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.

PROOF OF THE PROFESSION’S CRISIS

Posted on June 5, 2013 by thebellyofthebeast

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

Someone should remind law firm leaders that the Fifth Amendment protection against self-incrimination isn’t just for clients. It can work for them, too. The latest Altman-Weil survey of firm leaders is proof of widespread management incompetence, stupidity, and worse.

The survey went to the chairs or managing partners of 791 firms with 50 or more lawyers. Firms with more than 250 lawyers (that is, mostly Am Law 200 firms) had a much higher response rate (42 percent) than smaller firms (26 percent). In other words, the survey results tilt toward big law firm attitudes.

The troubling big picture

The Am Law Daily’s summary includes comments from the survey’s author, Thomas Clay, who said that too many firms are “almost operating like Corporate America…managing the firm quarter-to-quarter by earnings per share.” That shortsighted approach is “not taking the long view about things like truly changing the way you do things to improve client value and things of that nature.”

For example, 95 percent of respondents view increased pricing competition as an ongoing trend, and 80 percent expect shifts to non-hourly billing structures. But only 29 percent have made significant changes to their own pricing practices in the wake of the recession.

Group stupidity

It gets worse. When asked to identify their greatest challenges over the next 24 months, the item that managers cite most often is “increasing revenue.” The rest of the list is, in order: new business, growth, profitability, management transition, cost management, and attracting talent. If you’re wondering where clients fit — other than as a source of revenue and profits in items one, two, and three — “client value” finished eighth.

Long-term thinking? Forget it. The client silo mentality and resulting culture of short-termism are widespread and deep. Almost 30 percent of law firm leaders say their firms lack adequate mid-level partners to whom they could transition clients. In another set of responses, they reveal why: 78 percent say that “senior partners don’t want to retire”; 73 percent admit that “senior partners don’t want to forfeit current compensation by transitioning client work.”

Lateral incompetence

Meanwhile, lateral hiring remains the prevailing strategy to achieve growth. Ninety percent of respondents plan to hire laterals in 2013; more than 60 percent seek entire practice groups. For firms of more than 250 lawyers, the numbers are even more startling: 100 percent plan to acquire laterals; 92 percent plan to acquire groups.

How much time do lateral partners get to prove their worth? Almost 60 percent of responding firm leaders say two years or more; 30 percent don’t set a time frame.

What happens when laterals don’t meet the expectations that brought them into the firm? Two-thirds of firm leaders said that they “sometimes, rarely or never” tell unproductive lateral hires to leave.

Institutional ineptitude

Almost 40 percent of respondents say their partners’ morale is lower compared to the beginning of 2008. And those partners survived the purges of 2009 and beyond.

If you’re looking for contributors to declining morale, try these. Seventy-two percent of firm leaders report that fewer equity partners will be a permanent trend going forward. Three-fourths have either tightened their standards or take them more seriously. Meanwhile, 92 percent of responding two-tier firms don’t have an up-or-out policy as non-equity partner profit centers grow.

To summarize:

Managing partners know that change is coming and clients are demanding it, but firms aren’t revisiting their basic strategies or business models.

Growth and profits finish far ahead of enhancing client value as most law firm leaders’ top concerns.

Leaders view aggressive lateral hiring as critical to law firm growth, but when laterals don’t produce, most firms don’t do much about it.

Succession planning is problematic because senior partners don’t want to relinquish compensation that is tied to their client billings.

As senior leaders continue to pull up the equity partner ladder on the next generation, morale plummets and managing partners worry about the absence of mid-level talent to serve clients in the future.

Taking all of this together, psychologists would call it a severe case of cognitive dissonance — simultaneously holding contradictory thoughts in your head. Those who assert that most big firms are resilient and face no life-threatening problems are wrong. A crisis of leadership is already upon us as lot of supposedly smart people continue to do some really dumb things. Don’t take my word for it; they’re outing themselves.

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.

WHY THE BILLABLE HOUR ENDURES

Posted on April 24, 2013 by thebellyofthebeast

Last month, I wrote a New York Times op-ed discussing the billable hour regime and its unfortunate consequences for the legal profession. The piece generated a lot of response, most of which supported my themes. Readers generally agreed that the system rewards unproductive behavior, invites abuse, and pits attorneys’ financial self-interest against their clients’ goals.

Defending the billable hour

Even so, the Times published a responsive letter to the editor from the general counsel of Veolia Transportation — “the largest private sector operator of multiple modes of transit in North America,” according to its website — who defended hourly billing. He noted that alternatives to the billable hour “have not caught on because they do not allow the client the same opportunity to see the work as it is being done, evaluate its worth, and challenge when appropriate the relationship of time, task and cost.”

Theoretically, he has a point. In fact, the billable hour system arose from a desire for greater transparency. Before it gained widespread use, clients typically received a bill that included a single line: “For services rendered.” When today’s senior partners entered the profession, firms kept track of their time but didn’t impose mandatory minimum billable hour requirements. In fact, a 1958 ABA pamphlet recommended that attorneys maintain better time records and strive to bill clients 1,300 hours a year.

Unfortunately, transparency gave way to short-term profit-maximizing behavior that distorted the billable hour into an internal law firm measure of “productivity.” Quantity of time billed became more important than the quality or effectiveness of effort expended. Today’s required annual minimum hours typically run close to 2,000 — and most associates understand that enhancing their prospects for advancement requires many more.

Transparency yields to abuse

In theory, Veolia’s general counsel is correct about the billable hour’s transparency. But in practice, few clients are well-positioned to challenge “the relationship of time, task and cost.” For a complex case, what motions should be filed and how much time should their preparation take? How many witness depositions are needed? And of what length? What’s the right level of staffing to maximize the chances for success?

Some in-house counsel possess the sophistication to provide meaningful answers to these and other questions that underlie any effort to assess the relationship of hourly fees to “time, task and cost.” But most don’t. They trust their lawyers to do the right thing under an incentive structure that pushes those lawyers in the opposite direction.

Bankruptcy as a poster child

Embarrassing reports of billing deceit are rare. But the real problem isn’t such well-publicized abuses. Rather, it’s the cultural impact of the incentive structure. In most large law firms, one practice area is particularly revealing: big bankruptcy cases.

Large numbers of bodies billed at enormous hourly rates get thrown into such matters. All of the activity shows up in detailed time records accompanying massive fee petitions that courts routinely approve. Like the U.S. Trustee’s office that also reviews such filings, courts lack the resources to provide meaningful scrutiny of “time, task and cost.”

