Monthly Archives: December 2015

BIG LAW’S SHORT-TERMISM PROBLEM

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Recently, the New York Times devoted a special section of “Dealbook” to short-termism. Big law firms made a prominent appearance in an article focusing on leadership transition. Citing statistics at the managing partner level, the Times reports that only three percent of law firm managing partners are under age 50. Twelve percent are over 70. Almost half are between 60 and 70.

The Tip of the Graying Iceberg

The core problem of transition runs deeper than a single demographic data point about the age of those at the top of the big law pyramid. The developing crisis goes far beyond the question of who the next managing partner will be.

At most firms, aging partners at all partnership levels are hanging on to clients and billings. For them, it’s a matter of survival. Except for lock-step firms, equity partners “eat what they kill” — that is, their closely guarded silos of clients and billings determine their annual compensation.

In that culture, hoarding becomes essential to preserving annual compensation that partners come to regard as rightfully theirs — and theirs alone. Stated in language that many senior partners use in criticizing today’s young attorneys, these aging lawyers have developed a wrong-headed sense of entitlement.

The fact that they’re making far more than they dreamed of earning in law school doesn’t matter to them. Neither does the fact that they are compromising the future of their firms. But their short-term gains could become the institution’s long run catastrophe.

See the Problem

Surveys confirm that law firm leaders recognize the resulting problem. Seven years ago, Altman Weil issued the first of its annual “Law Firms in Transition” series. Since then, the survey has documented a fundamental failure of leadership on this issue.

For example, in the 2011 survey, Altman Weil asked firm leaders to name the areas in which they had the greatest concerns about their firms’ preparedness for change: “The top issue, identified by 47% of all firms, was the retirement and succession of Baby Boom lawyers in their law firms.”

In the 2012 survey, 70 percent of managing partners had “moderate” or “high” concern about client transition as senior partners retire. On a scale of one (no concern) to ten (extreme concern), the median score was seven.

In the 2013 survey, only 27 percent of managing partners reported that they had a formal succession planning process in place.

Ignore the Problem

How have these leaders responded to what they have identified for years as the most pressing long-term problem facing their firms? Poorly.

The 2015 survey observes, “In 63% of law firms, partners aged 60 or older control at least one quarter of total firm revenue, but only 31% of law firms have a formal succession planning process.”

There’s a reason that law firm leaders balk at meaningful transition planning. It requires them to accept the fact that they won’t run their firms forever. But contemplating one’s own mortality can be unpleasant.

It also requires them to rethink their missions. Leadership is not about maximizing this year’s partner profits or pursuing growth for the sake of growth to create illusory empires over which a dictator can preside. It requires a willingness to create incentive structures that encourage long-term institutional stability.

Toward that end, lofty aspirations are easier to state than to achieve. But here are a few governing principles:

— Client service should be central to everything a law firm does.

— Partner cooperation should trump partner competition.

— Clients and billings should flow seamlessly to the next generation while allowing aging partners to retain a sense of self-worth as firms encourage them to prepare for their “second acts,” whatever they may be.

— The culture of a firm should encourage partners to sacrifice some short-term financial self-interest in the effort to leave the firm better than they found it — just as their mentors did for most of them.

Become the Problem

The most creative leaders understand that all of this means thinking outside the conventional billable hour box that remains central to the short-term growth and profit-maximizing mindset. In that respect, the contrast between the absence of true leadership and clients’ desires is striking.

Since 2009, Altman Weil has done an annual survey of corporate chief legal officers, too. The survey asks the CLOs: “How serious are law firms about changing their legal service delivery model to provide greater value to clients?”

The responses are on a scale of one (not at all serious) to ten (doing everything they can), Every year since the survey began, the median score has been three. Three out of ten. Stated differently, as far as clients are concerned, their outside lawyers have little interest in responding to demands for change.

Likewise, LexisNexis/Counsel Link’s most recent semi-annual report analyzing six key metrics confirms the impact of short-termism:

— Clients want alternative fee arrangements. AFAs account for only seven percent of all billings.

— Clients want relief from high hourly rates. For the trailing 12-month period ending on June 30, 2015, big firms of more than 750 attorneys had a median partner billing rate of $711 an hour — up 6 percent from the period ending on December 31, 2014. (For firms of 501-750 lawyers the median hourly rate during the same period increased by only $5 an hour.)

The Future Is Here

As big firm leaders drag their feet, clients aren’t waiting for them. They have figured out that the biggest of big law premiums isn’t always worth it. An October 2013 study of $10 billion in client fee invoices by LexisNexis/Counsel Link concluded the “large enough” firms of 201-500 lawyers are eating into the market share of firms with more than 750 lawyers.

From 2010 to 2013, the biggest firms saw their market share drop from 26 percent to 22 percent. Meanwhile, the market share of the “large enough” firms increased from 18 to 22 percent. For high-fee matters totaling $1 million or more, the shift was even more dramatic: “large enough” firms increased their market share from 22 to 41 percent.

Anyone believing that most big law firm leaders are long-term thinkers preparing their firms for a challenging future is ignoring the actual behavior of those leaders. Most of them are focused on getting rich today. That’s not a strategy for success tomorrow.

