ASSOCIATE PAY AND PARTNER MALFEASANCE

Cravath, Swaine & Moore raised first-year associate salaries from $160,000 to $180,000 — the first increase since January 2007. As most law firms followed suit, some clients pushed back.

“While we respect the firms’ judgment about what best serves their long-term competitive interests,” wrote a big bank’s global general counsel, “we are aware of no market-driven basis for such an increase and do not expect to bear the costs of the firms’ decisions.”

Corporate clients truly worried about the long-run might want to spend less time obsessing over young associates’ starting salaries and more time focusing on the behavior of older attorneys at their outside firms. In the end, clients will bear the costs of short-term thinking that pervades the ranks of big firm leaders. Some already are.

Historical Perspective

Well-paid lawyers never generate sympathy. Nor should they. All attorneys in big firms earn far more than most American workers. But justice in big law firms is a relative concept.

Back in 2007 when associate salaries first “jumped” to $160,000, average profits per equity partner for the Am Law 100 were $1.3 million. After a slight dip to $1.26 million in 2008, average partner profits rose every year thereafter — even during the Great Recession. In 2015, they were $1.6 million — a 27 percent increase from seven years earlier.

In 2007, only 19 firms had average partner profits exceeding $2 million; in 2015 that group had grown to 29. But the average doesn’t convey the real story. Throughout big law, senior partners have concentrated power and wealth at the top. As a result, the internal compensation spread within most equity partnerships has exploded.

Twenty years ago, the highest-paid equity partner earned four or five times more than those at the bottom. Today, some Am Law 200 partners are making more than 20 times their lowest paid fellow equity partners in the same firm.

It Gets Worse

Meanwhile, through the recent prolonged period of stagnant demand for sophisticated legal services, firm leaders fueled the revolution of partners’ rising profits expectations by boosting hourly rates and doubling leverage ratios. That’s another way of saying that they’ve adhered stubbornly to the billable hours model while making it twice as difficult for young attorneys to become equity partners compared to 25 years ago.

The class of victims becomes the entire next generation of attorneys. Short-term financial success is producing costly long-term casualties. But those injuries won’t land on the leaders making today’s decisions. By then, they’ll be long gone.

So What?

Why should clients concern themselves with the culture of the big firms they hire? For one answer, consider two young attorneys.

Associate A joins a big firm that pays well enough to make a dent in six-figure law school loans. But Associate A understands the billable hour regime and the concept of leverage ratios. Associate attrition after five years will exceed 80 percent. Fewer than ten percent of the starting class will survive to become equity partners. Employment at the firm is an arduous, short-term gig. In return for long-hours that overwhelm any effort to achieve a balanced life, Associate A gets decent money but no realistic opportunity for a career at the firm.

Associate B joins one of the few firms that have responded to clients demanding change away from a system that rewards inefficiency. Because billable hours aren’t the lifeblood of partner profits, the firm can afford to promote more associates to equity partner. Associate B joins with a reasonable expectation of a lengthy career at the same firm. Continuity is valued. Senior partners have a stake in mentoring. The prevailing culture encourages clients to develop confidence in younger lawyers. Intergenerational transitions become seamless.

Associate A tolerates the job as a short-term burden from which escape is the goal; Associate B is an enthusiastic participant for the long haul. If you’re a client, who would you want working on your matter?

The Same Old, Same Old

As clients have talked about refusing to pay for first-year associate time on their matters, big firms’ upward profit trends continue. But the real danger for firms and their clients is a big law business model that collapses under its own weight.

As it has for the past eight years, Altman-Weil’s recently released 2016 “Law Firms In Transition” survey confirms again the failure of leadership at the highest levels of the profession. Responses come from almost half of the largest 350 firms in the country. It’s a significant sample size that provides meaningful insight into the combination of incompetence and cognitive dissonance afflicting those at the top of many big firms.

