DEWEY’S DILEMMA

Posted on March 7, 2012 by thebellyofthebeast

Dewey & LeBoeuf has talented lawyers, great clients, and 2011 average equity partner profits exceeding $1.7 million. So what required a March 2 firmwide memo from Chairman Steven H. Davis in response to “press stories on U.S. legal blogs”? If the firm paid some media relations consultant to advise him on the missive, it should demand a refund.

Lessons about communicating

Davis says that he planned to outline cost-cutting and other measures when he “knew exactly how they would impact individual offices and departments, but given the press attention,” he advanced his timetable. There’s the first lesson to learn from his approach: When management makes decisions, it shouldn’t attribute the timing of announcements to outside media influences, even if they are a factor.

The second lesson is to avoid firmwide memoranda on sensitive issues. That’s not because transparency is bad (although sometimes less is more). Rather, it’s because difficult news should be communicated in a way that best serves the institution, its people, and its clients.

In the age of global mega-firms, it’s difficult to bring all personnel — or even all partners — together for a candid conversation about what’s happening and why. But there’s no better use for all of that fancy videoconferencing technology than promoting the right narrative, rallying the troops, and instructing partners to inform clients and staff directly about internal firm situations that generate press.

Mixed messages

The substance of the memo presents other issues. Davis starts with the “many successes last year” and “improved financial performance” in 2011 that continued during the first two months of 2012. The problem, he suggests, is a “significant increase in our cost base.” Taking “proactive steps to align the firm’s resources with anticipated demand,” he notes that “[s]ome recent departures have been consistent with the firm’s strategic planning for 2012, and we expect some additional partners to leave.”

That leads to a third lesson about these situations. If a firm is pushing some partners out, don’t make a big deal about it while also touting the firm’s improved financial performance. As they’re losing their jobs, let subpar performers who were once valued firm assets keep their dignity. In fact, public characterizations invite scrutiny. For example, attrition and pruning are one thing, but did the firm’s strategic plan really contemplate losing current and former practice group leaders?

Then comes the punch line: the firm will reduce another five percent of attorneys and six percent of staff. Perhaps, as Davis suggests, the firm does “very much regret the impact” on affected colleagues, but with average equity partner earnings well above the million dollar mark, describing layoffs of 50 to 60 lawyers as “necessary to ensure the firm’s competitiveness” seems disingenuous to most observers.

Misleading metric?

Underlying all of this could be the fact that a key firm metric — average equity partner profits — is misleading. Perhaps, like many big firm trends, the real story is the internal gap between the highest and lowest equity partners.

According to the February issue of The American Lawyer, “Davis says that the firm resisted making mass lateral hires for three years after it was created in October 2007 through the merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, choosing to focus on integration first. ‘Now, we’re moving into a new part of the cycle….'”

One new part of the cycle is lateral partner hiring, for which Dewey was among the top ten firms in 2011. Some of its newest partners were probably expensive, such as former chairs of their previous firms’ practice areas. In 2009, Davis said that the firm rewarded superior performance and denied giving compensation guarantees to rainmakers. If, as recent reports suggest, that policy changed, guarantees could present risks. When a lateral bubble pops, it can inflict significant collateral damage.

Even so, Dewey remains a great firm. On the strength of its ranking surge from 33 to 14 in the Midlevel Associate Satisfaction survey, together with its numerous awards for diversity and pro bono initatives, the firm made the 2011 Am Law “A-list.” That requires decent people creating a culture worth preserving. Hopefully, “moving to the new part of the cycle” hasn’t taken the firm in an errant direction — or, alternatively, any detour is temporary.

THE BIG LAW PARTNER LOTTERY

Posted on February 29, 2012 by thebellyofthebeast

In last Sunday’s The New York Times Magazine, Adam Davidson suggests that many of today’s most intelligent and educated young people have entered an employment lottery. He draws on the best-selling Freakonomics by Stephen J. Dubner and Steven D. Levitt, who use the unlikely prospect of hitting it big to explain otherwise irrational economic behavior in drug dealer gangs: legions of foot soldiers seek to become kingpins someday.

Davidson focuses on the entertainment industry where people with solid academic credentials and big dreams go to work in mail rooms. In passing, he identifies large law firms as another example where, for most young attorneys, analogous dreams meet a similarly unfortunate fate.

The topic is particularly timely. The National Law Journal just released its annual list of the NLJ 250 “Go-to law schools” from which the nation’s biggest firms draw the most new associates. In 2007, the top twenty law schools sent fifty-five percent of graduates to big firms; in 2011, that percentage was down to thirty-six.

As the job market for new attorneys languishes, most of last year’s 50,000 law school graduates would count those new associates as already having won a lottery. But the real story is that they have actually acquired a ticket to one or two more.

The long odds

As more firms have developed two-tier partnerships, the big law lottery has become a two-step ordeal. Merit still matters, but attaining even the highest skill level is only a necessary and not sufficient condition for advancement. To get a sense of the odds against success, consider the most recent data on NLJ 250 associates who were promoted to partner last year (non-equity partners in two-tier systems).

In 2011, forty-seven Harvard law graduates went from associate to big firm partner. That sounds like a lot, except that five years earlier — in 2006 — Harvard sent 338 graduates into large firms. Although that fifteen percent rate isn’t as bad the lottery, winnowing the number down to include only those who will become equity partners gets closer. (A time lag of five years isn’t quite long enough for the groups of new and promoted associates to match exactly, especially as partner tracks have become longer. But it’s adequate to illustrate the point.)

Other top schools’ graduates face even worse odds. Columbia law sent 313 graduates to big firms in 2006; thirty-one of its grads went from associate to partner in 2011. In 2006, 143 Northwestern law grads got big firm jobs; in 2011, fourteen NU graduates advanced from associate to partners. The University of Pennsylvania’s 2006 class sent 187 into big firms; those firms promoted fifteen U Penn associates to partner last year.

A few schools fared better in this comparative sweepstakes: the University of Texas placed 194 of its 2006 graduates in big firms; last year twenty-nine UT grads went from associate to big law partners. Vanderbilt also broke the twenty percent barrier.

Irrational behavior?

Why do associates continue to play such long odds in a game that doesn’t yield any outcome for years and, for the vast majority of participants, turns out badly?

Understandably, some associates take big law jobs solely to burn off student loan debt before pursuing the dreams that actually took them to law school in the first place. But others are playing the big law lottery.

Meanwhile, those at the top of law firm pyramids have worsened the odds. They have pulled up the ladder by lengthening the equity partner track, reducing the rate of new equity partners, increasing leverage, and running their firms to maximize short-term equity partner wealth at the expense of long-run institutional stability and their colleagues’ personal well being.

Rationalizing these actions, many big law leaders have convinced themselves that the current generation of young lawyers is inferior to their own. They complain about those who act as if they’re entitled to everything and unwilling to work hard, as they once did. Three concluding points:

First, many large firm attorneys in the baby boomer generation act entitled, too.

Second, when today’s big law leaders were associates, no one was telling them to get their hours up.

Third, motivation and behavior follow incentive structures. If some of today’s young attorneys sometimes behave as if they don’t have a reasonable shot at winning the equity partner lottery, it’s because they don’t.

WORSE THAN CHEATERS

Posted on February 8, 2012 by thebellyofthebeast

Scandals involving schools of higher education lying to enhance their U.S. News rankings seem to be appearing more frequently. The most recent confession came from Claremont McKenna College. Its false numbers helped make it the ninth-best liberal arts college in the country. As usual, the school’s top leader blamed a rogue player instead of acknowledging a pervasive problem: deference to idiotic metrics has displaced reasoned judgment and the resulting institutional culture promotes predictable behavior.

Some difficulties flowing from U.S. News rankings methodology make the news. Like other recent instances of misreported data, the focus on Claremont relates to false admissions statistics, namely, SATs. At the University of Illinois College of Law, it was LSATs and GPAs.

Of course, such behavior is reprehensible. But do the rogue villains differ more in degree than in kind from deans who game the system? Some solicit transfer students whose low LSATs led to their rejection as entering one-Ls, but whose scores don’t count when they arrive as tuition-paying 2-Ls. Like the rogues, they seek to boost selectivity scores as measured by LSATs and undergraduate GPAs that comprise more than 20 percent of a law school’s total U.S. News ranking.

Similarly, employment rates at graduation and nine months later account for 18 percent of a law school’s ranking. That encourages deans to hire their own graduates for short-term projects and — until recent ABA revisions become fully effective — permits them to count every part-time, non-legal job as employment.

Expenditures per student account for about 10 percent of a law school’s score. That encourages deans to spend more money and increase tuition to cover the resulting costs while students incur more debt. The resulting vicious circle exacerbates intergenerational antagonisms that are rapidly becoming the legal profession’s — and society’s — next big crisis.

All of the recent attention about bogus admissions and placement numbers shines an important light on some dirty little corners of academia. But more profound rankings methodology problems have gone unnoticed. Specifically, selectivity and placement factors combined barely equal the weight that the ranking system gives to “Quality Assessment” — which accounts for 40 percent of a school’s overall score.

How does the U.S. News perform “Quality Assessment”? Two ways.

First, it sends out surveys to four individuals at all accredited law schools throughout the country: dean, dean of academic affairs, chair of faculty appointments, and the most recently tenured faculty member. The survey asks each recipient to rate all other schools on a scale from marginal (1) to outstanding (5). It doesn’t require that any respondent have any knowledge about any of the 190 schools that he or she rates. (Respondents have a “don’t know” option, but U.S. News doesn’t disclose how many used it. After all, that information would taint its misleading 66 percent response rate.)

A second assessment score comes from lawyers and judges. They, too, get the U.S. News survey asking for (1) to (5) responses about every school. Apart from 750 hiring partners and recruiters at law firms who made the newly developed U.S. News-Best Lawyers list of “Best Law Firms,” information about the “legal professionals, including hiring partners of law firms, state attorneys general, and selected state and federal judges” receiving the survey isn’t disclosed. But the anemic response rate is: 14 percent. One can reasonably ask why such flawed attempts at “quality assessment” should count at all.

