THE PERVASIVE AMAZON JUNGLE

Amazon’s founder and CEO, Jeff Bezos, hates the recent New York Times article about his company. He says it “doesn’t describe the Amazon I know.” Rather, it depicts “a soulless, dystopian workplace where no fun is had and no laughter heard.” He doesn’t think any company adopting such an approach could survive, much less thrive. Anyone working in such a company, he continues, “would be crazy to stay” and he counts himself among those likely departures.

The day after the Times’ article appeared, the front page of the paper carried a seemingly unrelated article, “Work Policies May Be Kinder, But Brutal Competition Isn’t.” It’s not about Amazon; it’s about the top ranks of the legal profession and the corporate world. Both are places where the Times’ version of Amazon’s culture is pervasive — and where such institutions survive and thrive.

The articles have two unstated but common themes: the impact of short-termism on working environments, and how a leader’s view of his company’s culture can diverge from the experience of those outside the leadership circle.

Short-termism: “Rank and Yank”

Bezos is hard-driving and demanding. According to the Times, his 1997 letter to shareholders boasted, “You can work long, hard or smart, but at Amazon.com you can’t choose two out of three.”

The Times reports that Amazon weeds out employees on an annual basis: “[T]eam members are ranked, and those at the bottom eliminated every year.” Jack Welch pioneered such a “rank and yank” system at General Electric long ago and many companies followed his lead. Likewise, big law firms built associate attrition into their business models.

Theoretically, a “rank and yank” system produces a higher quality workforce. But in recent years, a new generation of business thinkers has challenged that premise. Even GE has abandoned Welch’s brainchild.

As currently applied, the system makes no sense to Stanford Graduate School of Business professor Bob Sutton, who observed, “When you look at the evidence about stack ranking…. The kind of stuff that they were doing [at GE], which was essentially creating a bigger distribution between the haves and the have nots in their workforce, then firing 10% of them, it just amazed me.”

If Amazon uses that system, which focuses on annual short-term evaluations, it’s behind the times, not ahead of the curve.

Haves and Have Nots

Professor Sutton’s comment about creating a bigger gap between the haves and the have nots describes pervasive law firm trends as well. The trend could also explain why Bezos and the Times may both be correct in their contradictory assessments of Amazon’s culture. That’s because any negative cultural consequences of Bezos’ management style probably don’t seem real to him. Bezos is at the top; the view from below is a lot different.

This phenomenon of dramatically divergent perspectives certainly applies to most big law firms. As firms moved from lock-step to eat-what-you-kill partner compensation systems, the gap between those at the top and everyone else exploded. Often, the result has been a small group — a partnership within the partnership — that actually controls the institution.

Those leaders have figured out an easy way to maximize short-term partner profits for themselves: make the road to equity partner twice as difficult than it was for them. As big firm attorney-partner leverage ratios have doubled since 1985, today’s managers are pulling up the ladder on the next generation. It’s no surprise that those leaders view their firms favorably.

Their associates have a decidedly different impression of the work environment. Regular attrition began as a method of quality control. At many firms, it has morphed into something insidious. Leadership’s prime directive now is preserving partner profits, not securing the long-run health of the institution. Short-term leverage calculations — not the quality of a young attorney’s lawyering — govern the determination of whether there is “room” for potential new entrants.

About the Long-Run

Such short-term thinking weakens the institutions that pursue it. As Professor Sutton observes: “We looked at every peer reviewed study we could find, and in every one when there was a bigger difference between the pay at of the people at the bottom and the top there was worse performance.”

That’s understandable. After all, workers behave according to signals that leadership sends down the food chain. Dissent is not a cherished value. Resulting self-censorship means the king and the members of his court hear only what they want to hear. People inside the organization who want to advance become cheerleaders who suppress bad news. Being a team player is the ultimate compliment and the likeliest path to promotion.

One More Thing

Bezos’ letter to his employees about the Times article encourages anyone who knows of any stories “like those reported…to escalate to HR.” He says that he doesn’t recognize the Amazon in the article and “very much hopes you don’t, either.”

One former employee frames Bezos’ unstated conundrum correctly: “How do you possibly convey to your manager the intolerable nature of your working conditions when your manager is the one telling you, point blank, that the impossible hours are simply what’s expected?”

Note to Jeff B: Escalating to HR won’t eliminate embedded cultural attitudes.