When asked about the willingness of partners within ten years of retirement to “make long-term investments in the firm that will take five years or more to pay off,” fewer than six percent reported their partners’ “high” willingness to make such investments. But at most firms, partners within ten years of retirement are running the place, so the investments aren’t occurring.

Almost 60 percent of firm leaders reported moderate or high concern about their law firms’ “preparedness to deal with retirement and succession of Baby Boomers.” Meanwhile, they resolve to continue pulling up the ladder, observing that “fewer equity partners will be a permanent trend going forward” as “growth in lawyer headcount’ remains a “requirement for their firms’ success.”

Do law firm leaders think they are losing business to non-traditional sources and that the trend will continue? Survey says yes.

Do law firm leaders think clients will continue to demand fundamental change in the delivery of legal services? Survey says yes. (56 percent)

Do law firm leaders think firms “are serious about changing their legal service delivery model to provide greater value to clients (as opposed to simply reducing rates)”? Survey says no. (66 percent)

Do clients think law firms are responding to demands for change? Survey says most emphatically no! (86 percent)

But do law firm leaders have confidence that their firms are “fully prepared to keep pace with the challenges of the new legal marketplace”? Survey says yes! (77 percent)

If cognitive dissonance describes a person who tries to hold two contradictory thoughts simultaneously, what do you call someone who has three, four or five such irreconcilable notions?

At too many big law firms the answer is managing partner.

THE REAL STORY OF THE NEW YORK PRIMARY

It was a “Dewey Defeats Truman” moment.

Shortly after the polls closed on primary election night in New York, CNN made a bold prediction. Its exit polling showed Hillary Clinton and Bernie Sanders locked in a tight Democratic primary race. Clinton’s win would be close, Wolf Blitzer said: 52 percent to 48 percent.

Less than an hour later, that prediction was as laughable as the famous November 3, 1948 Chicago Tribune headline announcing that voters had elected Thomas E. Dewey President of the United States.

Statistically, the CNN call was far worse. In the end, Truman beat Dewey 49 to 45 percent. Clinton won New York — 58 to 42 percent.

When the News is News

One interesting aspect of the CNN mistake is how quickly it disappeared from public sight. That’s because all major media outlets use exit polling to predict results as soon as they can. First-predictors are the first to attract viewers. There’s no incentive for any of them to throw mud on a process that they all use as a marketing gimmick.

Another aspect is the paucity of discussion over what went wrong at CNN. I don’t know the answer, but this article isn’t about that. It’s about the real lesson of the episode: The use of statistics can be a perilous exercise.

Law Schools

Data are important. It’s certainly wise to look at past results in weighing future decisions. But it’s also important to cut through the noise — and separate valid data from hype.

For example, if less than one-third of a particular law school’s recent graduates are finding full-time long-term jobs requiring a JD, prospective students are wise to consider carefully whether to attend that school. But it becomes more difficult when some law professor argues that the average value of a legal degree over the lifetime of all graduates is, say, a million dollars.

It’s even more challenging when law deans and professors repeat the trope as if it were sacrosanct with a universal application every new JD degree-holder from every school. And it sure doesn’t help when schools with dismal full-time long-term JD employment outcomes tout, “Now is the Time to Fulfill Your Dream of Becoming a Lawyer.”

Law Firms

Likewise, based on their unaudited assessments, leaders of big law firms confess that only about half of their lateral hires over the past five years have been breakeven at best. And that not-so-successful rate has been declining.

Law firms are prudent to consider carefully that data before pursuing aggressive lateral hiring as a growth strategy. But it becomes more difficult when managing partners seek to preside over expanding empires. And it doesn’t help when law firm management consultants keep overselling the strategy as the only means of survival.

Data should drive decisions. But the CNN misfire is a cautionary tale about the limits of statistical analysis. Sometimes numbers don’t tell the whole story. Sometimes they point people in the wrong direction. And sometimes they’re just plain wrong.

