THE LATERAL BUBBLE

Most big law leaders say that they have to keep pushing equity partner profits higher to attract and retain rainmakers. They have repeated that mantra so often and for so long that the rest of the profession has accepted it as an article of faith.

Perhaps it’s true, but two items in the February issue of The American Lawyer prompt this heretical question:

What if the lateral hiring frenzy is creating a bubble?

Victor Li’s “This Time It’s Personal” describes the state of play: lateral hiring is way up. Law firm management consultants, including my friend Jerry Kowalski, predict more of the same for 2012 as firms counter revenue losses from departing partners to prevent the death spiral that can result. Such fear-driven behavior can easily lead to overpayment for so-called hot lateral prospects that turn out to be, well, not so hot.

As I’ve observed previously, the reasons for the lateral explosion have much to do with big law’s evolution. Its currently prevailing business model encourages partners to keep clients in individual silos away from fellow partners, lest they claim a share of billings that determine compensation. Paradoxically, such behavior also maximizes a partner’s lateral options and makes exit more likely. In other words, the institutional wounds are self-inflicted.

But the article quotes several firm leaders who emphasize that, while money was important in motivating some of the partners they acquired, the search for a global platform also mattered. Frank Burch, cochair of DLA Piper, acknowledges that enticing a lateral hire requires that the money offered be comparable. But he also says that his firm “did a lot of hiring from firms that reported higher profits per partner” than DLA Piper. The article cites four: Paul Hastings; Skadden, Arps, Slate, Meagher & Flom; White & Case; and Morgan, Lewis & Bockius.

Except “Crazy Like a Fox” by Edwin B. Reeser and Patrick J. McKenna (also in The American Lawyer February issue), makes the correct observation that a firm’s average PPP is not all that informative. The authors’ focus principally on the growing cohort of non-equity partners in a climate where clients are unwilling to pay for first- and second-year associates. But they make a telling point on a seemingly unrelated topic: the income gap within equity partnerships has exploded.

They note that a few years ago the equity partner pay spread was typically three-to-one; some places it’s now ten-to-one or even twelve-to-one:

“Over the last few years there has been a dramatic change in the balance of compensation, to a large degree undisclosed, in which increasing numbers of partners fall below the firm’s reported average profits per equity partner (PPP)…Typically, two-thirds of the equity partners earn less, and some earn only perhaps half, of the average PPP.”

(Trying to justify this trend, some firm leaders have offered silly explanations, such as geographical differences.)

Now apply this learning to Li’s article. A firm’s average PPP isn’t luring high-powered lawyers; the money at the top is. Perhaps the desire to provide clients with a better global platform plays a role in some laterals’ decisions, but most of the firms experiencing the highest number of lateral partner departures in 2011 are already worldwide players. In fact, four firms — DLA Piper, K&L Gates, Jones Day, and SNR Denton — are simultaneously on both the most departures and most hires list.

Consider an example. Last year when Jamie Wareham became big law’s highly public $5 million man, did leaving Paul Hastings for DLA Piper improve his ability to serve clients? Doubtful. But the bubble question is far more important to the firm: Has Wareham been worth it? Only he and his new partners know for sure.

That leads to a final heretical question: Where a lateral bubble develops, what happens when it bursts or, perhaps more pernicious, develops a slow profitability leak? Nothing good. For the answer, ask those who once worked at HowreyHeller Ehrman or one of the many other now-defunct firms whose leaders thought that acquiring high-profile laterals offered only upside.

THE ULTIMATE LATERAL HIRE

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.

FED TO DEATH

Most of today’s big law leaders think they’ll be able to avoid traps that have destroyed great firms of the recent past. Are they that much smarter than their predecessors? Or are they oblivious to the lessons of history?

My article, “Fed to Death,” in the December issue of The American Lawyer, suggests that most respondents to the magazine’s annual survey of Am Law 200 firm leaders have have forgotten what true leadership is. Consider it my seasonal gift to those who need it most — and want it least.

Happy Holidays and thanks for your continuing attention to my musings. I’m especially grateful to the thousands who have kept my novel, The Partnership, on Amazon’s Kindle e-book Legal Thrillers Best-Seller list for the past six months.

A NEW LAW SCHOOL MISSION – PART II

The second and final installment of “Great Expectations Meet Painful Realities” — my latest contribution to the debate about the legal profession’s growing crisis — is now available in the December 2011 issue of Circuit Rider, the official publication of the Seventh Circuit Bar Association. My article begins on page 26. For those who are interested, here’s the link to Part I.

OCCUPY BIG LAW

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.

BONUS TIME — AND ANOTHER UNFORTUNATE COMMENT AWARD

Above the Law’s David Lat wins my Unfortunate Comment Award with this assessment of Cravath, Swaine & Moore’s recent 2011 bonus announcement:

“My own take: these amounts — which are the same as the 2010 and 2009 bonus scales at CSM, except for the most-senior associates — are fair. The past three years — 2009, 2010, and 2011 — have been fine for Biglaw, but not amazing. To the extent that firms are treading water a bit, it’s reasonable for them to keep associate compensation at the same levels.”

“Treading water a bit”?

Let’s start with the suggestion that “the past three years have been fine for Biglaw, but not amazing.” According to The American Lawyer, Cravath’s 2008 average equity partner profits were $2.5 million — admittedly a sharp decline from 2007. But it’s still pretty good and, since then, equity partner profit trees have resumed their growth to the sky.

As the economy struggled, Cravath’s average partner profits increased to $2.7 million in 2009 and to $3.17 million in 2010, according to the Am Law 100 surveys. That’s not “treading water.” It’s returning to 2007 profit levels — the height of “amazing” boom years that most observers had declared gone forever. Watch for 2011 profits to be even higher.

It’s fair [and] reasonable to keep associate compensation at the same levels as 2009 and 2010″

If Lat’s comparative baseline is the American labor force generally, his view of fairness has superficial appeal. To most people, Cravath’s bonuses atop base salaries starting at $160,000 are impressive — ranging from $7,500 (first-year associates) to $37,500 (seventh-year associates). Couple those numbers with big firm partner complaints that law schools fail to train lawyers for tasks in the big law world and perhaps associates should consider themselves fortunate that they’re not being asked to rebate a portion of their pay for the privilege billing long hours.

(There are problems with current legal education in America, but the critique that graduates aren’t prepared for big law practice misses several key points, including: Eighty-five percent of lawyers will never have big firm jobs, the vast majority of those who do won’t keep them for more than a few years, and most of the remaining survivors will find their careers surprisingly unsatisfying. For more, take a look at “A New Law School Mission.”)

But I digress. For now, the question is fairness. In law firms, it’s a relative concept — a point that causes Lat’s analysis to miss the mark badly.

