TREATING SYMPTOMS; IGNORING THE DISEASE

Posted on June 1, 2017 by thebellyofthebeast

On May 22, 2017, The Wall Street Journal ran an article about the legal profession’s enduring problem: psychological distress. For decades, attorneys have led most occupations in the incidence of serious psychological afflictions — depression, substance abuse, even suicide. Now some law firms are “tackling a taboo,” namely, the mental health problems of their lawyers.

Some observers theorize that a special “lawyer personality” is the culprit. In other words, we have only ourselves to blame, so no one should feel sorry for us. Then again, no one ever feels sorry for lawyers anyway. But attorney psychological distress has become a sufficient problem that, as the Journal reports, some big law firms are now “offering on-site psychologists, training staff to spot problems, and incorporating mental health support alongside other wellness initiatives.”

Stated differently, law firms are following the unfortunate path that has become a dominant approach in the medical profession: treating symptoms rather than the disease. Perhaps that’s because law firm leaders know that curing it would cut into their personal annual incomes.

The Facts

Other workers have serious psychological challenges, too. But attorneys seem to suffer in disproportionately high numbers. The Journal article cites a 2016 study of US lawyers finding that 20.6 percent of those surveyed were heavy drinkers (compared to 15.4 percent for members of the American College of Surgeons). Likewise, 28 percent experienced symptoms of depression (compared with eight percent or less for the general population). According to a 2012 CDC study cited in the Journal, attorneys have the 11th-highest suicide rate.

Now add one more data point. According to an ABA survey in 2007, lawyers in big firms are the least satisfied with their jobs. Anyone familiar with the prevailing big firm environment knows that it has deteriorated dramatically since 1985.

The New World

What has changed? For starters, just getting a job at a big law firm is more difficult. Corporate clients have found cost-effective alternatives to young attorneys billing $300 an hour to review documents. At many firms, demand remains soft.

But the real psychological problems begin after a new associate enters the door. For most of them, promotion to equity partner has become a pipe dream. In 1985, 36 percent of all lawyers in The American Lawyer’s first survey of the nation’s fifty largest firms were equity partners. In 2016, the comparable number was under 22 percent. More than 40 percent of all AmLaw 100 partners are now non-equity partners. The leverage ratio of equity partners to all attorneys has doubled. Stated another way, it’s twice as difficult to become an equity partner today as it was in 1985. That’s what’s been happening at the financial pinnacle of the profession.

The Business Model

There is nothing inevitable about the underlying business model that produces these outcomes. It’s a choice. In 1985, average profits per partner for the Am Law 50 was $300,000 — or about $700,000 in 2017 dollars. Today’s it’s $1.7 million. And the gap within most equity partnerships reflects their eat-what-you-kill culture. Instead of 3-to-1 in 1985, the ratio of highest-to-lowest partner compensation within equity partnerships often exceeds 10-to-1. As the rich have become richer, annual equity partner earnings of many millions of dollars has become commonplace.

At what cost? The future. As law firm leaders rely upon short-term metrics — billings, billable hours, and leverage ratios — they’re pulling up the ladder on the next generation. Too many associates; too few equity slots. Let the contest begin!

But rather than revisit the wisdom of the model, some big firm leaders have made what the Journal characterizes as a daring move: bring in a psychologist. It’s better than nothing, but it’s a far cry from dealing with the core problem that starts with the billable hour, moves through metrics that managers use to maximize short-run partner profits, and ends in predictable psychological distress — even for the so-called winners. The Journal notes that a psychologist at one firm was offering this sad advice to its attorneys: Take a cellphone reprieve by turning off all electronic devices between 2:00 am and 6:00 am.

But even such input from mental health professionals seems anathema to some firm leaders. According to the Journal, Dentons’ chairman Joseph Andrew says that his fear of offering an on-site psychologist was that “competitors will say we have crazy lawyers.”

Former Acting Attorney General Sally Yates recently told the New Yorker about her father, an attorney who suffered from depression and committed suicide. “Tragically,” Yates said, “the fear of stigma then associated with depression prevented him from getting the treatment he needed.”

For some firm leaders, “then” is still “now.” And that’s truly crazy.

MORE ON MY NY TIMES OP-ED

Posted on September 18, 2015 by thebellyofthebeast

Professor Milan Markovic (Texas A&M) and Dean Jeremy Paul (Northeastern) responded to my recent post analyzing their letters to the New York Times about my Times op-ed.

On September 17, The American Lawyer published Dean Paul’s response (and my reply) here: http://www.americanlawyer.com/home/id=1202737553089/Is-Legal-Education-in-Crisis-A-Dean-Responds?mcode=1202617075486&curindex=0

On September 10, the Tax Prof Blog summary of my earlier post prompted Professor Markovic’s response (and my reply), here: http://taxprof.typepad.com/taxprof_blog/2015/09/more-on-the-ny-times-op-ed-too-many-law-students-too-few-legal-jobs.html

The Tax Prof Blog entry also included a comment from someone identifying himself as Gary Lucas. A person with that name also teaches at Texas A&M. I replied to that one, too.

At this point, I’m content to invoke the legal principle of res ipsa loquitur (“the thing speaks for itself”) and let readers decide this one.

ANOTHER COLOSSAL LATERAL MISTAKE

Posted on May 5, 2015 by thebellyofthebeast

Lateral hires are risky. Even managing partners responding to the Hildebrandt/Citi 2015 Client Advisory’s confidential survey admitted that only about half of their lateral partners are break-even at best — and the respondents had unrestrained discretion to decide what qualified as “break-even.” As Ed Newberry, co-global managing partner of Squire Patton Boggs told Forbes, “[L]ateral acquisitions, which many firms are aggressively pursuing now … is a very dangerous strategy because laterals are extremely expensive and have a very low success rate….”

Beyond the financial perils, wise firm leaders understand that some lateral partners can have an even greater destructive impact on a firm’s culture. In late 2014, former American Lawyer editor-in-chief Aric Press interviewed Latham’s outgoing chairman Bob Dell, who was retiring after a remarkably successful 20-year run at the top of his firm. Dell explained that he walked away from prospective lateral partners who were not a good cultural fit because they stumbled over Latham’s way of doing things.

Press wrote: “Culture, in Dell’s view, is not a code word for soft or emotional skills. ‘We think we have a high-performance culture,’ he says. ‘We work at that. That’s not soft.'”

Under the Radar and Under the Rug

Most lateral hiring mistakes attract little public attention. Firm leaders have no reason to highlight their errors in judgment. Fellow partners are reluctant to tell their emperors any unpleasant truth. If, as the adage goes, doctors bury their mistakes and lawyers settle theirs, then managing partners pretend that their mistakes never happened and then challenge anyone to prove them wrong. The resulting silence within most partnerships is deafening.

Every once in a while, a lateral hire becomes such a spectacular failure that even the press takes note. When that happens, the leaders of the affected law firm have nowhere to hide. Which takes us to James Woolery, about whom I first wrote five years ago.

Without mentioning Woolery specifically, I discussed a May 28, 2010 Wall Street Journal article naming him was one of several Cravath, Swaine & Moore partners in their late-30s and early-40s taking “a more pro-active approach, building new relationships and handling much of the work that historically would have been taken on by partners in their 50s.”

“We’re more aggressive than we used to be,” 41-year-old Cravath partner James Woolery told the Journal. “This is not your grandfather’s Cravath.”

A Serial Lateral

Six months later, it wasn’t Woolery’s Cravath, either. He’d already left to co-head J.P. Morgan Chase’s North American mergers and acquisitions group.

In 2013, only two years after accepting the Chase job, Woolery moved again. With much fanfare, he negotiated a three-year deal guaranteeing him at least eight million dollars annually to join Cadwalader, Wickersham & Taft. How was the cultural fit? The firm’s chairman, Chris White, described him as “the epitome of the Cadwalader lawyer” who deserved the lucrative pay package that made him the firm’s highest paid partner. A new title created especially for Woolery — deputy chairman — also made clear that he was White’s heir apparent.

To no one’s surprise, in 2014 Cadwalader announced that Woolery would take over as chairman in early 2015. As he prepared to assume the reins of leadership, the firm took a dramatic slide. The current issue of The American Lawyer reports that Cadwalader posted the worst 2014 financial results of any New York firm. Woolery’s guarantee deal looked pretty good as his firm’s average partner profits dropped by more than 15 percent. The firm’s profit margin — 26 percent — placed it 87th among Am Law 100 firms.

On January 19, 2015, the firm’s managing partner, Patrick Quinn, convened a conference call with all Cadwalader partners to convey a stunning one-two punch: Woolery would not become chairman, and he was leaving the firm to start a hedge fund. Woolery was not on the call to explain himself.

Unpleasant Press

No law firm wants this kind of attention. No client wants its outside firm to project uncertainty and instability at the top. No one inside the firm wants to hear about someone who has now been “thrust into the role of designated chairman of the firm,” as The American Lawyer described Patrick Quinn.

Woolery is gone, and so is Chris White, the former Cadwalader chairman who sold fellow partners on Woolery and his stunning guaranteed compensation package. White, age 63, left the firm in November to become co-CEO of Phoenix House, the nation’s largest non-profit addiction rehabilitation center.

Meanwhile, newly designated Cadwalader chairman Quinn says that the firm has no plans to change its strategy, including its reliance on lateral partner hiring. Maybe Chris White can use his new job to help Quinn and other managing partners shake their addiction to laterals. Apparently, first-hand experience with failure isn’t enough.

THINKING BEYOND THE AM LAW 100 RANKINGS

Posted on April 22, 2015 by thebellyofthebeast

It’s Am Law 100 time. Every year as May 1 approaches, all eyes turn to Big Law’s definitive rankings — The American Lawyer equivalent of the Sports Illustrated swimsuit issue. But behind those numbers, what do law firm leaders think about their institutions and fellow partners?