THE LATEST BIG LAW FIRM STRATEGY: PERFECTING ERROR

NOTE: Amazon is running a promotion. The KINDLE version of my novel, The Partnership, is available as a free download from March 30 through April 3, 2016.

Two months ago in “Big Law Leaders Perpetuating Mistakes,” I outlined evidence of failure that most big law firm leaders ignore. Back in December 2011, I’d covered the topic in “Fed to Death” The recently released trade paperback version of my latest book, The Lawyer Bubble – A Profession in Crisis, includes an extensive new afterword that begins, “The more things change…”

The failure is a ubiquitous strategy: aggressive inorganic growth. In response to facts and data, big law firm leaders aren’t stepping back to take a long, hard look at the wisdom of the approach. Instead, they’re tinkering at the margins in the desperate attempt to turn a loser into a winner. To help them, outside consultants — perennial enablers of big law firms’ worst impulses — have developed reassuring and superficially appealing metrics. For anyone who forgot, numbers are the answer to everything.

Broken Promises

One measure of failure is empirical. Financially, many lateral partners aren’t delivering on their promises to bring big client billings with them. Even self-reporting managing partners admit that only about half of their lateral hires are above breakeven (however they measure it), and the percentage has been dropping steadily. In “How to Hire a Home-Run Lateral? Look at Their Stats,” MP McQueen of The American Lawyer writes that the “fix” is underway: more than 20 percent of Am Law 200 firms are now using techniques made famous by the book and movie “Moneyball.”

“Using performance-oriented data, firms try to create profiles of the types of lawyers they need to hire to help boost profits, then search for candidates who fit the profile,” McQueen reports. “They may also use the tools to estimate whether a certain candidate would help the firm’s bottom line.”

There’s an old computer programmer’s maxim: “Garbage in, garbage out.”

Useless Data

Unlike baseball’s immutable data about hits, runs, strikeouts, walks, and errors, assessing attorney talent is far more complicated and far less objective. Ask a prospective lateral partner about his or her billings. Those expecting an honest answer deserve what they get. Ask the partner whether billings actually reflect clients and work that will make the move to a new firm. Even the partner doesn’t know the answer to that one.

Group Dewey Consulting’s Eric Dewey, who is appropriately skeptical about using prescriptive analytics in this process, notes, “An attorney needs to bring roughly 70 percent of their book of business with them within 12 months just to break even.” He also observes that more than one-third bring with them less than 50 percent.

Of course, there’s nothing wrong with assessing the likely value that a strategically targeted lateral hire might bring to the firm. And there’s nothing wrong with using data to inform decisions. But that’s different from using flawed numerical results to justify growth for the sake of growth.

Becoming What You Eat

Beyond the numbers is an even more important reality. Partners who might contribute to a firm’s short-term bottom line may have a more important long-term cultural impact. It might even be devastating.

Dewey & LeBoeuf — no relation to Group Dewey Consulting — learned that lesson the hard way. During the years prior to its collapse, the firm hired dozens of lateral rainmakers. But as the firm was coming apart in early 2012, chairman Steven H. Davis was wasting his breath when he told fellow partners there wasn’t enough cash to pay all of them everything they thought they deserved: “I have the sense that we have lost our focus on our culture and what it means to be a Dewey & LeBoeuf partner.”

Half of the partners he was addressing had been lateral hires over the previous five years. Most of them had joined the firm because it promised them more money. They hadn’t lost their focus on culture. They had redefined it.

A DIRTY LITTLE SECRET

The Wall Street Journal’s front page headline tells only part of story: “Legal Fees Cross New Mark: $1500.” The February 9 article lists the range of partner hourly rates at some big firms: Proskauer Rose from $925 to $1475; Ropes & Gray from $895 to $1450; Kirkland & Ellis from $875 to $1445; and so on and so on and so on.