As Cravath’s 2010 average equity partner profits have been returning to their 2007 high-water mark, compare them to associate bonuses, which haven’t:

Associate bonus after first full year

2007: $35,000, special $10,000

2011: $7,500

Second-year

2007: $40,000, special $15,000

2011: $10,000

Third-year

2007: $45,000, special $20,000

2011: $15,000

Fourth-year

2007: $50,000, special $30,000

2011: $20,000

Fifth-year

2007: $55,000, special $40,000

2011: $25,000

Sixth-year

2007: $60,000, special $50,000

2011: $30,000

Seventh-year

2007: $60,000, special $50,000

2011: $37,500

Earlier this year, Sullivan & Cromwell offered spring associate bonuses for 2010 ranging from $2,500 (first-year) to $20,000 (seventh-year). Cravath and others then followed suit. Even if that happens again this year, recent classes will still be far worse off than their 2007-era predecessors.

Meanwhile, law school tuition has continued to rise, so the newest associates have the biggest educational loans to repay. In the current buyer’s market for young attorneys, that’s more good news for big firms. Their associates — whose average billables are back over 2,000 hours again — won’t be going anywhere. Unless, of course, the staggering attrition rates needed to sustain the leveraged big law pyramid push them out the door. Viewed as an integrated system, the prevailing model functions effectively to produce and exploit an oversupply of lawyers.

Most big firms will follow Cravath’s lead. But they can afford to do better — a lot better — and they should. As associate bonuses have stagnated, the overall average equity partner profits for the Am Law 100 have returned to pre-recession levels — reaching almost $1.4 million in 2010.

How much is enough? More, apparently. According to the latest survey of Am Law 200 firm leaders currently appearing in the The American Lawyer, managing partners expect the upward profits trend to continue. Keeping the lid on associate compensation is a key to that strategy. It hasn’t been a great ride for the non-lawyer support staff, either.

Now you know why my next post will be titled, “Occupy Big Law.” I’m not kidding.

THE ARROGANCE OF OVERCONFIDENCE

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.

COMMENDABLE COMMENT AWARD

Rare candor at the top deserves recognition.

The September issue of The American Lawyer honors the magazine’s 2011 Lifetime Achievers — an impressive group. The list is alphabetical, which made Richard Beattie first. Now 72, he has enjoyed a long and distinguished career since joining Simpson, Thacher & Bartlett in 1968. Complementing a wildly successful big firm transactional practice, he also served the public in many capacities, including general counsel to the former U.S. Department of Health, Education and Welfare under Secretary Joseph Califano, Jr. in the 1970s.

In 1991, Beattie was elected to Simpson Thacher’s executive committee. He became chairman in 2004. By any measure, he has certainly earned his latest accolade. Yet another — my “Commendable Comment Award” — results from his response to The American Lawyer‘s question about his biggest regret:

“I regret the number of vacations with my family I missed as a result of working on transactions.”

Succeeding in big law requires talent, hard work, sacrifice, and — dare I say it — luck. Only the most reflective of big law leaders credit fortuity to their rise and even fewer discuss the downside — the personal cost that they and their families bear.

Mr. Beattie’s candor comes with a bit of irony. The same issue of the magazine reports this year’s Midlevel Associate Satisfaction survey. Overall, Simpson Thacher is tied for 56th out of 126 firms in the survey. It’s 36th out of 85 Am Law 100 and Global 100 firms. And remember, overall associate satisfaction for the survey group dropped again this year to an all-time low; being in the middle of the pack is, at best, a mediocre finish.

Going behind the numbers, Simpson scores below average in “family friendliness” — 3.47 out of five (the national average is 3.62). The firm is also below average in its associates’ stated likelihood of staying two years (3.44 compared to 3.58 nationally).

One more notable statistic from this year’s 2011 Am Law 100 listing: Simpson Thacher’s 2010 partner profits increased by more than nine percent over 2009. Its average profits per equity partner were $2.64 million — eighth place.

Being a lawyer has always been demanding. That won’t change. There are times when a situation requires sacrifices that only a particular lawyer (and his or her family) can make in responding to a client’s genuine emergency. But when it comes to big firms, clients in such situations rarely require the services of any particular mid-level associate.

In fact, during thirty years of practice, I never heard a client say, “I need associate X to cancel his or her family vacation to meet with me.” The seasoned senior partner may seem indispensable. Even the best midlevel associate? Never.

Which takes me back to Beattie and his firm. He gets high marks for admitting that work impaired his family life, but as a member of Simpson Thacher’s executive committee for two decades and chairman for the past seven years, he’s also had a unique power to shape his firm’s culture. His accomplishments are worthy of The American Lawyer‘s Lifetime Achievement Award, but he and others who set the profession’s tone have a special obligation to foster working environments in which young lawyers avoid what Beattie now describes as his biggest regret. Indeed, if they can’t, who can?

No leader of any big firm can single-handedly reverse the last two decades of unfortunately myopic and often short-sighted trends. But all should consider adopting “The Misery Index” — an informational tool that free market disciples should embrace. Such a metric might influence institutional behavior for the better, even if only marginally. Those willing to try it could, perhaps, improve the profession in ways they never thought possible back when they were missing all of those family vacations. There’s still time to keep others from missing theirs.

Anyone receiving honors recognizing a lifetime of achievement could leave no better legacy than empowering young proteges to avoid regrets similar to their own. Of course, the problem isn’t unique to Beattie or Simpson Thacher. It’s wrapped into the larger question of defining long-term success — a question that every big law leader should ponder for his or her firm. Regrettably, few will. There’s no way to bill a client for the time.

INFLATED PPP?

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.

FAMILY FRIENDLY?

Lawyers know that definitions dictate outcomes. That’s why the Yale Law Women’s latest list of the “Top Ten Family Friendly Firms” includes some surprising names. At least, some surprised me.

It turns out that the YLW’s definition of family friendly is more restrictive than the plain meaning of the words. According to the survey methodology, it’s mostly a function of firms’ attention to particular issues relating primarily to women. There’s nothing wrong with that, but it shouldn’t be confused with what really undermines the family-friendliness of any big firm — its devotion to billable hours and billings as metrics that determine success. That problem isn’t gender-specific.

To compile the annual list, YLW surveyed the Vault Top 100 Law Firms. What would happen if they included all of the NLJ 250 or an even larger group that included small firms? I don’t know, but I’ll bet the list would look a lot different.

Now consider the survey categories and YLW commentary:

— Percentage of female attorneys: “Although YLW found that, on average, 45% of associates at responding law firms are women, women make up only 17% of equity partners and 18% of firm executive management committees. Additionally, on average, women made up just 27% of newly promoted partners in 2010.”

