously, as if they held proprietary interests in them. Internal partnership fights over billing credit get ugly because a partner’s current compensation depends on the allocations. Partners have learned that the easiest way to avoid those fights is to keep their clients in silos away from other partners. For clients, it can mean never meeting the lawyer in the firm who could be most qualified to handle a particular matter. If they understood the magnitude of the problem, most clients would be astonished and outraged.
#3: Strategic Thinking
With respect to Richard Levin’s practice area, the most recent Georgetown/Thomson Reuters Peer Monitor Report notes that in 2014 big firm bankruptcy practices suffered a bigger drop in demand than any other area. Lawyers who had billed long hours to big ticket bankruptcy matters have now been repurposed for corporate, transactional, and even general litigation tasks. Don’t be surprised as firms announce layoffs.
Cravath’s timing may have been fortuitous. It hired Levin at the outset of the Great Recession — just as a big boom time for bankruptcy/restructuring lawyers began. Likewise, Levin departs as that entire segment of the profession now languishes. I think Cravath’s leaders are too smart to think that they can time the various segments of the legal market. But the firm’s strategic approach to its principal mission — client service — caused it to do the right things for the right reasons.
The harder they work at that mission, the luckier they get.
It’s Am Law 100 time. Every year as May 1 approaches, all eyes turn to Big Law’s definitive rankings — The American Lawyer equivalent of the Sports Illustrated swimsuit issue. But behind those numbers, what do law firm leaders think about their institutions and fellow partners?
The 2015 Citibank/Hildebrandt Client Advisory contains some interesting answers to that question. Media summaries of those annual survey results tend to focus on macro trends and numbers. Will demand for legal services increase in the coming months? Are billable hours up? Will equity partner profits continue to rise? Will clients accept hourly rate increases? Or will client discounts reduce realizations?
Those are important topics, but some of the survey’s best nuggets deserve more attention than they get. So as big law firm partners everywhere pore over the annual Am Law 100 numbers, here are five buried treasures from this year’s Citibank/Hildebrandt Client Advisory that will get lost in the obsession over Am Law’s short-term growth and profits metrics. They may reveal more about the state of Big Law than any ranking system can.
Chickens Come Home To Roost
1. “While excess capacity remains an issue, we are hearing from a good number of firms that mid-level associates are in short supply.”
My comment: After 2009, most firms reduced dramatically summer programs and new associate hiring to preserve short-term equity partner profits. That was a shortsighted failure to invest in the future, and it’s still pervasive. See #4 and #5 below.
The Growth Trap
2. “Many [law firm mergers] have tended to be mergers of strong firms with weaker firms, or mergers of firms that are pursuing growth for growth’s sake. On this latter trend, it is our view that these mergers are generally ill-conceived. In our experience, combining separate firm revenues does not necessarily translate into better profit results and long-term success.”
My comment: Regardless of who says it (or how often), many managing partners just don’t believe it.
The Lateral Hiring Ruse
3. “For all the popularity of growth through laterals, the success rate of a firm’s lateral strategy can be quite low. For the past few years, we have asked leaders of large firms to quantify the rate of success of the laterals they hired over the past five years. Each year, the proportion of laterals who they would describe as being above ‘break even’, by their own definition, has fallen. In 2014, the number was just 54 percent of laterals who had joined their firms during 2009-2013.” [Emphasis added]
My comment: Think about that one. The survey allows managing partners to use their own personal, subjective, and undisclosed definition of “success.” Even with that unrestricted discretion to make themselves look good, firm leaders still admit that almost half of their lateral hiring decisions over the past five years have been failures — and that they’re track record has been getting worse! That’s stunning.
Pulling Up The Ladder
4. “We are now seeing [permanent non-partner track associates and other lower cost lawyers] appear among some of the most elite firms. When we ask these firms whether they are concerned that expanding their lawyer base beyond partner-track associates will hurt their brand, their response is simply that this is what their clients, and the market in general demands.”
My comment: At best such managing partner responses are disingenuous; at worst they are lies. Clients aren’t demanding non-partner track attorneys; they’re demanding more value from their outside lawyers. Thoughtful clients understand the importance of motivating the next generation’s best and brightest lawyers with meaningful long-term career opportunities.
