An earlier post considered Nassim Nicholas Taleb’s bestseller, The Black Swan. (https://thebellyofthebeast.wordpress.com/2010/09/06/biglaw-and-the-black-swan/ ). Taleb describes the folly of relying on supposedly proven models of the past to anticipate the smooth continuation of existing trends. Such myopic thinking ignores the wholly unexpected Black Swans that actually shape history. The essence of the Black Swan is its serendipity, coupled with its power. It can be good or bad, but it’s always transformative. September 11 was a Black Swan, as were Microsoft and Facebook.
If you accept Taleb’s theory, I think Am Law introduced Biglaw to a Black Swan in 1985 with its profits per equity partner rankings. They encouraged internal behavior that, over time, dramatically changed most large firms’ cultures. Today, accepting conventional wisdom means following managers (few of whom are leaders — a crucial distinction for Taleb) who focus on supposedly proven metrics: billings, billable hours, and associate/partner leverage ratios. Free markets dictate decisions; important things that don’t impact the current year’s bottom-line drop out of key calculations; equity partner profits trees grow to the sky.
But wait! The U.S. News evaluations seem to ignore this crucial Am Law metric. They utilize client and attorney surveys assessing lawyer quality, not firms’ bottom-line profits. In seeking to attain or retain the highest available practice group rating (Tier 1), will firms teach to this new test that the criteria appear to use?
Not so fast. Even as U.S. News released the rankings, big firms began setting the goalposts for the new competition. Because U.S. News departed from its typical numerical approach in favor of tiers for practice groups, Sidley Austin and K&L Gates each claimed the overall #1 position based on their total Tier 1 rankings.
If I’m right, the new rankings will simply accelerate an embedded trend toward lateral recruiting at the highest levels. (http://amlawdaily.typepad.com/amlawdaily/2010/09/lateral-uptick.html) Big firms will compete even more ferociously for top partners to fill particular U.S. News practice group holes — and they’ll jettison incumbents to make room. How will high-powered partners decide where to plant themselves? They’ll take their books of business and follow the money. The definitive Am Law metric — average equity partner profits — will remain inviolate. Too many Biglaw partnerships will continue their devolution into collections of attorneys whose principal bond is financial.
So there’s no Black Swan here — just another log on the bonfire that is already consuming much of the profession.
But these developments favor the emergence of a Black Swan that I identified in my earlier post. Australia now has publicly traded law firms. Attorneys in Great Britain have begun preparing to follow that lead when the Legal Services Act becomes effective next year. (http://www.law.com/jsp/law/international/LawArticleIntl.jsp?id=1202463691626)
Biglaw’s ongoing transformation to a species of Big Business could culminate in non-lawyer shareholders and boards. What will stop them? Equity partners who have been hired to buttress a firm’s claim to Tier 1 status in the U.S. News rankings? As relative newcomers, their allegiance to their new firms will be more tenuous. The idea of preserving whatever remains of a unique professional culture will seem antiquated, particularly with the big bucks for their shares of an initial public offering (IPO) dangling before them.
It sure looks to me like the same country that introduced the first black swan to the New World is now exporting something far more ominous for the legal profession.
As much as I admire Professor Harper’s ariculate, often fearless and bold attacks on some citadels of the profession, from time to time, I feel constrained to take issue with some of Professor Harper’s assumptions. Here, contrary to Prof. Harper’s assertion about the AmLaw rankings as a reliable or definitive metric. The AmLaw metrics are widely known to be completely unreliable. http://kowalskiandassociatesblog.com/2010/05/19/should-law-firms-continue-to-report-publicly-on-profits-per-partner/
The issue of law firms being publicly owned and traded is a swan of a completely color. The catalyst for abandoning previous guild inspired rules which precluded lawyers from sharing profits with non-lawyers is a law firm’s basic need for working capital. That capital had previously been supplied by partners, who most often made capital comtributions by borrowing money from bank, with which the law firm typically had a relationship with, secured by the partner’s pledging of profit distributions. Additional required capital came in the form of direct bank borrowing. However, the tightening of the credit markets has had an extremely constrictive influence on law firms. Underwriting criteria have increased dramatically and banks scrutinize law forms’ conformance to covenants (such as head count, revenue streams, expnses, etc.) as never before. It is the need for this lifeblood of capital which will inform the change from partnership yo public entity.