The 2015 Citibank/Hildebrandt Client Advisory contains some interesting answers to that question. Media summaries of those annual survey results tend to focus on macro trends and numbers. Will demand for legal services increase in the coming months? Are billable hours up? Will equity partner profits continue to rise? Will clients accept hourly rate increases? Or will client discounts reduce realizations?

Those are important topics, but some of the survey’s best nuggets deserve more attention than they get. So as big law firm partners everywhere pore over the annual Am Law 100 numbers, here are five buried treasures from this year’s Citibank/Hildebrandt Client Advisory that will get lost in the obsession over Am Law’s short-term growth and profits metrics. They may reveal more about the state of Big Law than any ranking system can.

Chickens Come Home To Roost

1. “While excess capacity remains an issue, we are hearing from a good number of firms that mid-level associates are in short supply.”

My comment: After 2009, most firms reduced dramatically summer programs and new associate hiring to preserve short-term equity partner profits. That was a shortsighted failure to invest in the future, and it’s still pervasive. See #4 and #5 below.

The Growth Trap

2. “Many [law firm mergers] have tended to be mergers of strong firms with weaker firms, or mergers of firms that are pursuing growth for growth’s sake. On this latter trend, it is our view that these mergers are generally ill-conceived. In our experience, combining separate firm revenues does not necessarily translate into better profit results and long-term success.”

My comment: Regardless of who says it (or how often), many managing partners just don’t believe it.

The Lateral Hiring Ruse

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

My comment: Think about that one. The survey allows managing partners to use their own personal, subjective, and undisclosed definition of “success.” Even with that unrestricted discretion to make themselves look good, firm leaders still admit that almost half of their lateral hiring decisions over the past five years have been failures — and that they’re track record has been getting worse! That’s stunning.

Pulling Up The Ladder

4. “We are now seeing [permanent non-partner track associates and other lower cost lawyers] appear among some of the most elite firms. When we ask these firms whether they are concerned that expanding their lawyer base beyond partner-track associates will hurt their brand, their response is simply that this is what their clients, and the market in general demands.”

My comment: At best such managing partner responses are disingenuous; at worst they are lies. Clients aren’t demanding non-partner track attorneys; they’re demanding more value from their outside lawyers. Thoughtful clients understand the importance of motivating the next generation’s best and brightest lawyers with meaningful long-term career opportunities.

Permanent dead-end tracks undermine that objective. So does the continuing trend in many firms to increase overall attorney headcount while keeping the total number of equity partners flat or declining. But rather than accept responsibility for the underlying greed that continues to propel equity partner profits higher, law firm leaders try to blame clients and “the market.” For the truth, they should consult a mirror.

The Real Problem

5. “Leaders of successful firms also talk about getting their partners to adopt a more long-term, ‘investment’ mindset. In an industry where the profits are typically paid out in a short time to partners, rather than being retained for longer term investment, this can be a challenge.”

My comment: Thinking beyond current year profits is the challenge facing the leadership of every big firm. Succeeding at that mission is also the key assumption underlying the Client Advisory’s optimistic conclusion:

“It is clear to us that law firms have the capacity and the talent to adapt to the needs of their clients, and meet the challenges of the future — contrary to those who continually forecast their death.”

I’m not among those forecasting the death of all big firms. In fact, I don’t know anyone who is. That would be silly. But as in 2013 and 2014, some large firms will fail or disappear into “survival mergers.” As that happens, everyone will see that having what the Client Advisory describes as “the capacity and talent to adapt” to the profession’s dramatic transformation is not the same as actually adapting. The difference will separate the winners from the losers.

A MYTH THAT MOTIVATES MERGERS

Posted on October 8, 2014 by thebellyofthebeast

In a recent interview with The American Lawyer, the chairman of Edwards Wildman, Alan Levin, explained the process that led his firm to combine with Locke Lord. It began with a commissioned study that separated potential merger partners into “tier 1” and “tier 2” firms. The goal was to get bigger.

“Size matters,” he said, “and to be successful today, you really have to be in that Am Law 50.”

When lawyers deal with clients and courts, they focus on evidence. Somehow, that tendency often disappears when they’re evaluating the strategic direction of their own institutions.

Bigger Is…?

There’s no empirical support for the proposition that economies of scale accompany the growth of a law firm. Back in 2003, Altman Weil concluded that 30 years of survey research proved it: “Larger firms almost always spend more per lawyer on staffing, occupancy, equipment, promotion, malpractice and other non-personnel insurance coverages, office supplies and other expenses than do smaller firms.” As firms get bigger, the Altman Weil report continued, maintaining the infrastructure to support continued growth becomes more expensive.

Since 2003, law firms have utilized even more costly ways to grow: multi-year compensation guarantees to overpaid lateral partners. Recently, Ed Newberry, chairman of Patton Boggs, told Forbes, “[L]ateral acquisitions, which many firms are aggressively pursuing now…is a very dangerous strategy because laterals are extremely expensive and have a very low success rate — by some studies lower than 50 percent across firms.”

The Magic of the Am Law 50?

Does success require a place in the Am Law 50? If size is the only measuring stick, then the tautology holds. Big = successful = big. But if something else counts, such as profitability or stability, then the answer is no.

The varied financial performance of firms within the Am Law 50 disproves the “bigger is always better” hypothesis. The profit margins of those firms range from a high of 62 percent (Gibson Dunn) to a low of 14 percent (Squire Sanders — which is in the process of merging with Patton Boggs).

Wachtell has the highest profit margin in the Am Law 100 (64 percent), and it’s not even in the Am Law 50. But that firm’s equity partners aren’t complaining about its 2013 average profits per partner: $4.7 million — good enough for first place on the PPP list. Among the 50 largest firms in gross revenues, 17 have profit margins placing them in the bottom half of the Am Law 100.

Buzzwords Without Meaning

A cottage industry of law firm management consultants has developed special language to reinforce a mindless “size matters” mentality. According to The Legal Intelligencer, Kent Zimmermann of the Zeughauser Group said recently that Morgan Lewis’s contemplated merger with Bingham McCutchen “may be part of a growing crop of law firms that feel they need to be ‘materially larger’ in order to increase brand awareness, [which is] viewed by many of these firms as what it takes to get on the short list for big matters.”

Not so fast. In the Am Law rankings, Morgan Lewis is already 12th in gross revenues and 24th in profit margin (44 percent). It doesn’t need to “increase brand awareness.” That concept might help sell toothpaste; it doesn’t describe the way corporate clients actually select their outside lawyers.

In a recent article, Casey Sullivan and David Ingram at Reuters suggest that Bingham’s twelve-year effort to increase “brand awareness” through an aggressive program of mergers contributed mightily to its current plight. The authors observe that In the early 1990s “[c]onsultants were warning leaders of mid-sized firms that their partnerships would have to merge or die, and [Bingham’s chairman] proved to be a pioneer of the strategy.”

Consultants have given big firms plenty of other bad advice, but that’s a topic for another day. Suffice it to say that Bingham’s subsequent mergers got it into the Am Law 50. However, that didn’t protect the firm from double-digit declines in 2013 revenue and profits, or from a plethora of partner departures in 2014.

In his Legal Intelligencer interview, Kent Zimmermann of Zeughauser also said that he has “seen firms with new leadership in place look to undertake a transformative endeavor like this [Morgan Lewis-Bingham] merger would be.” If Zimmermann’s overall observation about firms with new leadership is true, such leaders should be asking themselves: transform to what? Acting on empty buzzwords risks a “transformative endeavor” to institutional instability.

Soundbites

In contrast to Alan Levin’s “size matters” sound bite, here’s another. A year ago, IBM’s general counsel, Robert Weber, told the Wall Street Journal, “I’m pretty skeptical about the value these big mergers give to clients…I don’t know why it’s better to use a bigger firm.”

Weber should know because he spent 30 years at Jones Day before joining IBM. But is anyone listening? IBM’s long-time outside counsel Cravath, Swaine & Moore probably is. Based on size and gross revenues, Cravath doesn’t qualify for the Am Law 50, but its clients and partners don’t care.

Uncertain Outcomes

Does becoming a legal behemoth add client value? Does it increase institutional nimbleness in a changing environment? Does it enhance morale, collegiality, and long-run firm stability? Do profit margins improve or worsen? Why are many big firm corporate clients — H-P, eBay, Abbott Labs, ConocoPhilllips, Time Warner, DuPont, and Procter & Gamble, among a long list — moving in the opposite direction, namely, toward disaggregation that increases flexibility?

Wearing their “size alone matters” blinders, some firm leaders aren’t even asking those questions. If they don’t, fellow partners should. After all, their skin is in this game, too.

A STORIED LATERAL HIRE

Posted on February 5, 2014 by thebellyofthebeast

“Are Laterals Killing Your Firm?” is the provocative title of The American Lawyer‘s February issue. The centerpiece is a thoughtful article, “Of Partners and Peacocks,” by Bill Henderson, professor at Indiana University Maurer School of Law and Director of the Center on the Global Legal Profession, and Christopher Zorn, professor of political science, sociology, crime, law, and justice at Penn State University.

Henderson and Zorn conclude that “for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits.” As I observed in last week’s post, most big law managing partners have conceded as much in anonymous surveys. Even so, the drumbeat of lateral hiring to achieve top line revenue growth persists, even in the face of dubious bottom line results.

A timely topic

One lateral hire outcome became particularly fascinating this week. On the way out of the top spot at DLA Piper is global co-chair Tony Angel. You might remember him from one of my earlier articles, “The Ultimate Lateral Hire.”

The American Lawyer 2012 Lateral Report identified Angel as one of the top lateral hires of the year — “a typically bold and iconoclastic play by DLA. For a firm to bring in a former managing partner from another firm is rare,” Am Law Daily reporter Chris Johnson wrote in March 2012. According to the article, the 59-year-old Angel was to receive $3 million a year for a three-year term.

With great fanfare, DLA touted its coup. “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,” boasted then co-chair Frank Burch.

At the time, DLA’s press release was equally effusive: “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.”

Predictably, law firm management consultants also praised the move: “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,” said Peter Zeughauser. Legal headhunter Jack Zaremski called it a “brave move” that “might very well pay off.”