— Access to and use of parental leave: Virtually all firms have them. Big deal.

— Emergency and on-site child care: I understand the advantages, but how much family friendly credit should a firm get for providing a place where young lawyers can leave their babies and pre-schoolers while they work all day?

— Part-time and flex-time work policies: “98% offer a flex-time option, in which attorneys bill full-time hours while regularly working outside the office.” So what? I know senior partners without families who’ve done that for years.

— Usage of part-time and flex-time policies: “On average, 7% of attorneys at these firms were working part-time in 2010.” Will they become equity partners? “Of the 7% of attorneys working part-time, only 11% were partners, a number that may also include partners approaching retirement. Only 5% of the partners promoted in 2010 had worked part-time in the past, on average, and only 4% were working part-time when they were promoted.”

— Billable hours and compensation practices: “[I]t remains to be seen whether it is truly possible to work part-time at all. Our statistics indicate that while part-time attorneys appear to be fairly compensated, many may work more hours than originally planned. Most firms (93%) provide additional compensation if part-time attorneys work more than the planned number of hours or make part-time attorneys eligible for bonuses (96%). However, part-time attorneys received bonuses at higher rates than full-time attorneys (25% compared to 23% on average), suggesting that many part-time schedules may ultimately morph into full-time hours over the course of a year.”

— Alternative career programs: What’s that? Outplacement support?

All of this gets weighted according to another survey of Yale Law School alumni who ranked the relative importance of the surveyed policies and practices.

Continuing efforts to achieve greater big law transparency are laudable. But one problem with lists and rankings is that they take on a life of their own, wholly apart from methodological limitations and the caveats accompanying the results. (See, e.g., U.S. News rankings). Here, the YLW cautioned that it “remains concerned about the low rates of retention for women, the dearth of women in leadership positions, the gender gap in those who take advantage of family friendly policies, and the possibility that part-time work can derail an otherwise successful career.”

The honored firms will gloss over that warning, issue press releases, and delude themselves into believing that they are something they’re not. Someone truly interested in whether a place is family friendly should find out where it ranks on the “Misery Index.” Partners won’t tell you, but that metric would reveal a firm’s true commitment to the long-term health and welfare of its attorneys and their families.

If you really love someone, you should set them free — even if it’s only every other weekend.

A NEW LAW SCHOOL MISSION

What ails the profession and is there a cure?

If you haven’t already seen it, you might want to take a look at Part I of my article, “Great Expectations Meet Painful Realities,” in the Spring 2011 issue of Circuit Rider. My latest contribution to the debate on the profession’s growing crisis begins on page 24 of the Seventh Circuit Bar Association’s semi-annual publication.

Part II begins at page 26 of the December 2011 issue.

IMPROVING PROSPECTS — BUT FOR WHOM?

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.

BIG LAW INCIVILITY

Attorney incivility is nothing new. Noting that the problem dated to the nineteenth century, Chief Justice Warren Burger addressed it in 1971 remarks to the American Law Institute. He criticized the lawyer who equated zealous advocacy with “how loud he can shout or how close he can come to insulting all those he encounters.” (“The Necessity for Civility,” 52 FRD 211, 213 (1971))

Here’s a more recent example from a deposition, cited in Judge Marvin E. Aspen’s oft-quoted 1998 article on the erosion of civility:

Mr. V: Please don’t throw it at me.

Mr. A: Take it.

Mr. V: Don’t throw it at me.

Mr. A: Don’t be a child, [Mr. V]. You look like a slob the way you’re dressed, but you don’t have to act like a slob….

Mr. V: Stop yelling at me. Let’s get on with it.

Mr. A: You deny I have given you a copy of every document?

Mr. V: You just refused to give it to me.

Mr. A: Do you deny it?

Mr. V: Eventually you threw it at me.

Mr. A: Oh, [Mr. V], you’re about as childish as you can get. You look like a slob, you act like a slob.

Mr. V: Keep it up.

Mr. A: Your mind belongs in the gutter.

Evidence of incivility among adversaries is largely anecdotal; the best examples don’t lend themselves to statistical analysis. A recent Above the Law post led me to ponder this question: does the prevailing big law business model contribute to incivility?

Mark Herrmann, a former big law partner, writes “Inside Straight” from his relatively new vantage point as in-house counsel. “How to Be a Crappy Partner” isn’t about civility, but some of his readers’ comments led me to this observation: when lawyers inside a law firm treat each other poorly, no one should expect their behavior to improve for outside opponents.

Unpleasant personalities are everywhere. Big firm lawyers as a group may be no worse than those in other practice settings; jerks exist across the spectrum. Likewise, drawing conclusions from any potpourri of Above the Law comments is dangerous. Even so, the most coherent “Crappy Partner” reactions fall into the following categories, each of which has a counterpart in external incivility:

— Disrespect for People’s Time

“Give me 10 minutes as an associate in a world without Blackberrys–please.” Other examples: delaying assignments until they conflict with an associate’s long-planned (and widely known) vacation; imposing tight deadlines only to let the completed work sit undisturbed on the assigning partner’s desk for two weeks; Friday night forwarding of a client’s earlier request for answers by the following Monday with a message revealing that the partner sat on the client’s request for five days.

Incivility counterpart: Fighting over inconsequential scheduling matters; taking actions, such as so-called emergency motions, solely to disrupt opponents’ personal lives.

— Flagrant Misbehavior

“Believe it or not, I’m on your side.” Examples: partners who yell, scream, and act in ways that most parents wouldn’t tolerate from a two-year-old; verbal abuse; sexist comments; narcissism.

Incivility counterpart: Ad hominem attacks.

— Lack of Candor About the Big Law Model

“I’m smart; that’s why you hired me. I can do the math.” Examples: pretending that associates don’t notice as fewer than ten percent of earlier new hires advance to equity partner after years of 2,000+ billables; bragging about the firm’s tenth year of increasing partner profits while laying off associates and staff; giving lip-service to mentoring and professional development when short-term profits drive decisions based on metrics that exclude such considerations.

Incivility counterpart: Lawyers believing their own press releases–and acting the role.

Send the purveyors (and victims) of such hubris into the world and what do you expect? More than most occupations, lawyers learn from role models and mentors. The culture that undermines morale at many large firms isn’t self-limiting. The prevailing business model often rewards “crappy partner” behavior and rarely penalizes it. External incivility is one byproduct of that internal ethos.

Large firms aren’t solely to blame for incivility; far from it. But for good and ill, they exert vastly disproportionate influence over the profession. Among other failings, the prevailing big law business model isn’t helping the cause of civility. Tellingly, here’s one commenter’s sad advice on how to avoid becoming a crappy partner:

“Please say please and thank you.”

