“I just don’t see the need to cram two firms with around a thousand lawyers [each] together. It made no sense,” one Akin partner reportedly told the National Law Journal shortly after the collapse of Akin-Orrick merger talks.
The number of law firm mergers in 2010 is down from recent years, but look at the headliners: Sonnenschein – Denton; Hogan & Hartson – Lovells; Reed Smith – Thompson & Knight; Orrick and anyone. An earlier consolidation wave produced K&L Gates, DLA Piper, Bingham McCutcheon and others.
How much of this activity proceeds from the simplistic premise that bigger is always better?
When I was a young partner in my large firm, Finley Kumble became a disaster that struck fear in the hearts of big firm expansionists. During the early 1980s, Finley rocked the legal world as it signed up high-profile figures and raided other firms’ superstars, some of whom earned the then-staggering sum of $1 million annually. From only 8 lawyers in 1968, Finley became the nation’s second largest firm by 1985.
It promoted itself as a national powerhouse run on principles of meritocracy. The more business a lawyer generated, the more money he or she took home. Money was the glue that held the partnership together. Does that sound familiar?
But Finley grew too fast, assuming debt for office expansions and promising outsized paychecks to big name lateral hires. As revenue dollars dwindled, the firm disintegrated. With more than 650 attorneys at the time of its dissolution in 1987, it was still one of the nation’s largest firms.
The ghost of Finley Kumble haunted Biglaw leaders for years. Some saw its end as confirming that even large, diverse firms possessed their own identities. Mixing cultures through aggressive recruitment of name players with portable practices was a mistake. Others concluded that senior attorneys and their egos couldn’t survive as a single cohesive unit if their sole point of intersecting common purpose was greed. Still others saw the failure as an inevitable consequence of unrestrained growth. Finley proved that there was a limit on the size that any healthy large law firm could attain. No one knew the outside boundary with certainty, but crossing it was fatal.
What did today’s Biglaw managers learn from the lessons of Finley Kumble’s demise? Probably very little. After all, lawyers excel at distinguishing away precedent that undermines their preferred positions.
In that respect, modern proponents of growth through merger and high-profile lateral acquisitions can point to many differences between Finley and today’s firms. For example, the use of MBA-type metrics that focus on short-term profits at the expense of non-monetary values is now pervasive throughout Biglaw. In that respect, the earlier potential for cultural clashes has diminished as current year equity partner profits have become the universal coin of the realm. Likewise, lateral movement at all levels — especially among rainmakers who were Finley Kumble’s signature recruits — has become commonplace. Indeed, the legal world has become more hospitable to Finley’s central mission and modus operandi.
It would be interesting to hear from former Finley attorneys on the question of how today’s large firms differ from what their old firm once was. Perhaps Finley was just ahead of its time. Or perhaps some major players in Biglaw law are about to see their times change. Or maybe the large firm segment of the profession is proceeding toward the same countdown that big accounting firms have already experienced: From Big 8 to Big 6 to Big 5 to Big 4 — and the race is on to be one of those few.
Here’s the key question: Who benefits in the long run from the rise of mega-firms? Management consultants embrace strategic fits producing scale economies that supposedly benefit clients and equity partners. Perhaps they are correct. But who considers whether hidden costs include undermining community, exacerbating attorney dissatisfaction, or imperiling broader professional values?
Personally, I enjoyed the time when I recognized most of my equity partners at the firm’s annual meetings. Who is willing to develop or consider a metric by which to measure that?
The Belly of the Beast 
Yes, here I am again.
I carry the history of my ten year tenure, first as an associate and then as a partner as both a mark of Cain and as the most remarkable learning experience I have ever had.
Most would agree that Finley Kumble dramatically and forever changed the business of the practice of law firms and the expansion and growth of law firms. Whether these changes have benefited or hurt the profession is a debate which has continued since the very early 1980’s, when Finley Kumble’s growth began to explode (I joined Finley Kumble in 1979, its 84th lawyer), escalated on its demise on December 1988 and continued through today.