One answer is that eliminating them would magnify the importance of the other factors, including test scores. In that respect, there’s a curious aspect of the recent NY Times article about Claremont’s false SATs. It quoted Robert Franek at length. Franek is senior vice president of The Princeton Review, a test-preparation business that has flourished as a principal benefactor of the U.S. News rankings mania.

The Princeton Review does rankings, too. Anyone who regards its list of law schools with the “Best Career Prospects” as meaningful should take a look at the top five for 2012 and ask, “Where are Harvard, Yale and Stanford?”

And then there’s The Princeton Review‘s original October 12, 2010 press release (subsequently revised) that announced the 2011 winner in the “Best Law School Professors” category: Brown.

Brown, of course, doesn’t have a law school.

THE ULTIMATE LATERAL HIRE

Posted on January 25, 2012 by thebellyofthebeast

Among 2011’s “Lateral Partner All-Stars,” Tony Angel’s symbolic importance seems unrivaled. As I write, I don’t know who will make The American Lawyer‘s annual February list. But when Angel became DLA Piper’s leader, his new firm became the definitive poster child for big law’s transformation. Celebrate at your peril.

Whither goest thou?

DLA Piper resulted from the combination of several large firms comprised of once-independent enterprises: DLA’s three U.K. components were Dibb Lupton Broomhead, Alsop Stevens, and Wilkinson Kimbers; Piper Rudnick’s predecessors included Baltimore-based Piper & Marbury, Chicago-based Rudnick & Wolfe, and San Diego-based Gray, Cary, Ware & Freidenrich.

According to its website, DLA Piper grew from 2700 lawyers in January 2005 to 4200 today. The attorneys it added during that period would comprise one of the 20 largest firms in the world — eclipsing Kirkland & Ellis, Weil Gotshal & Manges, and Gibson, Dunn & Crutcher.

But is it really a law firm? K&L Gates chairman Peter Kalis makes the telling point that, as a verein, it may be more like a confederation of different firms that share a common name, but not profit pools. Still, adding 1500 attorneys in six years makes any observer wonder about DLA Piper’s global partner conferences. The 2010 meeting took place in Orlando, Florida, home of Disney World. There’s a metaphor in there someplace.

Ascertaining shared values and visions

According to Am Law Daily, the whirlwind courtship between Angel and DLA Piper began with a May 2011 breakfast meeting that included Frank Burch and others on the leadership team. The idea of naming him global co-chair gained momentum as Angel lined up partner support from the firm’s 76 offices. On November 7, he got the top spot. How?

“He’s got great values and he believes in what we’re trying to do and he shares our view of what’s going on in the world,” said Burch, who now shares DLA Piper’s global chair with Tony Angel. “So, we didn’t hesitate for a second and worry about the fact that the guy was not in the firm.”

Didn’t hesitate for a second? Didn’t worry about the fact that the guy was not in the firm? Why not? When Burch said that Angel has “great values,” “believes in what we’re trying to do,” and “shares our view,” what did he mean?

DLA Piper’s press release offered a hint:

“Tony will work with the senior leadership on the refinement and execution of DLA Piper’s global strategy with a principal focus on improving financial performance and developing capability in key markets.”

Translation: Get bigger and make surviving equity partners richer.

Consultant Peter Zeughauser said that Angel is a hot property: “It’s hard to get a guy that talented. There just aren’t that many people out there who have done what he has done.”

Zeughauser was referring to Angel’s management of Linklaters from 1998 to 2007. When he left, it had a global presence and average partner profits of $2.4 million. Although DLA Piper’s 2010 average partner profits exceeded $1 million in 2010, Angel’s job is to take them even higher.

Ignored in the financial shorthand are questions no one asks:

— Most big firms prospered wildly during big law’s go-go years. Does the person at the top deserve all the credit? The partners who bring in clients, orchestrate deals, and win trials don’t think so.

— Conversely, according to Am Law‘s Global 100, by 2010 Linklater’s 2010 average profits per partner slipped to $1.8 million. Does anyone think that happened because Angel left three years earlier? Not likely.

— What gets sacrificed in the myopic quest for growth and short-term profits? That’s becoming clearer: things that aren’t easily quantified, including a sense of community and a culture that mentors home-grown talent from which a firm’s future leaders can emerge.

Rather than consider the heresy implicit in such questions, the spin zone focuses on what legal headhunter Jack Zaremski called a “brave move” that “might very well pay off.”

Pay off, indeed. In the latest Am Law Mid-level Associates Survey, DLA Piper ranked 99th out of 126 firms. In reviewing their shared values and vision, did Angel and his new DLA Piper partners discuss the rewards that might come with addressing the firm’s attorney morale problems?

Probably not. After all, Linklaters ranked 108th.

EYE OF NEWT

Posted on December 18, 2011 by thebellyofthebeast

This post is not about politics. It’s about much more.

The Republican Presidential debates have generated many surprising applause lines, but Newt Gingrich delivered this one on December 15 and it should scare all freedom-loving Americans. So should the crowd reaction.

“[T]he courts have become grotesquely dictatorial, far too powerful, and I think, frankly, arrogant in their misreading of the American people,” Gingrich proclaimed in the final debate before the Iowa caucuses. “I taught a short course in this at the University of Georgia Law School. I testified in front of sitting Supreme Court justices at Georgetown Law School. And I warned them: You keep attacking the core base of American exceptionalism, and you are going to find an uprising against you which will rebalance the judiciary.”

[“Testified in front of sitting Supreme Court justices at Georgetown Law School”? Maybe he means “giving testimony” in his newly-found religious sense.]

Anyway, Gingrich — the man who racked up a $500,000 Tiffany’s tab, but decries “elites” — then proceeded to explain exactly how he’d accomplish a “rebalance”: abolish courts that disagreed with his views; subpoena sitting judges for Congressional appearances; ignore Supreme Court decisions that he didn’t like.

For a candidate who fancies himself a historian, ironies abound. For someone who is given to rhetorical flourishes while comparing himself to Winston Churchill and analogizing his adversary’s policies to Nazism, the remarks are astonishing. They’d be funny, too, if they weren’t so frightening.

Newt justice

Stalwart conservatives, including Ann Coulter, Bill O’Reilly, and former Bush administration Attorneys General, Alberto Gonzalez and Michael Mukasey, have roundly condemned Gingrich’s assault on the federal judiciary. So did the National Review.

Lest you think that his Iowa remarks were impromptu outbursts, Newt’s October 7, 2011 White Paper, “Bringing the Courts Back under the Constitution,” lays it all out. (Gingrich brags about not being a lawyer; unfortunately for Vince Haley, a 1992 University of Virginia Law School graduate, the White Paper lists him as its senior editor.)

This post considers just one of Newt’s ideas: subpoenaing judges before Congressional committees to explain their reasons for decisions that he doesn’t like. His White Paper describes it this way:

“Judicial Accountability Hearings

Congress can establish procedures for relevant Congressional committees to express their displeasure with certain judicial decisions by holding hearing [sic] and requiring federal judges come [sic] before them to explain their constitutional reasoning in certain decision [sic] and to hear a proper Congressional Constitutional interpretation.”

Problematic grammar aside, the stated rationale is disingenuous. In decisions that matter, federal judges routinely explain their reasoning in written opinions. The losing party may disagree, but the process is transparent. If there’s an appeal, at least three more judges review the case; they usually explain themselves, too. A few reach the Supreme Court, where yet more judicial elucidation occurs.

Unless the purpose is to pursue judicial impeachment — the constitutional remedy for misconduct — anyone who seeks to command a sitting judge’s appearance before Congress has a single goal: winning through intimidation. That takes me to Newt the historian, who sometimes ignores history’s most important lessons.

Precedent

Following World War I, Germany’s Weimar Constitution established an independent judiciary. On August 20, 1942, Adolf Hitler appointed Otto Thierack as Reichminister of Justice. Six weeks later, Thierack issued the first of his “Letters to All Judges.” According to an article from the U S. Holocaust Memorial Museum, the Letters set forth “the state’s position on political questions and on the legal interpretation of Nazi laws.” German judges understood the importance of following those “suggestions.”

But the article also notes that even Hitler’s SS grasped the potentially explosive implications of Thierack’s intrusions. The fear of a public backlash led to classifying the Letters as state secrets. In a May 30, 1943 report, the Security Service of the SS declared, “The people want an independent judge. The administration of justice and the state would lose all legitimacy if the people believed judges had to decide in a particular way.”

During the final Iowa debate, Gingrich listed U.S. Supreme Court Justices Roberts, Scalia, Thomas, and Alito as his favorites. That endorsement should make them squirm and, as another history lesson confirms, react publicly:

“First they came for the Socialists, and I did not speak out — Because I was not a Socialist…”

OCCUPY BIG LAW

Posted on December 7, 2011 by thebellyofthebeast

The encampments are gone, but Occupy Wall Street leaves behind a slogan that should make any history student shudder and some big law leaders squirm:

“We’re the 99-percenters.”

It’s not a leftist fringe rant. During a recent Commonwealth Club of California appearance, presidential debate moderator Jim Lehrer said that, if becoming President turned on the answer to a single question, he’d pose this one to every candidate:

“What are you going to do about the growing disparity of wealth in the United States of America?”

Once-great civilizations collapsed under such weight. A similar internal phenomenon is quietly weakening some mighty law firms.

Destabilizing trends

“Don’t redistribute wealth — that’s class warfare” has become a popular rhetorical rallying cry. (See, for example, the Wall Street Journal‘s lead editorials on December 2 and 7.) But a stealth class war has already produced massive economic redistribution — from the 99-percenters to the one-percenters.

Nobel laureate Joseph Stiglitz writes in Vanity Fair that the top one percent control 40 percent of the nation’s wealth — up from 33 percent 25 years ago. In a recent interview, Jeffrey Winters of Northwestern University notes: “[In America], wealth is two times as concentrated as imperial Rome, which was a slave and farmer society. That’s how huge the gap is.”