Then again, maybe I’m wrong about all of this. On the same day the Times published its piece on the increasingly harsh law firm business model, the Wall Street Journal ran Harvard Law School Professor Mark J. Roe’s op-ed: “The Imaginary Problem of Corporate Short-Termism.”

It’s all imaginary. That should come as a relief to those working inside law firms and businesses that focus myopically on near-term results without regard to the toll it is taking on the young people who comprise our collective future.

ANOTHER COLOSSAL LATERAL MISTAKE

Lateral hires are risky. Even managing partners responding to the Hildebrandt/Citi 2015 Client Advisory’s confidential survey admitted that only about half of their lateral partners are break-even at best — and the respondents had unrestrained discretion to decide what qualified as “break-even.” As Ed Newberry, co-global managing partner of Squire Patton Boggs told Forbes, “[L]ateral acquisitions, which many firms are aggressively pursuing now … is a very dangerous strategy because laterals are extremely expensive and have a very low success rate….”

Beyond the financial perils, wise firm leaders understand that some lateral partners can have an even greater destructive impact on a firm’s culture. In late 2014, former American Lawyer editor-in-chief Aric Press interviewed Latham’s outgoing chairman Bob Dell, who was retiring after a remarkably successful 20-year run at the top of his firm. Dell explained that he walked away from prospective lateral partners who were not a good cultural fit because they stumbled over Latham’s way of doing things.

Press wrote: “Culture, in Dell’s view, is not a code word for soft or emotional skills. ‘We think we have a high-performance culture,’ he says. ‘We work at that. That’s not soft.'”

Under the Radar and Under the Rug

Most lateral hiring mistakes attract little public attention. Firm leaders have no reason to highlight their errors in judgment. Fellow partners are reluctant to tell their emperors any unpleasant truth. If, as the adage goes, doctors bury their mistakes and lawyers settle theirs, then managing partners pretend that their mistakes never happened and then challenge anyone to prove them wrong. The resulting silence within most partnerships is deafening.

Every once in a while, a lateral hire becomes such a spectacular failure that even the press takes note. When that happens, the leaders of the affected law firm have nowhere to hide. Which takes us to James Woolery, about whom I first wrote five years ago.

Without mentioning Woolery specifically, I discussed a May 28, 2010 Wall Street Journal article naming him was one of several Cravath, Swaine & Moore partners in their late-30s and early-40s taking “a more pro-active approach, building new relationships and handling much of the work that historically would have been taken on by partners in their 50s.”

“We’re more aggressive than we used to be,” 41-year-old Cravath partner James Woolery told the Journal. “This is not your grandfather’s Cravath.”

A Serial Lateral

Six months later, it wasn’t Woolery’s Cravath, either. He’d already left to co-head J.P. Morgan Chase’s North American mergers and acquisitions group.

In 2013, only two years after accepting the Chase job, Woolery moved again. With much fanfare, he negotiated a three-year deal guaranteeing him at least eight million dollars annually to join Cadwalader, Wickersham & Taft. How was the cultural fit? The firm’s chairman, Chris White, described him as “the epitome of the Cadwalader lawyer” who deserved the lucrative pay package that made him the firm’s highest paid partner. A new title created especially for Woolery — deputy chairman — also made clear that he was White’s heir apparent.

To no one’s surprise, in 2014 Cadwalader announced that Woolery would take over as chairman in early 2015. As he prepared to assume the reins of leadership, the firm took a dramatic slide. The current issue of The American Lawyer reports that Cadwalader posted the worst 2014 financial results of any New York firm. Woolery’s guarantee deal looked pretty good as his firm’s average partner profits dropped by more than 15 percent. The firm’s profit margin — 26 percent — placed it 87th among Am Law 100 firms.

On January 19, 2015, the firm’s managing partner, Patrick Quinn, convened a conference call with all Cadwalader partners to convey a stunning one-two punch: Woolery would not become chairman, and he was leaving the firm to start a hedge fund. Woolery was not on the call to explain himself.

Unpleasant Press

No law firm wants this kind of attention. No client wants its outside firm to project uncertainty and instability at the top. No one inside the firm wants to hear about someone who has now been “thrust into the role of designated chairman of the firm,” as The American Lawyer described Patrick Quinn.

Woolery is gone, and so is Chris White, the former Cadwalader chairman who sold fellow partners on Woolery and his stunning guaranteed compensation package. White, age 63, left the firm in November to become co-CEO of Phoenix House, the nation’s largest non-profit addiction rehabilitation center.