Petitions seeking hourly rates of $700 for associates and $1,000 for partners routinely go unchallenged, as do the listed activities that consume these attorneys’ time. Last year, when the U.S. Trustee proposed that firms disclose whether they charge higher hourly rates for the same attorneys performing non-bankruptcy work, the profession united in opposition.

The moral

The billable hour regime endures because, like the general counsel of Veolia, clients think they have it under control. But that requires a leap of faith as outside lawyers resolve the ongoing dilemma of a system that pits fiduciary responsibility to a client against the attorneys’ financial self-interest. With law firms obsessing over current year profits and partners seeking to maximize personal books of business to preserve their own positions in an eat-what-you-kill world of frenetic lateral partner movement, that dilemma becomes profound.

As for the billable hour’s impact on other aspects of the profession’s culture, another Times letter to the editor offered this: “Appearing before St. Peter, a young law firm associate asked why he was being taken at age 29. Taken aback, St. Peter said the associate’s billable hours made the associate appear to be 95.”

SOMEBODY’S CHILD

Posted on March 20, 2013 by thebellyofthebeast

Nine years ago, Senator Rob Portman (R-Ohio) supported a constitutional amendment banning same-sex marriage. Now he wants Congress to repeal the provisions of the Defense of Marriage Act that deny federal recognition to such marriages. Apparently, his reversal on this issue began two years ago when his college freshman son told Portman and his wife that he was gay.

Plenty of prominent national figures have similarly changed their views. The tide of history seems overwhelming, even to conservative commentator George Will. Others can debate whether Portman and those who have announced newly acquired positions favoring gay rights are courageous, hypocrites, opportunists, or something else.

For me, the more important point is that his own child’s connection to the issue caused Portman to think differently about it. Applied to lawyers, the question become simple:

What if the profession’s influential players treated the young people pursuing a legal career as their own children?

Portman’s explanation

In 2011, Portman knew that his son was gay when 100 law graduates walked out of his commencement address at the University of Michigan.

“But you know,” he told CNN recently, “what happened to me is really personal. I mean, I hadn’t thought a lot about this issue. Again, my focus has been on other issues over my public policy career.”

His key phrases are pregnant with larger implications: “[W]hat happened to me is really personal….I hadn’t thought a lot about this issue.”

Start with law school deans

As the lawyer bubble grew over the past decade, some deans and university administrators might have behaved differently if a “really personal” dimension required them to think “a lot” about their approaches. Perhaps they would have jettisoned a myopic focus on maximizing their law school rankings and revenues.

At a minimum, most deans probably would have disclosed earlier than 2012 that fewer than half of recent graduates had long-term full-time jobs requiring a legal degree. It seems unlikely that, year after year, they would have told their own kids that those employment rates exceeded 90 percent. Perhaps, too, deans would have resisted rather than embraced skyrocketing tuition increases that have produced six-figure non-dischargeable educational debt for 85 percent of today’s youngest attorneys.

Then consider big firm senior partners

At the economic pinnacle of the profession, big firms have become a particular source of not only attorney wealth, but also career dissatisfaction. In substantial part, both phenomena happened — and continue to happen — because managing partners have obsessed over short-term metrics aimed at maximizing current year profits and mindless growth.

For example, the billable hour is the bane of every lawyer’s (and most clients’) existence, but it’s lucrative for equity partners. If senior partners found themselves pushing their own kids to increase their hours as a way to boost those partners’ already astonishing profits, maybe they’d rethink the worst consequences of a destructive regime.

Similarly, the average attorney-to-equity partner leverage ratio for the Am Law 100 has doubled since 1985 (from 1.75 to 3.5). Perhaps managing partners wouldn’t have been so quick to pull up the ladder on lawyers who sat at their Thanksgiving tables every year, alongside those managing partners’ grandchildren who accompanied them. Not every young associate in a big firm should advance to equity partner. But offering a 5 to 10 percent chance of success following 7 to 12 years of hard work isn’t a motivator. It invites new attorneys to prepare for failure.

Finally, compared to the stability of a functional family, the current big law firm lateral partner hiring frenzy adopts the equivalent of periodic divorce as a cultural norm. Pursued as a growth strategy, it destroys institutional continuity, cohesion, community, and morale. Ironically, according to Professor William Henderson’s recent American Lawyer article “Playing Not to Lose,” it offers little or no net economic value in return.

Adopting a family outlook or a parental perspective isn’t a foolproof cure for what ails the legal profession. Indeed, running law schools and big firms according to the Lannister family’s values (“The Game of Thrones”) — or those of Don Corleone’s (“The Godfather”) — might not change things very much at all.

It’s also worth remembering that Oedipus was somebody’s child, too.

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.

MORE LAW SCHOOL NON-REFORM

Posted on February 20, 2013 by thebellyofthebeast

Every week, there’s a new proposal to reform legal education. In a recent New York Times op-ed, John J. Farmer Jr., dean of the Rutgers School of Law in Newark, offered his suggestion: two-year apprenticeships.

Most deans operate in good faith and are genuinely concerned about the current state of the profession. In fact, a core element of dean Farmer’s idea is quite sound. Hands-on training was a good idea when Clarence Darrow studied under the tutelage of a practicing attorney, and it still is. The British placement system of training contracts has kept its lawyer bubble smaller than ours.

But Darrow began his apprenticeship after one year of classes. Farmer’s suggestion of a two-year residency following three years of law school misses the mark, as do his predictions about what it would accomplish.

Problems of mysterious origin

Farmer begins where he must: a collapsing job market; law school deception in creating the oversupply of lawyers; record tuition levels and student debt. But he ignores an important question: How did those things happen? The answer: a flawed law school business model.

Consider Farmer’s point about law school deception. For years, his school joined most others in reporting 90-plus percent employment rates for the newest graduates. In the 2008 ABA Official Law School Guide, Rutgers-Newark showed a 93.3 percent employment rate; as recently as the 2012 Official Guide, it was 91.3 percent.

Starting in 2012, the ABA required schools to reveal which graduates had long-term full-time jobs requiring a legal degree. Rutgers-Newark hit the overall average for all law schools: only 56 percent for the class of 2011.

As for lawyer oversupply, Rutgers-Newark has been a continuing contributor. According to the 2008 Official Guide, Rutgers-Newark matriculated 182 full-time students from 3,010 applicants. Since then, the number of applicants has declined dramatically, but the number of enrollments hasn’t.

The 2013 Official Guide reports that Rutgers-Newark received only 2,218 applicants to its full-time program. Yet the school still matriculated 174 new students. In other words, since 2007, the number of applicants has dropped by 800 (26 percent), but first-year enrollment has declined by only eight students (4 percent).