Permanent dead-end tracks undermine that objective. So does the continuing trend in many firms to increase overall attorney headcount while keeping the total number of equity partners flat or declining. But rather than accept responsibility for the underlying greed that continues to propel equity partner profits higher, law firm leaders try to blame clients and “the market.” For the truth, they should consult a mirror.
The Real Problem
5. “Leaders of successful firms also talk about getting their partners to adopt a more long-term, ‘investment’ mindset. In an industry where the profits are typically paid out in a short time to partners, rather than being retained for longer term investment, this can be a challenge.”
My comment: Thinking beyond current year profits is the challenge facing the leadership of every big firm. Succeeding at that mission is also the key assumption underlying the Client Advisory’s optimistic conclusion:
“It is clear to us that law firms have the capacity and the talent to adapt to the needs of their clients, and meet the challenges of the future — contrary to those who continually forecast their death.”
I’m not among those forecasting the death of all big firms. In fact, I don’t know anyone who is. That would be silly. But as in 2013 and 2014, some large firms will fail or disappear into “survival mergers.” As that happens, everyone will see that having what the Client Advisory describes as “the capacity and talent to adapt” to the profession’s dramatic transformation is not the same as actually adapting. The difference will separate the winners from the losers.
[NOTE: Beginning April 16 and continuing through April 20, Amazon is running a promotion for my novel, The Partnership. During that period, you can get the Kindle version as a FREE DOWNLOAD. Recently, I completed negotiations to develop a film version of the book.]
Dentons must have a large support staff whose only job is to introduce the firm’s new partners to each other. Three months ago, it joined with the massive China-based Dacheng to create the world’s largest law firm — or whatever it is. Now McKenna Long & Aldridge’s partners will merge their 420 lawyers into the Dentons North American verein.
Well, not all 420 lawyers because, as McKenna Long’s chairman Jeffrey Haidet told the Daily Report, “There will probably be some fallout from the legacy partnership. It’s unfortunate….”
There’s nothing unfortunate about the deal for Haidet, whose personal “fallout” will make him co-CEO in Dentons-US.
Eliminating The Opposition
Haidet tried to make this deal in 2013, but according to the Daily Report, it collapsed when a few key McKenna Long partners balked over concerns about losing the McKenna identity and name. The currently prevailing big law firm business model doesn’t value such dissent. So it’s no surprise that during 2014 McKenna Long lost a greater percentage of its partners (22.3 percent) than any other Am Law 200 firm.
Haidet told the American Lawyer that some of his firm’s record-setting 59 departures last year “were of partners who disagreed with the firm’s growth strategy.” That’s not surprising either, since that strategy apparently involved extinguishing the firm itself. A venerable Atlanta institution that is also highly regarded for its Washington, DC government contracts and policy work will soon disappear.
If and when McKenna Long releases its financial results for 2014, the underlying motivations behind Haidet’s renewed discussions with Dentons may become clearer. Perhaps the firm’s financial performance limited its options. But this much is obvious: Compared with McKenna Long’s earlier focus that gave it a clear identity, the partners who survive this transaction will join an organization that has an open-ended goal, namely, getting bigger.
Dentons’ global CEO Elliott Portnoy told the Wall Street Journal, “There is no logical end.” That echoed global chair Joseph Andrew’s remarks in an earlier article: “We compete with everyone. We compete with the largest law firms in the world and the smallest law firms.” Combine those two thoughts from the top of Dentons’ leadership team and it sounds like an effort to be all things to any and all potential clients.
“We’re going to be driven by our strategy,” Portnoy told the Journal. Even so, it looks like the strategy is growth for the sake of growth — a dangerous path. But as Andrew put it, they’re out to prove everybody else wrong about the perils of that approach: “What we’re trying to do is to take these myths that have gathered in the legal profession and say (they’re) not true.”
The Evidence Speaks
Andrew and Portnoy are fighting more than “myths.” Last year, the 2014 Georgetown/Thomson Reuters Peer Monitor Report on the Legal Profession devoted most of its annual report to the folly of growth alone as a business strategy. It begins by debunking the argument that increased size means economies of scale and cost savings:
“[O]nce a firm achieves a certain size, diseconomies of scale can actually set in. Large firms with multiple offices — particularly ones in multiple countries — are much more difficult to manage than smaller firms. They require a much higher investment of resources to achieve uniformity in quality and service delivery and to meet the expectations of clients for efficiency, predictability, and cost effectiveness. They also face unique challenges in maintaining collegial and collaborative cultures, particularly in the face of rapid growth resulting from mergers or large-scale lateral acquisitions.”
