ANOTHER BIG LAW FIRM STUMBLES

King & Wood Mallesons was never really a law firm. For starters, it was a verein — a structure that allowed three distinct firms to create a branding opportunity — King & Wood in China, Mallesons in Australia, and SJ Berwin in the United Kingdom. As things turned out, when SJ Berwin came on board in 2013, the verein whole quickly became less than the sum of its parts.

As The American Lawyer’s Chris Johnson and Rose Walker put it in their recent article, a verein is “a holding structure that allows member firms to retain their existing form. The structure…enabled the three practices to combine quickly and keep their finances separate.”

But the structure also means that when one member of the verein hits hard times, the others can walk away. For KWM, “the Chinese and Australian partnerships have effectively been able to stand back and watch as the European practice burned.”

Not Just a Verein Problem

To be sure, the verein structure exacerbates SJ Berwin’s current difficulties. But before leaders of big non-verein firms become too self-satisfied, they might consider whether their own firms risk the same dangers now afflicting KWM.

As Johnson and Walker report, the firm’s compensation system produced bad behavior. KWM awarded client credit to the partner who physically signed the invoice. That effectively encouraged partners to refer work to rival firms, rather than other KWM partners.

Think about that last sentence for a minute.

“It was one of the things that killed the firm,” says one former London partner. “If I sent work to other [KWM] partners, it would be out of my numbers at the end of the year. It was better for me to send it to another firm, as I’d then still be the one invoicing the client, so I’d get the credit for everything.”

A Team of One, Not One Team

When it came to cross selling among offices and practice groups, management talked a good game. Indeed, the verein’s 2013 merger tag line was “The Power of Together.” But here, too, behavior followed internal financial incentives. The compensation committee focused on individual partner performance, not the “one team, one firm” sound bite on its “vision and values” website page.

“There was a complete disconnect between what management said we should do and what the remuneration committee would reward us for doing,” says a former partner.

Lessons Not Learned, Again

As KWM’s European arm disintegrates, most law firm leaders will probably draw the wrong conclusions about what went wrong. Emerging narratives include: SJ Berwin had been on shaky ground since the financial crisis hit in 2008; the firm lacked competent management; the principal idea behind the combination — creating a global platform — was sound; only a failure of execution produced the bad outcome.

For students of law firm failures, the list sounds familiar. It certainly echoes narratives that developed to explain the 2012 collapse of Dewey & LeBoeuf. But the plight of KWM — especially the SJ Berwin piece — is best understood as the natural consequence of a partnership that ceased to become a partnership. In that sense, it resembles Dewey & LeBoeuf, too.

The organizational structure through which attorneys practice law together matters. The verein form allows King & Wood and Mallesons to back away from Sj Berwin with limited fear of direct financial exposure. But as SJ Berwin careens toward disaster, fellow verein members will suffer, at a minimum, collateral damage to the KWM brand.

What’s the Future Worth?

The lesson for big law firm leaders seems obvious. Since the demise of Dewey, that lesson has also gone unheeded. A true partnership requires a compensation structure that rewards partner-like behavior — collegially, mentoring, expansion and transition of client relationships to fellow partners, and a consensus to pursue long-term strategies promoting institutional stability rather than maximizing short-term profit metrics.

Firms that encourage attorneys to build individual client silos from which partners eat what they kill risk devastating long-term costs. They’re starving firm of their very futures. Unfortunately, too many big law firm leaders share a common attitude: the long-term will be someone else’s problem.

In a line that stretches back to Finley Kumble and includes Dewey & LeBoeuf, Bingham McCutchen, and a host of others, the names change, but the story remains the same. So does a single word that serves both as those firms’ central operating theme and as their final epitaph: greed.

INDIANA TECH: ANOTHER COSTLY LESSON IGNORED

I’ll have more to say about the election, but not today. Instead, let’s take a closer look at a story that got lost in the shuffle of presidential politics. It deserves more attention than it received.