FOR YOUR LISTENING PLEASURE…

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Try Track #6 on my son’s latest album — “Where Are You Now?”

Link: https://soundcloud.com/harper-blynn/tracks

If you like that one, try #7 — “Long Way From Home.”

 

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DEWEY, THE D.A., AND SECRETS

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“There aren’t too many secrets in this case,” said Judge Robert Stoltz on December 5. He was referring to the Dewey & LeBoeuf trial over which he presided. The multi-year effort to convict Steven Davis, Stephen DiCarmine, and Joel Sanders produced a raft of acquittals on many charges and a hung jury on the more serious offenses.

Actually, there are two big secrets in the case, but no one is talking about them.

Secret #1: Why Zachary Warren?

Former Dewey chairman Steven H. Davis won’t face a retrial. Assistant DA Peirce Moser has offered him a deferred prosecution agreement. As reported, he will not have to admit guilt and can continue practicing law. When my kids were young, they would have called this a “do-over.”

Judge Stoltz’s reference to secrets was in response to Moser’s suggestion that the retrial of executive director DiCarmine and finance director Sanders should precede the first trial of former low-level staffer Zachary Warren. The longer Warren dangled in a world of uncertainty, the more leverage it would give Moser in his relentless pursuit of someone who never should have been indicted in the first place. Appropriately, the judge denied Moser’s request.

That leads to secret number one: Why is the Manhattan DA’s office squandering its scarce resources to pursue Zachary Warren at all?

I’ve written extensively about Warren’s plight. At age 24, he worked at Dewey & LeBoeuf for about a year from mid-2008 to mid-2009 as a client relations specialist. His principal job was to pester Dewey & LeBoeuf partners into making sure clients paid their bills.

Apparently, his mistake of a lifetime came on December 30, 2008. That’s when he accepted an invitation to join 29-year-old finance director Frank Canellas and 53-year-old chief financial officer Sanders for dinner at Del Frisco’s steakhouse. There he allegedly witnessed the creation of what the DA’s office called a master plan of accounting fraud. As his price for that free dinner, Warren would get indicted five years later.

When Zachary Warren left Dewey & LeBoeuf in June 2009, did anyone in the world think that the firm was unlikely to repay its bills, much less collapse — ever? No.

In 2010, was Warren even at the firm as others worked on the bond offering at the center of the DA’s case? No, he was a one-L at Georgetown.

Even if obtained, would a conviction of Warren result in anything positive for anyone inside or outside our justice system? No.

Warren’s indictment was a travesty. The jury’s rejection of the DA’s case against his superiors is reason alone to drop the effort to prosecute him.

Unsatisfying Answers

So why is Moser so determined to try Zach Warren? One possibility is that the same phenomena contributing to Dewey & LeBoeuf’s downfall infects the DA’s office: hubris, ego, lack of accountability for mistakes, and an unwillingness to admit errors that would prompt thoughtful individuals to change course. Maybe it’s a lawyer personality thing.

Another possibility is the public servant manifestation of greed: the DA wants to put a Dewey & Le Boeuf notch — any Dewey & LeBoeuf notch — on its convictions holster. After Cyrus Vance, Jr. personally announced the indictments in a circus-like press conference on March 6, 2014, Moser suffered unambiguous defeat. In fact, even the plea agreements that the DA’s office squeezed from former firm staffers who later testified at trial now look silly. Unfortunately, the resulting penalties aren’t silly for those who are stuck with them.

To put the DA’s pursuit of Zachary Warren in context consider this. According to published reports, assistant DA Peirce Moser has offered him a plea deal, too. But it is more onerous than the DA’s deferred prosecution agreement with Davis.

There is no just world in which that makes any sense.

Secret #2: Where is the Money?

Prosecutors told the jury that it would not see a “smoking gun.” That’s because the DA didn’t know how to look for or describe it. But the gun was there. It was pervasive, insidious, and hiding in plain sight. It was the environment that caused staffers to fear for their jobs if powerful partners weren’t happy. That meant making sure they received millions more than the firm had available to distribute, even if it came from bank credit lines and outside investors in the firm’s 2010 bond offering.

That leads to secret number two: Why didn’t the DA follow the money?

The public could have reasonably expected Vance to direct the power of his office toward the most egregious offenders and offenses. That didn’t happen. Sure, Davis had a major responsibility for the strategy that brought the firm down. But the executive committee consisted of top partners who were supposed to be fiduciaries in running the firm for the benefit of all partners and the institution. Likewise, as most of the firm’s so-called leaders walked away with millions — far more than Davis, DiCarimine, Sanders, or Warren received — bankruptcy creditors got between five and fifteen cents for every dollar the firm owed them.

In a November 2012 bankruptcy court filing, Davis himself teed up what should have been the central issue in any attempt to assign blame for the firm’s problems:

“While ‘greed’ is a theme…, the litigation that eventually ensues will address the question of whose greed.”

The DA’s office never pursued that question.

Just Rewards

Shortly after Vance’s March 2014 press conference, assistant district attorney Peirce Moser received a promotion. He became chief of the tax crimes unit. The DA’s office announced that Moser’s new position would not preclude him from continuing to run the Dewey & LeBoeuf case. Based on his prominence at the most recent court hearing, it’s still Moser’s case.