In addition to the quality and cultural issues discussed in my February post on the Dacheng deal, Dentons’ expanding administrative structure prompts this question: How many CEOs can a law firm have at one time? In addition to global CEO Portnoy and global chairman Andrew, Haidet will join four other current Dentons CEOs. Additional senior management will result from implementing the Dacheng deal.
Turning to the key question, the Georgetown Report notes, “[G]rowth for growth’s sake is not a viable strategy in today’s legal market. The notion that clients will come if only a firm builds a large enough platform or that, despite obvious trends toward the disaggregation of legal services, clients will somehow be attracted to a ‘one-stop shopping’ solution is not likely a formula for success.”
Compare that analysis to the Wall Street Journal’s summary of Dentons’ strategic plan: “[T]he firm hopes to become a one-stop shop for big corporations and small businesses alike.”
The Georgetown Report’s most intriguing suggestion is that a law firm’s pursuit of indiscriminate growth can mask a failure of true leadership:
“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 may have.”
As a way for law firm leaders to convince their partners that they have a strategic vision, the Report continues, growth is “a more politically palatable than a message that we need to fundamentally change the way we do our work.”
Drawing an analogy to Amity Police Chief Martin Brody’s line (delivered by Roy Scheider) in the movie Jaws, the Georgetown Report concludes, “For most firms…the goal should be not to ‘build a bigger boat’ but rather to build a better one.”
Dentons has already built an enormous boat and, as Portnoy said, “There is no logical end.” Someday soon we’ll know if it’s a better boat, and whether it even floats.
My unwelcome diagnosis and resulting detour into our dysfunctional medical system diverted my attention from scrutinizing commentators who make dubious assertions about the current state of the legal profession.
Well, I’m back for this one. At first, I thought that Professor Steven Davidoff Solomon’s article in the April 1 edition of the New York Times, “Despite Forecasts of Doom, Signs of Life in the Legal Industry,” was an April Fool’s joke. But the expected punch line at the end of his essay never appeared.
To keep this post a manageable length, here’s a list of points that Solomon got wrong in his enthusiastic account of why the legal industry is on the rise. As a professor of law at Berkeley, he should know better.
- “The top global law firms ranked in the annual AmLaw 100 survey experienced a 4.3 percent increase in revenue in 2013 and a 5.4 percent increase in profit.”
That’s true. But it doesn’t support his argument that new law graduates will face a rosy job market. Increased revenue and profits do not translate into increased hiring of new associates. In most big firms, profit increases are the result of headcount reductions at the equity partner level – which have been accelerating for years.
- “Bigger firms are hiring.”
Sure, but nowhere near the numbers prior to Great Recession levels. More importantly, big firms comprise only about 15 percent of the profession and hire almost exclusively from the very top law schools. Meanwhile, overall employment in the legal services sector is still tens of thousands of jobs below its 2007 high. Even as recently December 2014, the number of legal services jobs had fallen from the end of 2013.
- “Above the Law, a website for lawyers, recently reported a rising trend for lateral moves for lawyers in New York.”
Apples and oranges. The lateral partner hiring market — another big law firm phenomenon that has nothing to do with most lawyers — is completely irrelevant to job prospects for new entry-level law school graduates. Even during the depths of the Great Recession, the former was hot. The latter continues to languish.
- “Last year, 93.2 percent of the 645 students of the Georgetown Law class of 2013 were employed.”
That number includes: 83 law school-funded positions, 12 part-time and/or short-term jobs, and 51 jobs not requiring a JD. Georgetown’s full-time, long-term, non-law school-funded JD-required employment rate for 2013 graduates was 72.4 percent – and Georgetown is a top law school. The overall average for all law schools was 56 percent.
- “[Michael Simkovic and Frank McIntyre found that a JD degree] results in a premium of $1 million for lawyers over their lifetime compared with those who did not go to law school.”