On second thought…

The current publicity surrounding Angel’s transition is decidedly more subdued. According to a recent Am Law article, Angel and his fellow outgoing global co-chair, Lee Miller, “will remain with the firm in a senior advisory capacity, the details of which will be worked out later this year.”

Two years, plus another 10 months as a lame duck, is a remarkably short period to occupy the top spot of any big firm. Only those who work at DLA Piper can say whether Angel’s brief reign was a success (and why it’s over so soon). Not all of them are likely to provide the same answer.

Separating winners from losers

In 2008, more than three years before Angel’s arrival, the firm’s non-equity partners found themselves on the receiving end of requests for capital contributions. According to Legal Week, “275 partners contributed up to $150,000 each to join the equity.” The move was “intended to motivate partners by granting them a direct share of the firm’s profits, as well as an equal vote in the firm’s decisions.” But it also helped “DLA reduce its bank debt.”

That equitization trend continued during Angel’s tenure. In 2012, the firm’s non-U.S. business reportedly added capital totaling 30 million pounds Sterling “as a result of the move to an all-equity partnership structure.” Again according to Legal Week, the firm’s non-equity partners in the UK, Europe, and Asia Pacific paid on average 61,000 pounds Sterling each to join the equity.”

Perhaps most new equity partners discovered that their mandatory bets became winners. After all, gross profits and average profits for the DLA Piper verein went up in 2012. Then again, averages don’t mean much when the distribution is skewed. According to a Wall Street Journal article three years ago, the internal top-to-bottom spread within DLA Piper was already nine-to-one.

Anyone looking beyond short-term dollars and willing to consider things that matter in the long run could consult associate satisfaction rankings for cultural clues. In the 2013 Am Law Survey of Midlevel Associate Satisfaction, DLA Piper dropped from #53 to #77 (out of 134 firms). That’s still above the firm’s #99 ranking in 2011.

The more things change

Management changes are always about the future. It’s not clear how, if at all, incoming co-chair Roger Meltzer’s vision for DLA Piper diverges from Angel’s. Age differences certainly don’t explain the transition; both men are around 60. Likewise, both have business orientations. Meltzer practices corporate and securities law; Angel joined DLA Piper after serving as executive managing director of Standard & Poor’s in London.

Maybe it’s irrelevant, but Meltzer and Angel also have this in common: Both are high-powered lateral hires. Angel parachuted in from Standard & Poor’s in 2011; Meltzer left Cahill, Gordon & Reindel to join DLA Piper in 2007. It makes you wonder where these guys and DLA Piper will be a few years from now.

Failure of Leadership

Posted on December 4, 2013 by thebellyofthebeast

The American Lawyer’s annual leaders survey reveals that most law firm managing partners are living in denial. When the changing world intrudes in ways that they can no longer ignore, another psychological state — cognitive dissonance — sets in as they try simultaneously to hold contradictory ideas in their heads. As a consequence, what is happening today at the top of most big firms is the antithesis of leadership.

Denial

In the Am Law leaders survey, 70 percent of respondents said that the sluggish demand for legal services in 2013 would continue through 2014. That’s not surprising. In 2012, only a fourth quarter surge saved many firms from the abyss. The unusual circumstances producing that phenomenon aren’t present this year.

If 2014 will be more of the same as firms compete for business in a zero-sum game, how do individual managing partners size up their situations? Unrealistically. Two-thirds of the 105 leaders responding to the survey of Am Law 200 firms were “somewhat optimistic” about the prospects for their firms in 2014. Another ten percent were “very optimistic.”

More than 80 percent expect profits per partner to grow in 2014 — and one-fourth of those expect growth to exceed five percent. They’ll use the same old model — 98 percent expect billable hour increases, even though three-fourths of respondents said their realization rates for 2013 are 90% or worse. They also said that only 18 percent of their matters include an alternative fee arrangement.

Cognitive dissonance

They can’t all be right about 2014 — for which an overwhelming majority say that “things will be tough for almost everyone else, but my firm will thrive.” More importantly, most of them won’t be right. So what are today’s leaders doing to prepare their firms for more of the harsh reality that they’ve already experienced for the past several years? Not much.

A staggering 85 percent of managing partners said they were somewhat worried (61 percent) or very worried (24 percent) about partners who are not billing enough hours. Almost 70 percent are concerned that some partners are staying on too long before retirement.

An Altman Weil Survey found similar results last summer. Seventy percent of law firm leaders said that older partners were hanging on too long. In the process, they are hoarding clients, billings, and opportunities in ways that impede the transition of firm business to younger lawyers. Yet the drive to maximize short-term profits led 80 percent of firm leaders to admit that they planned to respond to current pressures by tightening equity partner admission standards. Pulling up the ladder on the next generation is not the way to motivate the young talent needed to solve the transition problem.

Morale

All of this may be working well for some partners at the top of what remains a leveraged pyramid business model. But even among the partners, all is not well. The Altman Weil Survey reported that 40 percent of law firm leaders thought partner morale was lower than it had been in 2008. In other words, deequitizations and partnership purges during the Great Recession haven’t produced greater happiness in the survivor cohort.

The Am Law Survey confirms that this downward trend continues. In 2012, 63 percent of managing partners characterized the morale of their partners as “somewhat optimistic.” In 2013, it dropped to 56 percent — near the 2009 nadir of 54 percent.

Leadership lemmings

Every survey reveals that most big firm leaders have their eyes on a single mission: growth. Whether through aggressive lateral hiring or mergers and acquisitions, some managing partners are cobbling together entities that aren’t really law firm partnerships. They’ve forgotten that a sense of community and common purpose is essential to maintaining organizational morale. They’ve also forgotten that no law firm is better than the quality of its people.

Most leaders also acknowledge that a myopic growth strategy imposes significant financial and other costs on their institutions — overpaying for so-called rainmakers who are less than advertised; sacrificing the stability that comes from a cohesive culture in exchange for current top line revenues; incentivizing partners to hoard clients because billings determine compensation and client silos facilitate lateral exits; discouraging the development of talent that should comprise the future of the firm.

As managing partners build empires that they hope will be too big to fail, they might spend a little time considering whether their denial and cognitive dissonance are producing entities that are too big to succeed.

THE NEWEST BIG LAW PARTNERS SPEAK

Posted on November 13, 2013 by thebellyofthebeast

A recent survey of associates who became partners in their Am Law 200 firms between 2010 and 2013 produced some startling results. The headline in The American Lawyer proclaims that new partners “feel well-prepped and well-paid.” But other conclusions are troubling.

More than half (59 percent) of the 469 attorneys responding to the survey were non-equity partners. That’s significant because for them the real hurdle has yet to come. Most won’t advance to equity partnership in their firms. But even the combined results paint an unattractive portrait of the prevailing big law firm business model.

Lateral progress

It should surprise no one that institutional loyalty continues to suffer as the leveraged big law pyramid continues to depend on staggering associate attrition rates. According to the survey, almost half of new partners said that “making partner is nearly impossible.”

It’s toughest for home grown talent. Forty-seven percent of new partners switched firms before their promotions, most within the previous four years. An earlier survey of 50 Am Law 200 firms made the point even more dramatically: 59 percent of those who made partner in 2013 began their careers elsewhere. Long ago, a lot of older partners became wise to this gambit. They learned to hoard opportunities and preserve client silos as the way to move up and/or acquire tickets into the lucrative lateral partner market.

Somewhat paradoxically in light of their lateral paths into the partnership, 90 percent of new partners thought that commitment to their firms was of great or some importance as a factor in their promotion to partner. Yet almost 60 percent said that, since making partner, their commitment to the firm had decreased or only stayed the same.

Why don’t they feel like winners?

More than 80 percent of respondents thought that the “ability to develop and cultivate new clients” was “of great or some importance” in their promotion to partner. Yet more than half of new partners said that they received no formal training in business development.

Other results also suggest that a big law partnership has become an increasingly mixed bag. Almost eight out of ten said their business development efforts had increased since making partner. How did they make room for those activities in their already full workdays as “on-track-for-partner associates”? Eighty-three percent reported that time with their family “had decreased or stayed the same.” More than half said that control of their schedules had decreased or stayed the same. Making partner doesn’t seem to help attorneys achieve the kind of autonomy that contributes to career satisfaction and overall happiness.

The meaning of it all

More than 60 percent of new partners were satisfied or very satisfied with their compensation. Maybe money alone will continue to draw the best law graduates into big firms. A more important question is whether they will stay.

Most partners running today’s big firms assume that every associate has the same ambition that they had: to become an equity partner. Meanwhile, they’ve been pulling up the ladder on the next generation. Leverage ratios in big firms have doubled since 1985; making equity partner is now twice as difficult as it was then. Does anyone really believe that the current generation of young attorneys contains only half the talent of its predecessors?

The law is a service business. People are its only stock in trade. For today’s leaders who fail to retain and nurture young lawyers, the future of their institutions will become grim indeed. As that unfortunate story unfolds, they will have only themselves to blame. Then again, if these aging senior partners’ temporal scopes extend only to the day they retire, perhaps they don’t care.

THE TRUE COST OF THE WEIL LAYOFFS

Posted on June 26, 2013 by thebellyofthebeast

The Wall Street Journal describes the layoffs of 60 lawyers and 110 staff as “the starkest sign yet that the legal industry continues to struggle after the recession.” But who, exactly, is struggling?

Not the owners of the business. The overall average profits for equity partners in the Am Law 100 reached record levels in 2012. Even during the darkest days of the Great Recession in 2008, PPP for that group remained comfortably above $1.2 million before resuming the climb toward almost $1.5 million last year.

Not equity partners at Weil, Gotshal & Manges, who earned a reported average PPP of $2.2 million in 2012, according the the American Lawyer.

So Who Suffers?

One group of victims consists of 60 young people who had done everything right until everything went wrong for them on June 24. They’re intelligent, ambitious, and hard-working. Exemplary performance in high school earned them places in good colleges where they graduated at the top of their classes. They attended excellent law schools and excelled, even as the competition got tougher.