Farmer also laments record levels of tuition and resulting student debt. The 2008 Official Guide listed Rutgers-Newark’s full-time non-resident tuition and fees at $27,976; residents paid $19,623. Today, non-resident tuition at the school exceeds $37,000 — a 33 percent jump. Resident tuition has increased by almost 30 percent and now exceeds $25,000.

Non-solutions

Ignoring the role of law schools in creating the current crisis leads Farmer to a proposal that won’t solve it. He suggests scrapping the system whereby big firms “hire graduates from a few select schools, paying them exorbitantly.” In its place, he wants a residency program that would allow law firms “to hire more lawyers, at lower rates, and give talented graduates of less prestigious institutions a chance to shine.”

During his proposed two-year apprenticeships, students would work for minimal wages (“repaying their debts could be suspended, as it is for medical residents”). At the end of the period, firms “could then select whom to keep.” For the losers in that contest, job searches would start anew.

Not gonna happen

Apart from retaining the flawed law school business model that has taken the profession to its current state, Farmer’s plan requires a remarkable leap of faith in big law firm behavior. In particular, he hopes that firms would charge lower hourly rates for new associates and, as a result, hire more of them.

Unlike many law school deans, Farmer has extensive experience as a practicing lawyer. But when he tries to predict the behavior of big law firm leaders, he enters tricky terrain.

The prevailing law firm business model perverts the definition of productivity to mean total billable hours, rather than the efficiency with which lawyer inputs produce outputs for clients. The model emphasizes the metrics of near-term profits at the expense of longer-run values. It would view reducing associate labor costs as a godsend to its bottom line, not as a reason to spread the same amount of existing work among more lawyers.

Farmer doesn’t suggest reducing tuition, enrollment, or the duration of law school itself. Such steps would challenge the law school business model directly. That’s the real lesson of dean Farmer’s op-ed: Until deans revisit their roles in creating the current mess, their proposed solutions are likely to remain wanting.

Dean Farmer suggests, “Legal education has not so much failed the profession as mirrored it.” Actually, it’s done both.

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.

THE CULTURE OF CONTRADICTIONS

Posted on January 16, 2013 by thebellyofthebeast

In an ironic twist, the latest Client Advisory from the Citi Private Bank Law Firm Group and Hildebrandt Consulting warns: “Law firms discount or ignore firm culture at their peril.” Really?

Law firm management consultants have played central roles in creating the pervasive big law firm culture. But that culture seldom includes “collegiality and a commitment to share profits in a fair and transparent manner,” which Citi and Hildebrandt now suggest are vital. For years, mostly non-lawyer consultants have encouraged managing partners to focus myopically on business school-type metrics that maximize short-term profits. The report reveals the results: the unpleasant culture of most big firms.

Determinants of culture

For example, the report notes, associate ranks have shrunk in an effort to increase their average billable hours. That’s how firms have enhanced what Hildebrandt and CIti continue to misname “productivity.” From the client’s perspective, rewarding total time spent to achieve an outcome is the opposite of true productivity.

Likewise, the report notes that along with the reduction in the percentage of associates, the percentage of income (non-equity) partners has almost doubled since 2001. Hildebrandt and Citi view this development as contributing to the squeeze on partner profits. But income partners have become profit centers for most firms. As a group, they command higher hourly rates, suffer fewer write-offs, and enjoy bigger realizations.

From the standpoint of a firm’s culture, a class of permanent income partners can be a morale buster. That’s especially true where the increase in income partners results from fewer internal promotions to equity partner. Comparing 2007 to 2011, the percentage of new equity partner promotions of home-grown talent dropped by 21 percent.

Lateral culture?

In contrast to the more daunting internal path to equity partnership, laterals have thrived and the income gap within most equity partnerships has grown dramatically. “Lateral hiring is more popular than ever,” the report observes. In contrast to the drop in internal promotions, new equity partner lateral additions increased by 10 percent from 2007 to 2011.

This intense lateral activity is stunning in light of its dubious benefits to the firms involved. The report cites Citi’s 2012 Law Firm Leaders Survey: 40 percent of respondents admitted that their lateral hires were “unsuccessful” or “break even.” The remaining 60 percent characterized the results as “successful” or “very successful,” but for two reasons, that number overstates reality.

First, it typically takes a year or more to determine the net financial impact of a lateral acquisition. Most managing partners have no idea whether the partners they’ve recruited over the past two years have produced positive or negative net economic contributions. For a tutorial on the subject, see Edwin Reeser’s thorough and thoughtful analysis, “Pricing Lateral Hires.”

Second, when is the last time you heard a managing partner of a big firm admit to a mistake of any kind, much less a big error, such as hiring someone whom he or she had previously sold to fellow partners as a superstar lateral hire? These leaders may be lying to themselves, too, but in the process, they’re creating a lateral partner bubble.

Stability?

The Hildebrandt/Citi advisory gives a nod to institutional stability, mostly by observing that it’s disappearing: “The 21-year period of 1987-2007 witnessed 18 significant law firm failures. In recent years, that rate has almost doubled, with eight significant law firms failing in the last five years.” If you count struggling firms that merged to stave off dissolution, the recent number is much higher.

In a Bloomberg interview last October, Citi’s Dan DiPietro, chairman of the bank’s law firm group, said that he maintained a “somewhat robust watch list” of firms in potential trouble, ranging from “very slight concern to oh my God!”

Cognitive dissonance

Here’s a summary:

Culture is important, but associates’ productivity is a function of the hours they bill.

Culture is important, but associates face diminishing chances that years of loyalty to a single firm will result in promotion to equity partnership.

Culture is important, but lateral hiring to achieve revenue growth has become a central business strategy for many, if not most, big firms. It has also exacerbated internal equity partner income gaps.

Culture is important and, if a firm loses it, the resulting instability may cause that firm to disappear.

As you try to reconcile these themes, you’ll understand why, as with other Hildebrandt/Citi client advisories, the report’s final line is my favorite: “As always, we stand ready to assist our clients in meeting the challenges of today’s market.”

BONUS TIME – 2012

Posted on November 28, 2012 by thebellyofthebeast

It’s always interesting when two respected legal writers approach the same story in different ways. That happened in the coverage of recently announced associate bonuses.

Ashby Jones at the Wall Street Journal penned an article in the November 27 print edition of the paper that ran under this headline:

“Cravath Sends Cheer — Law Firm Lifts Bonuses for Some Associates as Much as 60%”

As always, Jones accurately reports what is true, namely, that Cravath, Swaine & Moore led this year’s associate bonus announcements with an increase over last year’s base bonus levels. Five paragraphs in, he acknowledges that this significant bump still leaves associates well below the 2007 pay scale. The highest associate bonuses this year are $60,000, compared to $110,000 for combined regular and special bonuses in 2007.