Meanwhile, newly designated Cadwalader chairman Quinn says that the firm has no plans to change its strategy, including its reliance on lateral partner hiring. Maybe Chris White can use his new job to help Quinn and other managing partners shake their addiction to laterals. Apparently, first-hand experience with failure isn’t enough.

THINKING BEYOND THE AM LAW 100 RANKINGS

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.

DENTONS STRIKES AGAIN

[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.

What’s Next?

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.”

A Distraction?

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.

THE BINGHAM CASE STUDY — PART I

“For the first time since I’ve been in this job, we have all the pieces we need to do our job.”

That was former Bingham McCutchen chairman Jay Zimmerman’s penultimate line in the September 2011 Harvard Law School Case Study of his firm.

Oops.

Harvard Law School Professor Ashish Nanda and a research fellow developed the study for classroom use. According to the abstract, it’s a textbook example of successful management. It demonstrates how a firm could evolve “from a ‘middle-of-the-downtown pack’ Boston law firm in the early 1990s to a preeminent international law firm by 2010.”

Oops, again.

Familiar Plaudits

At the time of Nanda’s study, the profession had already witnessed a string of recent big firm failures. He should have taken a closer look at them. In fact, only seven months before publication of the Harvard Study, Howrey LLP was in the highly publicized death throes of what was a preview Bingham’s unfortunate fate.

Bingham’s Zimmerman and Howrey’s last chairman, Robert Ruyak, had several things in common, including accolades for their leadership. Just as Nanda highlighted Zimmerman’s tenure in his study, two years before Howrey’s collapse, Legal Times honored Ruyak as one of the profession’s Visionaries. Along similar lines, less than a month after publication of the Harvard study, Dewey & LeBeouf’s unraveling began as partners learned in October 2011 that the firm was not meeting its revenue projections for the year. But Dewey chairman Steven Davis continued to receive leadership awards.

Perhaps such public acclaim for a senior partner is the big firm equivalent of the Sports Illustrated curse. Being on the cover of that magazine seems to assure disaster down the road. (According to one analyst, the SI curse isn’t the worst in sports history. That distinction belongs to the Chicago Cubs and the Billy Goat hex. But hey, anyone can have a bad century.)

Underlying Behavior

The Lawyer Bubble investigates Howrey, Dewey, and other recent failures of large law firms. The purpose is not to identify what distinguishes them from each other, but to expose common themes that contributed to their demise. With the next printing of the book, I’m going to add an afterword that includes Bingham.

If Nanda had considered those larger themes, he might have viewed Bingham’s evolution much differently from the conclusions set forth in his study. He certainly would have backed away from what he thought was the key development proving Bingham’s success, namely, aggressive growth through law firm mergers and lateral hiring. He might even have considered that such a strategy could contribute to Bingham’s subsequent failure — which it did.

To find those recent precedents, he need not have looked very far. Similar trends undermined Howrey, Dewey, and others dating back to Finley Kumble in 1988. As a profession, we don’t seem to learn much from our mistakes.

The MBA Mentality Strikes Again

What caused Professor Nanda to line up with those who had missed the fault lines that had undone similar firms embracing the “bigger is always better” approach? One answer could be that he’s not a lawyer.

Nanda has a Ph.D in economics from Harvard Business School, where he taught for 13 years before becoming a professor of practice, faculty director of executive education, and research director at the program on the legal profession at Harvard Law School. Before getting his doctorate, he spent five years at the Tata group of companies as an administrative services officer. He co-authored a case book on “Professional Services” and advises law firms and corporate inside counsel.

It’s obvious that Nanda is intelligent. But it seems equally clear that his business orientation focused him on the enticing short-term metrics that have become ubiquitous measures of success. They can also be traps for the unwary.

In Part II of this series, I’ll review some of those traps. Nanda fell into them. As a consequence, he missed clues that should have led him to pause before joining the Bingham cheerleading squad.

Meanwhile, through December 6, Amazon is offering a special deal on my novel, The Partnership: It’s FREE as an ebook download. I’m currently negotiating a sale of the film rights to the book.

LAW & FOOTBALL: RANKINGS DOUBLETHINK

For many people, the holiday season means an intense focus on college football. This year, a 12-person committee develops weekly team rankings. They will culminate in playoffs that produce head-to-head competition for the national championship in January.