Simkovic acknowledges that their calculated median after-tax, after-tuition lifetime JD premium is $330,000. More fundamentally, the flaws in this study are well known to anyone who has followed that debate over the past two years. See, e.g., Matt Leichter’s two-part post beginning at https://lawschooltuitionbubble.wordpress.com/2013/09/09/economic-value-paper-a-mistrial-at-best/, or the summary of my reservations about the study here: http://thelawyerbubble.com/2013/09/03/once-more-on-the-million-dollar-jd-degree/. Most significantly, it ignores the fact that the market for law school graduates is really two markets — not unitary. Graduates from top schools have far better prospects than others. But the study admittedly takes no account of such differences.
- “[The American Bar Foundation’s After the JD] study found that as of 2012, lawyers had high levels of job satisfaction and employment as well as high salaries.”
It also found that by 2012, 24 percent of the 3,000 graduates still responding to the study questionnaire are no longer practicing law. The study’s single class of 2013 originally included more than 5,000 — so no one knows what the non-respondents are doing.
“These are the golden age graduates,” said American Bar Foundation faculty fellow Ronit Dinovitzer [one of the study’s authors], “and even among the golden age graduates, 24 percent are not practicing law.”
7. “Law schools have tremendous survival tendencies. I have a bet with Jordan Weissmann at Slate that not a single law school will close.”
Yes. Those “survival tendencies” are called unlimited federal student loans for which law schools have no accountability with respect to their students employment outcomes. If Solomon wins that bet, it will be because a dysfunctional market keeps alive schools that should have closed long ago.
Whatever happened to the News York Times fact-checker?
A month ago, I informed readers that I was taking a break from my ongoing commentary on the legal profession. Instead, I’ve focused my blog on my personal journey through modern medicine after my cancer diagnosis. The American Lawyer, which has republished all of my “Belly of the Beast” blog posts for the past five years, ran the post inaugurating my new series. But I haven’t asked it to republish my eight subsequent medically-oriented posts, which seemed beyond the interests of its primary readership. For reasons that will become evident, I’m inviting republication of this one.
Having spent almost 40 of the past 50 days in the hospital, I’ve had an intimate look at the medical care delivery system from inside one of the nation’s top institutions. I’m now convinced that many big hospitals and law firms share an important characteristic: a lost sense of mission.
This criticism doesn’t apply to most lawyers or to doctors individually. Dedicated, conscientious physicians and attorneys abound. But the devolution of the leading segments of both professions to short-term business-oriented approaches has resulted in structures and constraints within which many of those practitioners must operate. Ultimately, clients, patients, and the workers within those institutions are paying the price.
How Did This Happen?
Not that long ago, doctors ran many hospitals. Today in the United States, only four percent (235 out of more than 6,500 hospitals) are run by physicians. Along the way, the quality of a patient’s experience has suffered.
As the New York Times reported recently, “[N]ew research suggests that having a doctor in charge at the top is connected to overall better patient care and a better hospital.”
“Dr. [Amanda] Goodall [the author of the study] said the finding was consistent with her research in other fields, which has shown, among other things, that research universities perform better when led by outstanding scholars and that basketball teams perform better when led by former top players.”
Dr. Goodall goes on to observe, “M.D. C.E.O.’s are more likely to prioritize patients because patient care is at the heart of their education and working life as a physician. When it comes to making hard budgetary decisions or rationing choices, M.D. C.E.O.’s may be able to make more informed decisions.”
Keeping The MBA-Mentality In Check
I’m not an anarchist. I have a master’s degree in economics and understand the importance of data-drivien decisions. But I also appreciate the limitations of statistics and the dangers of a myopic MBA-type approach to management. There is nothing wrong with using accounting and business methods in the process running complex organizations, including big hospitals and law firms. But when those methods dominate institutional culture — setting the tone from the top of a hospital or law firm — those organizations no longer exist to serve people. Instead, they develop a new purpose: to serve the short-term bottom line.
As Dr. Goodall suggests, ““I think the pendulum may have swung too far in the favor of managers. This is partially because business schools have become so prominent, as has the M.B.A. These qualifications are helpful, but it is possibly not enough just to have a management education.”
Lawyers still run most big law firms, but the trends toward non-attorney CEOs and non-attorney managers developing increasing power and influence within big firms is well underway. More pointedly, many lawyers in big firms have obtained MBAs and are increasingly relying on their newly-learned “management tools” to run their firms. That can be okay, provided they do not become too fond of their “MBA-hats” and lose sight of their more important JD mission — to serve clients. It’s easier said than done because maximizing short-term partner profits is how such leaders — and their partners — measure successful leadership.