Both Winters and Stiglitz suggest that today’s oligarchs use wealth to preserve power. One effective tactic is to encourage the pursuit of dreams that, for most 99-percenters, are largely illusory. My favorite New Yorker cartoon is a bar scene with a scruffy man in a T-shirt telling a well-dressed fellow patron: “As a potential lottery winner, I totally support tax cuts for the wealthy.”

For today’s young attorneys, one largely illusory dream has become the brass ring of a big firm equity partnership atop the leveraged pyramid.

Big law winners

So far, wealthy lawyers have avoided public outrage. But between 1979 and 2005, the top one percent of attorneys doubled their share of America’s income — from 0.61 to 1.22 percent. For the Am Law 50, average equity partner profits soared from $300,000 in 1985 ($630,000 in today’s dollars) to $1.5 million in 2010.

Even so, the really big gap — in society and within large law firms — is inside the ranks of the privileged, and it has been growing. By one estimate, the top one-tenth of one percent of Americans captured half of all gains going to the top one percent. Similarly, management consultant Kristin Stark of Hildebrandt Baker Robbins observes that before the recession, the top-to-bottom ratio within equity partnerships “was typically five-to-one in many firms. Very often today, we’re seeing that spread at 10-to-1, even 12-to-1.”

So what?

Meritocracies are vital and valuable, but for nations as well as for institutions, extreme income inequality reveals something about the culture that produces it. A recent study found that only three nations in the Organization for Economic Cooperation and Development — Chile, Mexico and Turkey — have greater income inequality than America. Perhaps it’s coincidental, but all OECD countries with less inequality — including Norway, Denmark, Sweden, Switzerland, Canada, Germany, Austria, and Britain — likewise surpass the U.S. in almost every quality of life measure.

In big law, exploding inequality is one symptom of a profound ailment: The myopic focus on short-term compensation metrics that reward bad behavior — hoarding clients, demanding more billables, raising leverage ratios. As the prevailing model creates stunning wealth for a few, it encourages attitudes that poison working environments and diminish the profession.

Unlike imperial Rome, today’s large firms won’t fall prey to Huns and Vandals. Rather, modern casualties include mentoring, training, collegiality, community, loyalty, and building institutional connections between clients and young lawyers. Those characteristics once defined the very concept of professional partnership. Today’s business of law makes precious little room for them. Clients who think that these relatively new trends aren’t compromising the quality and cost of their legal services are kidding themselves.

A meaningful Occupy Big Law movement would require that: 1) clients (and courts approving attorneys’ fees petitions) finally say, “Enough!” and 2) would-be protesters stop viewing themselves as future equity partner lottery winners. Meanwhile, senior partners need not worry about disaffected lawyers and staff taking to the streets.

After all, there’s no way to bill that time.

THE ARROGANCE OF OVERCONFIDENCE

Posted on November 8, 2011 by thebellyofthebeast

Most of us hate admitting our mistakes, especially errors in judgment. Lawyers make lots of judgments, which is why they should pay special attention to two recent and seemingly unrelated NY Times articles.

In the October 23 NYT Magazine, psychologist and economics Nobel laureate Daniel Kahneman describes an early encounter with his own character flaw that led him to research its universality. Assigned to observe a team-buidling exercise, he was so sure of his predictions about the participants’ future prospects that he disregarded incontrovertible data proving him wrong — again, and again, and again.

In subsequent experiments, he discovered that he wasn’t alone. A similar arrogance of overconfidence explains why, for example, individual investors insist on picking their own stocks year after year, notwithstanding the overwhelming evidence that their portfolios are worse for it.

In the same Sunday edition of the Times, philosopher Robert P. Crease discusses the two different measurement systems. One relates to traditional notions: how much something weighs or how far a person runs. Representatives from 55 nations met recently to finalize state-of-the-art definitions for basic units of such measurements — the meter, the second, the kilogram, and so forth.

The second system is less susceptible to quantification. Crease notes: “Aristotle…called the truly moral person a ‘measure,’ because our encounters with such a person show us our shortcomings.” Ignoring this second type in favor of numerical assessments gets us into trouble, individually and as a society. Examples include equating intelligence to a single number, such as I.Q. or brain size, or evaluating students (and their teachers) solely by reference to standardized test scores.

Lessons for lawyers — and everyone else

Now consider the intersection of these two phenomena — the arrogance of overconfidence and the reliance on numbers alone to measure value. For example, in recent years, a single metric — partner profits — has come to dominate every internal law firm conversation about attorney worth. Billings, billable hours, and leverage ratios have become the criteria by which most big law leaders judge themselves, fellow partners, their associates, and competitors. They teach to the same test — the one that produces annual Am Law rankings.

The arrogance of overconfidence exacerbates these tendencies. It’s one thing to press onward, as Kahneman concludes most of us do, in the face data proving that we’re moving in the wrong direction. Imagine how bad things can get when a measurement technique appears to validate what are really errors.

I’m not an anarchist. (I offer my advanced degree in economics as modest support.) But the relatively recent notion that there is only one set of law firm measures for defining success — revenues, short-term profits, leverage — has become a plague on our profession. Of course, we’re not alone. According to the Times, during the academic year 2005-2006, one-quarter of the advanced degrees awarded in the United States were MBAs. Business school-type metrics are ubiquitous and, regrettably, often viewed as outcome determinative.

But lawyers know better than to get lost in them, or once upon a time they did. The metrics that most big firm leaders now worship were irrelevant to them as students two or three decades ago. Like today’s undergraduates, they were pursuing a noble calling. Few went to law school seeking a job where their principal missions would be maximizing client billings and this year’s partner profits.

Will the profession’s leaders in the next generation make room for the other kind of measure — the one Aristotle had in mind — that informs the quality of a person’s life, not merely it’s quantitative output? Might they consider the possibility that focusing on short-term metrics imposes long-run costs that aren’t easily measured numerically but are far more profound?

Reviewing the damage that their predecessors’ failures in that regard have inflicted — as measured imprecisely by unsettling levels of career dissatisfaction, substance abuse, depression, and worse — should motivate them to try.

Meanwhile, they’ll have to contend with wealthy senior partners telling them to keep their hours up — a directive that those partners themselves never heard. Good luck to all of us.

DEBT, DECEPTION, AND THE ABA

Posted on October 5, 2011 by thebellyofthebeast

The ABA kicked the can down the road again. When law schools classify their most recent graduates as “employed” in 2012, they still won’t have to disclose whether the jobs are part-time or require passing the bar. Anything and everything counts — which leads to this question:

Q: When are some law schools like for-profit colleges?

A: Every day.

Both groups are under increasing scrutiny for similar tactics. The Wall Street Journal doesn’t like the new efforts to hold for-profit colleges accountable. Recently, it used those initiatives to bludgeon a favored target:

“Where there’s money, there are trial lawyers…”

After the many WSJ articles about the rise of corporate big law’s multi-millionaires, such special disdain for greedy, non-corporate trial lawyers seems somewhat disingenuous. But I digress.

The editorial criticizes the government’s intervention in a whistleblower’s False Claims Act case against a for-profit college system and concludes with this non-sequitur:

“If the government thinks such schools are unfairly benefitting from federal subsidies, then it should cut off grants to all college students.”

Whoa, Nelly!

The Journal sidesteps the most important questions that the False Claims Act cases raise and that apply equally to many law schools: How do institutions of higher education recruit students and what happens after they sign up? When colleges are accused of “a boiler-room style sales culture,” it’s no answer to say “a recruiter’s job is to recruit.” Surely, the Journal‘s editorial board understands the importance of truthful information to the proper functioning of free markets.

For example, here’s information that for-profit colleges are loathe to emphasize: their student drop-out rate is over 50 percent. According to one report, only 38 percent graduate within six years (compared to 53 and 64 percent for public and private non-profit institutions, respectively). Another report of the ten largest for-profit schools puts their graduation rate at 22 percent.

Law schools don’t have those stunning drop-out rates, but two other criticisms apply to many of them:

— Encouraging students to take on debt that can’t be repaid. Bloomberg News reports that for-profit colleges enroll 12 percent of all undergraduates, receive 25 percent of all student loan dollars, and account for almost half of all defaults. Only a day after its editorial, the Journal reported that the for-profit default rate had soared to 15 percent, compared to non-profit rates of 7.2 and 4.6 for public and private schools, respectively.

Ironically, the same edition running the editorial attacking efforts to increase for-profit college accountability also contained a small item on the front page: “Vital Signs” — a graph with this accompanying description:

“Americans are borrowing more for student loans. In July, consumers owed the government about $386 billion, largely for student loans, up from $139 billion two years earlier. However, during the same period of time, consumers pulled back on other types of borrowing, such as credit cards and loans for automobiles.” [emphasis supplied]

Evidently, a standard hot-button topic for the Journal‘s editors — “wealth redistribution” — isn’t so bad when the redistribution is from students to their schools.

Law schools? Almost half of their graduates incur more than $100,000 in educational loans. But the real tragedy that the ABA continues to facilitate involves ongoing deception about the prospects for getting jobs needed to repay them.

— Misleading employment stats. For-profit schools’ recent battle over federal “gainful employment ” regulations mirrors the controversy over the way many law schools report employment data. Prospective students read about graduates who are “employed,” even though they’re performing tasks that don’t require the degrees that schools are trying to sell them. Likewise, law schools can call their graduates employed, even if they’re greeters at Wal-Mart.

Overwhelming educational debt is one of many terrible things happening to the next generation under the guise of “letting the markets decide” — however imperfect or distorted those markets may be. Whether for-profit or, like most law schools, run as if they were, educational institutions that pursue the myopic short-term mission of filling classrooms with tuition-paying bodies do their students a disservice. As the cycle of deception-debt-no jobs produces a bubble that is already beginning to burst, the resulting damage to the country will become increasingly obvious, too. Some of the “Occupy Wall Street” protesters are already making that abundantly clear.

INFLATED PPP?