All of those accomplishments landed them great jobs. In the midst of a dismal legal job market, they went to work at one of the nation’s most prestigious law firms. Making more than $160,000 a year, many believed that soon they might throw off the yoke of six-figure student loan debt.

Now, they’re unemployed.

Another group of victims consists of 110 staffers who also got the boot. According to the NY Times, approximately half of them were secretaries. These behind-the-scenes workers often go unappreciated by lawyers who mistakenly take all of the credit for their own success.

A third group is a reported 10 percent of partners, many of whom who will suffer compensation cuts of “hundreds of thousands of dollars,” according to the NY Times.

“It’s All About the Future”

Announcing the layoffs, executive partner Barry Wolf described the move as “about the future of the firm and strategically positioning us for the next five years.” But layoffs aren’t about weeding out associates who don’t measure up to the rigorous quality standards necessary for equity partnerships. They’re about matching supply (of associates) with demand (for legal work) according to undisclosed criteria.

In fact, it seems a bit strange to talk about a firm positioning itself for the future while simultaneously dropping a morale bomb on its associates (and some partners) during the height of the summer program. The best and the brightest young prospects are working in big firms where luring that talent into the firms is a top priority. Bad public relations from a high-profile layoff can have a chilling effect that outlasts a single news cycle.

And what is that future going to look like? Will Weil be hiring any new associates over the next 12 months? Or 18 months? Or even 24 months? If so, I know 60 candidates with big firm experience (at Weil) who may be interested.

There is no shortage of current students who will continue to seek high-paying jobs at Weil, Gotshal & Manges. But what if negative publicity dissuades those few with the rare qualities necessary to become superstar partners from even signing up for on-campus interviews? By its very nature, such longer-run damage is impossible to know, much less measure.

Big Law’s Cheerleaders Applaud the Move

Law firm management consultants applauded Weil’s move. That’s not surprising because they have been central players in the profession’s transformation to just another business. They consistently endorse businesslike steps to maximize short-term profits. They expect other firms to follow Weil’s lead, and perhaps some will. Law firm consultant Peter Zeughauser said, “Weil is a bellwether firm and this will be a real wake up call.”

The etymology of bellwether may be relevant. In the mid-15th century, a bell was hung on a wether, a castrated ram that led a domesticated flock. In that way, the noise from the bellwether made it possible to hear the flock coming before anyone saw it.

In an informal Am Law survey, other firm leaders have distanced themselves from Weil. Before following that lead ram, perhaps they’re giving some thought to where it is going.

UGLINESS INSIDE THE AM LAW 100 – PART 2

Posted on May 15, 2013 by thebellyofthebeast

Part I of this series considered the possibility that a key metric — average partner profits — has lost much of its value in describing anything meaningful about big law firms. In eat-what-you-kill firms, the explosive growth of top-to-bottom spreads within equity partnerships has skewed the distribution of income away from the bell-shaped curve that underpins the statistical validity of any average.

Part II considers the implications.

Searching for explanations beyond the obvious

In recent years, equity partners at the top of most big firms have engineered a massive redistribution of incomes in their favor. Why? The next time a senior partner talks about holding the line on equity partner headcount or reducing entry-level partner compensation as a way to strengthen the partnership, consider the source and scrutinize the claim.

One popular assertion is that the high end of the internal equity partner income gap attracts lateral partners. In fact, some firms boast about their large spreads because they hope it will entice laterals. But Professor William Henderson’s recent analysis demonstrates that lateral hiring typically doesn’t enhance a firm’s profits. Sometimes selective lateral hiring works. But infrequent success doesn’t make aggressive and indiscriminate lateral hiring to enhance top line revenues a wise business plan.

According to Citi’s 2012 Law Firm Leaders Survey, even law firm managing partners acknowledge that, financially, almost half of all lateral hires are no better than a break-even proposition. If leaders are willing to admit that an ongoing strategy has a failure rate approaching 50 percent, imagine how bad the reality must actually be. Even worse, the non-financial implications for the acquiring firm’s culture can be devastating — but there’s no metric for assessing those untoward consequences.

A related argument is that without the high end of the range, legacy partners will leave. Firm leaders should consider resisting such threats. Even if such partners aren’t bluffing, it may be wiser to let them go.

“We’re helping young attorneys and building a future”

Other supposed benefits to recruiting rainmakers at the high end of a firm’s internal partner income distribution are the supposedly new opportunities that they can provide to younger attorneys. But the 2013 Client Advisory from Citi Private Bank-Hildebrandt Consulting shows that lateral partner hiring comes at the expense of associate promotions from within. Homegrown talent is losing the equity partner race to outsiders.

In a similar attempt to spin another current trend as beneficial to young lawyers, some managing partners assert that lower equity partner compensation levels lower the bar for admission, making equity status easier to attain. Someone under consideration for promotion can more persuasively make the business case (i.e., that potential partner’s client billings) required for equity participation.

Such sophistry assumes that an economic test makes any sense for most young partners in today’s big firms. In fact, it never did. But now the prevailing model incentivizes senior partners to hoard billings, preserve their own positions, and build client silos — just in case they someday find themselves searching for a better deal elsewhere in the overheated lateral market.

Finally, senior leaders urge that current growth strategies will better position their firms for the future. Such appealing rhetoric is difficult to reconcile with many partners’ contradictory behavior: guarding client silos, pulling up the equity partner ladder, reducing entry level partner compensation, and making it increasingly difficult for home-grown talent ever to reach the rarified profit participation levels of today’s managing partners.

Broader implications of short-term greed

In his latest book, Tomorrow’s Lawyers, Richard Susskind wrote that most law firm leaders he meets “have only a few years left to serve and hope they can hold out until retirement… Operating as managers rather than leaders, they are more focused on short-term profitability than long-term strategic health.”

Viewed through that lens, the annual Am Law 100 rankings make greed respectable while masking insidious internal equity partner compensation gaps that benefit a relatively few. Annual increases in average partner profits imply the presence of sound leadership and a firm’s financial success. But an undisclosed metric — growing internal inequality — may actually portend failure.

Don’t take my word for it. Ask lawyers from what was once Dewey & LeBoeuf and a host of other recent fatalities. Their average partner profits looked pretty good — all the way to the end.

UGLINESS INSIDE THE AM LAW 100 — PART I

Posted on May 1, 2013 by thebellyofthebeast

Every spring, the eyes of big firm attorneys everywhere turn to the American Lawyer rankings — the Am Law 100 — and the contest surrounding its key metric: average profits per equity partner (PPP). But if the goal is to obtain meaningful insight into a firm’s culture, financial strength or profitability for most of its partners, those focusing on PPP are looking at the wrong ball.

Start with the basics

For years, firms have been increasing their PPP by reducing the number of equity partners. American Lawyer reports that cutbacks in equity partners, when done correctly, are “a solid management technique, not financial chicanery.” But as firms are now executing the strategy, it looks more like throwing furniture into the fireplace to keep the equity house warm.

Since 1985, the average leverage ratio (of all attorneys to equity partners) for the Am Law 50 has doubled from 1.76 to more than 3.5. It’s now twice as difficult to become an equity partner as it was when today’s senior partners entered that club. Between 1999 and 2009, the ranks of Am Law 100 non-equity partners grew threefold; the number of equity partners increased by less than one-third.

Arithmetic did the rest: average partner profits for the Am Law 50 soared from $300,000 in 1985 ($650,000 in today’s dollars) to more than $1.7 million in 2012.

The beat goes on

Perhaps it’s not financial chicanery, but many firms admit that they’re still turning the screws on equity partner head count as a way to increase PPP. According to the American Lawyer’s most recent Law Firm Leaders’ Survey, 45 percent of respondent firms de-equitized partners in 2012 and 46 percent planned to do so in 2013.

But even when year-to-year equity headcount remains flat, as it did this year, that nominal result masks a destabilizing trend: the growing concentration of income and power at the top. In fact, it is undermining the very validity of the PPP metric itself.

An unpublished metric more important than PPP

The internal top-to-bottom spread within the equity ranks of most firms doesn’t appear in the Am Law survey or anywhere else, but it should, along with the distribution of partners at various data points. As meaningful metrics, they’re far more important than PPP.

Even as overall leverage ratios have increased dramatically, the internal gap within equity partnerships has skyrocketed. A few firms adhere to lock-step equity partner compensation within a narrow overall range (3-to-1 or 4-to-1). But most have adopted higher spreads. In its 2012 financial statement, K&L Gates disclosed an 8-to-1 gap — up from 6-to-1 in 2011. Dewey & LeBoeuf’s range exceeded 20-to-1.

This growing internal gap undermines the informational value of PPP. In any statistical analysis, an average is meaningful if the underlying sample is distributed normally (i.e., along a bell-shaped curve where the average is the peak). But the distribution of incomes within most big firm equity partnerships bears no resemblance to such a curve.

Cultural consequences

Rules governing statistical validity have real world implications. Growing internal income spreads render even nominally stable equity partner head counts misleading. Lower minimum profit participation levels make room for more equity partner bodies, but what results over time is Dewey & LeBoeuf’s “barbell” system. A handful of rainmakers dominates one side of the barbell; many more so-called service partners populate the other — and they rarely advance very far.

As Edwin B. Reeser and Patrick J. McKenna wrote last year, in Am Law 200 firms, “Typically, two-thirds of the equity partners earn less, and some perhaps only half, of the average PPP.” Statisticians know that for such a skewed distribution, the arithmetic average conveys little that is useful about the underlying population from which it is drawn.

Why it matters

For firms that don’t have lock-step partner compensation, the PPP metric doesn’t reveal very much. For example, consider a firm with two partners and an 8-to-1 equity partner spread. If Partner A earns $4 million and Partner B earns $500,000, average PPP is $2.25 million — a number that doesn’t describe either partner’s situation or the stability of the firm itself. But the underlying details say quite a bit about the culture of that partnership.