A recent comment from the chairman of that committee, Jeff Long, is reminiscent of something U.S. News rankings czar Robert Morse said about his ranking system last year. Both remarks reveal how those responsible for rankings methodology rationalize distance between themselves and the behavior they incentivize.

Nobody Wants Credit?

Explaining why undefeated Florida State dropped from second to third in the November 11 rankings, Long told ESPN that making distinctions among the top teams was difficult. He explained that the relevant factors include a team’s “body of work, their strength of schedule.” Teams that defeat other strong teams get a higher rank than those beating weaker opponents. So even though Oregon has suffered a loss this year, its three victories against top-25 opponents jumped it ahead of undefeated FSU, which had only two such wins. Long repeated his explanation on November 19: “Strength of schedule is an important factor….”

Whether Oregon should be ahead of FSU isn’t the point. Long’s response to a follow-up question on November 11 is the eye-catcher: Was the committee sending a message to teams that they should schedule games against tougher opponents?

“We don’t think it’s our job to send messages,” he said. “We believe the rankings will do that.”

But who develops the criteria underlying the rankings? Long’s committee. The logic circle is complete.

Agency Moment Lost: Students

In his November 14 column for the New York Times, David Brooks writes more broadly about “The Agency Moment.” It occurs when an individual accepts complete responsibility for his or her decisions. Some people never experience it.

Rankings can provide opportunities for agency moments. For example, some prelaw students avoid serious inquiry into an important question: which law school might be the best fit for their individual circumstances? Instead, I’ve heard undergraduates say they’ll attend the best law school that accepts them, and U.S. News rankings will make that determination.

If they were talking about choosing from law schools in different groups, that would make some sense. There’s a reason that Harvard doesn’t lose students to Boston University. But too many students take the rankings too far. If the choice is between school number 22 and the one ranked number 23, they’re picking number 22, period. That’s idiotic.

In abandoning independent judgment, such students (and their parents) cede one of life’s most important decisions to Robert Morse, the non-lawyer master of the rankings methodology. It’s also an agency moment lost.

Agency Moment Lost: Deans, Administrators, and Alumni

Likewise, deans who let U.S. News dictate their management decisions say they’re just responding to incentives. As long as university administrators, alumni, and prospective students view the rankings as meaningful, they have to act accordingly. Any complaint — and there are many — should go to the person who develops the rankings methodology.

All roads of responsibility lead back to U.S. News’ Robert Morse, they say. But following that trail leads to another lost agency moment. In March 2013, Lee Pacchia of Bloomberg asked Morse if he took any responsibility for what’s ailing legal education today:

“No…U.S. News isn’t the ABA. U.S. News doesn’t regulate the reporting requirements. No….”

Agency Moment Lost: Methodology Masters

Morse went on to say that U.S. News was not responsible for the cost of law school, either. Pacchia didn’t ask him why the methodology rewards a school that increases expenditures without regard to the beneficial impact on student experiences or employment outcomes. Or how schools game the system by aggressively recruiting transfer students whose tuition adds revenue at minimal cost and whose lower LSAT scores don’t count in the school’s ranking methodology. (Vivia Chen recently reported on the dramatic increase in incoming transfer students at some schools.)

Cassius was only half-right. The fault lies not in our stars; but it doesn’t lie anywhere else, either!

The many ways that U.S. News rankings methodology has distorted law school deans’ decision-making is the subject of Part I of my book, The Lawyer Bubble – A Profession in Crisis. Part II investigates the analogous behavior of law firm leaders who rely on metrics that maximize short-term Am Law rankings in running their businesses (e.g., billings, billable hours, hourly rates, and leverage ratios).

Aggregate Rankings v. Individual Outcomes

In the end, “sending a message” through a rankings methodology is only one part of an agency equation. The message itself doesn’t require the recipient to engage in any particular behavior. That’s still a choice, although incentive structures can limit perceived options and create first-mover dilemmas.

Importantly, individual outcomes don’t always conform to rankings-based predictions. Successful participants still have to play — and win — each game. That doesn’t always happen. Just ask Mississippi State — ranked number one in the college football playoff sweepstakes after week 12, but then losing to Alabama on November 15. Or even better, look at number 18 ranked Notre Dame, losing on the same day to unranked Northwestern.

Maybe that’s the real lesson for college coaches, prelaw students, law school deans, and law firm leaders. Rather than rely on rankings and pander to the methodology behind them, focus on winning the game.

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.