Posted on August 29, 2011 by thebellyofthebeast

Recently, the Wall Street Journal broke the story, but it’s not new. Five years ago, The American Lawyer‘s then editor-in-chief Aric Press posed this question after hearing about presentations that Citi Private Law Firm Group was making to big firm managers (I’m paraphrasing):

Were law firms providing his magazine with financial information different from what they told their bankers at Citigroup?

In 2006, Press thought not: “The American Lawyer’s report of profits per partner is essentially the same as Citi’s for 47 percent of the firms to which [Citi] has access. For another 22 percent, the difference is 10 percent or less.”

In other words, 69 percent consistency (i.e., within 10 percent) between Am Law and Citi data — and that’s before reconciling their different definitions of equity partner.

On August 22, 2011, the Journal headline read “Law Firms’ Profits Called Inflated” — a supposedly new scandal: “[A]ccording to the person briefed on Citi’s [latest] analysis, in addition to about 22% of the top 50 firms overstating their 2010 profits per partner by more than 20%, an additional 16% inflated their numbers by 10% to 20%. An additional 15% of the firms had profits-per-partner figures that were inflated by 5% to 10%….”

In other words, 62 percent consistency (within 10 percent), again before appropriate reconciliations.

For Citi’s latest sample size of 50, that’s a swing of three law firms.

Of course, no firm should inflate its Am Law PPP, but a few always have. In his 2006 article, Press wondered why. I think it’s because some metrics assume an unsavory life of their own. In that way, Am Law PPP functions similarly to U.S. News law school rankings. Even when the underlying numbers are accurate, relying on the metric to make important decisions can lead to unfortunate behavior.

Pandering to idiotic U.S. News criteria results in dubious practices that discredit the overall result: recruiting previously rejected applicants who went to other schools, but whose LSATs don’t count if they arrive as tuition-paying 2L transfer students; using post-graduation employment rates that don’t distinguish between full- and part-time positions, or jobs requiring a legal degree and those that don’t; awarding first-year scholarships to students with high GPAs and LSATs, only to crush them with mandatory grading curves that impose forfeiture for years two and three.

A similar devotion to misguided metrics dominates many firms. In the 2008 Am Law 100 issue, Press observed: “[P]rofits-per-partner [is] the metric that has turned law firm managers into contortionists…” Maximizing PPP means equity partners squeezing more billables out of everybody, raising rates, and “pulling up the ladder behind them.”

Reliance on misguided metrics isn’t unique to the legal profession. What starts as teaching to a test sometimes culminates in cheating to get higher scores — with middle school instructors at the center of alleged wrongdoing. But catching attorneys in this particular lie is more difficult than finding common erasures for a classroom of standardized test-takers. Like law schools that self-report their information to the ABA (and U.S. News), private law firms submit whatever they want to The American Lawyer. Recipients can’t verify what they get.

However, Citigroup is a lender to law firms and “independently reviews many law firms’ financial performance,” according to the Journal. The WSJ had a story only because Citi entertained an audience of big law chairmen and managing partners with discrepancies between actual law firm profits and what the firms reported for public consumption. I wonder if the bank tried to reconcile its own clients’ apparent discrepancies before highlighting what the WSJ now depicts as a pervasive scandal.

Legal consultant Jerome Kowalski urges firms to stop reporting PPP, as Orrick, Herrington & Sutcliffe LLP announced it would last year. That’s unlikely, but meanwhile, the real travesty is that the liars go unidentified. Inflating profits for Am Law is a hubristic finger in the eyes of a firm’s client.

Maybe clients have no right to care what their lawyers make, as Adam Smith, Esq. argues in a recent blog post. But the unavoidable fact is that many do. From their perspective, the truth would have been bad enough. A few firms goosing their seven-figure PPP averages even higher make all firms look worse, not better.

IMPROVING PROSPECTS — BUT FOR WHOM?

Posted on May 10, 2011 by thebellyofthebeast

Life is just a matter of perspective. For example, here’s some apparently good news:

— The legal sector added 1,500 jobs in April.

— Ashby Jones at the Wall Street Journal Law Blog cited a recent article in The Guardian for the proposition that the U.K. might actually have a shortage of lawyers next year. Could the U.S. be far behind?

— NALP’s Executive Director James Leipold noted that, along with an overall attorney employment rate of 88.3% for the class of 2009, “the most recent recruitment cycle showed signs of a small bounce in the recruiting activity of law firms, a sign that better economic times likely lie ahead.”

Now consider each headline a bit differently:

— “Legal sector” isn’t limited to attorneys; more than 44,000 new law school graduates hit the market every year.

— The Guardian article relies solely on a report from the College of Law that has an interest in encouraging applications to its program for prospective solicitors. More than one comment to the initial report expressed angry skepticism about the College’s short-term motives. Where have I heard that before?

Meanwhile, the Bureau of Labor Statistics projects that, for the entire ten-year period from 2008 to 2018, net U.S. attorney employment will increase by only 100,000. Even if all aging attorneys retired as they turned 65, there aren’t enough of them to make room for all the newbies. In 1970, for example, law schools awarded only about one-third of the number of JDs conferred in 2010.

— To his credit, NALP’s Leipold went behind the 88% employment rate for the class of 2009. The resulting caveats are significant.

First, the percentage employed are graduates “for whom employment status was known.” Who’s excluded? Who knows?

Second, nearly 25 percent of all reported jobs were temporary; more than 10 percent were part-time.

Third, only 70 percent “held jobs for which a J.D. was required.” Unfortunately, law schools don’t offer tuition refunds (or relief from student loans) for education that was unnecessary for their graduates’ actual employment opportunities. That doesn’t surprise me. (See “Law School Deception.”)

Finally, more than 20 percent of employed graduates from the class of 2009 “were still looking for work.” Beneath the veneer of superficially good news — having a job — career dissatisfaction continues to eat away at too many of the profession’s best and brightest in yet another generation.

That doesn’t mean people shouldn’t go to law school. It means that they should think carefully about it first, starting with this question: why do I want to be a lawyer and will the reality of the job match my expectations?

Turning the employment subject toward big law leads to one more lesson on perspective.

A day after the Ashby Jones and James Leipold articles, the WSJ‘s Nathan Koppel summarized big law’s continuing job-shedding: the NLJ 250 lost another 3,000 in 2010, bringing their total decrease since 2008 to 9,500. They may be hiring some new associates, but they’re getting rid of many more.

NALP expects to release its 2010 employment data in May. But every big law leader knows that May’s true importance lies in a much more significant event: annual publication of the Am Law 100. For some partners, pre-release anxiety is palpable, if not paralyzing.

This year, average equity partner profits for the Am Law 100 went up by over 8% — to almost $1.4 million. For context, that surpasses 2007, which was the peak of an uninterrupted five-year PPP run-up. Pretty stunning for an economy that remains difficult for so many. Gross revenues increased as overall headcount dropped by almost 3%. More revenues from fewer attorneys meant more billables — mislabeled as higher “productivity” in big law terms — for the chosen. (See “The Misery Index.”) As jobs remained scarce and associate hours climbed, equity partner earnings continued their ascent.

How much is enough? For some people, the answer will always be more; short-term metrics that maximize current PPP guide their way. Life is easy when deceptively objective numbers make solutions simple, reflection unnecessary, and the long-term someone else’s problem. It’s just a matter of perspective.

KING & SPALDING’S REVERSAL OF FORTUNE

Posted on May 2, 2011 by thebellyofthebeast

It was an impossible task. Take a multimillion-dollar a year big law partner with unambiguously conservative Republican credentials and make him look like a combination of Atticus Finch and Clarence Darrow as he pursues the far right’s ideological agenda. Somehow, while working at cross-purposes, Paul Clement and King & Spalding pulled it off. What should have been a non-event became a major story because the firm said yes to Clement’s representation of House Republicans in Defense of Marriage Act (DOMA) litigation – and then it said no.

But the issues are more complicated than the headlines and current talking points.

With words befitting the talented advocate that he is, Clement relinquished his lucrative equity partnership saying, “Defending unpopular clients is what lawyers do.”

Dutifully, Hays fell on his sword in expressing the firm’s official non-explanation for its about-face: “inadequate vetting.”

Attorneys across the political spectrum condemned Clement’s former firm while praising him for adherence to the maxim that everyone deserves representation. Even President Clinton’s solicitor general, Seth Waxman, commended his allegiance to the “highest professional and ethical traditions in continuing to represent a client to whom he had committed in this very charged matter.”

Let’s suspend the hyperbole for a moment of analysis and reflection.

— “They’re Not Entitled to Me”

The target audiences for Clement’s lofty rhetoric were the media and the public, not King & Spalding’s Chairman Robert D. Hays, Jr. — the resignation letter’s addressee. Clearly, Clement scored a public relations bullseye.

He began with the suggestion that his personal “thoughts about the merits of DOMA are as irrelevant as my views about the dozens of federal statutes that I defended as Solicitor General.” Not quite. The solicitor general must always take the same side – the government’s; attorneys in private practice can say no. As Harvard Law Professor Alan Dershowitz told my classmates and me 35 years ago: “In our system, everyone is entitled to representation. But that doesn’t mean that everyone is entitled to me.”

When attorneys wrap themselves in their roles as advocates for unpopular people and positions, it’s worth pausing to consider whether such nobility is easier because it coincides with their ideological leanings. Clement urged that “being on the right or wrong side of history is a question for the clients.” But whether to represent a client is always a question for the attorney. Would Clement have taken the other side in DOMA cases? Based on his record, that seems unlikely.

His new home is Bancroft PLLC, now an eight-lawyer firm that looks like a Republican government-in-waiting. Clement’s conservative dots connect easily to his newest employer: beginning with clerk to Justice Scalia to associate in Kenneth W. Starr’s appellate group at Kirkland & Ellis to solicitor general for President George W. Bush. Pursuing a far right rallying cry doesn’t look like much of an ideological stretch. There’s nothing wrong with that; it’s just true.

— What Went Awry?

Wholly apart from any proximity between his client’s position on DOMA and Clement’s personal politics, King & Spalding missteps created the story. If the firm had simply failed to approve Clement’s initial request to take the cases – as big firms often do – no one would have noticed or cared. That didn’t happen, but what did happen at King & Spalding could have arisen elsewhere throughout big law. Here’s how.