Back in 2013, when Indiana Tech opened the state’s fifth law school, I wrote that the decision was the latest example of pervasive legal market dysfunction. As the number of applicants declined, marginal schools increasingly were admitting students who wouldn’t be able to pass the bar, much less get decent jobs requiring a JD. Schools such as Indiana Tech were continuing to inflate the growing lawyer bubble, which was also the title of my 2013 book. (Proving that some things never change, it came out in paperback earlier this year.)

The central contributor to that bubble remains in place. Specifically, the federal student loan program absolves marginal law schools of accountability for their graduates’ poor employment outcomes, while encouraging administrators to fill classrooms with tuition-paying bodies. The results are predictable: lower admission standards, lower bar passage rates, and burgeoning law student debt for degrees of dubious value from marginal schools.

Victims of a Doomed Experiment

Indiana Tech’s inaugural class of first-year students began their studies in August 2013. Two years later, the school failed in its first attempt to get ABA accreditation. Further proving the ABA’s failure to address the continuing crisis in legal education, it granted Indiana Tech provisional accreditation earlier this year. The school graduated its first twelve students in 2016; only one passed the bar exam. Another passed on appeal, and a third passed the bar in another state.

On October 31, 2016, the school’s 71 students received an unwelcome Halloween surprise. The board of trustees announced its unanimous vote to close forever on June 30, 2017.

Indiana Tech President Arthur Snyder’s statement said, “[F]or the foreseeable future, the law school will not be able to attract students in sufficient numbers for the school to remain viable.”

Here’s the thing. President Snyder’s observation was equally true in 2011 — when the school completed its feasibility study and announced the decision to move forward. But rather than confront obvious facts about the demand for legal education that were apparent to everyone else, President Snyder insisted in 2013:

“We have given this decision careful research and consideration, and we believe we can develop a school that will attract and retain talented individuals who will contribute to our region’s economic development.”

Thanks to President Snyder and Indiana Tech’s board of trustees, those individuals — students and faculty — now face a tough and uncertain road.

Seeking Answers

What could have motivated such an obviously bad decision to open a new law school in the teeth of a lawyer glut? The answer is pretty simple. Snyder is a business guy. He has an MBA in strategic management from Wilmington University and a doctorate in education (innovation and leadership) from Wilmington University. Before joining the academic world, he spent more than 20 years in the telecommunications industry, rising to the position of vice president for the Data Systems Division of AT&T.

For someone focused on a bottom line approach to running higher education, adding a law school probably seemed like a no-brainer. In a 2011 interview for the National Law Journal, Snyder explained his strategy. Noting that about half of Indiana residents who attended ABA-approved law schools were doing so out of state, he said, “There are potential students who desire a law school education who cannot get that education in this area….”

Capturing that segment of the market was a strange premise upon which to build the case for a new law school. Which Indiana students admitted to established out-of-state schools did he expect to jump to an unaccredited newcomer?

The Real Play For Dollars

Like most law schools that should have closed their doors long ago, Indiana Tech’s business strategy sought to exploit market dysfunction. If the school could attract a sufficient number of aspiring attorneys to Fort Wayne, student loan dollars for tuition would take care of everything else, including a spiffy new building:

“The Indiana Tech Law School contains eight state-of-the-art classrooms, a courtroom, several learning and relaxation spaces for students including lounges and an outdoors patio, a three-story library, and everything else our students need to make their time here a successful and rewarding experience.”

Would graduates obtain decent full-time long-term jobs requiring the Indiana Tech JD degrees costing them close to $100,000? That would never become President Snyder’s problem.

The Opposite of Leadership

After the ABA denied Indiana Tech provisional accreditation in 2015, the handwriting was on the wall. But Snyder doubled down on a bad bet. The school tried to bolster admissions with a loss leader: a one-year tuition scholarship to students who enrolled in the fall of 2015. Anyone who took that deal is now twisting in the wind.

Indiana Tech reportedly lost $20 million. But its failed business strategy, followed by gimmicks that could never save it, produced dozens of real-life human victims whose damage is immeasurable. Those people don’t count in calculating Indiana Tech’s profit-and-loss statement. Except as conduits for federal student loan dollars, it’s fair to ask if they ever counted at all.

