Tag Archives: 2014 Client Advisory

DANGEROUS ADVICE FOR LAW FIRM LEADERS

Posted on by
1

During the past 25 years, law firm management consulting has grown from cottage industry to big business. In a recent Am Law Daily article, “What Critics of Lateral Hiring Get Wrong,” Brad Hildebrandt, one of its pioneers, provides a comforting message to his constituents:

“Large law firms are weathering the storm of the past five years and continue to transform their businesses to operate with efficiency and agility amid a new set of client expectations.”

Hildebrandt v. Altman Weil

Hildebrandt correctly notes that painting all large firms with a single brush is a mistake. But his general description of most firms today is at odds with the results of Altman Weil’s recent survey, “2014: Law Firms in Transition.” The summary of responses from 803 law firm leaders (including 42 percent of the nation’s largest 350 firms) offers these highlights:

— “The Survey shows clear consensus among law firm leaders on the changing nature of the legal market…. [But] law firms are proceeding without an apparent sense of urgency.”

— “Less than half of the law firms surveyed are responding to the pressures of the current market by significantly changing elements of their traditional business model.”

— “Most firms are not making current investments in a future they acknowledge will be different – and different in seemingly predictable ways.”

— “Only 5.3 percent of firms are routinely looking farther than five years out in their planning.”

Altman Weil’s conclusions comport with its October 2013 Chief Legal Officer Survey. When clients rated outside law firms’ seriousness about changing legal service delivery models to provide greater value, the median score was three out of ten — for the fifth straight year.

Hildebrandt v. Georgetown/Thomson Reuters Peer Monitor and Henderson

So what are most big firms doing? Growth through aggressive lateral hiring. Hildebrandt responds to “academics, journalists, former practicing attorneys, and countless legal bloggers” who question that strategy. Count me among them.

Acquiring a well-vetted lateral partner to fill a specific strategic need is wise. But trouble arises when laterals become little more than portable books of business whose principal purpose is to enhance an acquiring firm’s top line revenues.

“Growth for growth’s sake is not a viable strategy in today’s market,” the 2014 Georgetown/Thomson Reuters Peer Monitor Report on the State of the Legal Market observes. Nevertheless, the report notes, most firms are pursuing exactly that approach: “[Growth] masks a bigger problem — the continuing failure of most firms to focus on strategic issues that are more important….”

Professor William Henderson has done extensive empirical work on this subject. “Is Reliance on Lateral Hiring Destabilizing Law Firms?” concludes: “[T]he data is telling us that for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits.”

Hildebrandt v. Citi/Hildebrandt

Big law partners acknowledge the truth behind Henderson’s data. According to the 2014 Citi/Hildebrandt Client Advisory, only 57 percent of law firm leaders describe their lateral recruits during 2008-2012 as successful, down from 60 percent last year. If those responsible for their firms’ aggressive lateral hiring strategies acknowledge an almost 50 percent failure rate, imagine how much worse the reality must be. Nevertheless, the lateral hiring frenzy continues, often to the detriment of institutional morale and firm culture.

With respect to culture and morale, Hildebrandt rejects the claim that lateral partner hiring crowds out homegrown associate talent. But the 2013 Citi/Hildebrandt Client Advisory suggests that it does: Comparing “the percentages of new equity partners attributable to lateral hires vs. internal promotions in 2007…with percentages in 2011 reveals a marked shift in favor of laterals” — a 21 percent decrease in associate promotions versus a 10 percent increase in lateral partner additions.

Nevertheless, Hildebrandt offers this assessment:

“In the six years prior to the recession, many firms admitted far too many partners—some into equity partnership, many into income partnership. A driving factor in the number of partners in the lateral marketplace is that firms are coming to grips with the mistakes of the past. Lax admissions standards have been a far greater issue than mistakes made on laterals.”

When I read that passage, it seemed familiar. In fact, Chapter 5 of my latest book, The Lawyer Bubble – A Profession in Crisis, opens with this quotation:

“The real problem of the 1980s was the lax admission standards of associates of all firms to partnerships. The way to fix that now is to make it harder to become a partner. The associate track is longer and more difficult.”

Those were Brad Hildebrandt’s words in September 1996. (“The NLJ 250 Annual Survey of the Nation’s Largest Law Firms: A Special Supplement — More Lawyers Than Ever In 250 Largest Firms,” National Law Journal)

“Fool Me Once, Shame On You…”

Evidently, most firms followed Hildebrandt’s advice in the 1990s because the overall leverage ratio in big law firms has doubled since then. His recent suggestion that “lax admission standards” caused firms to make “far too many” equity partners during the six years prior to the Great Recession of 2008-2009 is particularly puzzling. In the May 2008 issue of American Lawyer, Aric Press noted that during the “Law Firm Golden Age” from 2003 to 2007, “Partners reaped the benefits of hard work — and of pulling up the ladder behind them. Stoking these gains has been a dramatic slowdown in the naming of new equity partners.”

Meanwhile, the swelling ranks of income partners reflect a different strategy: using the non-equity partner tier as a profit center. The strategy is misguided, but pursuing it has been intentional, not a “mistake.” (Take a look at the American Lawyer article, “Crazy Like a Fox,” by Edwin Reeser and Patrick McKenna.)

Even so, Hildebrandt’s words reassure firms that are recruiting laterals for all the wrong reasons and/or tightening the equity partner admission screws. Tough love might better serve the profession.