First, money matters. DOMA was never a pro bono affair for King & Spalding. In the prevailing big law model, a revenue dollar is a revenue dollar and new business is new business. Cases and deals generating media attention are especially attractive, in part because they help in The American Lawyer’s annual “Best Departments” competition.

The House of Representatives, a high-profile client, agreed to pay a blended rate of $520/hour with taxpayer dollars. Clement charges more than that for his time, but blended means that every lawyer on the case — all the way down to first-year associate — bills out at that $520 hourly rate. Although appellate matters are top-heavy, partners typically control staffing to make money on blended rate deals. (A $500,000 cap was subject to negotiated increases.) The case also offered another win-win possibility: attracting other conservative clients.

Second, someone at King & Spalding underestimated the backlash. I don’t know what Hays meant by “inadequate vetting,” but partners typically brag to firm colleagues about noteworthy new business as they’re trying to land it. Somewhere amidst the backslapping, they can forget other considerations that matter. Here, the intense adverse reaction came swiftly, certainly and, apparently, surprisingly. The surprise would have been a byproduct of myopic revenue generation; magical thinking at the outset can assume away all potentially bad consequences.

Third, once a new client matter is approved, firms typically let the partner in charge finalize the details. I don’t know whether King & Spalding did that here, but I wonder if anyone at the firm other than Clement read the retention agreement prior to its execution. If so, the implications of silencing an entire national law firm (including staff) must have arisen. A gag provision barred everyone in the firm from engaging “in lobbying or advocacy for or against any legislation (i) that is pending before the [House] Committee…[through January 3, 2013], or (ii) that would alter or amend in any way the Defense of Marriage Act and is pending before either the U.S. House of Representatives or the U.S. Senate or any committee of either body….”

Whose idea was that? Private employers can impose lots of restrictions on employees, but some observers have suggested that this sweeping ban violates state law where King & Spalding has offices, including California and New York. In any event, personnel throughout the firm might have been astonished to discover that, as of April 14, their jobs now required that they forego free speech on personal matters near and dear to many of them. The provision certainly didn’t astonish Clement, who signed the agreement on his firm’s behalf.

— The Road Not Taken

Clement concluded with Judge Griffin Bell’s statement that an attorney who undertakes a representation should finish it. But that proposition is far from immutable. Attorneys decide whether to leave clients all the time, but without the underlying morality play that developed here. Examples: A lawyer laterals into a new firm after saying good-bye to clients that would pose a conflict if he brought them along; or the new firm sends an existing client packing to accommodate the lateral’s more lucrative business; or a firm simply jettisons an existing client in favor of a more financially promising one. Here, the ink was barely dry on the April 14 agreement before Clement resigned from his firm eleven days later. If he’d chosen to stay, the client would have faced little hardship in transitioning to replacement counsel.

The firm now weathers a storm of critics who argue that it has forsaken the profession’s finest traditions by abandoning a client with an unpopular position. Some will distort the issues for political gain, as Virginia’s attorney general already has.

Meanwhile, Clement retains a moral high ground that some people have been too quick to give him. Did he consider the gag provision’s breadth, scope, or potential enforcement problems? Would he have counseled a client — any client — to agree to it? Imagine the outcry if tobacco companies tried to prevent all employees of their outside law firms from using weekends and evenings to advocate anti-smoking legislation.

As an outstanding appellate advocate who has been mentioned as a possible U.S. Supreme Court candidate in a Republican administration, Clement knows that final decisions should be based on a complete record that includes all of the evidence. The current judgments identifying the heroes and villains in this saga are premature.

HOWREY’S LESSONS: A NATIONAL CONVERSATION

Posted on March 21, 2011 by thebellyofthebeast

My latest “Commendable Comments” award goes to a non-lawyer, the Washington Post’s Pulitzer prize-winning columnist Steven Pearlstein.

Since I started my blog a year ago, two of my most popular articles have been “Howrey’s Lessons” and “Howrey’s Lessons — Part II.” Versions recently ran on Am Law Daily, where they also attracted widespread attention.

I don’t know if Pearlstein was among the thousands who saw my analysis of Howrey’s end and its relationship to ubiquitous big law trends, but his March 20 column reinforces my themes. If I hadn’t been attending the Virginia Festival of the Book in Charlottesville to discuss The Partnership, I might have missed it. I’m glad I didn’t.

Both of my Howrey articles focused on a central point: What matters most are not the things that make the once venerable institution different from other large firms. Rather, the true significance of its death lies in what makes the firm similar to many, many others. Intelligent lawyers who specialize in distinguishing adverse precedent prefer to think otherwise; they do so at their peril.

Noting as I had that, as recently as 2008, the DC-oriented Legal Times hailed Howrey’s final chairman, Robert Ruyak, as one of 30 “visionaries,” Pearlstein describes how quickly the world turned. In the end, I found Ruyak’s litany of claimed contributors to the firm’s demise — clients demanding contingency fee arrangements; conflict problems that made European growth problematic; and the rise of competitive electronic discovery vendors — unpersuasive; I explained why in “Howrey’s Lessons — Part II.” Pearlstein is more charitable in accepting such excuses at face value. That’s understandable because he’s never worked in a large firm.

But on the big picture, his assessment echoes my earlier observations:

1. Howrey’s global expansion through lateral hiring created a firm of free agents who lacked the deep loyalties that once characterized the firm. That phenomenon wasn’t unique to Howrey.

2. Pearlstein notes that profits per partner has become “not only the key determinant of how much partners take home, but it is the metric by which the very competitive and ambitious people in the legal business keep score.” My regular readers know that the business school mentality of misguided metrics — billings, billable hours, and leverage ratios aimed at increasing partners’ short-term profits — has transformed a once noble profession in unfortunate ways.

3. Pearlstein observes that when Howrey’s average partner profits took a downward turn, the partnership — which wasn’t really a partnership in the way most people understand that concept — found that its “bonds of loyalty [were] not strong enough to hold Howrey together.” In “Howrey’s Lessons,” I put it this way: “[W]hen cash becomes king, partnership bonds remain only as tight as the glue that next year’s predicted equity partner profits provide….”

Likewise, Pearlstein’s overall conclusion is identical to mine: The most troubling aspect of Howrey’s death is that “the industry seems to have learned nothing from such episodes.” He closes with an acknowledgement of the widespread problem of partner and associate dissatisfaction that the prevailing big law culture has exacerbated.

On only one point would I offer this limited qualification to Pearlstein’s survey of the legal blogosphere concerning Howrey. He suggests that the media (press and blogs) offer “the same uncritical acceptance of…a world in which firms are held together by nothing more than a collective determination to increase profit per partner.” Respectfully, I offer my ongoing commentary over the past year as a consistent voice in challenging the prevailing big law model.

When an intelligent, sophisticated observer such as Steven Pearlstein takes a seemingly isolated issue involving lawyers — that is, Howrey’s disintegration — and uses his national platform to shine a welcome light on a deeper professional problem, it becomes that much more difficult for big law leaders to ignore. They’ll continue to turn a blind eye to the incubating crisis, but perhaps they’ll rest just a little bit less easily in doing so.

Pearlstein’s prize is a copy of The Partnership, which I will send him this week. I’m confident that, as an interested outsider, he’ll find it fascinating.

HOWREY’S LESSONS — PART II

Posted on March 13, 2011 by thebellyofthebeast

I wasn’t going to write another article about Howrey. But then I read chairman Robert Ruyak’s explanations for his firm’s collapse, together with columnist Peggy Noonan’s review of former Defense Secretary Donald Rumsfeld’s new book. The two men have more in common than the first two letters of their last names. Both are at the center of dramatically unfortunate episodes that occurred on their respective watches. Both look for villains and miss the bigger picture.

Former Reagan speechwriter and conservative columnist Noonan opens her review with this: “I found myself flinging his book against the wall in hopes I would break its stupid little spine…You’d expect [Rumsfeld] to be reflective, to be self-questioning, and questioning of others, and to grapple with the ruin…He heard all the conversations. He was in on the decisions. You’d expect him to explain the overall, overarching strategic thinking that guided them. Since those decisions are in the process of turning out badly,…you’d expect him to critique and correct certain mindsets so that [others] will learn.” He doesn’t.

Those words also describe Ruyak’s unsatisfying explanations for Howrey’s failure:

1. European offices:

“The real problem we ran into in Europe was conflicts of interest…It’s a different analysis in Europe. But we had to apply the U.S. standards across Europe. That made it difficult to grow because we had to forgo a lot of cases…”

Analysis of potential conflicts issues should have anchored any business plan that began with London (2001) and continued with high-powered lateral acquisitions in Brussels (2002), Amsterdam (2003), Paris (2005), Munich (2007), and Madrid (2008). By July 2008, Howrey was Managing Intellectual Property‘s “Top U.S. Firm in Europe” with more than 100 lawyers there and plans for more.

More importantly, firms survive conflicts-related departures. But here, 26 European lawyers (12 partners, 14 associates) in October 2010 supposedly set off a chain reaction that crushed an otherwise healthy, 550-attorney firm that, only a decade earlier, had no European presence.

2. Document discovery vendors.

“We created a whole portion of the firm to handle [document discovery] efficiently – using staff attorneys and sometimes temporary people, computer systems and facilities.” Along came some companies that were “offering to do this work less expensively at a lower price.”

But in May 2009, Ruyak had attributed part of Howrey’s Am Law 100-leading revenue surge to avoiding “areas that suffered significant downturns,” singling out for praise the firm’s five-year-old document review and electronic discovery center that added $47 million to the top line. So successful was the Falls Church operation that he was considering a second one on the West Coast. (The American Lawyer, May 2009, p.118)

Yet somehow, 75 staff attorneys and 100 temps accounting for 8% of Howrey’s $570 million gross in 2008 became a key contributor to the firm’s demise two years later.