I wonder what their mothers would say.

HOWREY’S LESSONS — PART II

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.

HOWREY’S LESSONS

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?

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?

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.

GREED ATOP THE PYRAMIDS

Three recent reports are more interesting when read together: the National Law Journal‘s annual headcount survey at the largest 250 law firms, the Citi Law Firm Group’s third quarter report on law firm performance, and the Association of Corporate Counsel/The American Lawyer (ACC/TAL) Alternative Billing 2010 Survey.

The headline from the NLJ 250 item: a 1,400 drop in 2010 total attorney headcount. This qualified as a welcome improvement over the far deeper plunge in 2009. Associates took the biggest hit, accounting for about 1,000 of the eliminated positions.

That doesn’t sound too bad, until you realize that it’s a net reduction number. As 5,000 new law school graduates got large firm jobs, many more — over 6,000 — lost (or left) theirs. This simple arithmetic suggests an unsettling reality: The relatively few who land big law jobs may discover that keeping them is an even more daunting challenge.

In some respects, that’s nothing new. Long before the Great Recession began, attrition was a central feature of most large firm business models. In 2007, lucrative starting positions were plentiful, but big law’s five-year associate attrition rate was 80%. Some of it was voluntary; some involuntary. The survival rate for those continuing the journey to equity partner was exceedingly small.

That takes us to the Citi report. The only really good news now goes to top equity partners: For them, big law’s short-term profit-maximizing model remains alive and well. The formula remains simple: Firms are imposing increasingly strict limits on equity partnership entry and, according to Citi, charging clients higher hourly rates overall as some partners remain busy with tasks that less costly billers performed previously. (Equity partners have to keep their hours up, too.) Amid the bloodshed elsewhere, average equity partner profits for the Am Law 100 actually rose slightly in 2009 — to $1.26 million. Not bad for the first full year of the worst economic downturn in a century.

But even that remarkable average masks growing wealth gaps within equity partnerships. One law firm management consultant observed, “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.” That is stunning.

While maintaining leverage and increasing hourly rates, the third leg of the profits stool likewise remains intact: billable hours. As business picks up, firms are hiring fewer associates than in earlier recovery periods. Under the guise of transparency, some newbies are hearing that they have to meet monthly billable hours targets in addition to the annual requirements reported to NALP.

The ACC/TAL survey reveals why: Earlier rhetoric surrounding the new world of alternative fees was largely empty. Hourly billing remains king of the fee-generating hill. As another Am Law survey confirmed, simple discounts from regular hourly rates accounted for 80% of so-called alternative fee arrangements last year.

The pressure to bill hours is increasing. Unfortunately, it remains an important, albeit misnamed, productivity metric. Indeed, rewarding time alone is the antithesis of measuring true productivity, which should focus on the efficiency of completing tasks — not the total number of  hours used to get them done.

As one law firm management consultant told the NLJ, “We’re finally seeing the bottom of the legal recession…There’s been a reset. There are fewer lawyers producing more work and more revenue.”

When the Am Law 100 profit results come out in May, Citi’s prediction will come true: As the economy continues to sputter and young law school graduates worry about their prospects, overall average profits per equity partner will follow their steady upward trajectory.

Law firm management consultants might say all of this results from increased productivity that the “reset” of big law has produced. That’s one way to put it. But the the growing spread between highest and lowest within equity partnerships — coupled with the plight of everyone else — may reveal something more sinister: The worst economic downturn of modern times has provided protective cover to greed atop the pyramids.

CULTURE SHOCK

On December 30, K&L Gates Chairman Peter Kalis sent an email that recently reached the legal blogosphere. Bluntly, he reminded fellow partners to get their outstanding client bills paid before the firm’s fiscal year-end. Above the Law reproduced it [complete with typos purportedly from the original]:

“Let me be clear about a couple of things. First, partners and administrators at this law firm are expected to run through the tape at midnight on December 31. Many of you came from different cultures. I don’t care about your prior acculturation. We didn’t conscript you into service at this law firm. You came volunatrily [sic]. What we are you are as well.

“And that brings me to my second point. We are a US-based global law firm. US law firms operate on a cash basis of accounting. Our fees must be collected by midnight within the fiscal year in which they are due. You don’t get to opt out of this feasture [sic] because it doesn’t appeal to you. Again, I couldn’t care less whether it appeals to you. It is who we are and therefore it is who you are. Get us paid by tomrrow [sic].” (http://abovethelaw.com/2011/01/the-two-faces-of-kl-gates/)

The message demonstrates three things — from the predictably banal to the inadvertently profound.

First, although the tone is a bit harsh, the substantive content doesn’t surprise any big law partner. Most lawyers aren’t particularly good businessmen. Reminding them that aging invoices require follow-up isn’t evil or wrong; it’s necessary. No attorney enjoys nagging clients about an overdue receivable. Presumably, the December 30 message was just the final step in a sustained year-end drive asking partners to complete a task that they’d otherwise avoid (as I did).

Second, email is perilous. Speedy communication can be great, but it’s fraught with danger. In less than a minute, you can address, type, and send a message to an entire group (and eventually reach many more blog readers). If you don’t take the time to proofread for typos, much less reflect on how others might later analyze your statements, no one will stop you from hitting the send button. Once released, the words assume a life of their own and context disappears. Every trial lawyer who has sought to explain away a client’s unflattering email message understands the problem. Surprisingly, some of those same lawyers fail to apply the lesson to their own writings. Next time, Kalis will probably prepare a script and deliver his thoughts via voicemail.

The third point has nothing to do with substance — that is, chiding partners to get client bills paid. Rather, the message acknowledges an unintended consequence of the prevailing big law business model: It has produced unprecedented lateral partner mobility that, in turn, erodes distinctive firm cultures. Two sentences make the point:

“Many of you came from different cultures. I don’t care about your prior acculturation.”

Six months ago, I praised Kalis for encouraging prospective associates to put interviewing partners on the spot when he urged: “[Recruits] should ask searching questions. How practice has changed over the years and how you deal with the changing demands. And how hard it is to reconcile your life at work with the rest of your life…I don’t believe lawyers should bow to icons. I want them to look me in the eye and ask tough questions.”  (http://thecareerist.typepad.com/thecareerist/2010/06/kl-gates-likes-them-sassy.htmlhttps://thebellyofthebeast.wordpress.com/2010/07/09/summer-associates-take-note-inadvertent-revelations/)

Although they probably won’t pose them, recruits now have more tough questions for him and other big law attorneys: As partners lateral into equity partnerships, what does the culture of the receiving firms become? Does it coalesce around the common denominator of maximizing current-year profits? Or is there room for other, non-monetary values that have traditionally defined the profession? If it’s the latter, how does the firm encourage them?