BIG LAW LEADERS “GET IT”? SERIOUSLY?

Posted on by
2

biglaw-450

This article won the “Big Law Pick of the Week.” BigLaw‘s weekly newsletter reaches the world’s largest law firms and the corporate counsel who hire them.

The concluding lines of this year’s Client Advisory from Hildebrandt/Citi are defensive, if not petulant:

“Unlike the commentary of many observers of the legal profession suggesting that today’s senior management do not ‘get it,’ we believe the large law firms today have every capability to adjust to the changing market….”

That nifty non sequitur is also a rhetorical sleight of hand. Having “every capability to adjust” is not the same as actually adjusting. The suggestion that today’s senior law firm leaders “get it” implies that they are responding in healthy and productive ways to a period of dramatic change.

Well, most of them aren’t. Instead, they’re maximizing current income at great expense to the future of their institutions. But don’t take my word for it; take theirs.

Facts get in the way

Consider the dominant big firm strategy: lateral hiring and mergers to achieve top line revenue growth. In Citi’s 2012 Law Firm Leaders Survey, senior leaders self-reported that only 60 percent of their laterals were above “break even.” For 2013, the rate dropped to 57 percent. As for mergers, anyone who thinks bigger is always better should look at the decline in operating margins that has followed most recent big firm combinations. That phenomenon is called diseconomies of scale.

Moreover, even the self-reported “success rate” is inflated. It takes years to determine the true financial impact of a lateral hire, so most managing partners touting those efforts actually have no idea whether their recent acquisitions will benefit their firms’ bottom lines. In fact, if leaders already admit to mediocre results for the laterals they personally sponsored, imagine how much worse the reality must be.

Beyond the numbers

Notwithstanding previous failures on a massive scale, managing partners are still pursuing growth for the sake of growth. Unfortunately, it can be a loser in ways that go far beyond mere financial losses. The negative impact on a firm’s culture, morale, and long-term institutional stability can be devastating.

For example, the 2013 Hildebrandt/Citi Client Advisory reported that between 2007 and 2011, law firms increased the number of lateral partners by 10 percent. Meanwhile, homegrown promotions to partner during the period dropped by 21 percent. That trend is undermining already low associate morale.

The lateral hiring frenzy has demoralized partners, too. A loss of community afflicts partnerships of people who don’t know each other. That’s one reason that forty percent of respondents to Altman Weil’s May 2013 survey of firm leaders said their partners’ morale was lower than it was at the beginning of 2008.

Another reason for diminished partner morale is the way lateral hiring has contributed to higher internal equity partner compensation spreads. Bidding to attract so-called rainmakers has pushed the high end of the range up. So have existing partners who threaten to test the lateral market. In that zero sum game of dividing the partnership pie, the bottom end of the range has moved down. (For an example, take a look at James B. Stewart’s New York Times profile of a former Dewey & LeBoeuf partner who reportedly earned $350,000 while his “protector” earned $8 million.)

More collateral damage ignored

Accompanying the lateral hiring frenzy and short-term metrics that drive the prevailing big firm business model are destructive client silos. More than 70 percent of law firm leaders responding to the Altman Weil survey said that older partners were hanging on too long. In the process, they’re hoarding clients, billings, and opportunities in ways that block the transition of firm business to younger lawyers.

But leadership’s response to this problem is perverse: 80 percent of managing partners admit that they plan to continue tightening equity partner admission standards.

The ongoing failure of leadership also reveals itself in managing partners’ overall agendas. When asked to prioritize goals for their firms, they placed “client value” number eight — behind (1) increasing revenue, (2), generating new business, (3) growth, (4) profitability, (5) management change, (6) cost management, and (7) attracting talent.

Closer to the mark

In contrast to the Hildebrandt/Citi 2014 Client Advisory, the Georgetown Law Center/Peer Monitor 2014 Report on the State of the Legal Profession concludes that most law firm leaders don’t “get it” at all:

“[G]rowth for growth’s sake is not a viable strategy in today’s legal market…Strategy should drive growth and not the other way around. In our view, much of the growth that has characterized the legal market in recent years fails to conform to this simple rule and frankly masks a bigger problem – the continuing failure of most firms to focus on strategic issues that are more important for their long-term success than the number of lawyers or offices they have.”

The report explains that, in an effort to justify the counterproductive urge to grow, “law firm leaders feel constrained to articulate some kind of strategic vision…and the message that we need to ‘build a bigger boat’ is more politically palatable than a message that we need to fundamentally change the way we do our work.”

Similarly, the author of the 2013 Altman Weil survey, Thomas Clay, says that too many firms are “almost operating like Corporate America…managing the firm quarter-to-quarter by earnings per share.” That shortsighted approach is “not taking the long view about things like truly changing the way you do things to improve client value and things of that nature.”

Even clients recognize that most outside law firms aren’t adapting to new realities. An October 2013 Altman Weil Survey asked chief legal officers to evaluate the seriousness of their outside law firms in changing the legal service delivery model to provide greater value. On a scale from zero (not at all serious) to ten (doing everything they can), “for the fifth year, the median was a dismal ‘3.’”

Perhaps the authors of the Hilebrandt/Citi 2014 Client Advisory actually believe that most of their big law managing partner constituents “get it.” No one else does.