In his 2011 interview about the then-planned new law school, President Snyder suggested that Indiana Tech law school could be the first to offer a joint JD and master in science degree in leadership. He thought it would be an especially good fit because the university already has several programs in leadership.

Sometimes the most important learning in life comes from careful observation of negative role models. Speaking of negative role models, as I said at the beginning, I’ll have more to say about the election results in the days and weeks to come.

BIG LAW RESISTS THE ASSAULT ON DEMOCRACY

Call them unsung heroes.

When attorneys in big law firms get things right, they deserve more attention than they receive. Recently, some of them have won important victories in the profession’s noblest pursuit: protecting our republic. And they’re not getting paid anything to do it.

Start with North Carolina. On July 29, a unanimous court of appeals threw out that state’s voter ID law. In an 83-page opinion, the court wrote that the law had targeted African Americans “with almost surgical precision.”

Behind that monumental win was an enormous investment of money and manpower — all of it pro bonoDaniel Donovan led a team of lawyers from Kirkland & Ellis LLP through two trials over a four-week period. More than fifty witnesses testified. After losing in the trial court — which issued a 479-page opinion denying relief — the plaintiffs appealed. On July 29, they won. Think of it as Kirkland & Ellis’s multi-million dollar contribution to democracy.

On, Wisconsin!

The same day that the court of appeals threw out North Carolina’s unconstitutional voter ID law, a federal judge in Madison invalidated Wisconsin’s effort to disenfranchise African Americans and Latinos. Big law firm partner Bobbie Wilson at Perkins Coie LLP was at the center of that effort. A nine-day trial and more than 45 witnesses (including six experts) culminated in Judge James B. Peterson’s 119-page ruling in favor of the plaintiffs.

On August 22, the seventh circuit court of appeals denied the request of Governor Scott Walker’s administration to stay Judge Peterson’s ruling.

North Dakota

Three days later, Richard de Bodo of Morgan, Lewis & Bockius LLP won a challenge to North Dakota’s voter ID laws. The targets of that legislation were Native Americans.

Like similar statutes enacted throughout the country since 2010, voter ID laws in North Carolina, Wisconsin, and North Dakota were products of a Republican-controlled legislature and governorship. The real motivation behind such restrictions on a fundamental right is as ugly as it is obvious.

Fighting Against the Demographic Tide of History

In 2014, the Brennan Justice Center noted that North Carolina and Wisconsin were in select company: “Of the 11 states with the highest African-American turnout in 2008, 7 have new restrictions in place: Mississippi (73.1 percent), South Carolina (72.5), Wisconsin (70.5), Ohio (70.0), Georgia (68.1), North Carolina (68.1), and Virginia (68.1).”

Of the 12 states with the largest Hispanic population growth between 2000 and 2010, North Carolina was one of nine that made it harder to vote. The others were South Carolina, Alabama, Tennessee, Arkansas, North Carolina, Mississippi, South Dakota, Georgia, and Virginia.

Rigged Elections? Yes, But in Whose Favor?

Now that the Republican nominee for President of the United States is pushing a dangerous and destructive new theme, the battle to vote has now assumed a great significance.

“I’m afraid the election is going to be rigged,” Donald Trump warned at a rally in Columbus, Ohio on August 1, right after the North Carolina federal appeals court ruled.

That evening he told an interviewer: “I’m telling you, November 8, we’d better be careful, because that election is going to be rigged. And I hope the Republicans are watching closely, or it’s going to be taken away from us.”

Dedicated attorneys — especially those in big firms willing to donate enormous resources to the cause — have worked hard to protect the right of every eligible person to vote. If they hadn’t, then the North Carolina legislature might, indeed, have rigged the election in a key swing state that President Obama had won. But that’s not what Trump meant, was it?

No, he sees a different enemy.

“[P]eople are going to walk in, they are going to vote 10 times maybe. Who knows?” he said in an August 2 interview.

He now has a website page: “Help Me Stop Crooked Hillary From Rigging This Election.” Such whining is actually much more than that. It’s a campaign tactic uniting two sinister and pervasive themes: racial division and attacks on the rule of law.