The answers matter because Kalis’s email emphasizes (twice): “What we are you are as well.”

I don’t know about K&L Gates, but what passes for culture in too many big firms is his message’s final exhortation: “Get us paid by tomrrow [sic].”

NUMBERS TELL A STORY

When challenged to tell a story in as few words as possible, Ernest Hemingway replied with six: “For sale: Baby shoes — never worn.”

I’m not Hemingway, but in his spirit of brevity, I offer five phrases — totaling eight words — distilling a recent Wall Street Journal article, “Law Firms Hold Line In Setting Bonuses,” by Vanessa O’Connell and Nathan Koppel. It appeared on the Monday after Christmas, so you might have missed it.

***
HOURS UP: “Average hours billed by associates at the nation’s top 50 law firms by revenue rose by 7% in 2010.”
***
BONUSES FLAT: “At New York-based Milbank, Tweed, Hadley & McCoy LLP, where bonuses were only slightly above last year’s payouts, hours billed by associates were up about 6%.” [According to Above the Law, the firm’s 2010 bonuses ranged from $7,500 for first-year associates to $35,000 for those in the class of 2003. That’s a big drop from 2006, when first-year associates received “special year-end bonuses” of $30,000. Student-loan repayment requirements have not experienced a similar decline.]
***
MANAGERS RATIONALIZE: “‘The actual number of [billed] hours is still low compared to what it has historically been,’ [says Milbank’s Chairman Mel M. Immergut].”
***
PARTNERS WIN: “Revenue at Milbank Tweed will be up by about 3% on flat expenses, Mr. Immergut says, adding that profit per partner will be up by 8% to 10%, depending on year-end collections.” According to The American Lawyer, Milbank Tweed’s average profits per partner in 2009 were $2.230 million. How much is enough? The answer appears to be “More.”

LAW SCHOOL DECEPTION

Last Sunday, the NY Times asked: Are law schools deceiving prospective students into incurring huge debt for degrees that aren’t worth it?

Of course they are. The U.S. News is an aider and abettor. As the market for new lawyers shrinks, a key statistic in compiling the publication’s infamous rankings is “graduates known to be employed nine months after graduation.” Any job qualifies — from joining Cravath to waiting tables. According to the Times, the most recent average for all law schools is 93%. If gaming the system to produce that number doesn’t cause students to ignore the U.S. News’ rankings altogether, nothing will.

My friend, Indiana University’s Maurer School of Law Professor Bill Henderson, told the Times that looking at law schools’ self-reported employment numbers made him feel “dirty.” I assume he’s concerned that prospective students rely on that data in deciding whether and where to attend law school. I agree with him.

But an equally telling kick in the head is buried in the lengthy Times article: Most graduates who achieve their initial objectives — starting positions in big firms paying $160,000 salaries — quickly lose the feeling that they’re winners. Certainly, they must be better off than the individuals chronicled in the article. What could be worse than student debt equal to a home mortgage, albeit without the home?

Try a legal job with grueling hours, boring work, and little prospect of a long-term career. Times reporter David Segal summarized the cliche’: “Law school is a pie-eating contest where first prize is more pie.”

These distressing outcomes for students and associates aren’t inevitable. In fact, they’re relatively new phenomena with a common denominator: Business school-type metrics that make short-term pursuit of the bottom line sterile, objective, and laudable. Numbers prove who’s best and they don’t lie.

Law school administrators manipulate employment data because they have ceded their reasoned judgment to mindless ranking criteria. (“[M]illions of dollars [are] riding on students’ decisions about where to go to law school, and that creates real institutional pressures,” says one dean who believes that pandering to U.S. News rankings isn’t gaming the system; it’s making a school better.)

Likewise, today’s dominant large firm culture results from forces that produced the surge in average equity partner income for the Am Law 50 — from $300,000 in 1985 to $1.5 million in 2009. Leveraged pyramids might work for a few at the top; for everyone else — not so much.

The glut of law school applicants, as well as graduates seeking big firm jobs to repay their loans, leaves law school administrators and firm managers with no economic incentive to change their ways. The profession needs visionaries who are willing to resist perpetuating the world in which debt-laden graduates are becoming the 21st century equivalent of indentured servants.

Henderson calls for law school transparency in the form of quality employment statistics. I endorse his request and offer a parallel suggestion: Through their universities’ undergraduate prelaw programs, law schools should warn prospective students about the path ahead before their legal journeys begin.

Some students enter law school expecting to become Atticus Finch or the lead attorneys on Law & Order. Others pursue large firm equity partnerships as a way to riches. Few realize that career dissatisfaction plagues most of the so-called winners who land what they once thought were the big firm jobs of their dreams.

A legal degree can lead to many different careers. The urgency of loan repayment schedules creates a practical reality that pushes most students in big law’s direction. If past is prologue, the vast majority of them will not be happy there. They should know the truth — the whole truth — before they make their first law school tuition payments. Minimizing unwelcome surprises will create a more satisfied profession.

Meanwhile, can we all agree to ignore U.S. News rankings and rely on our own judgments instead of its stupid criteria? Likewise, can big law managers move away from their myopic focus on the current year’s equity partner profits as a definitive culture-determining metric? I didn’t think so.

THANKSGIVING

“Your articles are sometimes ‘edgy,'” my friend suggested wryly.

I took it as a compliment. He was referring to my more pointed critiques, especially of misguided metrics that often supplant reasoned thought. A frequent target has been big law’s resulting transformation over the past two decades: Most firms now maximize short-term equity partner profits at the expense of other values — collegiality, community, mentoring, career satisfaction, efficient lawyering, long-term institutional vitality, and even the profession’s unique identity.

But it wasn’t always so, and that’s why my large firm career figures prominently in the following list of things for which I am thankful:

— A spouse (the same one who put me through law school), children, and family who helped me maintain perspective. “The law is a jealous mistress” (Story, J.), but I’ve tried to practice what I’ve preached. When it was time for firmwide work-life presentations, I was the go-to partner. Those waiting for me at home were the reason.

— A rewarding career. I joined Kirkland & Ellis immediately after graduation because it promised litigation associates engaging colleagues, great training, challenging matters, and exciting courtroom experiences. I stayed for a long time because it delivered on all counts. When I was young, my ambition was to be the civil trial lawyer version of Perry Mason. Starting with a first-chair jury trial as a third-year associate, I got close enough to enjoy my work while making some lifelong friends. It was a much different time.