That’s great if you can get it, but most firms can’t. The 2016 Georgetown/Thomson Reuters Peer Monitor “State of the Legal Profession” tells a second part of the story: realization and collection rates have plummeted. How much a firm bills doesn’t matter; what it actually brings in the door does. In 2005, collections totaled 93 percent of standard rates. By the end of 2015, it was down to 83 percent.

The Music Stopped, Almost

Annual standard hourly rate increases have blunted the profit impact of declining collections, but trees stopped growing to the sky about ten years ago. Except in bankruptcy courts. That’s the third element of the story and the profession’s dirty little secret: one of the most lucrative big law practice areas has no client accountability for its fees. Even worse, the process facilitates pricing behavior that spills over into other practice areas.

Take the recent Journal article. Where did the reporters get the detailed hourly rates for the firms it identified? A note at the bottom of the chart reveals the answer: “Source: Bankruptcy court filings.” If managing partners exchanged their firms’ hourly rates privately, it would raise serious antitrust issues. But in bankruptcy, publicly filed fee petitions do all of that work for them.

It gets worse. In bankruptcy, no one forces attorneys into the discounting that produces the current 83 percent overall average collections rate. Remember the infamous “Churn that bill, baby” email involving DLA Piper a few years ago? That was a bankruptcy case. Traditional mechanisms of accountability are ineffective. Unlike a solvent corporate client, a company in trouble has little leverage in dealing with its outside counsel. Until it emerges from a Chapter 11 reorganization, the days of minimizing legal expenses to maximize shareholder value are suspended. If it winds up in Chapter 7 liquidation, those days are gone forever.

At the same, time, the lawyers handling the bankruptcy have little risk. They get paid ahead of everyone else. Lawyers for creditor committees are a theoretical check only. They, too, get paid first and the members of the exclusive club of big law firm attorneys reappear. Their roles may change — debtor’s counsel in one bankruptcy may be creditors’ attorney in another and the liquidating trustee’s lawyer in yet another. In none of those capacities is there any incentive to rock the long-term, “paid-in-full hourly rate” boat.

More Theoretical Accountability

The U.S. Trustee receives all attorneys’ fees petitions before courts approve them. The Trustee can object, but it doesn’t have sufficient resources to analyze detailed line item time and expense entries on the thousands of pages that firms submit. The Trustee issued new guidelines that became effective for cases filed after November 1, 2013. Perhaps they will make a difference. But in the end, they are still guidelines and the final decision on attorneys fees resides with the bankruptcy judge.

As hourly rates have increased to the $1500 level that the Journal highlights, courts have given their rubber stamps of approval to the trend. Rather than challenge the high rates that all firms charge, bankruptcy judges determine merely that they are “reasonable and customary” because, after all, comparable firms are charging them for comparable work. The circularity is as obvious as the resulting payday for the lawyers. Someday, media attention and popular outrage may force meaningful change that has yet to occur.

Worse Than It Seems

Considering the 83 percent collection rate in the context of the nearly 100 percent rate for bankruptcy lawyers yields an insight relevant to the fourth and final part of the larger big law firm story. In particular, the current 83 percent collection rate is deceptively high. If a firm’s average is 83 percent and its bankruptcy lawyers collect close to 100 percent, then firms with large bankruptcy practices have non-bankruptcy clients pushing some practice areas into deep concessions off standard rates.

Likewise, combining this fact with two conclusions from the Georgetown/Thomson Reuters Peer Monitor Report produces ominous implications for such firms:

— “Demand for law firm services…was essentially flat in 2015,” and

— Bankruptcy experienced the largest negative growth rate in demand by practice area.

Unless the country heads into a recession that few economists expect, the continuing reduction in bankruptcies will drive overall average collections dramatically lower. That’s bad news for big law firms with significant bankruptcy practices.

Back in 2011, an icon of the bankruptcy bar, the late Harvey Miller of Weil, Gotshal and Manges, defended his firm’s approach to legal fees: “The underlying principle is, if you can get it, get it.”