Facts Don’t Matter

Trump began stoking fear and division with a promise to build a wall to keep out Mexicans, whom he called rapists and drug dealers. He then coupled it with a “deportation force” to “round ’em up,” sending 11 million illegal immigrants “back where they came from.”

Then he professed ignorance about David Duke. (“I don’t know anything about David Duke… I know nothing about white supremacists.”) Before long, he unleashed hostility toward “Mexican” Judge Gonzalo Curiel. After scaring people, it was a short step for him to becoming their self-professed “law-and-order” savior.

Now he is wrapping his message in a long-discredited canard. Defenders of unconstitutional voter ID laws persist in fomenting “election fraud” paranoia, even though it lacks any factual basis. Professor Justin Levitt at Loyola Law School, Los Angeles tracked all claims of alleged voter ID fraud and found a grand total of 31 credible allegations – out of more than one billion ballots cast.

In the North Dakota case, Judge Daniel L. Hovland wrote, “There is a total lack of any evidence to show voter fraud has ever been a problem in North Dakota.”

Likewise, in the Wisconsin case, the judge ruled. “The Wisconsin experience demonstrates that a preoccupation with mostly phantom election fraud leads to real incidents of disenfranchisement, which undermine rather than enhance confidence in elections, particularly in minority communities. To put it bluntly, Wisconsin’s strict version of voter ID law is a cure worse than the disease.”

And in the North Carolina case, a unanimous court of appeals concluded, “The record thus makes obvious that the ‘problem’ the majority in the General Assembly sought to remedy was emerging support for the minority party.”

Mob Mentality

The cry of phantom election fraud feeds Trump’s narratives, while taking them a perilous step farther: de-legitimizing an election that polls now show Trump is losing “hugely.” As his prospects sag, his vile rhetoric escalates.

Shortly after an August 10 poll showed Trump trailing in Pennsylvania by double digits, he went to that state and told an Altoona crowd, “Go down to certain areas and watch and study and make sure other people don’t come in and vote five times… The only way we can lose, in my opinion – I really mean this, Pennsylvania – is if cheating goes on… ”

Never mind that Pennsylvania hasn’t voted for a Republican Presidential nominee since 1988. Even an incumbent, George H.W. Bush, couldn’t carry it in 1992.

Trump then continued waving his red herring: “Without voter ID there’s no way you’re going to be able to check in properly.”

Scorched Earth

The real danger to democracy isn’t election rigging or cheating. It’s Donald J. Trump. De-legitimization – the ultimate ad hominem attack on a process to undermine its outcome – is a standard tactic from his deal-making playbook. When it appeared that he might not arrive at the Republican convention with enough delegates to secure the nomination, he warned about “riots,” if someone else won.

Never mind the rules; they’re for losers. Anyone fearing that Trump will win should fear more that he won’t.

Trump knows that facts don’t matter because – true or false – the branding sticks. For example, there was never any evidence to support Trump’s wild “birther” claims about President Obama in 2011. But five years later, 20 percent of Americans still believe — today — that he was born outside the United States.

Some people will always believe anything Trump says, even as he contradicts himself from one moment to the next. His infamous line was pretty accurate: “I could stand in the middle of Fifth Avenue and shoot somebody, and I wouldn’t lose any voters.”

Perhaps he is discovering that “any” was an overstatement. But his de-legitimization strategy worked against most Republican politicians, who folded like cheap suits rather than break from the man-baby who would be king. Now the stakes are higher. His targets are the rule of law, the essence of democracy, and the peaceful transfer of Presidential power that occurs every four years.

The Real Losers

The eventual victims of Trump’s scorched earth approach will be the American people. If, as with his false “birther” claims five years ago, 20 percent of voters – about half of his current supporters – believe that Trump’s defeat results from a “rigged” election that “cheaters” won, the collateral damage to the county will be profound.

Donald Trump lives in a simple binary world of winners and losers – and he’s all about winning at any cost. He measures success in dollars. His latest tactic makes democracy itself the loser. Try putting a price on that. And thank some big law firms and their attorneys who are willing to make the investment required to stand in his way.