Meanwhile, at the New York Times…

On the same day that Ashby Jones’s article ran in the WSJ, Peter Lattman at the New York Times was a bit more circumspect. In that paper’s print edition, the bold line that ran in the middle of the story reads:

“[Cravath’s] year-end awards set the bar for others, and the payouts are up a bit in 2012.”

Like Jones, Lattman observes that base bonus amounts are substantially higher than previously. But he correctly notes that “when spring bonuses are added to the equation, there has been little increase for Cravath’s associates over the last two years. The law firm did not award spring bonuses in 2012, but last year paid its associates a small stipend in addition to a year-end award. When 2011’s spring bonuses and year-end bonuses are added together, total bonus compensation actually exceeds this year’s level.”

Both Jones and Lattman report that Cravath had $3.1 million in average partner profits for 2011. For perspective, that’s slightly above the $3.05 average for 2006, and not all that far from the $3.3 million all-time high in 2007. Needless to say, associate bonuses haven’t enjoyed a similar recovery. But depending on what happens in the spring, they still could, which leads to a final point.

Who’s right?

The answer is Elie Mystal over at Above the Law. Mystal observes that spring bonuses more properly belong in the analysis of total compensation for the immediately preceding calendar year. That is, a bonus paid in early 2011 is really compensation for 2010.

The analysis is straightforward. Big law firms waiting for more complete information on how the fiscal year will end preserve flexibility by lowballing the November bonus numbers. Evidently, Cravath concluded that its $3.1 million average partner profits for 2011 were inadequate to justify any significant spring bonus for associates in early 2012.

The fate of the “special” bonus

The question now is whether spring bonuses are gone forever. After all, they first appeared as “special bonuses” — meaning that they came with this implied caveat: don’t build those dollars into next year’s expectations. Of course, that message has landed on deaf ears. But it gives firm leaders a way to convince themselves that it’s fair to leave associate compensation far below 2007 levels, even though average partner profits have recovered almost completely to those lofty heights. Indeed, some firms have even bested their pre-recession records.

In all of this, two things are working against associates who dream of a return to the good old days (of 2007). First, the glut of attorneys grows as the demand for new associates shrinks. Second, most law firm leaders are dealing with a revolution of rising expectations among senior equity partners. The potential loss of a rainmaker strikes fear in the hearts of many firm leaders.

But here’s a reason to hope. True visionaries seeking long-term institutional stability let such troublemakers walk. They promote cultural values that transcend the impact on the current year’s income statement. They let resulting gains in client service and attorney morale produce ample financial and non-financial rewards for all.

And all of this reveals itself in how partners at the top of a firm treat associates at the bottom — a place where too many seem to have forgotten that they themselves once stood.

A BIG LAW FIRM THREE-WAY

Posted on November 13, 2012 by thebellyofthebeast

With Hurricane Sandy and the election dominating last week’s headlines, news of another blockbuster merger didn’t receive the attention that it deserved. Later this month, the combination of SNR Denton, the Canadian firm (Fraser, Milner & Casgrain – FMC), and Paris-based Salans will create a 2,500-attorney enterprise known as Dentons, assuming their respective partners approve the merger. The transaction merits a closer look.

Not so long ago

Twenty years ago, Elliott Portnoy graduated from Harvard Law School. In 2002, he joined Sonnenschein, Nath & Rosenthal. Prior to that, he’d headed the public policy group of Arent Fox, an Am Law 200 firm, in Washington, D.C.

In June 2006, at age 40, Portnoy became the youngest chairman in Sonnenschein’s history. At the same time, the firm released a new strategic plan whereby it would increase average equity partner profits from $800,000 to $1.4 million by 2008. That didn’t happen.

In 2007, Sonnenschein had 600 lawyers and average partner profits of $915,000, but since then it hasn’t seen profits numbers that high. Central components of its strategy have been the aggressive recruitment of lateral partners and the pruning away of others. In early 2008, 37 lawyers and 87 non-attorney employees received their walking papers. By year-end, average partner profits had dropped to $805,000. Of course, the onset of the Great Recession contributed to that decline, but many other firms weathered the storm with much less damage.

Time to merge

The 2008 drop in average partner profits didn’t seem to affect Sonnenschein’s strategic plan. Aggressive lateral hiring continued, including 100 lawyers from failing Thacher, Proffitt & Wood in December 2008. Average partner profits kept dropping — to $780,000 in 2009. The following year, 2010, brought the ultimate lateral hiring event: Sonnenschein’s merger with U.K.-based Denton, Wilde & Sapte to create a 1,200-lawyer firm.

As a Swiss verein, the two firms retained their independent financial status. But according to the Am Law Global 100, SNR Denton’s first full year as a combined entity produced overall average partner profits of $700,000 in 2011. The former Sonnenschein side of the firm reported $880,000 in average partner profits, so Portnoy heralded the merger a success and “not a destination, but a part of the journey.”

The journey continues

In 2011, SNR Denton was one of several firms exploring merger possibilities with Dewey & LeBoeuf as it careened toward disaster. According to the Wall Street Journal, Sonnenschein’s leadership had named its proposed deal “A Phoenix Rises from the Ashes” and contemplated a full-scale merger that combined all 1,000 Dewey & LeBoeuf attorneys with SNR Denton. Borrowed money would have financed the transaction — a tactic apparently drawn from the big law firm “lessons not learned” list.

Unexpected bad news may have saved SNR Denton from itself. According to the Journal, the deal was gaining momentum when it cratered after Dewey’s revelation that Manhattan district attorney Cyrus Vance, Jr. had opened a criminal investigation into Dewey.

Doubling down on a dubious approach

The journey has now led to the proposed combination of SNR Denton, FMC, and Salans. If consummated, the merger would double the size of the current SNR Denton. If the transaction goes through, what results won’t be a partnership. Whether it would become a profitable business venture for the participants is an open question.

To help answer that question, SNR Denton’s management got limited outside help. According to Portnoy and SNR Denton’s global chairman Joseph Andrew, “branding and advertising advisers” recommended a single-name moniker, Dentons. (Do they know that Dr. Dentons are children’s pajamas with feet?) But Andrew also noted that the firm used no strategic legal consultants or advisers in its process.

I don’t know if the other firms had advisers. Nor do I know if Salans had advisers in 1998, when it blazed a trail by becoming the first major law firm to complete a transatlantic merger, acquiring Christy & Viener. But that transaction didn’t turn out very well.

Maybe this time will be different. For the sake of many fine lawyers and even greater numbers of staff who are relying on management to chart a wise course for three law firms, let’s hope so. Among the most important lessons of Dewey & LeBoeuf are these: the margin for leadership error is slim and the consequences of missteps can be catastrophic.