What were the causes of death? Multiple causes, actually, all lessons to be learned and always borne in mind:
Leverage certainly was an issue, but not the immediate cause of death. At the time of death, Finley Kumble carried $84,000,000 in bank debt. That debt theoretically could have been adequately amortized should the firm have continued to function.
These are the the diseases suffered:
A complete lack of transparrency. A small coterie of largely backbiting and mutually untrusting partners ran the law firm. The only information generally shared with partners was the daily cash receipts. A number of partners, including me, actually had our names placed on the firm’s mailing list so that we could find out where the firm had recently opened offices and the names of lawyers who joined the firm as partners.
Management’s principal focus on cash collections, to the virtual indifference to almost anything else. Monthly each partner was required to meet with Steve Kumble to review his or her cash collections. These visits were not quite collegial exchanges. For many, waterboarding would have been a pleasant improvement.
An anecdote: A senior associate, on the cusp of election to the partnership, was working for months on a major matter, which riveted significant attention by the intenational media; it literally involved both matters financial, serious governmental threats to life and limb of former leaders of Latin American countries, US Foreign policy and more. Parties involved in the matter included not only foreign leaders, formerly warmly embraced by the US and then deposed by clandestine US activities. Participants in the drama included not only federal courts, but the White House, the State Department and a major European US ally. The senior associate led a team of lawyers who worked tirelessly and the matter appeared to be winding down to a remarkably successful conclusion a month or so before the partnership vote was to be taken. Kumble summoned the young partner in to his office and said that he was hearring very good things regarding what lawyer was accomplishing and the credit it was bringing to the law firm. Kumble then pulled out a sheaf of computer reports and placed them in front of his younger colleague. The reports were those of cash collections from the matter being handled by the younger lawyer — very substantial sums. Kumble then turned to the younger man and said in words or substance, while your work has been great for these clients, you now need to start thinking like a partner. These clients are extremely concerned and frightened and they will pay any amounts while this whole matter is pending. So, as a partner, you may want to think about not rushing through the resolution of the case so quickly, for the firm’s benefit. The lawyer listened, settled the case two weeks later and two weeks after that was admitted to the partnership.
Focus on originations. Partner compensation was largely predicated on originations. If a litigation partner attracted a client with significant corporate business, the originating partner had to either beg and plead for help from a corporate partner or engage in horse trading (“I’ll handle your clients’ litigations if you handle my clients’ corporate business” or “if you handle the corporate work, I’ll let you have a portion of the corporate work.”) Battles royal frequently roiled about who should get the origination credt. (e.g., “How dare you take origination credit for client x? Why, six years ago, I took its CEO out to lunch and I have the American Express receipt to prove it”).
Battles for being the king of the hill. The last year of Finley Kumble’s existence was one in which the small executive commitee were closeted fighting to become Ruler for Life. It was a bloody battle. One executive comittee member was “fired” and was paid millions of dollars for the privilege, even as profit distributions had halted. No other partner was consulted. When a few partners asked about this, the response from the top was that “this was good for the firm.” Another name partner openly sought a new job, which was announced in the press, presumably leaked by him. As these scorpions fought among themselves, nobody was managing the business of the firm. Instead, partners with business, seeing the obvious chaos, began looking for other opportunities. Associates, with little to do, since little new work was being originated actually approached me in a group asking if the library could stock more copies of current magazines so that they could have more to read during the day.
Dumb deception. Because, perhaps as now, the One Deity was PPP, every artifice was used to pump that number up. Managing partners, without consuting any other partner, entered in to an agreement with the firm’s lenders, under which the firm’s accounts receivables were purchased by a shell corporation. The shell corporation borrowed money from the firm’s lenders and the proceeds were then paid to the firm. Poof! Additional income was created. Of course, if clients did not pay their invoices, the liability flowed back to the firm. Very clever scheme; here was a bunch of ostensibly smart lawyers turning non taxable loan proceeds into taxable income, all in homage to PPP. And, without informing the firm’s partners. The firm’s fiscal year ended on January 31. If insufficient income had been received by that time, subsequent receipts were noted as “additional receipts for January 31.” January ordinarily ended in March.
