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The concluding lines of this year’s Client Advisory from Hildebrandt/Citi are defensive, if not petulant:
“Unlike the commentary of many observers of the legal profession suggesting that today’s senior management do not ‘get it,’ we believe the large law firms today have every capability to adjust to the changing market….”
That nifty non sequitur is also a rhetorical sleight of hand. Having “every capability to adjust” is not the same as actually adjusting. The suggestion that today’s senior law firm leaders “get it” implies that they are responding in healthy and productive ways to a period of dramatic change.
Well, most of them aren’t. Instead, they’re maximizing current income at great expense to the future of their institutions. But don’t take my word for it; take theirs.
Facts get in the way
Consider the dominant big firm strategy: lateral hiring and mergers to achieve top line revenue growth. In Citi’s 2012 Law Firm Leaders Survey, senior leaders self-reported that only 60 percent of their laterals were above “break even.” For 2013, the rate dropped to 57 percent. As for mergers, anyone who thinks bigger is always better should look at the decline in operating margins that has followed most recent big firm combinations. That phenomenon is called diseconomies of scale.
Moreover, even the self-reported “success rate” is inflated. It takes years to determine the true financial impact of a lateral hire, so most managing partners touting those efforts actually have no idea whether their recent acquisitions will benefit their firms’ bottom lines. In fact, if leaders already admit to mediocre results for the laterals they personally sponsored, imagine how much worse the reality must be.
Beyond the numbers
Notwithstanding previous failures on a massive scale, managing partners are still pursuing growth for the sake of growth. Unfortunately, it can be a loser in ways that go far beyond mere financial losses. The negative impact on a firm’s culture, morale, and long-term institutional stability can be devastating.
For example, the 2013 Hildebrandt/Citi Client Advisory reported that between 2007 and 2011, law firms increased the number of lateral partners by 10 percent. Meanwhile, homegrown promotions to partner during the period dropped by 21 percent. That trend is undermining already low associate morale.
The lateral hiring frenzy has demoralized partners, too. A loss of community afflicts partnerships of people who don’t know each other. That’s one reason that forty percent of respondents to Altman Weil’s May 2013 survey of firm leaders said their partners’ morale was lower than it was at the beginning of 2008.
Another reason for diminished partner morale is the way lateral hiring has contributed to higher internal equity partner compensation spreads. Bidding to attract so-called rainmakers has pushed the high end of the range up. So have existing partners who threaten to test the lateral market. In that zero sum game of dividing the partnership pie, the bottom end of the range has moved down. (For an example, take a look at James B. Stewart’s New York Times profile of a former Dewey & LeBoeuf partner who reportedly earned $350,000 while his “protector” earned $8 million.)
More collateral damage ignored
Accompanying the lateral hiring frenzy and short-term metrics that drive the prevailing big firm business model are destructive client silos. More than 70 percent of law firm leaders responding to the Altman Weil survey said that older partners were hanging on too long. In the process, they’re hoarding clients, billings, and opportunities in ways that block the transition of firm business to younger lawyers.
But leadership’s response to this problem is perverse: 80 percent of managing partners admit that they plan to continue tightening equity partner admission standards.
The ongoing failure of leadership also reveals itself in managing partners’ overall agendas. When asked to prioritize goals for their firms, they placed “client value” number eight — behind (1) increasing revenue, (2), generating new business, (3) growth, (4) profitability, (5) management change, (6) cost management, and (7) attracting talent.
Closer to the mark
In contrast to the Hildebrandt/Citi 2014 Client Advisory, the Georgetown Law Center/Peer Monitor 2014 Report on the State of the Legal Profession concludes that most law firm leaders don’t “get it” at all:
“[G]rowth for growth’s sake is not a viable strategy in today’s legal market…Strategy should drive growth and not the other way around. In our view, much of the growth that has characterized the legal market in recent years fails to conform to this simple rule and frankly masks a bigger problem – the continuing failure of most firms to focus on strategic issues that are more important for their long-term success than the number of lawyers or offices they have.”
The report explains that, in an effort to justify the counterproductive urge to grow, “law firm leaders feel constrained to articulate some kind of strategic vision…and the message that we need to ‘build a bigger boat’ is more politically palatable than a message that we need to fundamentally change the way we do our work.”