BIG LAW FIRM MANAGEMENT PUZZLES

Posted on November 7, 2012 by thebellyofthebeast

Last month, ALM Legal Intelligence released “Thinking Like Your Client: Strategic Planning In Law Firms,” a curiously titled survey of Am Law 200 law firm leaders. The title is curious because the results demonstrate that most law firm managing partners are neither thinking like clients nor planning strategically for their firms’ futures.

Lateral self-delusion

The appendix of actual law firm responses from 79 out of all Am Law 200 partners is more interesting than the narrative explanations in the report. For example, one question asked them to identify their firms’ top three priorities. In order, the most frequent answers were:

Growing the firm’s revenues — 66 percent

Talent acquisition and retention — 59 percent

Improving firm profitability — 54 percent

Eighty percent said they had a strategic plan in place to address firm priorities. But other responses suggest that the plans are pretty simple: hire more lateral partners.

When asked how, as part of their strategic plans, firms were pursuing growth in the next two years, 96 percent said “acquiring laterals.” Seventy-six percent of the 75 respondents who listed this strategy said they would pursue laterals “aggressively.” More than 70 percent of respondents expect that, as a staffing category, lateral partner hires will increase over the next five years.

Yet they also acknowledge that laterals have been a mixed bag. Only 28 percent of managing partners said that their lateral strategies over the past five years have been “very effective — most laterals have been retained and contributed to business growth.” And those are just the dollar impacts. Ignored are the cultural consequences for a firm whose growth strategy depends on endless acquisition of outside talent. Nevertheless, most big firm leaders are doubling down on a dubious approach.

Is it really about the clients?

As for other half of the report’s title — “thinking like your client” — fewer than a third of respondents included “client performance management and client satisfaction measurement” as one of their top three priorities. Responses to other questions echoed that attitude. Forty-one percent admitted that they had no plan in place to build, track and measure client loyalty and satisfaction. When asked what aspect of their client relationships they would most like to change, only 21 percent said higher service levels — far behind the desire to take work from other firms and improve profitability.

When asked to identify the top three metrics they regarded as most important in managing firm performance, leaders listed a familiar trinity: firm revenue, firm profit, and profit per partner. Client retention metrics got a whopping 4 percent response, tied at the bottom of the list with “other.”

Only 18 percent use “client retention metrics” to reward partners, but more than 70 percent identified collections, firm profit, billings and client business development as the key criteria. (Apparently dollars from new clients are worth more than dollars from old ones.)

Look out for what’s next

How well is all of this working? Better for some than for others, and that will continue. When asked whether non-partner to partner leverage ratios had left their firms properly resourced to provide exceptional client service while also growing the firm business, 70 percent of law firm managers said they needed to make adjustments.

We all know which way those “adjustments” will go: in the direction of fewer equity partners. With respect to staffing categories that managing partners expect to experience the biggest decrease over the next five years, the largest plurality chose equity partners. Additionally, more than 90 percent of law firm managers said they had “unprofitable partners.” Seventy percent said that such subpar performers were at risk for de-equitization or removal.

Finally, if you’re wondering about the hourly rate regime and whether law firms can deal with any other system, consider this: When asked to compare alternative fee arrangements (AFAs) to hourly rate matters, 12 percent of firm leaders said AFAs were more profitable, 23 percent said they were less profitable, and 65 percent had no clue. How’s that for a leadership confidence builder?

Perhaps some of these managing partners have a subconscious awareness of their shortcomings. When asked to list the top three areas where their firms have a competitive advantage, only 14 percent chose “strong firm leadership.” Unfortunately, it seems clear that even that dismal number is too high.

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.

IS IT REALLY MORE COMPLEX THAN GREED?

Posted on July 10, 2012 by thebellyofthebeast

Revisionism is already obfuscating the story of Dewey & LeBoeuf’s demise. If facts get lost, the profession’s leaders will learn precious little from an important tragedy.

For example, the day after Dewey & LeBoeuf filed its bankruptcy petition, Clifford Winston and Robert W. Crandall, two non-lawyer fellows at the Brookings Institution, wrote an op-ed piece for The Wall Street Journal offering this analysis: “Dewey’s collapse has been attributed to the firm being highly leveraged and unable to attract investment from businesses outside the legal profession.”

Attributed by whom? They don’t say. Anyone paying attention knows that outside investors bought $150 million in Dewey bonds. But apparently for commentators whose agenda includes proving that overregulation is the cause of everyone’s problems — including the legal profession’s — there’s no reason to let facts get in the way.

Another miss

On the same day that the Winston & Crandall article appeared, a less egregious but equally mistaken assessment came from Indiana University Maurer School of Law Professor William Henderson in the Am Law Daily: “More Complex than Greed.” Bill and I agree on many things. I consider him a friend and an important voice in a troubled profession. But I think his analysis of Dewey & LeBoeuf’s failure misses the mark.

Henderson suggests, “One storyline that will attract many followers is that large law firm lawyers, long viewed as the profession’s elite class, have lost their way, betraying their professional ideals in the pursuit of money and glory. This narrative reinforces that lawyer-joke mentality that lawyers just need to become better people. That narrative is wrong.”

What’s wrong with it? In my view, not much, as “House of Cards” in the July/August issue of The American Lawyer now makes painfully clear.

What happened?

Rather than the greed that pervades “House of Cards,” Henderson suggests that Dewey & LeBoeuf reveals the failure of law firms to innovate in response to growing threats from new business models, such as Axiom and Novus Law. Innovation is an important issue and Henderson is right to push it. But as the story of Dewey’s failure unfolds, the inability to innovate in the ways that Henderson suggests — using technology and cheaper labor to achieve efficiencies and cost savings — won’t emerge as the leading culprit.

Rather, greed and the betrayal of professional ideals lie at the heart of what is destabilizing many big law firms. In that respect, most current leaders have changed the model from what it was 25 years ago. Am Law 100 firms’ average partner profits soared from $325,000 in 1987 to $1.4 million in 2011. Behind that stunning increase are leadership choices, some of which eroded partnership values. As a result, many big firms have become more fragile. If greed doesn’t explain the following pervasive trends, what does?

— Short-term metrics — billings, billlable hours, leverage — drive partner compensation decisions in most big firms. Values that can’t be measured — collegiality, community, sense of shared purpose — get ignored. When a K-1 becomes the glue that holds partnerships together, disintegration comes rapidly with a financial setback.