Firms with the courage to do so would follow the lead of K&L Gates and disclose what that firm calls its “compression ratio” and then take it a step farther: reveal their internal income distributions as well. But such revelations might lead to uncomfortable conversations about why, especially during the last decade, managing partners have engineered explosive increases in internal equity partner income gaps.

A future post will consider that topic. It’s not pretty.

THE LAWYER BUBBLE — Early Reviews and Upcoming Events

Posted on March 29, 2013 by thebellyofthebeast

The New York Times published my op-ed, “The Tyranny of the Billable Hour,” tackling the larger implications of the recent DLA Piper hourly billing controversy.

And there’s this from Bloomberg Business Week: “Big Law Firms Are in ‘Crisis.’ Retired Lawyer Says.”

In related news, with the release of my new book, The Lawyer Bubble – A Profession in Crisis, my weekly posts will give way (temporarily) to a growing calendar of events, including:

TUESDAY, APRIL 2, 2013, 10:00 am to 11:00 am (CDT)
Illinois Public Media
“Focus” with Jim Meadows
WILL-AM – 580 (listen online at http://will.illinois.edu/focus)

TUESDAY, APRIL 2, 2013, 1:00 pm to 2:00 pm (CDT)
“Think” with Krys Boyd
KERA – Public Media for North Texas – 90.1 FM (online at http://www.kera.org/think/)

THURSDAY, APRIL 4, 2013, 11:00 am to Noon (EDT)
Washington, DC
“The Diane Rehm Show”
WAMU (88.5 FM in DC area) and NPR

FRIDAY, APRIL 5, 2013, 10:45 am to 11:00 am (EDT)
New York City
“The Brian Lehrer Show”
WNYC/NPR (93.9 FM/820 AM in NYC area)
(http://www.wnyc.org/shows/bl/)

SATURDAY, APRIL 6, 2013, Noon (EDT)
New Hampshire Public Radio
“Word of Mouth” with Virginia Prescott
WEVO – 89.1 FM in Concord; available online at http://nhpr.org/post/lawyer-bubble)

WEDNESDAY, APRIL 10, 2013, 8:00 am to 9:00 am (CDT)
“The Joy Cardin Show”
Wisconsin Public Radio (available online at http://www.wpr.org/cardin/)

FRIDAY, APRIL 12, 2013
“The Shrinking Pyramid: Implications for Law Practice and the Legal Profession” — Panel discussion
Georgetown University Law Center
Center for the Study of the Legal Profession
600 New Jersey Avenue NW
Location: Gewirz – 12th floor
Washington, D.C.

TUESDAY, APRIL 23, 2013, 7:00 pm (CDT) (C-SPAN 2 is tentatively planning to cover this event)
The Book Stall at Chestnut Court
811 Elm Street
Winnetka, IL

Here are some early reviews:

“The Lawyer Bubble is an important book, carefully researched, cogently argued and compellingly written. It demonstrates how two honorable callings – legal education and the practice of law – have become, far too often, unscrupulous rackets.”
—Scott Turow, author of Presumed Innocent and other novel

“Harper is a seasoned insider unafraid to say what many other lawyers in his position might…written with keen insight and scathing accusations…. Harper brings his analytical and persuasive abilities to bear in a highly entertaining and riveting narrative…. The Lawyer Bubbleis recommended reading for anyone working in a law related field. And for law school students—especially prospective ones—it really should be required reading.”
—New York Journal of Books

“Anyone looking into a career in law would be well advised to read this thoroughly eye-opening warning.”
—Booklist, starred review

“[Harper] is perfectly positioned to reflect on alarming developments that have brought the legal profession to a most unfortunate place…. Essential reading for anyone contemplating a legal career.”
—Kirkus Reviews

“[Harper] burns his bridges in this scathing indictment of law schools and big law firms…. his insights and admonitions are consistently on point.”
—Publishers Weekly

“Imagine that the elite lawyers of BigLaw and the legal academy were put on trial for their alleged negligence and failed stewardship. Imagine further that the State had at its disposal one of the nation’s most tenacious trial lawyers to doggedly build a complete factual record and then argue the case. The result would be The Lawyer Bubble. If I were counsel to the elite lawyers of BigLaw and the legal academy, I would advise my clients to settle the case.”
—William D. Henderson, Director of the Center on the Global Legal Profession and Professor at the Indiana University Maurer School of Law

“With wit and insight,The Lawyer Bubble offers a compelling portrait of the growing crisis in legal education and the practice of law. This book is essential reading for anyone concerned about the profession or contemplating a legal career.”
—Deborah L. Rhode, Professor of Law and Director of the Center on the Legal Profession, Stanford University

“This is a fine and important book, thoughtful and beautifully written. It makes the case – in a responsible and sober tone – that we are producing far too many lawyers for far too small a segment of American society. It is a must-read for leaders of law firms, law schools, and the bar, as the legal profession continues its wrenching transition from a profession into just another business.”
—Daniel S. Bowling III, Senior Lecturing Fellow, Duke Law School

“In this superb book, Steven Harper documents, ties together and suggests remedies for the deceit that motivates expanding law school enrollment in the face of a shrinking job market, the gaming of law school rankings and the pernicious effect of greed on the leadership of many of our nation’s leading law firms. The lessons he draws are symptomatic, and go well beyond the documented particulars.”
—Robert Helman, Partner and former Chairman (1984-98), Mayer Brown LLP; Lecturer, University of Chicago Law School

“Every sentient lawyer realizes that the legal profession is in crisis, but nobody explains the extent of the problem as well as Steven Harper. Fortunately, he also proposes some solutions – so there is still room for hope. This is an essential book.”
—Steven Lubet, author of Fugitive Justice and Lawyers’ Poker

“Steven Harper’s The Lawyer Bubble is an expression of tough love for the law, law firms and the people who work in them. The clear message is take control of your destiny and your firm to avoid the serious jeopardy that confronts far too many firms today. Whether you are a partner, associate, or law student, you should read this compassionate and forceful work.”
—Edwin B. Reeser, Former managing partner, author, and consultant on law practice management

“Harper chronicles the disruption of his once-genteel profession with considerable sadness, and places the blame squarely at the wing-tipped feet of two breeds of scoundrel: law school deans, and executive committees that have run big law firms …” –“Bar Examined” – Book Review in The Washington Monthly (March/April 2013)

FROM CRAVATH TO CHASE TO CADWALADER

Posted on February 27, 2013 by thebellyofthebeast

James Woolery is on the move again. We’ve never met, but I’m beginning to feel as if I know the guy.

Woolery first appeared in my June 3, 2010 post about a policy change at Cravath, Swaine & Moore. The Wall Street Journal featured the then-41-year-old Cravath partner in an article about the firm’s plan to allow lawyers in their 30s and 40s to “make a name for themselves” by taking the lead on client deals. Historically, the WSJ reported, Cravath had reserved that role for partners in their 50s.

Six months later, I wrote about Woolery’s departure from Cravath to become co-head of JP Morgan Chase’s North American mergers and acquisitions group. He told the New York Times that he’d developed a business development focus and the Chase opportunity allowed him to build on those skills. So much for practicing law.

Now, two years after joining Chase, Woolery has become the first firmwide deputy chair of Cadwalader, Wickersham & Taft — a new position apparently created specially for its prominent lateral hire. The Wall Street Journal suggested that the move “is a big personal bet for Mr. Woolery. He is jumping back to the legal industry when it is still struggling with a shortage of work, and he is leaving J.P.Morgan just as mergers are showing new signs of life.”

Regardless of the particular reasons for Woolery’s various moves, the contrast between where he started (Cravath) and where he has now ended (Cadwalader) is remarkable.

Cravath

Whatever else people may think of Cravath, it has an unrivaled reputation for attracting first-rate attorneys. It is also a partnership in the truest sense of that concept: A single tier with a lock-step compensation system that resists an undue emphasis on short-term thinking. The Cravath model promotes longer run values, such as institutional stability.

For example, a lateral hiring frenzy pervades big law, but it’s a relatively rare event at Cravath. The firm focuses on developing talent internally. Its attorneys work hard, run a challenging gauntlet to equity partnership, and reap rich rewards for success.

In May 2007, an American Lawyer interviewer asked Cravath’s then-presiding partner Evan R. Chesler whether partners would stick around if the firm made less money. “I don’t know the answer to that,” he said. “I think there is more glue than just money.”

Cadwalader

Cravath’s ethos wouldn’t appeal to attorneys drawn to Cadwalader’s culture. In the mid-1990s, Cadwalader began moving aggressively toward what its new chairman Robert O. Link Jr. called a meritocracy. Others call it “eat-what-you-kill.”

In a February 2007 interview with the American Lawyer, Link expressed an attitude about firm culture that differed dramatically from Chesler’s. “Everyone should wake up in the morning and feel a little vulnerable,” he said.

Link meant it. In 1995, the 268-lawyer Cadwalader firm’s two-tier partnership had 76 equity partners, giving it a leverage ratio of three-and-a-half. By 2005, the firm had nearly doubled in size, but it had only 75 equity partners. Its leverage ratio of seven far exceeded that of all other Am Law 100 firms.

Cadwalader’s asset-backed structured finance practice fueled much of its growth. By 2007, it had 645 lawyers and a stunning leverage ratio of eight-and-a-half. But when the residential housing market cratered and took asset-back structured finance legal work with it, the firm’s fortunes slid badly.

By the end of 2012, Cadwalader had 435 lawyers — down more than 200 from five years earlier. Only 55 of them were equity partners — down 20 from 2007. The good news for the survivors was that by 2012, average equity partner profits had recovered almost completely to their 2007 all-time high of $2.7 million.

Differences that transcend metrics

As Cadwalader became smaller, Cravath maintained average partner profits ranging from $2.5 to $3.2 million, a leverage ratio of approximately four, and moderate growth from 412 to 476 attorneys. Even more to the point, it’s hard to imagine any circumstance short of dissolution that would cause Cravath to shed almost a third of its equity partners, as Cadwalader did from 2007 to 2012.