3. Contingent and alternative fees

“Unlike corporations that operate on an accrual basis, it’s hard to adjust from a cash base on your business to an accrual base where you are deferring significant amounts of revenue into future time periods. Once you make that adjustment, I think it works. But the adjustment period is difficult.”

In other words, partners couldn’t tolerate the deferred gratification associated with contingency fee matters. But they loved the upside. In 2008, Howrey’s average partner profits jumped almost 30% — to $1.3 million. When PPP dropped to $850,000 in 2009, Ruyak said 2008 had been an aberration resulting from $35 million in contingency receipts. (The American Lawyer, May 2010, p. 101)

Perhaps inadvertently, he revealed the real culprit: a revolution of rising expectations among the already rich. Ruyak put it this way: “Partners at major law firms have very little tolerance for change.”

If he’s referring to firms that have lost cohesion and a shared purpose beyond a myopic focus on current profits exceeding the last year’s, he’s right. But that culture exists for a reason. Aggressive lateral growth produces partners who don’t know each other. Firm allegiances become tenuous; the institutions themselves become fragile.

Ruyak’s self-serving explanations avoid accepting personal responsibility, but that’s not their greatest fault. The bigger problem is that other law firm leaders will find false comfort in his litany; it encourages the view that Howrey’s challenges were unique. As I said before, they weren’t.

HOURLY RATES: PLEASE DON’T READ

Posted on February 24, 2011 by thebellyofthebeast

For a long time, big law’s high-flying hourly rates remained under popular radar screens. Not anymore. On the heels of Jamie Wareham’s $5 million move to DLA Piper, The Wall Street Journal recently added “Big Law’s $1,000-Plus an Hour Club.”

Will big law leaders react with shame and embarrassment to such disclosures? Doubtful. Most partners will defend their rates as market-driven. As Weil, Gotshal & Manges’s bankruptcy partner Harvey Miller told the Journal bluntly: “The underlying principle is if you can get it, get it.”

He’s not alone. According to the article, “the average law-firm partner now asks $635 an hour and bills $575.” Ashby Jones’s companion online report quoted a law firm management consultant’s prediction that $2,000/hour for top partners could be only five years away.

“Get it if you can” is unworthy of a noble profession and a dangerous business plan. Some clients pay enormous rates to those who, as one in-house lawyer put it, are worth it. But rising resistance to $500+/hour associates creates problems for big law’s leveraged pyramid. At $1,000/hour, 2,000 partner hours generate $2 million in gross revenues, which is a lot less than these marquee players pocket annually. When younger attorneys’ hourly rates multiplied by their billables (less salary and bonus) no longer make up the difference, clients squeezing the bottom will dramatically reduce profits at the top. Along the way, the effort to preserve equity partner earnings will exacerbate the most unpleasant aspects of big law culture.

Another fault line runs through today’s high rates: Taxpayers are bearing some of those fees directly, not just through price elasticity curves that push some legal cost increases into the consumer price of a client’s goods or services. For example, last May, Harvey Miller’s firm had received $16 million in legal fees for work on the GM bankruptcy that taxpayers funded. With hubris that ignored the public’s financial contribution, Miller defended his resistance to discounts from Weil Gotshal’s reported rates of $500+/hour for associates to more than $1,000/hour for some senior partners: “If you had cancer and you were going into an operation, while you were lying on the table, would you look at the surgeon and say, ‘I’d like a 10 percent discount’? This is not a public, charitable event.” He was only half-right.

Similarly, Congress is now investigating legal fees that the federal government has paid to firms representing Fannie Mae and its former executives. When shareholders sued the company in 2004, each defendant retained separate counsel. That’s typical because a single attorney’s simultaneous representation of multiple defendants can create conflicts that inhibit zealously advocacy on behalf of any particular client. In such circumstances, indemnification agreements usually obligate the company to pay its former executives’ separate lawyers, as well as its own.

Normally, none of this would be controversial, but Fannie Mae isn’t normal. When it collapsed in 2008, the government assumed control. Taxpayers are now footing the legal bills — really big ones — for defending the company and its former executives in the pending lawsuits. The Times reported:

“The amount advanced by the government to pay legal bills for Fannie Mae and its former executives was a well-kept secret for more than two years. But the bills add up quickly. In the main lawsuit [overseen by Ohio attorney general Mike DeWine on behalf of two state pension funds that owned Fannie Mae shares], 35 to 40 lawyers representing Fannie defendants attend monthly conferences by the judge.”

It’s a tragic irony. In Ohio, state and local workers have taken to the streets in protesting budget reductions that would reduce their wages and end collective bargaining. Meanwhile, the attorney general leads a lawsuit against Fannie Mae and its former executives while federal taxpayers — some of whom are Ohioans — finance the defense that creates big paydays for a relatively few lawyers.

I don’t know these attorneys or their hourly rates. But generating national bipartisan outrage isn’t a good development for them or big law generally.

Sunlight can be a disinfectant, unless you’re a vampire.

HOWREY’S LESSONS

Posted on February 18, 2011 by thebellyofthebeast

If Howrey LLP disappears, most big law leaders will make distinctions; they’ll focus on how their organizations are different from Howrey’s. More interesting are the similarities, especially the universal forces that might render others vulnerable to the highly respected firm’s current plight.

First is the speed with events can overtake seemingly secure institutions — and I’m not referring to the fall of Mubarak in Egypt. On May 19, 2008, the Legal Times hailed Howrey LLP’s chairman Robert Ruyak as one of the profession’s “Visionaries.” He deserved it. During the prior 30 years, his distinguished career enhanced Howrey’s reputation and the business of law in DC. But on February 1, 2011, he and Winston & Strawn’s managing partner Thomas Fitzgerald together urged Howrey partners to act quickly on Winston’s offers to hire about three-quarters of them. The big law world can rapidly take a dramatic and unexpected turn.

Second is the way unprecedented demand for big law services combined with the prevailing business model to create enormous financial paydays that became even larger as firms grew. When Ruyak became chairman in January 2000, Howrey ranked near the middle of the Am Law 100 in average profits per equity partner (PEP — $575,000). It had 325 attorneys (89 equity partners).

Ruyak’s strategy targeted growth in three core practice areas: antitrust, IP, and litigation. As the Legal Times observed, “To achieve that vision, Ruyak knew that the firm had to be bigger, so Howrey went on a merger spree.” It added Houston-based patent firm Arnold, White & Durkee, acquired the antitrust practice of Collier, Shannon, Rill & Scott, and established European offices in London, Amsterdam, Brussels, Paris, Munich, and Madrid.

By 2006, Howrey had 555 attorneys; its 127 equity partners averaged $1.2 million each. After profits dropped in 2007, they soared by almost 30% in 2008 — the biggest percentage revenue-per-lawyer gain in the Am Law 100. Howrey’s 2008 profits were $1.3 million per equity partner — an all-time high.

Third is the fragility that such financial prosperity created for the fabric of many law firm partnerships. When profits plunged 35% in 2009, Ruyak’s partial explanation was that 2008 had been aberrational. Large contingency receipts accounted for much of that year’s non-recurring spike. The firm was still “figuring out how to do [alternative fee arrangements] well.” (The American Lawyer, May 2010, p. 101)

Unfortunately, the revolution of rising expectations was underway; the short-term bottom-line mentality is an impatient and unforgiving two-edged sword. In 2000, Howrey had a clear identity and average equity partner profits of almost $600,000 — seemingly sufficient to keep partners satisfied and any firm stable. Certainly, that amount far exceeded any current big law equity partner’s wildest financial dreams when entering the profession. A decade later, disappointing projections that the firm might reach only 80-90% of its $940,000 PEP target (or $750,000 to $850,000) fed rumors and a perilous media downdraft.

Heller Ehrman proved that lateral hiring and law firm mergers risk sacrificing firm culture in ways that inflict unexpected damage. I don’t know if that has happened at Howrey, but when cash becomes king, partnership bonds remain only as tight as the glue that next year’s predicted equity partner profits provide, assuming those predictions are believed.

That leads to a final lesson: leadership requires credibility. Only two weeks before the remarkable joint message from Ruyak and Fitzgerald, Howrey spokespersons insisted that all was well: “The amount of costs taken out of the firm at all levels — which includes leases, partners, associates, and the like leaving the firm — have made the firm much more efficient,” vice-chairman Sean Boland said. “It’s done wonders for our cost structure, such that we’re going to see some major advantages in 2011. We’re very encouraged by the cost cutting that we’ve done.”

Likewise, one of its outside consultants said that the firm was “getting back to its strengths… What’s happening at Howrey is largely by design.” Maybe so. But from this distance, the parade of top partner departures and Ruyak’s involvement in Winston’s outstanding offers make the design appear curious, indeed.

In May 2008, the Legal Times, concluded with a senior partner’s observation that Howrey had become “a very exciting place to work.” I suspect that’s still true. As with most things legal, the definition is everything.

LOCATION, LOCATION, LOCATION?

Posted on February 14, 2011 by thebellyofthebeast

In “Greed Atop the Pyramids,” I observed that the internal spread between the top and the bottom within large firm equity partnerships has grown dramatically in recent years. No one feels sorry for those at the low end, but the compensation for many top partners has reached staggering heights. My title suggested an explanation.

K&L Gates Chairman Peter Kalis — whom I’ve never met — has offered another reason: It’s not greed; it’s geography. His photograph appeared with The Wall Street Journal article on Jamie Wareham, “The $5 Million Dollar Man.” According to the Journal, at K&L Gates “top partners earn up to nine times as much as other partners. Pay spreads widen as firms become more geographically diverse, operating in cities with varying costs of living, said Peter Kalis, chairman of K&L Gates. The firm’s pay spread rose from about 5-to-1 to as much as 9-to-1 in the past decade as it expanded. ‘Houses cost less in Pittsburgh than they do in London,’ Mr. Kalis said.”

Let’s consider that proposition. It’s certainly true that London is more expensive than New York, and New York is more expensive than Pittsburgh. It’s also true that some firms consider cost-of-living differences when setting compensation; some apply formulaic across-the-board geographical adjustments. But the issue involves the top of a widening range, not the relative cost of comparable talent across offices.