If no good deed goes unpunished, sometimes it seems that no bad deed goes unrewarded.

AMERICAN AIRLINES AGONY

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Rarely do I use this forum to discuss personal issues. Earlier this year, I made an exception to inform readers that an unwelcome medical diagnosis of pancreatic cancer had interrupted my weekly posts. As it happened, my 48 days in the hospital provided a unique perspective on our dysfunctional medical system. So as I gained strength, I wrote about that experience. (A book is in the works.) In any event, I’m pleased to report that my progress and prognosis are good.

The outpouring of sympathy and support has been overwhelming. But it hasn’t been universal. Which takes us to the headline for this post.

American Airlines: “Doing What We Do Best”

Twenty-four hours before the first of what would become my five hospitalizations between February and June, my wife and I were scheduled to fly from Chicago to San Francisco on American Airlines. The University of San Francisco School of Law had invited me to its annual Law Review Symposium for a discussion of my book, The Lawyer Bubble – A Profession in Crisis.

Blood test results prompted my doctor to send me to the ER — pronto. Instead of boarding a plane, I was boarding a hospital gurney. After several months of procedures and tests, doctors finally located the source of episodic and life-threatening internal bleeding. One long-term consequence of my condition is that I will remain grounded indefinitely — no air travel.

American Airlines: “The New American is Arriving”

Once it became clear that I would not be able to rebook a flight on American during the one-year period required for our non-refundable tickets, I contacted the airline to seek a refund. (As my principal caregiver, my wife can’t use her ticket either. For better or worse, and for penalties associated with non-refundable tickets…)

The ticket value is significant, but not overwhelming ($870.19 each — for a total of $1740.38). Still, it was worth pursuing.

I called American’s preferred customer number because I’ve been a loyal American flyer for decades. The person I reached was pleasant and cooperative. He found our original reservation, provided ticket numbers, and directed me to the American Airlines website. There, I would click on the customer service link and complete a refund request form.

Shortly after submitting the on-line request, I received a response seeking a physician’s letter confirming my medical plight. Within 24 hours, I scanned and emailed my doctor’s letter describing the cancer diagnosis:

“The complications of his illness include intermittent internal bleeding that renders him unable to travel by air for the foreseeable future… His wife is also my patient and his principal caregiver. As a consequence, she likewise will be unable to travel by air for the foreseeable future.”

Two days later, a customer relations person acknowledged receipt of the letter with this ominous note:

“I have forwarded it to personnel in our accounting office. They are the specialists who review such requests. They will do so and be in touch with you directly.”

American Airlines: “Going for Great”

I knew I was in trouble. The “accounting office” was going to make the final decision about the seriousness of my medical condition in deciding whether to permit a $1,740 refund: “They are the specialists.”

In what?

Five weeks later, I received this nameless form response from a “do not reply” email address:

“After reviewing the documentation submitted, it has been determined the request does not meet our exception requirements.”

“[I]t has been determined…” The passive voice covers a multitude of sinners. But it makes you wonder what the “exception requirements” are and who sets them. More precisely, if my situation doesn’t qualify, what does?

The response continued:

“The ticket purchased is non-refundable so we cannot offer a refund, issue a travel voucher, or transfer this ticket to another person. However, the ticket will remain valid in our system for one year from the original date of issue, at which time it will expire and all value will be lost.”

I know. I can never use the ticket. That’s why I sought an exception.

“The unused non-refundable ticket may be applied to future travel as long as all travel is completed prior to the expiration date.”

Anyone who had read the letter from my physician could never have included that sentence.

“The new ticket will be subject to a change fee based on the fare rules, in addition to any difference in fare or fees that may be in effect at the time of travel. We are forwarding your case to our Customer Relations department for consideration of a waiver for the above stated reissue fee that would be assessed to use your ticket for future travel.”

Lucky me! I might get a fee waiver for a ticket that I will never buy. No one who read my doctor’s letter could have written that, either.

“Please allow time for Customer Relations to review your situation and respond to your case before making additional contact.”

In other words, don’t bother us anymore. My wife received the identical message.

Wrong Without a Remedy

Readers may recognize the subheadings in this post. They are American Airlines’ advertising slogans over the years. The last one — “Going for Great” — is the most recent. Based on my experience, it will never get there.

There’s a lesson for anyone contemplating a flight on American Airlines. When you book a nonrefundable ticket, even the prospect of death from an intervening terminal illness that results in grounding you permanently will not qualify as an exception to the airlines’ “no refund” policy.

There’s a larger lesson, too. American Airlines’ handling of my request is emblematic of a larger societal phenomenon: myopic short-termism. When accountants’ incentive structures displace customer service, the culture of an organization follows that lead.

By the way, feel free to pass this along — retweet, post on Facebook, etc. — and to share your thoughts directly with American Airlines’ customer relations. (After clicking here, select TOPIC: Customer Relations; SUBJECT: Complaint; REASON: Other. After that, you’re on your own.)

I’m sure they would love to hear from you.