Back in May 2010, Woolery told the Wall Street Journal, “This is not your grandfather’s Cravath.” It’s not clear what that characterization of his former firm means or if it is correct, but offspring sometimes underestimate the value of a grandfather’s gifts. And offspring sometimes grow up to be grandparents themselves.

BIG LAW’S 2012 PERFORMANCE — NUMBERS AND NUANCE

Posted on February 13, 2013 by thebellyofthebeast

Two recent reports sound a warning that most big law firm leaders should heed. One is the Georgetown Center for the Study of the Legal Profession/Thomson Reuters Peer Monitor Report on the State of the Legal Profession. The other is Citi Private Bank’s Annual Law Firm Survey.

Lessons from Dewey & LeBoeuf

The Georgetown/Thomson Reuters Report is noteworthy because, at long last, thoughtful analysts are giving Dewey & LeBoeuf’s collapse the larger context that it deserves. For the most past, today’s managing partners have persuaded themselves that Dewey’s failure resulted from a unique confluence of management missteps that they themselves could never make. But most current leaders are making them.

In particular, Dewey wasn’t an outlier; it was among the elite of the Am Law 100. The firm embodied a culmination of prevailing big law firm trends that can—and will—produce future disasters. As the Georgetown/Peer Monitor Report explains, those trends include raising the bar for promoting home-grown talent into equity partnerships while overpaying for lateral equity partner hires, increasing internal compensation spreads to create a subgroup of real players within equity partnerships, and ignoring the importance of morale and institutional loyalty to long-term stability.

Crunching the numbers

Meanwhile, Citi Private Bank’s annual full-year survey of big firms produced this upbeat headline: “Firms Posted a 4.3 Percent Rise in 2012 Profits.” But important underlying details are more troubling.

Although revenue and profits were up by 3.6 and 4.3 percent, respectively, overall demand at the 179 firms in the Citi sample grew by just 0.2 percent in 2012, expenses increased by 3.1 percent, and headcount grew more than demand. It’s a decidedly mixed bag of financial results.

In fact, Citi’s Dan DiPietro and Gretta Rusanow fear that the 2012 fourth quarter revenue surge saving many big firms “may not be sustainable.” For example, “survivorship bias” contributed to the final 2012 numbers. That is, Citi’s analysis removed Dewey & LeBoeuf’s revenue, demand, and equity partner figures from the 2011 base year because the firm disappeared in 2012. But most of Dewey’s revenue went to surviving firms, thereby artificially inflating the overall 2012 numbers. To some extent, it’s like comparing 2012’s apples to 2011’s oranges. Including Dewey’s 2011 numbers would have resulted in negative demand growth in 2012.

Citi also discussed the impact of accelerated year-end collections. They’re an annual event at most firms, but the expiring Bush-era tax cuts gave partners unique incentives to push clients for payment in December 2012. The report also mentioned a related possibility: firms may not have prepaid 2013 expenses.

A more insidious prospect goes unmentioned: some firms may have deferred expenses that were due and owing in December 2012. If the 2013 first quarter Citi report is surprisingly weak, look for a spike in expenses as a factor. Freedom to ignore generally accepted accounting principles in financial reporting gives law firms financial flexibility that can become dangerous.

Or maybe the numbers don’t matter

Transcending all of these possibilities is, perhaps, the simplest. Averages are often deceptive. For example, in a firm where the internal top-to-bottom equity partner income spread is ten-to-one or higher, average partner profits may reveal that some partners are players and most aren’t. But as an economic metric describing a typical partner in the firm, it’s useless.

Just as average profits can mask enormous differences within an equity partnership, so, too, overall average profits for the industry can hide the gap between successful firms and those struggling to survive. That means 2013 could be another year in which some Am Law 200 law firms will fail (or become absorbed in last-resort mergers).

Fragile winners

But even firms that regard themselves as financial winners in 2012 should beware. Many would do well to heed the Georgetown/Thomson Reuters caution about the loss of traditional partnership values that undermined Dewey & LeBouef. Considered from a different perspective, numbers that appear to demonstrate success can actually reveal lurking failure.

After all, as recently as the May 2011 list of the Am Law 100, Dewey was #23 in 2010 average equity partner profits ($1.8 million), #22 in gross revenue per lawyer ($910,000), and #19 on the Am Law profitability index with a profit margin of 36 percent. In February 2012, the firm made Am Law’s annual “most lateral hires” list for 2011, but no public report disclosed the firm’s staggering (but by no means unique) top-to-bottom equity partner income gap.

As a wise friend reminds me periodically, things are rarely as good as they seem — or as bad as they seem. He’s definitely right about the good part.

BAD NUMBERS REVEALING WORSE TRENDS

Posted on July 17, 2012 by thebellyofthebeast

By now, everyone interested in the job prospects for new lawyers has seen two recent headline items:

— Nine months after graduation, only 55 percent of the class of 2011 had full-time, long-term jobs requiring a legal degree, and

— The median starting salary for all employed attorneys in the class of 2011 has dropped to $60,000 — from $72,000 only two years earlier.

The New York City Bar Association just formed a task force to wring its hands over the lawyer oversupply crisis — as if it were something new. A closer analysis of the salary data reveals several underlying realities that are even worse than that declining number suggests.

Digging deeper

For example, NALP’s press release about the median salary number came with this concluding sentence: “Salary information was reported for 65% of graduates reported to be working full-time in a position lasting at least one year.” If that means 35 percent of such workers with full-time jobs didn’t report their salary information, then the published median probably overstates the actual number — perhaps by a lot.

A more detailed breakdown reveals that for the class of 2011, the $40,000 to $65,000 category accounted for 52 percent of all reported salaries. Compare that to the class of 2009: Two years ago, starting salaries of between $40,000 and $65,000 accounted for 42 percent of reported salaries. Today, more new lawyers are working for less money, but they’re still the lucky ones — law graduates who got full-time jobs.

The trend in law firm starting salaries is more dramatic: The median starting salary for law firms of all sizes dropped from $130,000 in 2009 to $85,000 in 2011.

Whither big law?

Two more bits of information offer some insight into what’s happening in the biggest law firms:

— Only eight percent of 2011 graduates landed jobs in big firms of more than 250 attorneys.

— Entry level jobs that paid $160,000 a year accounted for only 16 percent of reported salaries in 2011. Even for the class of 2009 — graduating into the teeth of the Great Recession and widespread big firm layoffs — the $160,000 category accounted for 25 percent of reported salaries. And the 2009 denominator was bigger: 19,513 reported salaries v. 18,630 salaries in 2011. Importantly, the decline hasn’t resulted because big law firms have reduced their starting salaries; most haven’t.

Rather, as NALP’s Executive Director James Leipold explains, “[T]he downward shift in salaries is not, for the most part, the result of individual legal employers paying new graduates less than they paid them in the past. Although some firms have lowered their starting salaries, and we are starting to see a measurable impact from lower-paying non-partnership track lawyer jobs at large law firms, aggregate starting salaries have fallen over the last two years because graduates found fewer jobs with the highest-paying large law firms and many more jobs with lower-paying small law firms.”

Big law firms’ self-inflicted wounds

Surely, things are better than they were during the cataclysmic days of early 2009; equity partner profits have returned to pre-2008 peaks. So what’s happening? One answer is that large firms are increasing the ranks of non-equity partners. According to The American Lawyer, the number of non-equity partners grew by almost six percent in 2011. They now comprise fifteen percent of all attorneys in Am Law 100 firms.

As The American Lawyer’s editor in chief Robin Sparkman explains, “Some firms deequitized partners and pushed them into this holding pen. Other firms expanded the practice of moving potential equity partners (either homegrown or laterals) into this category — both to keep their PPP high and to give the lawyers a little breathing room before they face the rainmaking pressures of equity partnership.” I’d add one more category: some firms have increased the ranks of permanent non-equity partners.

Perilous short-termism

Edwin Reeser and Patrick McKenna have described how non-equity partners are profit centers. Keeping them around longer makes more money for equity partners, but creating that non-equity partner bubble comes at significant institutional costs. One is blockage.

For any firm, there’s only so much work to go around. Ultimately, the burgeoning ranks of non-equity partners has an adverse trickle down impact on those seeking to enter the big firm pipeline. Whether new graduates should have that aspiration is a different question, but the larger implications for the affected firms are clear: There’s less room for today’s brightest young law graduates.

Some leaders have decided that maximizing current equity partner profits is more important than securing, training and developing a future generation of talent for their law firms. Sooner than they realize, their firms will suffer the tragic consequences of that mistake.

DEWEY’S RICHARD SHUTRAN — RUNNING THE NUMBERS

Posted on June 7, 2012 by thebellyofthebeast

This is the fourth of a five-part series profiling Dewey & LeBoeuf’s former leaders. Richard Shutran (Trinity College, B.A., 1974; New York University, J.D., 1978) joined Dewey Ballantine in 1986 and rose to co-chair of the firm’s Corporate Department and Chairman of its Global Finance Practice Group. He left his position on Dewey’s Executive Committee in 2010, but in 2012 became a member of the four-man office of the chairman tasked to save the firm.

The Dewey & LeBoeuf website described Shutran’s transactional practice as “counseling…with respect to leveraged finance and project finance matters, mergers and acquisitions, and restructurings and reorganizations….” That makes him a numbers guy, someone especially well-suited to the challenges facing his firm when it asked him to return to leadership as one of the Gang of Four.

The 2010 bond issuance

Dewey’s 2010 private placement memorandum included Shutran’s biography in its “Senior Management” section. At the time, Bloomberg news reported on the $125 million bond offering for which Shutran said that the bonds’ interest rates were more favorable than the firm’s bank loans. That was true.

As partners were checking out two years later, the Daily Journal reported that Dewey was renegotiating those bank loans: “Richard Shutran, co-chair of Dewey’s corporate department, described the negotiations as standard.” At that point, perhaps they were.