THE ABA’S TERRIBLE, HORRIBLE, NO GOOD, VERY BAD DAY

It’s a mere formality. Every five years, the Department of Education renews the ABA’s power to accredit law schools. The June 2016 session before a DOE advisory committee (NACIQI) was supposed to be just another step in the rubber-stamping process. The NACIQI staff had recommended approval. The committee’s three-day session contemplated action on a dozen other accrediting bodies, ranging from the American Psychological Association to the American Theological Schools. Sandwiched between acupuncture and health education, the agenda contemplated an hour for the ABA.

What could go wrong?

For starters, committee members grilled the ABA’s representatives for an entire afternoon.

Questions About Law Student Debt?

First up for the ABA was the chair of the Section of Legal Education and Admissions to the Bar, Arizona Supreme Court Justice Rebecca White Berch. A committee member asked how the ABA assessed schools based on the interrelationship between student debt, bar passage rate, and graduate placement rates. Justice Berch said the ABA was looking “for a bar passing rate of 75 percent…. [W]as that part of your question?”

Actually, that was just a proposal set for an ABA Section hearing on August 6, but it wasn’t what the NACIQI had in mind.

NACIQI Member: “Sorry, no. I think my question also went to concern related to debt that students incurred while in law school and relationship of that to placement.”

ABA Managing Director Barry Currier tried to field that one:

“With respect to debt, we have been following a disclosure model for a number of years now and a lot of information is disclosed… [W]e collect information about student borrowing, but it is currently not part of the consumer information that schools are required to post with us… [T]here is no standard about how much debt is too much debt at this point in time.”

Let the squirming begin.

“So it may be,” Currier continued, “that as evidence mounts that students don’t shop very effectively and that as uncapped student loans are available, that we need to be more paternalistic, if you will, or more — we may need to make more information required and adopt standards around how much debt is too much debt.”

Placement Rates?

NACIQI: “What would be an appropriate placement rate for a law school?”

Currier: “Well our standards do not require any specific employment…[W]e don’t have a specific standard that a school must achieve in terms of placement.”

NACIQI: “But you are the ones who identified that legal education is very expensive… And if they can’t find a job it wrecks their lives.”

NACIQI: “[Y]ou can tell a lot from some of these low performing schools. And a school that sticks out to me is Whittier Law School in California… [T]he enrollment has dropped 51 percent since 2010, yet tuition has increased 31 percent since 2008.”

He wasn’t finished.

“Over 105 million dollars of Title IV funding has gone into this school. All the while, one in four graduates of this law school has obtained a full-time attorney job within nine months… Appalachian School of Law, University of LaVerne, Golden Gate, all have abysmal placement rates… [S]o I guess my question is specifically related to these low performing institutions: what are you guys doing?”

Then he answered his own question:

“[W]hen we look at these low performing schools, you guys are doing absolutely nothing.”

Can We Talk About Something Else?

Justice Berch’s attempt to change the subject was unavailing.

NACIQI: “We are talking about student debt, right, so — I guess you are not answering my question, and so I would like for us to stay on that… I just want to make sure we are talking about what is your responsibility and your response to these lower performing schools. I mean, have they been put on probation? That’s my first question.”

Justice Berch: You make a valid point. The answer is — has anyone yet been put on probation? No…”

NACIQI: “How many institutions have you denied accreditation to for low pass rates?

Justice Berch: For low pass rates alone, none.”

NACIQI: “Over the past five years how many institutions have you withdrawn your accreditation from?”

Currier: “Zero, zero.”

You Think The ABA Can’t Do The Job?

During the NACIQI’s discussion on the motion to recommend renewal of the ABA’s accreditation power, one member put the problem bluntly:

“I am troubled that the ABA just simply isn’t independent enough for this responsibility… I find it very difficult to think that they are going to be objective enough to continue to carry out this responsibility. And I reluctantly conclude that the ABA is not the appropriate accreditor for our law schools…[T]he crushing debt load on thousands and thousands of students is too serious for us… And I think the debt load is not going to get better if we say yes to this motion.”