Here’s how to test the hypothesis that geography accounts for this relatively new phenomenon: Are all of a firm’s top equity partners located in the city of the firm’s most expensive office? I doubt it. Or try it from the other side: Are any of the biggest paydays going to partners working in less expensive cities? Almost certainly.

I don’t know how much Kalis makes, but he might even be a useful example. His K&L Gates website biography page shows a commendable involvement in a number of Pittsburgh-area civic organizations. In addition to his Pittsburgh office, the page also lists a New York phone number, but his only bar admission is Pennsylvania. He’s certainly not headquartered in the most expensive cities where K&L Gates has offices — Tokyo, Moscow, Hong Kong, Singapore, Beijing, London, or Paris. My hunch is that, as Chairman and Global Managing Partner, he’s not at the low end of his firm’s equity partner compensation range, either. So why the superficially appealing but ultimately unpersuasive “houses are cheaper in Pittsburgh” line to explain away a pervasive big law trend?

Perhaps it’s because reality is sometimes harsh and unflattering. Citing a former pay consultant for law firms, the Journal article noted, “A majority of big law firms have begun reducing the compensation level of 10% to 30% of their partners each year, partly to free up more money to award top producers.”

I don’t know if that has happened at K&L Gates, but other law firm management consultants have suggested that the need to attract and retain rainmakers in a volatile market has widened the top-to-bottom equity partner range in many firms:

“Before the recession, [the top-to-bottom equity partner compensation ratio] was typically five-to-one in many firms. Very often today, we’re seeing that spread at 10-to-1, even 12-to-1.”

Finally, the Journal article itself provides additional evidence that something other than geography is at work: “A small number of elite firms, such as Simpson Thacher & Bartlett LLP and Cravath, Swaine & Moore LLP, still hew to narrower compensation bands, ranging from 3-to-1 to 4-to-1, typically paying the most to those with the longest service….”

Cravath has a London office. Simpson Thacher has offices in Beijing, Hong Kong, London, Los Angeles, New York, Palo Alto, Sao Paolo, Tokyo, and Washington, DC. Yet they have avoided the surging top-to-bottom equity partnership pay gaps that Kalis attributes to geography.

To understand what has really happened recently inside big firms — and why — read The Partnership.

There is, indeed, greed atop the pyramids — even in Pittsburgh.

Are You Worth $5 Million?

Posted on February 10, 2011 by thebellyofthebeast

The Wall Street Journal’s front page reported that litigator Jamie Wareham “will make about $5 million a year, a significant raise from his pay at Paul, Hastings, Janofsky & Walker LLP, where he has been one of the highest paid partners.”

This phenomenon – superstar lateral hiring – is nothing new, but in recent years it has become more common. For those who remember the 1980s, it’s vaguely reminiscent of the period when ill-fated Finley Kumble turned that strategy into a losing business model.

Of course, Finley failed for many reasons that may distinguish it from current trends. Still, those running that firm into extinction as they signed up marquee players who couldn’t carry their own economic weight probably wished they’d asked this question:

How can you determine whether a lawyer is worth $5 million?

Reserved for another day are the broader implications, including the challenges that significant lateral desertions and insertions at the top present to the very concept of firm partnership. This article focuses solely on underlying financial considerations associated with the superstar lateral hire.

Presumably, bringing in a big-name player makes economic sense for a firm operating under the prevailing business model, which means that at least one of the following conditions are met:

First, the proposed lateral has an independent book of business suitable for delivery to the new firm. That would be simple, but for the clients themselves. Even if they hired and regularly use a particular partner, they probably also like his or her package of assembled talent. Consequently, the lateral must bring along a team of capable junior lawyers. Alternatively, the new firm may have excess attorney inventory that it can deploy, but that requires the lateral to persuade clients to use new lawyers who can quickly and efficiently climb their learning curves.

Second, even absent a short-term economic justification, a firm could rationally conclude that anticipated events make the talent investment worthwhile for its future strategic positioning. Recent examples include firms that loaded up on bankruptcy attorneys when the economy was still strong. The crash of 2008 made them look like geniuses. More speculative are the “if you hire them, clients will come” bets that managers sometimes make. Former government employees, along with high-profile attorneys who lack a portable client following but are on everyone’s short-list of best lawyers, fall into this category.

For the first category, short-term value is simple arithmetic. According to the latest Am Law 100 report, Wareham’s old firm, Paul Hastings, had a 41% profit margin in 2009. If the “substantially less” than $5 million he’ll make at DLA Piper was — say, $4 million – he would have needed revenues of $10 million to earn his keep there, assuming no other equity partners claimed any part of that gross. At a total blended attorney rate for all attorneys on his client matters of $500/hour, that translates into 20,000 billable hours.

But at DLA Piper and its reportedly lower profit margin (26%), Wareham will have to produce almost $20 million to support a $5 million share of firm profits. At a blended hourly rate of $500, that means more than 40,000 hours. (If he is selling clients on a move with him on the promise of lower hourly rates, the billables requirement at DLA Piper would become even higher.)

If one of the 20 or so attorneys on Wareham’s team is another equity partner earning, say, $1 million, then the minimum break-even billables bogey moves proportionately higher. (Assuming a 26% profit ratio, it takes about $4 million gross — 8,000 hours at a blended rate of $500/hour — to net $1 million.)

Insofar as the lateral acquisition’s value relates to the second category – future payoff — big name players get a grace period. But at some point, the economic imperatives of the first category will surface. When that happens, they’ll feel the revenue and related billable hours heat even more than everyone else — except, of course, the attorneys working for them.

Such is the economically successful lateral hire outcome. Failure on a sufficiently large scale produces Finley Kumble.

ACCELERATING IN THE WRONG DIRECTION

Posted on November 5, 2010 by thebellyofthebeast

Recently, law firm management consultant Hildebrandt Baker Robbins’ Kristin Stark offered her solution to problems that she sees with many large firm compensation systems:

“Firms need to be talking to their partners about their performance every year — and throughout the year. Ongoing coaching of partners on their performance and helping them make improvements has become a powerful tool for driving partner and firm performance in successful firms. High-performing partners want to work in an environment where co-owners are engaged and actively contributing to firm growth. Without this, a firm’s top performers are at risk.” (http://www.law.com/jsp/law/article.jsp?id=1202472843670&Partner_Compensation_The_Downturns_New_Touchy_Subject)

Stark buried the lead, but her key point appears to be that a firm’s principal mission should be to keep its rainmakers happy. Otherwise, they’re “at risk” — meaning that they’ll leave to make more money elsewhere.

Wait a minute. A few lines earlier, Stark described the growing gap in high-to-low partner compensation: “Before the recession, [it] was typically five-to-one in many firms. Very often today, we’re seeing that spread at 10-to-1, even 12-to-1.”

“You can imagine that creates a lot of problems,” she continued. “It drives further tension between partners over compensation and creates an environment of the ‘haves’ and the ‘have-nots’ in law firms.”

What should firms that have become beholden to a few rainmakers and their often oversized egos do? Whatever it takes to keep them? Won’t that exacerbate the resentment of those whom Stark calls the “have-nots”? What are the limits of tolerably bad behavior by the “haves”? Big billers always get a pass for hoarding clients. How about verbally abusing subordinates? Or worse?

Meanwhile, she suggests, firms should coach other lawyers on the importance of “improving performance.” That’s code for billing more hours and bringing in more business. Forget about mentoring the next generation, encouraging collegiality, enhancing attorney career satisfaction, or focusing on other professional values for which the dominant large law firm model lacks a metrics link to bottom-line equity partner profits.

It also means reconciling the “have-nots” to their proper places in the firm:

“In this market firms have to constantly reevaluate the expectations of a partner, communicate with partners about what is required of them, and incorporate partner goals and expectations into the compensation process,” Stark said.

In other words, everyone should understand the need to work harder so that the highest paid equity partners widen their already enormous compensation advantages over all others.

All of this is an interesting commentary on a group of extraordinarily talented men and women — a firm’s longstanding (but non-rainmaker) equity partners who, apparently, somehow lost the intelligence and personality traits that caused them to excel in the first place. As students, their brains and hard work took most of them to the best colleges and law schools. As associates, their ambitions carried them past peers into equity partnerships. Presumably, they served clients who valued their work.

When did they lose it? Admittedly, a few never deserved promotion, but internal firm political stars aligned in a way that allowed them to bypass quality control criteria. Success made others fat, happy, and lazy; still others burned out. But most equity partners achieved their status because they had a lot going for them — and still do. If they continue to enjoy the practice of law, that alone pushes them as it always has.

Not so, says Stark. They need coaching to keep their expectations in check. They must pander to top billers whose eternal answer to the question “How much is enough?” will always be “More.” They should live with the anxiety accompanying ongoing performance evaluations throughout the year. Never mind that, in Biglaw as in life, individual careers experience peaks and valleys; rarely is any overall upward trajectory a straight line.

Fear isn’t a productive ingredient in the recipe for motivating talent. But try telling that to some large firm managing partners and their outside consultants. On second thought, don’t bother. They already know everything.

WHO REMEMBERS FINLEY KUMBLE?

Posted on October 14, 2010 by thebellyofthebeast

“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?

SOME DOCTORS THINK THEY’RE GOD; SOME LAWYERS THINK THEY’RE DOCTORS

Posted on September 27, 2010 by thebellyofthebeast

The medical analogy seemed familiar:

“When somebody comes to the emergency room and is on the operating table hemorrhaging, you don’t ask if [he] can pay the surgeon. You save the patient.” (http://www.nytimes.com/2010/09/02/business/02commission.html)

Lehman Brothers’ prominent bankruptcy lawyer was echoing the position of his client, former chairman Richard Fuld, a trader who rose from mail clerk to CEO. In his congressional testimony a few weeks ago, Fuld’s dominant theme was that others caused his company’s collapse. As untoward events overwhelmed the entire financial system, Lehman didn’t receive the favored treatment that saved AIG, facilitated JP Morgan Chase’s acquisition of Bear Stearns, allowed Goldman Sachs and Morgan Stanley to become classified as bank holding companies, and eventually enacted a $700 billion TARP program to buttress things.