Another “bond” issuance

Meanwhile, the firm was pursuing what fellow Gang of Four member Martin Bienenstock described as “a plan to deal with the shortage of payments to some partners.” In particular, those with guaranteed compensation deals had taken IOUs during earlier years when profits had fallen short of targets. The “plan” was to dedicate six percent of the firm’s income for six or seven years to pay them off, starting in 2014.

In addition to ongoing bank debt, the first wave of 2010 bond payments came due in 2013 and would continue through 2023. Now another debt repayment plan — to a special class of so-called partners — would take another chunk of future partnership earnings from 2014 to 2020.

Funny numbers

At about the same time, Shutran moved to the center of another controversy – also not of his making – relating to his firm’s financial health. He assured a Bloomberg reporter that the departure of Dewey’s elite insurance group “had no impact on our firm’s profitability. That group was break-even at best.” But he also said the firm had earned about $250 million in profits for 2011. The American Lawyer didn’t think that number jibed with what Dewey had provided for the magazine’s annual rankings.

On March 21, 2012, The Wall Street Journal reported The American Lawyer’s retroactive revisions to Dewey & LeBeouf revenue and profits numbers for 2010 and 2011 — by a lot. For example, Dewey’s 2011 average partner profits dropped from $1.8 million to $1.04 million. Shutran suggested methodological differences were to blame:

“‘They’re just not comparable numbers,’ Mr. Shutran said. ‘That’s something people like to pick on.’ Robin Sparkman, the editor-in-chief of the American Lawyer, said Dewey & LeBoeuf’s numbers were given to them by the firm’s management.”

About that bank loan

On April 11, 2012, Dewey identified seven key players essential to the firm’s survival. Shutran wasn’t among them, but he responded to questions about whether the wave of partner defections had triggered bank loan covenants: “It has not had any effect under (the) agreements,” he said. There’s no reason to doubt him.

But the real problem by then wasn’t the bank loans. It was the accumulated amounts owed for annual distributions to partners in excess of the firm’s net income. As Bruce MacEwen’s analysis suggests, whether it’s called mortgaging the future or something worse, the result is the same.

Something went terribly awry at Dewey & LeBoeuf, but here’s the scary part: among big law firms, some of the things that created Dewey’s predicament aren’t unique.

DEWEY: WHEN PARTNERS AREN’T REALLY PARTNERS

Posted on May 2, 2012 by thebellyofthebeast

Lost in the haze of battle over Dewey & LeBoeuf’s struggle is a remark that former chairman Steven H. Davis made in his March 22 Fortune magazine interview. That was Dewey’s first public relations initiative after it began squandering money on a crisis management/public relations expert. But it offered this kernel of inadvertent insight:

“One fundamental change in the way the firm has operated since the merger is that they moved away from the traditional lockstep compensation approach — where partners are basically paid in terms of tenure — and toward a star system in which the top moneymakers can out-earn their colleagues by a ratio of up to 10-to-1. Davis says the extremes shouldn’t define the system, though, and that the more ‘normal’ band is about 6-to-1. Still, it must chafe to be the guy who’s earning the ‘1’ and knows it. Hard to see oneself as a ‘partner’ of the ‘6s,’ let alone the ’10s.'”

In The Wall Street Journal story that the Manhattan district attorney had opened an investigation into Davis, this sentence offered a poignant flashback to his March 22 interview:

“While some junior partners made as little as $300,000 a year, other partners were pulling down $6 million or $7 million, according to former and current partners.”

That’s a twenty-to-one spread within a so-called partnership. And some of the biggest winners had multi-year guaranteed compensation deals.

There’s an asterisk. According to The American Lawyer‘s definitions, Dewey & LeBoeuf has equity and non-equity partners. Everyone knows that with respect to the internal power dynamics of two-tier firms, management pays no attention to non-equity partners. But the real kicker is that most equity partners don’t have much influence with senior leaders, either.

The growing non-equity partner bubble

Start with the non-equity partners. In January 2000, predecessor firm Dewey Ballantine had 118 equity partners and 21 non-equity partners. At the time, its eventual merger partner, LeBoeuf Lamb, had a similar ratio: 187 equity partners and 33 non-equity partners. Between them, they had 305 equity partners and 54 non-equity partners.

As of January 1, 2012, Dewey & LeBoeuf had 190 equity partners (one-third fewer than the separate firms’ combined total in 2000) and 114 non-equity partners (twice as many as in 2000).

Many firms have adopted and expanded two-tier partnership structures. That has many unfortunate consequences for the firms that create a permanent sub-class of such individuals. But non-equity partners are profit centers and most big law leaders say that ever-increasing profits are necessary to attract and retain top talent.

The equity partner income gap

That leads to a second point. Whether it’s Davis’s earlier “10-to-1” spread, the more recently reported “20-to-1,” or something in between, the income gap within equity partnerships has exploded throughout big law. That’s destabilizing.

The gap results from and reinforces a failing a business model. In the relentless pursuit of high-profile lateral hires, law firms bid up the price. Many laterals never justify their outsized compensation packages; some become serial laterals moving from firm to firm.

Even when the subsequent economic contributions of hot prospects seem to validate their worth on paper, aggressive lateral hiring erodes partnership values. The prevailing business model has no metric for collegiality, a shared sense of purpose, or the willingness to weather tough times. How badly frayed have partnership bonds become when, as at Dewey, some partners ask a district attorney to prosecute the firm’s most recent chairman? That’s the definition of bottoming-out.

It’s easy to identify the ways that Dewey’s problems were unique, such as guaranteeing partner compensation and issuing bonds. Leaders of other firms could benefit from a different exercise: assessing how their own institutions are similar to what Dewey & LeBoeuf became after their 2007 merger. Growing partnership inequality is pervasive and its implications are profound.

Legal consultant Peter Zeughauser told The Wall Street Journal, “It’s not your mother’s legal industry anymore. It’s a tougher business.” Implicit in that observation lies a deeper truth: partnerships aren’t really partnerships anymore.

They’re businesses, only worse. Those at the top of most big law firms function with far greater independence than corporate CEOs who must answer to a board of directors and shareholders. In many big firms, a growing internal wealth gap reinforces the hubris of senior leaders who answer to no one — except each other. With Dewey’s disintegration, we’re seeing where that can lead.

THE AGE-OLD PROBLEM OF AGE

Posted on April 18, 2012 by thebellyofthebeast

When Kelley Drye recently settled the age discrimination complaint that the EEOC had filed on behalf of a seventy-nine-year old former equity partner, the focus turned to whether law firms could adopt mandatory retirement policies. The conventional wisdom is that they’re a bad idea — maybe even unlawful age discrimination. The policy argument is that people live longer; those who are productive should be able to keep working; everyone should be compensated according to the value added.

The legal defense of mandatory retirement policies is that true partners are employers and, therefore, outside the law’s protections afforded employees. The rebuttal is that most partners in today’s big firms have little say over their fate, so should they get whatever benefits the law provides, including compensation based on their contributions.

As framed, the debate is incomplete.

Definitional confusion

Mandatory retirement is a misnomer. The issue isn’t whether partners can continue practicing law at their firms. Rather, the question is whether they should remain equity partners in a world where achieving that status is increasingly difficult. In other words, the dispute isn’t about any senior attorney’s devotion to the practice of law; it’s about the money he or she should get paid for doing it.

No one told Eugene D’Ablemont that he couldn’t continue working on his client matters. Indeed, he did for more than a decade after reaching Kelley Drye’s equity partner age limit of seventy. He simply wanted compensation appropriate for his economic contribution to the firm.

Salary as a “lifetime partner” (plus a bonus) wasn’t enough for him, even though Kelley Drye reportedly asserted in response to the original complaint that D’Ablemont billed only between 195 and 324 hours a year during the late 2000s. But he’d mustered letters from two clients who said that his personal involvement in their affairs over many years meant that his inability to take the lead on future matters “created a rather difficult situation” for the company.

Ay, there’s the rub.

The problematic dark side

Most big law firms have evolved — or devolved — into short-term bottom-line businesses. An eat-what-you-kill approach to compensation encourages partners to keep client relationships away from others who might claim billing credit when year-end reviews roll around. Likewise, the lateral hiring frenzy makes such behavior even more important to attorneys who want to preserve their options and demonstrate their dollar value.

As a result, aging partners have no reason to institutionalize clients by nurturing relationships with younger lawyers. For those who have little or no desire to confront either their own mortality or the prospect of life after their big firm careers, the incentives of most firms are unambiguous: keep what you have and try to keep anyone else from claiming any part of it.

Who benefits from this system? Equity partners who have already pulled up the ladder on the next generation by promoting fewer lawyers and making them wait longer.

Who suffers? Young attorneys who want opportunities and training. Apart from blockage and embedding economic interests in an aging group that is myopically self-interested, the system offers no reason for senior lawyers to become mentors.

What is collateral damage? The firms themselves. The failure of elders to encourage their clients to trust the firm’s next generation produces long-term institutional instability.

At the heart of the problem is a short-term metrics-driven model that fails to guide aging partners to productive lives after the law. Aric Press suggests ways that firms could do better. Meanwhile, the absence of mandatory retirement rules for equity partners will make existing intergenerational tensions worse as they undermine the fabric of many firms.

Again, no one is saying that such elders can’t continue practicing for as long as they want. But that doesn’t require hanging on to a slice of the equity pie.

As for clients who worry about a “difficult situation” that might result if their long-time counselor will no longer be lead attorney into his or her eighties, consider this: eventually, everyone dies. There’s nothing that even the EEOC can do about that.

DEWEY’S DILEMMA

Posted on March 7, 2012 by thebellyofthebeast

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

Lessons about communicating

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

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

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

Mixed messages

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

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

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

Misleading metric?

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

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

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

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

THE LATERAL BUBBLE

Posted on February 15, 2012 by thebellyofthebeast

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 Howrey, Heller 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

Posted on January 25, 2012 by thebellyofthebeast

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

Whither goest thou?

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

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

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

Ascertaining shared values and visions

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

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

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

DLA Piper’s press release offered a hint:

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

Translation: Get bigger and make surviving equity partners richer.