Similarly, the author of the 2013 Altman Weil survey, Thomas Clay, says that too many firms are “almost operating like Corporate America…managing the firm quarter-to-quarter by earnings per share.” That shortsighted approach is “not taking the long view about things like truly changing the way you do things to improve client value and things of that nature.”
Even clients recognize that most outside law firms aren’t adapting to new realities. An October 2013 Altman Weil Survey asked chief legal officers to evaluate the seriousness of their outside law firms in changing the legal service delivery model to provide greater value. On a scale from zero (not at all serious) to ten (doing everything they can), “for the fifth year, the median was a dismal ‘3.’”
Perhaps the authors of the Hilebrandt/Citi 2014 Client Advisory actually believe that most of their big law managing partner constituents “get it.” No one else does.
Once again, you’re the teller of inconvenient truths, and chiding people to re-tune their BS Meter to make sure it’s working.
IMO, one of the biggest barriers to fundamental change in the law business model is hourly billing. As long as you’re selling labor by the hour, there can be no economies of scale, so growth does not improve financial performance.
Here’s an example of the irrationality surrounding lateral hiring. I’m in the process of vetting an assessment tool that purports to identify which lawyers possess a sufficient number of 28 traits that, combined at a level above a certain threshold, correlate with those who generate 90% of firms’ revenue. Discussing this with many managing partners, I hear a dichotomy. They acknowledge that most laterals show up with only about 50% of the business they claimed to be able to bring with them. They also agree with the reported statistic that half of those laterals are not with the destination firm three years down the road. Despite objective measures that show that lateral hiring is a failed endeavor, especially when you consider the size of the economic bets on laterals, they express confidence in their ability to vet laterals and skepticism that an assessment tool could make a worthwhile contribution to that decision process. “What we’re doing doesn’t work, but we still have confidence in it.”
Here’s the part I really don’t get: For five years in a row, clients rate their outside law firms’ seriousness in responding to clients’ needs a dismal “3” on a scale of 0-10. Yet, what have clients done to use their buying power to enforce meaningful change by changing their buying habits? They continue to reward recalcitrance with rate increases and tolerance for published law firm profit margins that any of these client companies could only fantasize about, and partner earnings that those hiring these firms could only fantasize about.
Yes, law firms need to get serious about aligning themselves with what people like to call “the New Normal,” but clients have also got to stop being the enablers who only bemoan the lack of alignment yet do nothing serious themselves to motivate firms to change.
When Mom repeatedly tells a child that a specific behavior will result in loss of privileges, but it never does, what child changes that behavior? Right now, for most big firms, the cost of doing nothing is not only acceptable, but attractive, and the New Normal looks enough like the Old Normal to justify complacency.
Finally, the most compelling proof that firms don’t get it is their willingness to a) publish annual profit distribution numbers, and b) answer surveys and publicly declare “client value” to be eighth on their list of priorities. Do they think that clients can’t read? Or have they simply recognized that the client-lion roars but never uses its teeth?
I read the NYT profile — and after looking at how Stewart’s $350K a year got spent — I couldn’t help but think about all the law students I worked with over the years who would repeatedly say that they would take a big law job just long enough to pay off their debt and then move on to the work that they were truly passionate about in the public sector.
The reality is that what seem like high salaries, don’t actually go so far when you look at the living expenses associated with the lifestyle and it’s tough to voluntarily move from a good salary on once the education debt is gone — because by then, it’s usually been replaced with new debt……mortgages, children’s schooling, etc. Yes, spending could be reduced — but I can’t help but understand how justified one would feel to purchase quality housing, food, schooling for your children, and other products/services when you work a 60 hours week in a job that often offers such limited satisfaction. And of course, the other reality is that $350K is for someone likely at the peak of his carer. For young attorneys, even those at the top of the ranking system, $350K is a long ways off. And for the rest — it’s a pipe dream. So, imagine how the salary of a young associate breaks down in a place like New York – not exactly the lives they envisioned when shelling out for their legal education.
The sad thing for me — was that while I truly empathized with Stewart’s situation — in can’t compare to the lives of people I read about in The People’s Court http://prospect.org/article/peoples-court — where our broken legal system is really helping to destroy lives — or the reality of recent law graduates falling further and further into debt as they anxiously look for work or accept employment that may never offer them a real return on their investment in a law degree.