Another member added: “I think that objectivity is important as you go through this process, so I would think an independent body that does not have the conflict of interest that the ABA has.”

It’s Worse Than They Thought

The NACIQI didn’t consider a recent illustration of the ABA’s independence problems. Former ABA President Dennis Archer is chairman of the national policy board of Infilaw — a consortium of three for-profit law schools. At those schools — Arizona Summit, Florida Coastal, and the Charlotte School of Law — students graduate with six-figure debt and dismal prospects for a meaningful job requiring bar passage. (Full-time long-term JD-required job placement rate ten months after 2015 graduation: Arizona Summit — 40 percent; Florida Coastal — 39 percent; Charlotte — 26 percent.)

On November 18, 2013, Archer and Infilaw’s chief executive officer co-signed a seven-page tour de force warning the DOE about the perils of applying the “Gainful Employment Rule” to “proprietary law schools and first professional degree schools in general.” The letter (on Infilaw stationery) argued, among other things, that the proposed rule was unnecessary because the ABA — as an accrediting body — ensures that InfiLaw “must offer an education that will help students achieve their goals.”

Six months later, Archer became chairman of the ABA’s Task Force on the Financing Legal Education. A year later — June 2015 — the Task Force acknowledged that 25 percent of law schools obtain at least 88 percent of their revenues from tuition. But it refused to recommend an obvious remedy: financial penalties for schools where students incur massive law school debt in exchange for dismal long-term JD-required job prospects.

The Task Force’s recommendations were embarrassingly inadequate, but the ABA House of Delegates accepted them.

One More Chance?

The ABA’s culture of self-interest and insularity has now created a bigger mess. Some NACIQI members favored the “nuclear” option: recommending denial of the ABA’s accrediting authority altogether. The committee opted to send a “clear message” through less draconian means.

The final recommendation was to give the ABA a 12-month period during which it would have no power to accredit new law schools. Thereafter, the ABA would report its progress in addressing the committee’s concerns, including the massive debt that students are incurring at law schools with poor JD-required placement rates.

As one member put it, “It is great to collect data, but they don’t have any standard on placement. What’s the point of collecting data if you can’t…use the data to help the students and protect the students…”

Another member summarized the committee’s view of the ABA: “This feels like an Agency that is out of step with a crisis in its profession, out of step with the changes in higher ed, and out of step with the plight of the students that are going through the law schools.”

The day of reckoning may not be at hand, but it’s getting closer.

THE LATEST BIG LAW FIRM STRATEGY: PERFECTING ERROR

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

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

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

Broken Promises

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

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

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

Useless Data

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

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

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

Becoming What You Eat

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

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

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

BIG LAW LEADERS PERPETUATING MISTAKES

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

The Report offered this damning observation:

“In our view, much of the growth that has characterized the legal market in recent years… masks a bigger problem — the continuing failure of most firms to focus on strategic issues that are more important for their long-term success than the number of lawyers or offices they may have.”

Since then, the situation has deteriorated.

The Destabilizing Lateral Hiring Frenzy Continues

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

The answers are No and No.

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

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

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

Cognitive Dissonance

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

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

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

“For all the popularity of growth through laterals, the success rate of a firm’s lateral strategy can be quite low. For the past few years, we have asked leaders of large firms to quantify the rate of success of the laterals they hired over the past five years. Each year, the proportion of laterals who they would describe as being above ‘break even’, by their own definition, has fallen. In 2014, the number was just 54 percent of laterals who had joined their firms during 2009-2013.” (Emphasis supplied)

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

Costly Mistakes

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

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

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

Why?

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

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

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

Unfortunately, those appetites can be insatiable.

BIG LAW’S SHORT-TERMISM PROBLEM

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

The Tip of the Graying Iceberg

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

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

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

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

See the Problem

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

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

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

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

Ignore the Problem

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

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

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

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

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

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

— Partner cooperation should trump partner competition.

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

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

Become the Problem

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

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

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

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

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

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

The Future Is Here

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

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

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