The argument that the federal government should have stepped in to help seemed like an odd position for any ardent Wall Street capitalist, but he had a point. Back in September 2008, I wondered whether Treasury Secretary Paulson’s enthusiasm to allow the market’s creative destruction waned just a bit as Goldman Sachs, the firm Paulson had led before joining the Bush Administration, seemed to careen along the same catastrophic path as Lehman’s.

Still, omitted from Fuld’s analysis was his own mindset. In a single sentence at the end of his prepared remarks, he acknowledged “some poorly timed business decisions and investments, but we addressed those mistakes…” (http://www.fcic.gov/hearings/pdfs/2010-0901-Fuld.pdf ). He gave little attention to his own attitudes that created the institutional culture described in the Lehman Bankruptcy Examiner’s Report (authored by former U.S. attorney Anton Valukas):

“In 2006, Lehman made the deliberate decision to embark upon an aggressive growth strategy, to take on significantly greater risk, and to substantially increase leverage on its capital. In 2007, as the sub‐prime residential mortgage business progressed from problem to crisis, Lehman was slow to recognize the developing storm and its spillover effect upon commercial real estate and other business lines. Rather than pull back, Lehman made the conscious decision to “double down,” hoping to profit from a counter‐cyclical strategy. As it did so, Lehman significantly and repeatedly exceeded its own internal risk limits and controls.”

Presumably, the Lehman lawyer’s “saving the patient” point was that taxpayer-funded loans to the company in September 2008 would have allowed time for more orderly asset sales and, perhaps, avoided bankruptcy altogether.

Maybe he and Fuld are right, but the Fed’s lawyer saw things differently:

“If the Federal Reserve had lent money to Lehman, this hearing and all other hearings would only have been about how we wasted taxpayers’ money.”

I was less interested in who’s right than in the medical analogy, which seemed familiar. Then I remembered that, in a different context, the same lawyer said this in May:

“If you had cancer and you were going into an operation, while you were lying on the table, would you look at the surgeon and say, ‘I’d like a 10 percent discount’? This is not a public, charitable event.” (http://www.nytimes.com/2010/05/02/business/02workout.html?pagewanted=1&_r=1&hpw)

Back then, this attorney was commenting on requests from Kenneth Feinberg (court-appointed monitor in the Lehman bankruptcy) and Brady Williamson (examiner in the GM bankruptcy) for discounts in his Biglaw legal fees that reportedly ranged from $500/hour for first-year associates to more than $1,000/hour for some senior partners.

His concluding line — “this is not a public, charitable event” — was interesting. Bristling at the scutiny that Biglaw’s hourly rates had generated, he must have known that his firm had already billed $16 million in GM bankruptcy fees. Wasn’t “public” taxpayer money involved in GM’s dissolution?

The problem — universal throughout Biglaw — is this senior lawyer’s attitude of entitlement. (According to Am Law‘s 2010 list, his firm’s average equity partner profits exceeded $2.3 million in 2009.) The irony is the frequency with which partners make that complaint about younger lawyers: “They act like they’re entitled…they aren’t willing to work hard, like I did…they think they’re special.” I’ll bet such critics never thought that these traits merely qualified the upstarts to inherit their Biglaw thrones.

At the end of the day, I don’t know whether federal loans would have saved Lehman, but I’m sure of this: I hope I’m never on a operating table while a Biglaw attorney possessing such hubris holds the scalpel or the tourniquet.

ARE THE U.S. NEWS RANKINGS BIGLAW’S BLACK SWAN?

Posted on September 17, 2010 by thebellyofthebeast

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.

BLAGO, CLEMENS, AND LAWYERS

Posted on August 20, 2010 by thebellyofthebeast

Advising a client to do something he or she wants to do is easy. Giving counsel that contradicts a professed desire is a lot tougher.

When Ed Genson, one of Chicago’s top criminal defense lawyers, resigned his representation of Rod Blagojevich in January 2009, he said:

“I have been practicing law for 44 years. I never require a client to do what I say, but I do require them to at least listen to what I say…I intend to withdraw as counsel in this case. And I wish the governor good luck and Godspeed.” ( http://www.nbcchicago.com/news/local-beat/genson-quits-blagojevich-criminal-case-012309.html#ixzz0x9jPaEpt)

At the time, Blago had just begun what became his protracted media blitz. He hadn’t yet learned the self-described lesson of his sobering guilty verdict: “I talk too much.” Although Genson didn’t elaborate on the reasons for abandoning his leading role as defense counsel in a high-profile case, it’s fair to assume that his inability to prevent Rod from using television, radio, and a book tour to proclaim his innocence was an important factor.

Uncontrollable clients get their lawyers and themselves into trouble. I sometimes brought clients back to reality with a simple statement: “People brighter than you are in prisons all over America because they thought they were too smart to get caught.”

Which takes us to Roger Clemens. When persuasion alone doesn’t deter a self-destructive client, a lawyer’s options are limited. Sometimes a threatened resignation reins them in; at other times, even following through on the threat doesn’t.

Then again, there’s the possibility that the attorney blew it. I can’t say that Clemens’s lawyers gave him bad advice because, like the rest of us, I’ll never know what that advice was. But the chronology of the events leading to his recent indictment for lying to Congress raises interesting questions.

The story began in December 2007, when former Senator George Mitchell released his report about the widespread use of illegal, performance-enhancing drugs. Clemens and fellow Yankees pitcher Andy Pettitte were the most prominent of the implicated players. Pettitte eventually admitted taking HGH while recovering from an injury.

On a January 6, 2008 episode of 60 Minutes, Clemens steadfastly denied the claims. At the same moment, his lawyers were filing a defamation suit against the trainer who’d provided Mitchell with the incriminating testimony.

Meanwhile, the U.S. House Committee on Oversight and Government Reform continued its investigation into the matter. A week after Clemens’s 60 Minutes appearance, noted trial lawyer Rusty Hardin released this statement:

“I want to make very clear that there has been absolutely no change in Roger’s willingness and indeed desire to testify under oath before Congress in a public hearing at a date of the Oversight Committee’s choosing. Any suggestion that he or we are having any second thoughts about that is absolutely false.” (http://sports.espn.go.com/mlb/news/story?id=3194113)

House Committee Chairman Waxman later took Hardin’s comments a step farther, saying that he and the ranking Republican had decided that no public hearing was needed because prior depositions would suffice.

“[T]he only reason we had the hearing was because Roger Clemens and his lawyers insisted on it,” Waxman said. “Roger Clemens’s lawyers told us he wanted the opportunity to make his case in public.” (http://www.nytimes.com/2008/02/15/sports/baseball/15clemens.html )

In its totality, Clemens’s strategy was the litigation equivalent of “shock-and-awe” warfare.

When it became clear that the hearing had gone badly for Clemens, Hardin called Waxman’s statements “unbelievable, disingenuous and outrageous.” But according to the same Times article, “Once the depositions were taken…the Clemens side felt it had no choice but to proceed, fearing that the committee would use the depositions to produce a hostile written report. ‘We wanted this out in the open,’ Hardin said.” So Waxman appears to have the better of the “whose bad idea was this anyway?” argument.

In any event, this much is certain: Clemens didn’t have to: 1) appear on 60 Minutes; 2) file a defamation lawsuit on the Sunday evening that the show aired (or ever); or 3) tell Congress anything (unless it first chose to grant him immunity).

So what do Clemens and his lawyers have to show for their efforts?

In February 2009, a judge dismissed most of Clemens’ defemation claims against his former trainer. The Fifth Circuit Court of Appeals affirmed on August 12, 2010. The public has long forgotten about the Mitchell Report, but Clemens himself remains headline news. One of the great pitchers of all time now faces unpleasant proceedings that could culminate in a prison sentence.

I assume that his capable attorneys explained how high-profile politicians and celebrities consistently fail to learn the most important lesson of Richard Nixon’s shame. He resigned the Presidency over obstruction of justice charges stemming from a subsequent cover-up — not the original sin of breaking into Democratic National Committee headquarters at the Watergate. It’s rarely the underlying offense that creates the biggest problem. It’s what people say and do in its aftermath.

I also assume that Clemens’s lawyers were counseling him to keep his mouth shut and his profile low at every stage of that evolving circus. But the record on that is ambiguous, at best.

Blago is right that the jury failed to reach a verdict on 23 of the 24 counts against him. Whether he sought to exchange a Senate seat for campaign contributions will be decided another day. But unless an appeallate court reverses, he’ll go to jail for lying when the government asked him about his practices.

With the former governor back on the road again — and on the way to The Daily Show, among others — I’ll bet Ed Genson has lost little sleep over his wise decision to cut his former client loose.

I suspect that Clemens’s lawyers don’t think they have that option.

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The Belly of the Beast

Steven J. Harper, Esq.

Category Archives: FROM TODAY’S HEADLINES

DEWEY’S DILEMMA

THE BIG LAW PARTNER LOTTERY

WORSE THAN CHEATERS

THE ULTIMATE LATERAL HIRE

EYE OF NEWT

OCCUPY BIG LAW

THE ARROGANCE OF OVERCONFIDENCE

DEBT, DECEPTION, AND THE ABA

INFLATED PPP?

IMPROVING PROSPECTS — BUT FOR WHOM?

KING & SPALDING’S REVERSAL OF FORTUNE

HOWREY’S LESSONS: A NATIONAL CONVERSATION

HOWREY’S LESSONS — PART II

HOURLY RATES: PLEASE DON’T READ

HOWREY’S LESSONS

LOCATION, LOCATION, LOCATION?

Are You Worth $5 Million?

ACCELERATING IN THE WRONG DIRECTION

WHO REMEMBERS FINLEY KUMBLE?

SOME DOCTORS THINK THEY’RE GOD; SOME LAWYERS THINK THEY’RE DOCTORS

ARE THE U.S. NEWS RANKINGS BIGLAW’S BLACK SWAN?

BLAGO, CLEMENS, AND LAWYERS

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