Thanks for your comment. You may be right that the Am Law rankings are unreliable — especially because firms can manipulate them. Indeed, that proves my point. If the PPP rankings didn’t matter to firms, some wouldn’t bother to manipulate them in an effort to place higher in the list. Whatever their flaws, PPP drives decisions that define the cultures of too many firms. At least, that’s my view based on 30 years of experience and observation in the profession. Most senior Biglaw partners I know agree. Likewise, if capital needs are moving firms from partnerships to public entities, then it truly is a Black Swan worth watching.
You might want to reconsider your fascination with the Black Swan metaphor (two posts using it within a week). The current global population of Black Swans is about 500,000 and growing. It is not an endangered species or an infrequent occurrence in nature. Like an lot of amateur (read adjunct) academics, you would be better served by doing a little research before writing. That’s one of the principal differences between academics and lawyers.
Have you read Taleb’s book? As I’ve explained in my posts, his point (and the reason I find his metaphor intriguing) has nothing to do with the number of black swans that exist today. So I don’t understand your point about the need for more research into the current black swan population. Perhaps it would be an interesting exercise for an academic, but it’s completely irrelevant to Taleb’s argument. Rather, the critical fact for him is that, until the discovery of Australia, everyone in the Old World believed that all swans were white. Those who thought they knew everything were wrong because they hadn’t accounted for what they didn’t know — or had assumed away. If Taleb’s premise about the state of knowledge at the time of Australia’s discovery — and, therefore, his book’s very title — is incorrect, I’ve yet to read a reviewer who mentioned it. You’d think it would have come up by now.
A few more obserations, if I might, Professor: With more than two decades in the lateral partner hiring world, I know that the AmLaw PPP reports have only a negligible effect on partners’ decisions to make a move. The question may be raised by a potential lateral, but only en passant. Partners’ decisions in ultimately making a move is almost always ultimately predicated on what he or she will be making, with almost no reference to the AmLaw rankings. Partner compensation is very much a market driven factor. A partner with a given amount of transportable business and a practice specialty which may be in vogue or in a state of less demand will be paid the same amount by any firm sitting anyplace in the rankings.
Partners make their decisons on a variety of factors, such as general reputation, the firm’s ability to support his or her business, a firm’s capacity to allow him or her to grow his or her business, such as because of a larger geographical footprint and to no great surprise, an elvation of status — not equity or non-equity – but rather elvation to practice group leader, office head or membership in the firm’s management.
A completely surprising phenomenon is a general indifference by laterals in conducting any due diligence of a firm whose offer the candidate is considering. In my two decades of experience, being involved in literally hundreds of partners moving laterally, I have seen individual candidates or small practice groups ask for any financial disclosure fewer than a dozen times. Large acquisitions or firm mergers of consequence, on the other hand, do uniformly involve a great deal of due diligence and exchanges of information. In these instances, both sides are typically advised by professionals. Again, the AmLaw reports play absolutely no material role, with the sole exception of instances when a combination of consequece will elevate the combined firm in the rankings.
I have also seen managing partners make some rather odd decisions in acquiring laterals, which actually are AmLaw driven. For example, some firms will not take on laterals, particularly practice groups during the fourth quarter and sometimes third quarter, because the “ramp up” period — the period during which compensation is paid and work performed is not yet generated in to revenue. The decision not to mak any lateral hires during the third or fourth quarter is completely AmLaw ranking driven, since PPP will necesarily decline as the firm makes the investment in the lateral acquisition and without reference to the long term benefit to the law firm.
The dynamic of clients retaining law firms has undergone radical changes in the last two years. Clients now make decisions based on, among other things, responses to RFP’s, proposed Alternative Fee Arrangements, Convergence, value billing proposals and ACC Value Index ratings. I would be somewhat surprised if the US News rankings will play a material role, other than perhaps in law firm marketing efforts and a less than material role in client decisions. We are in a barve new world. http://kowalskiandassociatesblog.com/2010/03/31/alternative-fee-arrangements-a-primer/
Again I do commend you for opening up important issues to a broad and much needed public discourse on significant issues.
Thanks for your comment and continuing interest. My point about the Am Law rankings — based on 30 years in a big firm — is that the PPP metric itself has increasingly driven internal firm decisions. Your observations about some of the “odd decisions” firms make in acquiring laterals seem to reinforce that view. I accept your point that most potential lateral partners are more interested in what they will be making than in a firm’s overall ranking. In the end, what a firm thinks it can afford to pay will likely depend significantly on its overall profitability.