There is so much more to tell, much of it ribald. But in spite of it all there really were some outstandng lawyers who went on to achieve great heights in the profession, in leading other AmLaw 100 firms and in advising and counseling other firms, doing so rather successfully, taking to heart lessons learned from ill advised former law firm managers.
I suppose that survivors of great catastrophes of every kind have compelling tales to relate and lessons learned from mistakes of others. Many of us often get together, perhaps as do survivors of the Battle of the Bulge, and regale each other with times gone by.
In my next chapter, I will discusss the firm’s account with the Mayflower Madam.
Fascinating. Thanks for the contribution. I think you’d especially enjoy my new novel, The Partnership.
Why aren’t there economies of scale in the law business? If I bought a Lotus car with a Toyota engine, I pay a lot more than if I buy a Toyota. A big part of that is that Lotus is limited production, but Toyota has economies of scale. It’s cheaper, per car, to turn out 100,000 than 10,000. So, shouldn’t Biglaw yield cheaper hourly rates, since the firms use all those interchangeable cogs?
One would expect scale economies that produce production cost savings to reach consumers in the form of lower prices. But that result assumes homogeneous products and competitive markets. Presumably, the specialized legal skills that draw clients to large firms are sufficiently unique that those possessing them can command premium rates. That is, the cogs aren’t interchangeable. Perhaps that’s a partial explanation for Citi’s report that average hourly billing rates in Biglaw continue to trend upward, along with profits per equity partner. However, it’s also possible to envision a scenario wherein the rise of mega-firms and other developments (e.g., outsourcing) increase the commoditization of legal services. If that happens, clients may seek to capture the resulting cost savings for themselves and endanger Biglaw’s extraordinary profitability. Just a thought.
Having toiled in these fields for almost 35 years, I can state unequivolically that law firms are complete economic anamolies. For example, the larger the law firm, the higher, yes the higher it cost the law firm to “house” each lawyer. In short, if you take the direct costs of an associate (comp, allocated G&A; benefits, etc.), there are no economies of scale. Period. Law firm recruiting also defies basic principles of supply and demand in the world of recruiting. With a huge surfeit of high quality unemployed, well trained lawyers out there and a seemingly never ending river of law school graduates, growing each year for the last several years and increasing over the next several years as new law schools open and existing law schools adding seats to their schools, a remarkable number of law firms continue to recruit graduates and pay base salaries of a gravity defying $160,000, even as clients currently generally are now refusing to pay for any hours billed by first and second year associates.
And, yes, I did just order your book; even though i noticed that you did not buy my book “Navigating the Perfect Storm: Recruiting, Training and Retaining Lawyers in the Coming Decade” (Ark Press, 2010)
Jerry Kowalski
I have for some time thought about the question of who benefits from the megafirm mergers. From those I have seen, few benefit the junior and midlevel partners. They benefit the firm management, at least the part that survives, because they are compensated more like the CEO of a company – the bigger the company, the more money they make (and the easier it is to bury such large compensation in a larger balance sheet), For the partner who is rewarded based on originations or managing clients or a combination of the two, there is usually nothing but higher overhead, more expenses and time-consuming interactions with more offices. Synergy is largely bogus – the mergers do not grow the pie or create cost efficiencies. They just grow overhead, including managment overhead.
So who is driving these mergers? Mainly the management which is looking to pay itself a higher salary for managing a bigger enterprise. What reactions may come from the average partners who pay a higher portion of their revenues merely for the privilege of being in a larger firm remains to be seen.
And, incidentally, I won’t say that gobalization of business isn’t real, or its impact on the US legal profession not real. I’m just not convinced that mergers are always the best way to deal with it, or that that is really what is driving may of these mergers, regardless of what people say.