— Yawning gaps in the highest-to-lowest equity partner compensation. Twenty-five years ago at non-lockstep firms, the typical spread was 4-to-1 or 5-to-1; now it often exceeds 10-to-1 and is growing. That happens because people at the top decide that “more” is better (for them). Among other things, the concomitant loss of the equity partner “middle class” reduces the accountability of senior leaders.

— Leverage has more than doubled since 1985 and the ranks of non-equity partners have swelled. That happens when people in charge pull up the ladder.

— Lateral hiring and merger frenzy is rampant. One reason is that many law firm leaders have decided that bigger is better. The fact that “everybody else is doing it” reinforces errant behavior. Growth also allows managers to rationalize their bigger paychecks on the grounds that they’re presiding over larger institutions.

Throughout it all, associate satisfaction languishes at historic lows. No one surveys partners systematically, but plenty of them are unhappy, too. Unfortunately, such metrics that don’t connect directly to the short-term bottom line often get ignored.

Innovation won’t solve the problem

A few successful, stable law firms have shunned the now prevailing big law model. They innovate as needed, but far more important has been their ability to create a culture in which some short-term profit gives way to the profession’s long-term values. What is now missing from most big law firms was once pervasive: a long-run institutional vision and the willingness to implement it. Too often, greed gets in the way.

With all due respect to Messrs. Winston, Crandall and Henderson, sometimes the simplest explanation may also be the correct one.

DEWEY’S L. CHARLES LANDGRAF: THE PLIGHT OF THE LOYAL COMPANY MAN

Posted on June 18, 2012 by thebellyofthebeast

This is the last — for now — in a series profiling Dewey & LeBoeuf’s former leaders, especially its final four-man office of the chairman. L. Charles Landgraf (Rice University, B.A., 1975; New York University, J.D. 1978) had been a long-time partner at LeBoeuf Lamb when it merged with Dewey Ballantine in October 2007.

In the 1990s, when LeBoeuf Lamb needed someone to bolster its London presence, Landgraf went. When the firm established a Moscow office, he helped. When duty called to the Washington, D.C. office that he was heading in 2012, Charley landed in Dewey & LeBoeuf’s four-man office of the chairman. It quickly became a thankless job.

A partner’s predicament

According to a Wall Street Journal interview, Landgraf helped out after the firm had failed to meet profit targets for several years. Unable to pay everything owed to guaranteed compensation partners, he and Jeffrey Kessler “spearheaded” a plan (according to Martin Bienenstock in that interview). It would have paid off partners who had taken IOUs from the firm by dedicating six percent of partnership earnings from 2014 to 2020.

Always candid, Landgraf said recently that the plan was necessary because “the firm had a lot of built-up tension about the fact that we had a compensation schedule last year that exceeded the actual earnings, and that had been true for a couple of years.” “Built-up tension” is a delicate description of the plight facing a firm that organizes itself around so-called stars whose loyalty extends no deeper than their guaranteed incomes.

Go along to get along?

My hunch is that the plan to deal with this problem wasn’t Landgraf’s idea. He wasn’t among those listed in the “Senior Management” section of the firm’s 2010 private placement memorandum. Nor was he mentioned in April 2012 when Dewey & LeBoeuf identified for Thomson Reuters seven key players essential to the firm’s survival.

He may fit the profile of many big law partners who have spent years — even decades — in the same firm and retain a deep loyalty to something that has actually disappeared from their institutions, namely, a true partnership and all that it entails. Perhaps they defer too willingly to others who are supposed to be smarter, more knowledgeable and/or have superior judgment. But when things get rough, they step up and do what they can to salvage the situation.

Undue deference revealed

From that perspective, Landgraf’s interview for The Wall Street Journal on Saturday, May 12, 2012 was revealing. A day earlier, Dewey & LeBoeuf’s resident bankruptcy expert Martin Bienenstock had announced that he was leaving the firm. By the time the interview appeared, he was already on Proskauer Rose’s attorney roster.

But during The Wall Street Journal interview, Landgraf — who was then the only remaining member of the original Gang of Four comprising the office of the chairman — let his former partner do all of the talking for a firm that was no longer Bienenstock’s. In printed form, the interview transcript fills seven pages. Landgraf’s words barely consume a half-page.

Bienenstock credited Landgraf and Kessler for the plan that committed future partner earnings to pay guaranteed partner IOUs from prior years. Landgraf said that the lateral contracts were “something we’re looking at. Whether all the contracts were the subject of full discussion or simply known as a technique that was used…is still being reviewed.”

His next line suggested that others at the firm may have been a bit too persuasive in selling him a bad idea: “But the technique of using guarantees of all forms, especially in the recruitment of laterals and retention of key business users, is pretty widespread throughout the industry.”

For limited periods involving laterals? Maybe. For four- or six-year deals involving legacy partners? I don’t think so. For 100 members of a 300-partner firm? Not for something that should call itself a partnership.

Two days after that interview appeared, Landgraf was gone, too. As hundreds of remaining Dewey & LeBoeuf lawyers and staff around the world wondered what might come next, one gets the sense that he was trying to be a good partner to the end.

I don’t know if a final caution applies to Landgraf, but it’s an appropriate note on which to conclude this series: a team player serves neither himself nor his institution when he defers to others as they move the team in the wrong direction. It’s time to empower dissenting voices with Aric Press’s “Partner Protection Plan.”

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’S JEFFREY KESSLER: STARS IN THEIR EYES

Posted on June 1, 2012 by thebellyofthebeast

This is the third in a series profiling Dewey & LeBoeuf’s former leaders. Apparently, Jeffrey Kessler (Columbia University, B.A., 1975; Columbia Law School, J.D., 1977) has become a prisoner of his celebrity clients’ mentality. A prominent sports lawyer, he analogizes big-name attorneys to top athletes: “The value for the stars has gone up, while the value of service partners has gone down.”

Kessler was a long-time partner at Weil, Gotshal & Manges before joining Dewey Ballantine in 2003. After the firm’s 2007 merger with LeBoeuf Lamb, he became chairman of the Global Litigation Department, co-chairman of the Sports Litigation Practice Group and a member of the Executive and Leadership Committees. Long before he became a member of the Gang of Four in Dewey & LeBoeuf’s office of the chairman, he was a powerhouse in the firm.

Blinded by their own light

Some attorneys have difficulty resisting the urge to absorb the ambitions and ethos of their clients. Many corporate transactional attorneys have long been investment banker and venture capital wannabees, at least when it comes to the money they’d like to make.

Of course, not all corporate practitioners are myopic thinkers. Kessler proves that narrow vision isn’t limited to transactional attorneys. But the rise of such attitudes to the top of many large law firms has occurred simultaneously with the profession’s devolution to models aimed at maximizing short-term profits and growth.