Back To Basics
Most undergraduates go to law school because they want to do good. That message has emerged loudly and clearly from my prelaw students over the nine years that I’ve taught undergraduates at Northwestern’s Weinberg College of Arts & Sciences and over the more than 20 years that I’ve taught trial practice and legal ethics courses at the Law School. A similar impulse drives most people into the medical profession. Just as every lawyer’s mission should be to serve clients, medical care should be about a single-minded mission: patient care.
The dominant big law firm model has evolved away from helping clients and toward maximizing a firm’s short-term profits through a handful of definitive metrics — billable hours, hourly rates, equity partner leverage. Likewise, big medicine — if I can call it that — has succumbed to similar pressures — maximizing relative value units (medicine’s equivalent to the billable hour metric), minimizing costs, and squeezing workers in an effort to improve “productivity,” to name a few.
Similarly, a dominant and incorrect perception in both professions is that bigger is always better. The number of law firm mergers sets a new record every year. Hospital merger and acquisition activity is ubiquitous.
Lost Along The Way
Bigger isn’t better. As with law firms, increasing the size of hospitals works against efforts to create a sense of community, collegiality, and shared mission. Likewise, cost-saving isn’t appropriate when non-medical CEOs with MBAs introduce efficiency measures that ignore the potentially adverse impact on patients.
For more than two weeks, I’ve lived through situations that illustrate my point. For example, I don’t know the metric by which administrators set what they regard as appropriate staffing levels. But one nurse told me that some floors are regarded as “heavy” — meaning that patients have conditions that can require a lot of attention. That translates into greater demands on a nurse’s time. But if there aren’t enough nurses to handle the workload, the burden falls on those who are around. Transferring to a different floor or facility becomes an escape route. It would be interesting to study the nurse “attrition rate” from the “heavy” floors.
Law And Medicine
In the prevailing big law firm model, overworking people — attorneys and staff — maximizes revenues while controlling costs. One consequence is a five-year associate attrition rate for big law firms averaging 80 percent. In other words, for every 100 associates who begin their careers at a large firm, only 20 will still be working there five years later. Other consequences are more difficult to measure so they get ignored: the decline in worker morale and the lost productivity that results.
Do extraordinary associate turnover rates serve client interests? No. Do they foster a climate in which a shared mission of client service becomes the institution’s dominant ethic? No. Do they reflect short-term profit-maximization goals that are completely inappropriate for a profession that should regard itself as better than that? You bet.
Other instances from my medical experience seem equally divorced from what should be a central focus on the patient. They may seem trivial, and none is life-threatening. But collectively they reveal something about institutional focus.
For example, a patient may require periodic blood draws, but the doctors defer the timing of those draws to whenever the phlebotomists are “doing everyone else on the floor.” That might be efficient, but on my floor, that designated time is 4:00 am. Why does efficiency in the use of phlebotomists trump the patient’s need for sleep?
Here’s another: At 11:00 pm, when all of the lights in my room were out and I’d just fallen asleep, someone came in and emptied all of the trash cans. The following morning, I asked the nurse, “Who decided that 11:00 pm was a good time to go around waking people up to empty their trash?”
“That’s just when they come around,” she answered.
These and many other dictates from above govern behavior throughout the hospital. Where does the patient fit in the process of pursuing worker efficiency? At least when it comes to blood draws and trash removal, nowhere, it would seem.
Scholars still debate the meaning of Dick the Butcher’s line in Shakespeare’s Henry the Sixth: “First thing we do, let’s kill all the lawyers.” Were the Bard’s words — speaking through that anarchist — backhanded praise acknowledging attorneys as the source of law and order? Or was he going for the laugh that the play evidently received from contemporaneous audiences that had become weary — as Shakespeare himself had — of the misery that litigious lawyers could inflict on a person’s life?
Regardless of that controversy, I hereby invite debate on a new version of that line. I’ve adapted it to today’s medical and legal worlds: “First thing we do, let’s kill all the MBAs in big law and big med — so doctors and lawyers can recapture their professions.”
Actually, we don’t have to kill the MBAs. We just have to keep them in their proper place.