Miller isn’t around anymore, but his unfortunate credo for a noble profession survives — for now.

[NOTE: The trade paperback edition of my book, The Lawyer Bubble – A Profession in Crisis (Basic Books) — complete with an extensive new AFTERWORD — will be released on March 8, 2016 and is now available for pre-order at Amazon and Barnes & Noble.]

BIG LAW LEADERS PERPETUATING MISTAKES

In January 2014, the annual Georgetown/Peer Monitor “Report on the State of the Legal Market” urged law firm leaders to shun a “growth for growth’s sake” strategy. The year 2013 had been a record-setter in law firm mergers; lateral partner acquisitions were the centerpiece of what many big law firm leaders passed off as a “strategic plan.”

The Report offered this damning observation:

“In our view, much of the growth that has characterized the legal market in recent years… 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.”

Since then, the situation has deteriorated.

The Destabilizing Lateral Hiring Frenzy Continues

In 2015, there were more lateral moves in big law firms than at any time since 2009. Morgan, Lewis & Bockius’s mass hiring of 300 former Bingham Mccutcheon partners contributed significantly to the total, but the continuing lateral frenzy is evident. Was the 2014 Georgetown/Peer Monitor wrong? Has aggressive inorganic growth become a winning strategy?

The answers are No and No.

Those answers are not news, but a recent ALM Legal Intelligence analysis suggests that they still are correct. As MP McQueen reports in the February issue of The American Lawyer, “[The] study of 50 National Law Journal 350 firms conducted with Group Dewey Consulting of Davis, California, and released in November found that 30 percent of lateral partner hires delivered less than half their promised book of business after a complete year.”

The co-author of the report notes that lateral hiring is “the top growth strategy for many firms today but there is an incredible lack of empirical evidence as to whether laterals are achieving their promise.”

It’s actually worse than that. The evidence suggests that most lateral hires are disappointments to the firms that acquire them.

Cognitive Dissonance

The survey reported that 96 percent of respondents said that “hiring lateral lawyers with a client following” was “very important” or “moderately important” to their revenue growth strategy. In other words, virtually all firms continue to defy the Georgetown/Peer Monitor Report’s 2014 admonition.

But the survey respondents also said that only 49 percent of lateral hires delivered at least 75 percent of expected client billings. The other 50 percent did worse. Almost one-third of laterals delivered less than half of what they’d promised. And remember, those are anonymous, unaudited responses from the leaders who brought those laterals into the firm. The reality is far worse than they admit.

Likewise, as I’ve written previously, managing partners responding to the Hildebrandt/Citi 2015 Client Advisory’s confidential survey admitted that only about half of their lateral partners were break-even at best. As the Client Advisory reported:

“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 supplied)

That’s down from two years ago when managing partners self-reported to Citi/Hildebrandt a self-defined break-even or better rate of 60 percent.  At alarming speed, most big law leaders are running their firms backwards.

Costly Mistakes

The cultural impact of aggressive inorganic growth is not susceptible to measurement, so it gets ignored in the prevailing law-firm-as-a-business model. But there are plenty of recent examples of the potentially catastrophic costs. Just look at Howrey, Dewey, and Bingham McCutchen — three recent collapses on the heels of stunning lateral growth spurts.

“Nonsense,” big law leaders are telling themselves. “We’re not like those failed firms. They had unique problems. We’re special.” Sure you are. Things look great until it becomes apparent only too late that current partner profits are the only glue holding partners together. If money lured laterals into your firm, someone else’s more reliable money can lure them away.

But even in the not-so-long run, top-line growth through misguided lateral hiring produces bottom-line shrinkage. Laterals are expensive on the front end. On the back end, it can take years for the failure of financial expectations to become apparent. The ALI study estimates that lateral hiring misfires can reduce law firm profit margins by as much as 3 percent and profits per equity partner by 6 percent.