Kessler was a vocal proponent of the Dewey & LeBoeuf star system that produced staggering spreads between people like him — reportedly earning $5.5 million a year — and the service partners, some of whom made about five percent of that. It was the “barbell” system: top partners on one side; everybody else on the other.

In such a regime, there’s no shared sacrifice. What kind of partnership issues IOUs to star partners when the firm doesn’t make its target profits? Something that isn’t a partnership at all.

Lost in their own press releases

Kessler regularly finds himself in the presence of celebrity athletes. That can be a challenging environment. But once you start believing your own press releases, the result can be the plan that he and fellow Dewey & LeBoeuf partner Charles Landgraf “spearheaded” (according to fellow Gang of Four member Martin Bienenstock).

To deal with outstanding IOUs to Dewey partners whose guaranteed compensation couldn’t be paid when the firm underperformed for the year, Kessler helped to mortgage its future: for “a six- or seven-year period, starting in 2014, [a]bout six percent of the firm’s income would be put away to pay for this….”

It’s a remarkable notion. Partners didn’t get all of their previously guaranteed earnings because the firm didn’t do well enough to pay it. But rather than rethink the entire house of cards, it morphed into a scheme whereby future partnership earnings — for six or seven years — would satisfy the shortfall. Never mind that there was no way to know who would be among the firm’s partners in those future years. The money had to be promised away because the stars had to be paid.

Sense of entitlement

Kessler gives voice to the pervasive big law firm attitude that without stars there is no firm. It’s certainly true that every firm has to attract business and that some lawyers are more adept at that task than others. But Kessler’s approach produced yawning income gaps at Dewey. Similar attitudes have contributed to exploding inequality afflicting many equity partnerships. For insight into the resulting destabilization, read the recent article by Edwin Reeser and Patrick McKenna. “Spread Too Thin.”

But does Kessler really think that he and a handful of his fellow former Dewey partners are the first-ever generation of attorney stars? Twenty-five years ago when average partner profits for the Am Law 100 were $325,000 a year, did his mentors at Weil Gotshal earn twenty times more than some of their partners — or anything close in absolute dollars to what Kessler thinks he’s worth today? Does he believe that there are no stars at firms such as Skadden Arps, Simpson Thacher or other firms that have retained top-to-bottom spreads of 5-to-1 or less?

Beyond his prominence in the profession, Kessler is shaping tomorrow’s legal minds as a Lecturer-in-Law at Columbia. For anyone who cares about the future, that’s worth pondering.

DEWEY’S MARTIN BIENENSTOCK: PARTNERSHIP, PROFESSIONALISM AND WHAT TO TELL THE KIDS

Posted on May 24, 2012 by thebellyofthebeast

This is the second in a series profiling Dewey & LeBoeuf’s former leaders. Martin Bienenstock (University of Pennsylvania, B.S., Wharton School, 1974; University of Michigan, J.D., 1977) was heralded as “one of the most innovative, creative restructuring attorneys in the country” when the Dewey & LeBoeuf spin machine put him at the center of an April 21, 2012 article in The New York Times. He seemed to be the perfect candidate to save his firm.

One item that probably impressed NY Times’ readers was his presence on the Harvard Law School faculty. That credential showed up on the firm’s Private Placement Memorandum for its 2010 bond offering, too. According to the school’s website, he taught the Corporate Reorganization course during the spring term 2012.

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Apart from imparting substantive knowledge, he — like any educator — is also a role model for students. In that respect, what have future attorneys been learning from Bienenstock?

What does partnership mean?

Every law student learns the basic concepts: partners owe each other fiduciary duties; they share risk, gains and losses; they’re accountable to all other partners. But theoretical partnership principles played out much differently in Bienenstock’s firm after he joined Dewey & LeBoeuf and its Executive Committee in November 2007.

— Multi-year compensation guarantees went to some partners, including Bienenstock, but their pay didn’t depend on performance. Some partners say they were unaware of the scope and magnitude of such deals until an October 2011 partner meeting.

— Partner income spreads reportedly grew to more than twenty-to-one. In “Spread Too Thin,” Patrick McKenna and Edwin Reeser describe the destabilizing effects of that ubiquitous big law trend.

— A 2010 bond issuance obligated future partners to payments of at least $125 million, starting in 2013 and continuing to 2023.

— Top partners, including Bienenstock, thought they were making great sacrifices when the firm missed its income targets in 2011: they “capped” themselves at $2.5 million and took firm IOU’s to make up annual shortfalls from their guaranteed amounts. Continuing strategies that mortgaged the future, Dewey & LeBoeuf planned to dedicate six percent of its income from 2014 to 2020 to repay those IOUs.

— Questions have surfaced about the accuracy and sufficiency of the firm’s financial disclosures to fellow partners and third parties.

What does professionalism mean?

After Steven H. Davis left his management position, the Dewey & LeBoeuf spin machine put Bienenstock center stage as the go-to person who could work a miracle. Maybe it would be a “prepack” – a prepackaged bankruptcy that would allow the firm to shed some debts and become more attractive to a merger partner.

Maybe it would be a traditional merger.

Maybe, maybe, maybe.

One thing Bienenstock made clear throughout: “There are no plans to file bankruptcy. And anyone who says differently doesn’t know what they’re talking about.”

Ten days later, he and members of his bankruptcy group were on their way to Proskauer Rose.

Parsing Bienenstock’s statement about a bankruptcy filing is akin to dissecting President Clinton’s response to questions about his sexual encounters with a White House intern: “It depends on what the meaning of is, is.”

What does leadership mean?

Did Beinenstock have an actual plan for the firm’s survival or did chaos better serve the economic interests of a few top partners? Was he personally committed for the long haul or arranging his own exit? Was anyone really in charge?

Those questions went unanswered as speculation and uncertainty swamped the firm: One-third of the firm’s partners gone by the end of April? A memo invites others to build their own lifeboats, but attorneys and staff should keep working diligently for clients? Use personal credit cards for client copying charges? No mailroom? No IT? Why do senior partners keep asking for empty packing boxes?

Leadership is needed most in times of crisis. As Dewey & LeBoeuf’s Office of the Chairman went from four to three to two to one to none, leadership was nowhere to be found.

Accepting responsibility

When asked who or what was to blame for Dewey’s demise, Bienenstock demurred: “[N]o one saw the new world coming.”

Except plenty of other people did.

Were any of the summer or permanent associates whom Dewey stiffed Bienenstock’s former students at Harvard? If so, their real life experiences of the past three months taught them more about partnership, professionalism and leadership in some big firms than Bienenstock or anyone else could have communicated in years of classes. The question now is whether Bienenstock will be on Harvard’s faculty list next year.