The contrasting headlines are striking. Two days after Fried Frank announced that it was pulling out of Asia, Dentons revealed that its partners had voted to jump in — big time. A week later, a ceremony that looked like a treaty-signing marked the combination of Dentons with Asia’s largest law firm, Dacheng Law Offices. The result is now a 6,600-lawyer behemoth.
A Big Bet
Dacheng and Dentons share some things in common. Both firms are themselves products of rapid inorganic growth. Dacheng was founded in 1992. Its website now boasts more than 4,000 lawyers worldwide.
Dentons resulted from transactions that combined four law firms — Sonnenschein, Nath & Rosenthal, Denton Wilde Sapte (UK), Salans (France), and Fraser Milner Casgrain (Canada) — into an organizational form known as a Swiss verein. Each firm maintains its own profit pool but shares strategy, branding, IT and other core functions. According to its website at the time of the Dacheng deal, 2,600 lawyers carried the “Dentons” brand.
But a brand is not a business, and any brand is only as good as its underlying product. Law firms have a single product to sell: the talent of their personnel. The most important challenge that comes with inorganic growth is maintaining consistent quality. In that regard and perhaps more than any other business, law firms have precious little margin for error.
In responding to anticipated questions on that subject, Dentons global CEO Elliott Portnoy framed the issue, but never really responded to it: “We know our competition will suggest that this dilutes profitability and will raise questions about quality control. But the simple truth is that we’re going to be able to generate more revenue, increase our profitability and position ourselves as a truly multicultural firm.”
The Big Question
Apart from failing to address the quality question, sound bites about multiculturalism don’t answer a central question: What will the culture of the combined organization become?
The practical differences between Dentons and Dacheng are enormous. According to The American Lawyer, average revenue per Dacheng lawyer is $78,000. In the October 2014 America Lawyer Global 100 listing, Dentons’ RPL was $505,000. Even with separate revenue and profits pools, integrating these two giants will still be something to behold.
For example, the leadership structure of the new entity reads like the fine print on securities filing. The American Lawyer reports:
“The combined firm will also have a Chinese chair, and none of the five vereins will have a majority of board seats. Any single verein can also block a policy it doesn’t agree with. In the combined firm, the global board will be increased from 15 to 19, with five seats for the Chinese verein and the same number for the U.S. verein. Andrew says the future number of Chinese seats will be adjusted according to the verein’s revenue growth. The chair of the global board, which includes all five vereins, will be Peng; Portnoy will remain the firm’s global CEO, and Andrew will continue to be the firm’s outward face as global chair of the combined firm.”
The Big Risk
The principal question that any leader embarking on a merger of equals should ask is: What happens if it fails? Among other things, leadership requires risk management. Anticipating worst-case scenarios might lead to decisions that outsiders view as too conservative. But the downside consequence of failing to consider those scenarios can be fatal. Just ask the former partners of Dewey & LeBoeuf.
In that respect, the nearly simultaneous decision of Fried Frank to exit Asia after a nearly decade-long effort to gain traction there is interesting. That firm’s China entry began in 2006 with lateral hires from Hong Kong. A year later, it opened an office in Shanghai. But it began deliberating the fate of its Asia presence in 2009 before reaching its recent decision to leave.
According to firm chairman David Greenwald “discipline and good business judgment” led the firm to close its China offices. He deserves credit for a tough decision and forceful action. Calling the time of death on any failed effort is never easy.
In commenting to the American Lawyer about Fried Frank’s departure, law firm consultant Peter Zeughauser said, ““Nobody wants to admit defeat, but Fried Frank might be the canary in the mineshaft. China has always been a hard market, and with the local firms getting much stronger and starting to capture the lion’s share, it’s not getting any easier. Some firms will view it as a necessary investment for the future, but for others, it’s just not worth it.”
Different Approaches; Different Outcomes?
Published reports suggest that Fried Frank initially went into China hoping to capitalize on its existing relationships with U.S. clients — including Goldman Sachs and Merrill Lynch. Dentons appears to have a dramatically different strategy: joining forces with the largest of the China-based firms that Zeughauser identified as getting stronger.
Whatever else happens, the leaders of Dacheng-Dentons can say that they once presided over the largest ever lawyer branding experiment. Especially for Dentons, it involves a big bet. For the sake of everyone involved, let’s hope it’s on the right horse.