— A financial surprise. My job enabled my “second act” — writing books and these articles. All current large firm equity partners who graduated after 1970 should admit that their incomes have vastly exceeded their wildest law school dreams. Unfortunately, many are big law leaders who have decided that they’re entitled to such extraordinary wealth. To preserve it, they’ve used misguided metrics to create firm environments undermining attorney satisfaction and the profession’s core values. Younger lawyers have borne the brunt of the billable hours/leveraged pyramid culture, but they’re not alone. An ABA poll taken shortly before the 2008 economic collapse reported that 60% of attorneys practicing 10 years or more said they would urge a young person away from a legal career. Big firm lawyers are the unhappiest and the metrics-driven business model shoulders much of the blame.

— Readers who understand that criticism comes from caring. Interpersonally, it would have been easy for me to take my accumulated marbles from a lucrative career, buy a boat, and sail silently into the sunset. But that pesky person in the mirror would still be waiting every morning.

— Readers who confirm that I’m not alone. As a critic of large firms’ increasing use of simplistic metrics to displace important qualitative judgments about human value, I assumed that I was an outlier. The overwhelming feedback from intelligent, thoughtful, and varied readers — associates, academics, consultants, lay persons, and even big law partners — has convinced me that I’m writing what many of you think. Thanks for letting me know.

— Readers who understand my motives. I aim to improve the profession and assist those who are considering it as a career. An accomplished attorney famously observed, “Sunlight is the best disinfectant.” My tiny flashlight seeks to illuminate the path for those who might want to follow, but who haven’t yet paid the $150,000 entry fee. I’m not trying to dissuade anyone from becoming a lawyer, or even from pursuing a large law firm career. My goal is a happier profession; revealing truth that might help bridge the gap between expectations and reality can’t hurt.

Finally, I’m thankful for the courage of Aric Press and Dimitra Kessenides at The American Lawyer. In recent months, they’ve run 20 of my articles in Am Law Daily, even though my positions challenge many of their constituents’ attitudes and behavior. They’ve trusted me with their audience and amplified my voice.

If I’ve made some big law managers squirm and other people think, well, then I’m thankful for that, too.

“LIES, DAMN LIES, AND STATISTICS”

ALM editor-in-chief Aric Press penned a provocative article about Indiana Law Professor Bill Henderson’s for-profit venture on recruiting, retention, and promotion. (http://amlawdaily.typepad.com/amlawdaily/2010/11/pressconventionalwisdom.html) The WSJ law blog and ABA Journal covered it, too. (http://blogs.wsj.com/law/2010/11/15/on-law-firms-and-hiring-is-a-new-paradigm-on-the-way/) Henderson is analyzing why some attorneys succeed in Biglaw and others don’t.

Does anyone else find his project vaguely unsettling?

At first, I thought of the venerable computer programming maxim, “garbage in, garbage out.” That’s because he’s asking Am Law 200 partners to identify values and traits they want in their lawyers — and he’s assuming they’ll tell him the truth. But will they admit to seeking bright, ambitious associates wearing blinders in pursuit of elusive equity partnerships typically awarded to fewer than 10% of large firm entering classes? Or that such low “success” rates inhere in the predominant Biglaw business model that requires attrition and limits equity entrants to preserve staggering profits?

Then I considered Mark Twain’s reflections on the three kinds of falsehoods: “Lies, damn lies, and statistics.” It came to mind because Henderson’s researchers “pour over the resumes and evaluations of associates and partners trying to identify characteristics shared by those who have become ‘franchise players’ and those who haven’t.” Here’s what those resumes and evaluations won’t reveal: the internal politics driving decisions.

Most Biglaw equity partners are talented, but equally deserving candidates fail to advance for reasons unrelated to their abilities. Rather, as the business model incentivizes senior partners to hoard billings that justify personal economic positions, those at the top wield power that makes or breaks young careers — and everybody knows it. Doing a superior job is important, but working for the “right” people is outcome determinative. Merit sometimes loses out to idiosyncrasy that is impervious to Henderson’s data collection methods.

But perhaps the biggest problem with Henderson’s plan is it’s goal: identifying factors correlating with individual success. Does the magic formula include “a few years in the military, a few years in the job force, or a few years as a law review editor?”

If managers warm to Henderson’s conclusions (after paying his company to develop them), they’ll leap from correlation to causation, develop checklists of supposed characteristics common to superstars like themselves, and hire accordingly. Law schools pandering to the Biglaw sliver of the profession (it’s less than 15% of all attorneys) could take such criteria even more seriously. Before long, prospective students will incorporate the acquisition of “success” credentials into their life plans.

The difficulty is that today’s Biglaw partners already favor like-minded proteges. That inhibits diversity as typically measured — gender, race, ethnicity, sexual orientation, and the like — along with equally important diversity of views and a willingness to entertain them. Even today, concerned insiders are reluctant to voice dissent from Biglaw’s prevailing raison d’etre — maximizing short-term profits at the expense competing professional values and longer-term institutional vitality. Won’t meaningful diversity — of backgrounds, life experiences, and resulting attitudes about professional mission — suffer as groupthink makes firms even more insular? Meanwhile, trying to improve overall “success” rates is a futile goal; they won’t budge until the leveraged pyramid disappears.

I don’t fault Henderson, who bypassed Biglaw practice for academia after his 2001 graduation. But Press’s warning is important: “To some extent, it doesn’t matter what Henderson and Co. discover. What matters is that the inquiries have begun…If we’ve learned anything from the last decade, it’s that we can’t predict the consequences of new information beyond acknowledging its power to disrupt.”

Consider two unfortunate examples. The flawed methodology behind U.S. News’ law school rankings hasn’t deterred most students from blindly choosing the highest-rated one that accepts them. (Exorbitant tuition and limited job prospects may be changing that.) Likewise, Biglaw’s transformation from a collegial profession to a short-term bottom-line business accelerated after publication of average partner profits at the nation’s largest firms (then the Am Law 50), beginning in 1985; I just published a legal thriller describing that phenomenon. (http://www.amazon.com/Partnership-Novel-Steven-J-Harper/dp/0984369104)

The most important things that happened to me — in Biglaw and in life — were fortuitous. No statistical model could have predicted them. Still, I hope Henderson’s study answers an important question: Would his likely-to-succeed factors have led any firm to hire me?

THE END OF LEVERAGE? JUST KIDDING.

Since the beginning of the Great Recession, some observers have predicted the demise of the Biglaw leverage model. (http://www.law.com/jsp/article.jsp?id=1202428174244) Are they correct? After all, recent associate classes are dramatically smaller than in prior years. Unless equity partner ranks shrink proportionately, the argument goes, something has to give and that something will be the very business model itself. The days of using four or more associates to sustain a single equity partner must be numbered, right?