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

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

Ignored in the financial shorthand are questions no one asks:

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

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

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

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

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

Probably not. After all, Linklaters ranked 108th.

FED TO DEATH

Posted on December 20, 2011 by thebellyofthebeast

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.

BONUS TIME — AND ANOTHER UNFORTUNATE COMMENT AWARD

Posted on December 1, 2011 by thebellyofthebeast

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.

HUMBLE LEADERSHIP

Posted on October 12, 2011 by thebellyofthebeast

Over a year ago, I considered the then newly-named dean of the Harvard Business School, Nitin Nohria. He’s been an outspoken critic of MBA curriculum that fosters short-term thinking at the expense of ethics and long-term values.

Nohria’s appointment came after the economic collapse of 2008 caused many to rethink what I call the MBA mentality of misguided metrics. Business school faculty worried that they’d taught too narrowly — emphasizing the need to maximize short-term profits at the expense of important but less easily measured values. Some suggested that business management should become more like a profession, such as medicine or, ahem, law.

Unfortunately, the most visible and powerful segment of the legal profession — big law — had already evolved to mimic some of the business world’s worst features. Nohria would have to look elsewhere for guidance.

So I read with interest his recent Q&A in the Wall Street Journal. Ethics has been a centerpiece of his curriculum overhaul at Harvard. But he’s even more concerned that this new classroom emphasis won’t stick once students return to the workforce.

“[T]here seems to be a big difference between people’s understanding of their responsibilities as business leaders and their capacity to live up to those when faced with pressure or temptation,” he told the Journal.

Because those achieving power have more difficulty retaining their moral compasses, Nohria’s new mission is cultivating humility.

“Abraham Lincoln said people think that the real test of a person’s character is how they deal with adversity,” Nohria told the Journal. “A much better measure of a person’s character is to give them power. I’ve been more often disappointed with how people’s character is revealed when they’ve been given power.”

Author Jonah Lehrer made a similar observation in a WSJ article discussing one study’s conclusion that nice people have a better chance of advancing:

“Now for the bad news, which concerns what happens when all those nice guys actually get in power. While a little compassion might help us climb the social ladder, once we’re at the top we end up morphing into a very different kind of beast.”

What does this have to do with lawyers? Plenty, especially most of those who run big firms where power has become concentrated increasingly at the top.

“Before the recession,” one management consultant observed, 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.”

Several months ago, one big firm leader offered the Journal this spin:

“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.”

It’s a nice soundbite, but for reasons I’ve outlined before, not particularly persuasive. (E.g., Are there no top-of-the-range equity partners at K&L Gates’ Pittsburgh headquarters?)

But here’s the larger point: K&L Gates ranked 105th out of 126 firms in The American Lawyer 2011 Mid-Level Associate Survey. The firm scored well below the national averages in morale, collegiality, associate relations, training and guidance, family-friendliness, and overall rating as a place to work.

Kalis deserves praise for inviting recruits seeking jobs at his firm to ask tough questions. They won’t pose this one, but any leader should consider it:

While those at the top of big firms have consolidated their wealth and power, does true leadership — measured by the positive energy that everyone else in the place exudes — seem absent in a lot of them?

If Nohria is correct that the test of character comes when a person gains power, many at the top of some big firms could do better. Then again, it all depends on the metrics by which they’re measured.

COMMENDABLE COMMENT AWARD

Posted on September 21, 2011 by thebellyofthebeast

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.

SUFFERING IN SILENCE

Posted on September 5, 2011 by thebellyofthebeast

The 2011 Am Law associate survey is out. Billable hours continue moving up; morale continues moving down. As I explain in “Suffering in Silence” (appearing in the September 2011 print edition of The American Lawyer), those who get to participate in the survey are the lucky ones.

It’s especially appropriate for Labor Day.

INFLATED PPP?

Posted on August 29, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IMPROVING PROSPECTS — BUT FOR WHOM?

Posted on May 10, 2011 by thebellyofthebeast

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

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

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

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

Now consider each headline a bit differently:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A NEW METRIC: THE MISERY INDEX

Posted on April 6, 2011 by thebellyofthebeast

Let’s call it what it is.

Large law firms and their management consultants have redefined a word — productivity — to contradict its true meaning. Recent reports from Hildebrandt and Citi measure it as everyone does: average billable hours per attorney.

No one questions this perversion because the prevailing business model’s primary goal is maximizing partner profits. Billables times hourly rates produce gross revenues. More is better and the misnomer — productivity — persists.

The Business Dictionary defines productivity as the “relative measure of the efficiency of a person [or] system…in converting inputs into useful outputs.” But the relevant output for an attorney shouldn’t be total hours spent on tasks; it’s useful work product that meets client needs. Total elapsed time without regard to the quality of the result reveals nothing about a worker’s value. More hours often mean the opposite of true productivity.

Common sense says that effort on the fourteenth hour of a day can’t be as valuable as that exerted during hour six. Fatigue compromises effectiveness. That’s why the Department of Transportation imposes rest periods after interstate truckers’ prolonged stints behind the wheel. Logically, absurdly high billables should result in compensation penalties, but prevailing big law economics dictate otherwise.

Here’s a partial cure. Rather than mislabel attorney billables as measures of productivity, an index should permit excessive hours to convey their true meaning: attorney misery. The Misery Index would be a natural corollary to NALP’s survey of minimum billable hour requirements. Attorneys now accept as given the 2,000 hour threshold that most firms maintain, even though current big law leaders faced no mandatory minimum levels when they were associates. As Yale Law School describes in a useful memo, 2,000 is a lot. But even if the 2,000-hour bell can’t be unrung, the Misery Index could reveal a firm’s culture.

To construct this metric for a given firm, start with attorneys billing fewer than 2,000 hours annually (including pro bono and genuine firm-related activities such as recruiting, training, mentoring, client development, and management); those lawyers wouldn’t count toward their firm’s Misery Index. However, at each 100-hour increment above 2,000, the percentage of attorneys reaching each higher numerical category would be added. To reflect the increasing lifestyle costs of marginal billables, attorneys with the most hours would count at every 100-hour interval preceding their own. Separate indices should exist for associates (AMI) and partners (PMI).

The Misery Index would reveal distinctions that firmwide averages blur. For example, Firm A has an Associate Misery Index of 125, calculated as follows:

50% of associates bill fewer than 2,000 hours = 0 AMI points

50% > 2,000 = 50 AMI points

40% > 2,100 = 40

25% > 2,200 = 25

10% > 2,300 = 10

None > 2,400

AMI: 125

Firm B’s AMI of 315 describes a much different place:

10% of associates bill fewer than 2,000 hours = 0 AMI points

90% > 2,000 = 90 points

75% > 2,100 = 75

60% > 2,200 = 60

45% > 2,300 = 45

30% > 2,400 = 30

15% > 2,500 = 15

None > 2,600

AMI: 315

A Misery Index would aid decision-making, especially for new graduates. Some would prefer firms with a high one; most wouldn’t. A Misery Index above 300 might prompt questions about the physical health of a firm’s attorneys; a Misery Index of zero — no one working more than 2,000 hours — might prompt questions about the health of the firm itself. Big disparities between partners (PMI) and associates (AMI) would be revealing, too.

Data collection is problematic. NALP won’t ask for the information and most firms won’t supply it — unless clients demand it. (In an earlier article, I explained why they should.) Alternatively, individual attorneys could provide the information anonymously, similar to The American Lawyer’s annual mid-level associate surveys.

Complementing the Misery Index would be firm-specific Attrition Rates by class year from starting associate to first year equity partner. NALP’s last report — before the 2008 financial crisis — showed big law’s five-year associate attrition rates skyrocketing to more than eighty percent, but significant differences existed among firms.

The Misery Index and Attrition Rates would be interesting additions to Am Law‘s “A-List” criteria that many big firms heed. Imagine an equity partner meeting that included this agenda item: “Reducing Our Misery Index and Attrition Rates.” It would certainly be a departure from scenes and themes in my best-selling legal thriller, The Partnership.

Big law is filled with free market disciples who urge better information as a panacea, as well as metrics to communicate it. Here’s their chance.

HOWREY’S LESSONS — PART II

Posted on March 13, 2011 by thebellyofthebeast

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

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

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

1. European offices:

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

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

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

2. Document discovery vendors.

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

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

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

3. Contingent and alternative fees

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

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

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

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

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

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The Belly of the Beast

Steven J. Harper, Esq.

Tag Archives: American Lawyer

TREATING SYMPTOMS; IGNORING THE DISEASE

MORE ON MY NY TIMES OP-ED

ANOTHER COLOSSAL LATERAL MISTAKE

THINKING BEYOND THE AM LAW 100 RANKINGS

A MYTH THAT MOTIVATES MERGERS

A STORIED LATERAL HIRE

Failure of Leadership

THE NEWEST BIG LAW PARTNERS SPEAK

THE TRUE COST OF THE WEIL LAYOFFS

UGLINESS INSIDE THE AM LAW 100 – PART 2

UGLINESS INSIDE THE AM LAW 100 — PART I

THE LAWYER BUBBLE — Early Reviews and Upcoming Events

FROM CRAVATH TO CHASE TO CADWALADER

BIG LAW’S 2012 PERFORMANCE — NUMBERS AND NUANCE

BAD NUMBERS REVEALING WORSE TRENDS

DEWEY’S RICHARD SHUTRAN — RUNNING THE NUMBERS

DEWEY: WHEN PARTNERS AREN’T REALLY PARTNERS

THE AGE-OLD PROBLEM OF AGE

DEWEY’S DILEMMA

THE LATERAL BUBBLE

THE ULTIMATE LATERAL HIRE

FED TO DEATH

BONUS TIME — AND ANOTHER UNFORTUNATE COMMENT AWARD

HUMBLE LEADERSHIP

COMMENDABLE COMMENT AWARD

SUFFERING IN SILENCE

INFLATED PPP?

IMPROVING PROSPECTS — BUT FOR WHOM?

A NEW METRIC: THE MISERY INDEX

HOWREY’S LESSONS — PART II

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