Why?

If lateral hiring is bad, why are so many firms committed to it as a growth strategy. One answer is that it’s not always bad. Some of my best friends are laterals. Their moves benefitted them and their new firms. In every one of those cases, culture was at least as important as money to the partners’ decisions to relocate and their new firms’ desire to recruit them.

But that doesn’t account for firms that continue to pursue aggressive inorganic growth as an unrestrained strategic policy. When the odds of success are no greater than the flip of a coin, confirmation bias displaces judgment that should be a key attribute of true leadership.

That leads to another explanation for the continuing lateral hiring frenzy: The opposite of leadership. Most managing partners relish the creation of ever-expanding empires over which they can preside. Having made more than enough money to feed their families for generations, now they’re feeding their egos.

Unfortunately, those appetites can be insatiable.

A FIRM TO WATCH

Something worth watching could be happening at King & Wood Mallesons, one of the world’s largest law firms. It has an interesting history, a challenging present and, perhaps, an even more challenging future.

Past

Beijing-based King & Wood came into existence in 1993. If you look for photos or other information about either name partner, you won’t find them. Neither person ever existed. China doesn’t have U.S.-type ethics rules requiring that law firms carry the names of lawyers who work there (or did before retirement or death). The distinctly non-Chinese names are a branding exercise aimed at reaching a global audience.

In 2012, King & Wood merged with Australian-based Mallesons Stephen Jacques. In 2013, it added London-based SJ Berwin and now has 2,700 lawyers scattered across 30 offices around the world. It operates as a verein, meaning that the constituent firms are legally separate and don’t share profits. (Whether any verein is a real law firm is a subject for another day.)

Present

In July 2015, King & Wood Malleson’s Europe and the Middle East announced “rocketing” results.  Profits per equity partner had soared by 39 percent. During the year, the firm hired 15 lateral partners, including attorneys from Fried Frank, Linklaters, and Eversheds.

As London-based (and newly named) managing partner William Boss boasted, “This is an exciting time for our region….”

Maybe a bit too exciting, even for Boss.

Two days later, The Lawyer offered a potentially relevant footnote to the “rocketing” 39 percent jump in partner profits reported only two days earlier: “A number of insiders have questioned the large jump in PEP, attributing the growth to an exceptionally big and anomalous recovery for the firm on one piece of litigation.”

At about the same time, the firm revealed that it had completed its “partnership review” resulting in an almost 10 percent reduction in its London office equity ranks, according to The Lawyer. In addition, the firm lost some “big hitters.”

On January 15, 2016, William Boss resigned as managing partner — more than a year before his term was set to expire in May 2017. The firm said that he would remain in the position until April while the search for his replacement occurred.

Future

On January 20, The Lawyer reported that the firm had “launched a review of its capital contributions structure in order to ease cashflow, stop repeated delays to profit distributions and stem the flow of exits by ‘frustrated’ partners.”

What does that mean? Time will tell. But story in The Lawyer included these nuggets:

— “A number of sources close to KWM have accused the firm of withholding profit distributions over the last five years in order to keep up with tax bills, leading to a raft of senior exits last year.”

— “One source close to KWM said the firm had ‘only just’ paid out the full distributions due in August 2015, having previously paid just half the money owed in that quarter. Another said they had only been paid 25 per cent of their distributions for 2014/15, despite it being nine months into the financial year.”

— “Complaints about delayed profit payments follow a good year financially for the firm in the UK, Europe and Middle East, adding to the frustration of a number of partners, a source said. ‘It’s been a so-called record year for the firm but partners just aren’t getting paid,’ they added.”

— “The review could see its UK partners being asked to pay higher contributions to the firm in return for more units in the LLP.”

If the last item comes to pass, partners who write checks to the firm might want to understand exactly what they are buying and why.

BIG LAW’S SHORT-TERMISM PROBLEM

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.