In fact, the model endures, but with structural innovations. What has been transient leverage — continuous non-equity attorney attrition coupled with annual replenishment from law schools — is giving way to something more permanent and, perhaps, more sinister for the future of the profession. Law firm management consultant Jerome Kowalski recently called it the “Associate Caste System.”  (http://www.law.com/jsp/article.jsp?id=1202472939044&PostRecession_Law_Firms_A_New_Caste_System_Emerges)

New hires earning $160,000 a year are the “showcase pieces,” but they are a much smaller group than they once were. Below them at the same firms is a vast underbelly of lawyers. Some are full-time but have taken themselves off partner tracks and make less than their nominal classmates. At the bottom are contract attorneys whose jobs won’t last beyond their current projects. They work per diem with no benefits. Kowalski describes them as comparable to “those guys who hang around in front of a Home Depot waiting for some contractor to show up with a truck.”

The rise of  legal outsourcing could add yet another attorney subclass contributor to Biglaw profits, provided firms can persuade clients to accept fees greater than what the people doing the outsourced work earn. That’s nothing new. For a long time, clients have regarded overpriced associates as a necessary cost incurred to retain a big-name attorney.

Does this add up to the demise of the lucrative leverage model that has kept average equity partner profits for the Am Law 100 well above $1 million annually for many years?

For all practical purposes, it means the opposite. Although big firms are hiring 30 or 35 new associates rather than the 100 or more of a few years ago, most of them will still be unpleasantly surprised when they don’t capture the equity partner brass ring after pursuing it for a decade or more. That component of the model remains intact. Meanwhile, the rest of the leverage action has moved to the growing ranks of underbelly people. For as long as they get paid less than their billing rates, they contribute to equity partner wealth.

In fact, many Biglaw managers prefer this new system. They save on recruiting (say, 35 instead of 150 new associates each year), summer programs, associate training, and other expenses associated with talent development. Meanwhile, the underclass of attorneys who know their places will resign themselves to their limited prospects: a source of permanent leverage.

This continues an ugly trend: Many big firms have been candidly closing long-term career windows for their youngest lawyers. For example, Morgan Lewis already had a non-partner track for those who opted onto it. But when the firm recently announced a return to lock-step associate compensation, it included this kicker: another permanent non-partner track for young lawyers who pursue partnership but don’t make it. (http://amlawdaily.typepad.com/amlawdaily/2010/11/morganlewispay.html)

Rather than up-or-out, it’s becoming stick around and make the equity partners some money. In earlier times, wise firm leaders either promoted such individuals to well-deserved equity partnerships or terminated them as counterproductive blockage that undermined morale and deprived more promising younger lawyers of developmental opportunities. Either way, positioning the next generation to inherit clients served long-term institutional interests. But that’s less important when equity partners jealously guard their clients to preserve personal economic positions and “long-term” doesn’t extend beyond current profits or the coming year’s equity partner compensation decisions.

Here’s my question: How will any aspect of this new world promote the profession’s unique and defining values or improve Biglaw’s dismal career satisfaction rates? Here’s an even better one: Does anyone care?

WHO REMEMBERS FINLEY KUMBLE?

“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?

KEEP FEEDING PROFITS THE BEAST. WHAT COULD GO WRONG?

Most Biglaw equity partners are weathering the persistent economic storm quite well. But who’s paying the price?

As the economy cratered in 2009, average equity partner profits for the Am Law 100 actually edged up slightly — to $1.26 million. As the summer of 2010 ended, law firm management consultant Hildebrandt Baker Robbins reported that profits remained healthy in a stagnant market.  (http://www.hbrconsulting.com/PMIQ2-2010) (Its Peer Monitor Economic Index (PMI) purports to capture the “drivers of law firm profitability, including rates, demand, productivity and expenses.” How’s that for a nifty, all-inclusive metric?)

Recently, Citi released six-month data for 2010 showing increases in average equity partner profits compared to 2009, notwithstanding flat revenue and reduced demand. (http://amlawdaily.typepad.com/amlawdaily/2010/09/citimidyear.html)

How are the equity partners doing it? Look at the PMI components: revenue, expenses, and productivity.

1.  During the first half of 2010, billing rates trended  up  by 4%. According to Citi, that increase could reflect senior partners with higher billing rates doing work that younger lawyers once performed. Such hoarding is the way some partners respond to lean economic times. No one escapes the pressure to maintain hours.

2.  Reduced expenses is a nice way of saying that attorneys and staff lost their jobs. Black Thursday in mid-February 2009 was bad enough; Biglaw laid off thousands of associates that week. But Hildebrandt noted that headcount reductions actually peaked months later — in the fourth quarter of 2009. This “relentless focus on cost cutting has managed to sustain profitability.”

The chairman of Citi’s Law Firm Group added, “Given these results, we see the first six months of 2010 as lackluster from a volume perspective but made palatable due to belt-tightening.” Whose belts?

3.  Increased productivity is MBA-speak for squeezing more billable hours from attorneys. Hildebrandt expressed concern that the quarter’s 1.7% productivity increase marked a slowdown compared to the 2.3% gains of the two prior quarters. The prime directive remains: Get those hours up.

Now what?

Hilbedrandt’s report: “We may be reaching an inflection point where major fundamental changes in legal service delivery are needed to prosper in the years ahead. New approaches to firm structures, client management, pricing strategies and talent development need to be closely examined. The challenge to firms will be in their willingness to innovate, experiment and change longstanding firm traditions in order to find new avenues of growth and profitability.”

What does that mean? Last week, Hildebrandt’s Lisa Smith offered a five-year scenario in which increased efficiency, outsourcing, and use of staff attorneys could combine to reduce the number of current non-partner attorneys in the Am Law 200 from 65,000 to 47,500 — a 27% drop. (http://www.hbrconsulting.com/blog/archive/2010/09/23/chipping-away-at-the-traditional-model.aspx ) It’s unclear if her assumed efficiency gains included expected law firm consolidations, but mergers of any businesses usually eliminate jobs.

Meanwhile, non-economic metrics — the ones that the predominant Biglaw business model ignores — add another dimension. Associate satisfaction continues to plummet. If someone asked, many partners would express discontent as well. Particularly unhappy would be those feeling vulnerable to the metrics that make decisions automatic in too many big firms: billings, billable hours, and leverage ratios.

Think equity partners are safe? Think again. As Citi’s Law Firm Group chairman noted, “Most firms reduced equity partner headcount in the first half of 2010, so it’s clear that this is a focal point. We believe it will continue to be a priority throughout 2010.”

All of this brings to mind Martin Niemoller’s famous remark about Nazi Germany during the 1930s: “First they came for the Socialists, and I did not speak out because I was not a Socialist…” His litany continued through trade unionists and Jews before concluding,

“When they came for me, no one was left to speak for me.”

Here’s where the analogy fails: More than 85% of attorneys practice outside Biglaw. That’s a lot of survivors.

SOLVING THE BIGLAW MYSTERY OF GROWING CAREER DISSATISFACTION

Clues that explain the growing ranks of dissatisfied Biglaw attorneys are everywhere — even on C-Span. I’d intended to watch the recently televised replay of a judicial conference panel discussion for a few minutes, but the ongoing train wreck captivated this onlooker for an hour. I wonder if I can get CLE credit?

Participants included a Biglaw managing partner, the general counsel of Fortune 100 company, and a professor at a top law school. The absence of a law firm management consultant was surprising; they’re ubiquitous.

There’s no reason to name the Biglaw partner or his firm because his views are mainstream — and reveal why attorney career dissatisfaction continues to increase more rapidly in large firms than elsewhere. Here’s a synopsis of his comments:

1.  Law schools should turn out project managers. That’s what he and his clients really need because front line opportunities — such as trials for litigators — are disappearing.

2.  In their first days at his firm, new associates learn about its finances: “They realize that our 35% profit margins are fragile. They understand the importance of billing their time. They know more about the firm’s finances than I did as a first-year partner.” He didn’t mention Am Law‘s most recent report that his firm’s average equity partner profits exceeded $1 million. Everyone avoided that elephant in the room.

3.  When asked whether associates today felt greater work-related pressures, he was adamant: “No. People today are nostalgic for a time that never existed. As an associate, I worked hundreds of hours a week reviewing documents. Today’s associates don’t work any harder, just differently. They leave the office, have dinner with their families, help put the kids to bed, and then work from their home computers. So they actually have it better than I did.”

The client representative on the panel followed with a line that generated the day’s biggest laugh: “I’m wondering how you billed hundreds of hours a week when there are only 168 hours in a week. But then I realized that you were talking about the bill you sent the client!”

No one asked the Biglaw partner an obvious and unsettling question: His firm’s NALP directory reports an associate minimum requirement of 2,000 billable hours yearly. What was the requirement in the early 1970s, when he was an associate? (Answer: There wasn’t one. There also weren’t cellphones or BlackBerrys that tether today’s attorneys to their jobs — 24/7.)

The law professor responded that law schools can’t train project managers because they’re not business schools. Besides, the law requires something different from such vocational-type training. He could have added that fewer that 15% of all attorneys comprise the NLJ 250, thereby prompting the obvious follow-up: Why should law schools tailor curriculum to satisfy such a small segment of the profession anyway?

“With highly paid starting positions in big firms disappearing,” he concluded, “what am I supposed to tell incoming students they’ll be getting for the $150,000 required to obtain a law degree?” No one suggested the truth, however he saw it.

The general counsel disagreed with the Biglaw partner on a key point: “I don’t hire lawyers to be project managers. I want their best judgments and special skills.” The Biglaw partner replied that perhaps the GC didn’t really know what he wanted or needed.

The audience submitted written questions; the best came from a judge: “I didn’t go to law school to become rich. Why is everything so focused on the money? Is professionalism gone and, if so, how do we recover it?”

When such panels include attorneys willing to speak truth to power, we’ll hear honest answers to those inquiries. But who wants that?

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

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.

BIGLAW’S GLASS IS 44% FULL

Give credit where it’s due: Not all big firms are bad, and even those many might consider the most problematic aren’t problems for everybody in them. After all, the ABA’s most recent survey reported that 44% of lawyers in big firms (defined as having more than 100 lawyers — which means it’s not limited to Biglaw) were satisfied with their careers. Sure, that’s a failing grade in every course I’ve ever taken or taught, but it’s a base upon which to build. So what accounts for such attorneys and what can be done to increase their ranks?

Some are satisfied because they thrive in the predominant Biglaw business model. The myopic focus on metrics — billings, billable hours, and associate/partner leverage to maximize short-term equity partner profits — doesn’t seem misguided to them. Rather, it feels natural, maybe even necessary. When I was in law school, most of these personality types were in business schools. Now they’re everywhere.

Another group works at firms that have resisted adopting this MBA mentality; the beneficial results permeate their cultures. I spoke recently with a friend who’s the chairman of a big firm that hasn’t wrapped itself in the false security of numbers. Instead of metrics, he still requires senior partners to render subjective judgments about attorney quality in determining compensation and promotion. Of course, objective data matter, but they’re not dispositive.

That’s how most firms once operated. They’re reluctant to admit it now, but just about everybody running a big firm today owed early success to someone else. Typically, it was a mentor who recognized untapped potential and was willing to spend time and effort developing it. Rather than self-contained books of business, young attorneys had supporters whose principal aim was to identify and nurture first-rate minds that would eventually produce first-rate lawyering. Whatever wealth followed was a by-product of talent that attracted clients, not the exclusive goal of a short-term profits equation.

My friend’s firm doesn’t lead the Am Law 100 in any rankings, but it has done reasonably well in associate satisfaction surveys and equity partners are averaging over $1 million yearly. If polled, he and many in his firm would be among Biglaw’s satisfied attorneys. They serve interesting clients on challenging matters.

That takes me to a third point. Even firms adhering slavishly to the misguided metrics model have something valuable to offer their lawyers besides money. When I started at my former firm over 30 years ago, partners recruiting me warned that some tasks would be boring, even menial, but others would be exhilarating. Biglaw clients typically have problems at the law’s cutting edge. It was true then; it’s true now — although the balance has tipped more toward boring and menial, especially for younger attorneys.

Still, this begins to resolve an apparent paradox: The ABA survey reporting high levels of dissatisfaction — with big firms faring the worst — also found that seven out of ten attorneys generally regarded their jobs as intellectually challenging.

So whether a lawyer is at a firm like the one my friend leads, in a different environment where the MBA mentality of misguided metrics rules, or somewhere in between, a viable path to career satisfaction remains possible throughout Biglaw. In the end, it’s is no different from other aspects of life: We are products of decisions that define who and what we are.

That’s leads to a final observation. Sooner than it realizes (or prefers), the current generation of large firm managers will find itself replaced with a younger group of leaders who will impose their own vision. How will the ascendants respond to the choices that will define them, their institutions, and the 15% of the bar comprising the NLJ 250 that exerts a disproportionate influence over the profession?

My friend put the issue squarely:

“I’ve been able to resist the dominant trend toward what you correctly call misguided metrics. The challenge is whether those of us sharing that view will be able to pass that ethic along to the next generation. I don’t know the answer to that question. But you agree, don’t you, that it’s a great profession?”

Yes, I do.

He’s still the best — and smartest — lawyer I know.

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

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.