DEWEY’S MORTON PIERCE: ACCEPTING RESPONSIBILITY

Posted on May 20, 2012 by thebellyofthebeast

This is the first in a series profiling Dewey & LeBoeuf’s former leaders. Morton Pierce (Yale University, B.A., 1970; University of Pennsylvania, J.D., 1974) is an appropriate place to begin because on May 3, 2012, he told The Wall Street Journal that he hadn’t been actively involved in Dewey’s management for years and had stepped down from the firm’s Executive Committee in 2010.

Pierce is widely acclaimed as one of the country’s top mergers and acquisitions attorneys. He was chairman of Dewey Ballantine when its attempt to merge with Orrick, Herrington & Sutcliffe failed in 2007.

A partnership within a partnership

Pierce was a principal architect of Dewey Ballantine’s merger with LeBoeuf Lamb. Based on Bruce MacEwen’s analysis of the financial data, Dewey got the better end of that deal. As for Pierce himself, The Wall Street Journal reports that he “had negotiated a pay package that guaranteed him $6 million a year for six years, according to a person with direct knowledge of the arrangement.” The subject of my next post, Martin Bienenstock, said that there were many such deals to lock up talent for at least four years after the merger.

Early in 2010 — the year Pierce says he left the firm’s Executive Committee — Dewey mortgaged its future with a $125 million bond offering (repayment due from 2013 to 2023). In 2011, the sixty-two-year-old Pierce negotiated a new deal for himself. The Journal continues: “[H]e secured a new, eight-year contract that would pay him $8 million for several years and wind down to $6 million in later years, that person said.”

Dewey’s next gambit: IOUs to the oxymoronic group — guaranteed compensation partners — when the firm didn’t earn enough current income to pay them in full. Committing future profits to make up for prior periods of missed earnings is, at best, a dubious strategy. At worst, it transforms a partnership into something that looks like a Ponzi scheme. It’s difficult to envision an attorney recommending the idea to a client.

A firm leader?

Pierce’s effort to distance himself from management is interesting. He’s featured prominently as part of the firm’s “Executive Office” in the 2010 Private Placement Memorandum for its bonds. Two years later, an April 11 2012 article identified Pierce as “one of seven key lawyers” who determined Dewey’s fate.

Until the day he left in May 2012, the firm’s website still introduced his biographical page as follows: “Morton Pierce is a Vice Chair of Dewey & LeBoeuf and co-chair of the Mergers and Acquisitions Practice Group. He is also a member of the firm’s global Executive Committee.”

Not my job

From a self-proclaimed distance, Pierce described Dewey’s leaders in the third person. When asked about an April 2012 meeting at which senior partners supposedly recommitted themselves to the firm and its survival, Pierce’s only comment was: “There was a meeting and I was there.”

Three weeks later, he told the Journal, “I think the executive committee did the best job that they could under the circumstances.” That article continued, “Mr. Pierce didn’t assign blame for the firm’s current situation.”

Pierce told the NY Times, “I am sorry about what happened” — as if some external event or rogue actor was responsible.

The nature of leadership

Even so, Pierce kept his sense of gallows humor while packing up for White & Case. Describing how he’d like to merge all of the wonderful firms that had expressed interest in taking him as Dewey imploded, he told The Wall Street Journal on May 3: “Although looking at the Dewey & LeBoeuf merger, maybe mergers aren’t such a good idea.”

I suspect that most of the 2,000 Dewey lawyers and staffers who once worked at the firm don’t think Pierce has much of a future in comedy. He didn’t mention his other non-joke: that his resignation letter reportedly claimed that the firm owed him $61 million.

If the Dewey spin machine and website description were accurate, Pierce remained at the center of power until the moment he resigned from the firm. If, as he claims, he wasn’t involved in management after 2010, that’s worse. The notion that someone of Pierce’s professional stature would remain on the sidelines as his firm pursued misguided strategies and then would watch it spin into oblivion is stunning.

Senior partners in big firms often complain about young lawyers’ unwillingness to take responsibility for mistakes and their consequences. Perhaps some of the profession’s so-called leaders could set a better example.

DEWEY: PROFILES IN SOMETHING

Posted on May 15, 2012 by thebellyofthebeast

Some key players in the Dewey & LeBoeuf debacle are also among the profession’s leaders; that makes them role models. Some teach at law schools; that means they’re shaping tomorrow’s attorneys, too. But how do they look and sound without the Dewey spin machine?

Some readers might worry that spotlighting them erodes civility. But civility goes to the nature of discourse; it can never mean turning a blind eye to terrible things that a few powerful people do to innocent victims. Sadly, the personalities and trends that unraveled Dewey aren’t unique to it.

As to former chairman Steven H. Davis, David Lat’s analysis at Above the Law and Peter Lattman’s report at the NY Times are sufficient; there’s no reason to pile on. Rather, I’ll look at the “Gang of Four” plus one: the men comprising the four-man office of the chairman who replaced Davis as the firm came unglued, and Morton Pierce. Here’s a preview.

Morton Pierce was chairman of Dewey Ballantine when merger discussions with Orrick, Herrington & Sutcliffe failed and LeBoeuf, Lamb, Greene & McRae entered the picture. After spearheading the deal with Davis, Pierce locked in a multi-year $6 million annual contract that he reportedly enhanced in the fall of 2011. In his May 3 resignation later, he reportedly claimed that the firm owed him $61 million.

As he spoke with The Wall Street Journal while packing boxes for White & Case, Pierce said that he hadn’t been actively involved in firm management since 2010. But the Dewey & LeBoeuf website said otherwise: “Morton Pierce is a Vice Chair of Dewey & LeBoeuf and co-chair of the Mergers and Acquisitions Practice Group. He is also a member of the firm’s global Executive Committee.” [UPDATE: Two days after this May 15 post, Pierce’s page on the Dewey & LeBoeuf website finally disappeared. Such are the perils of losing an IT department too early in the unraveling process.] My post on Pierce will be titled “Accepting Responsibility.”

Martin Bienenstock, one of the Gang of Four, was an early big name hire for the newly formed Dewey & LeBoeuf. In November 2007, he left Weil, Gotshal & Manges after 30 years there. He got a guaranteed compensation deal and sat on the Executive Committee as his new firm careened toward disaster. As Dewey & LeBoeuf’s end neared, he maintained a consistent position throughout: “There are no plans to file bankruptcy. And anyone who says differently doesn’t know what they’re talking about.”

No one asked if he had a realistic plan for the firm’s survival. Ten days later, he and members of his bankruptcy group were on the way to Proskauer Rose. The title of my upcoming post on Pierce could work for Bienenstock, too. But because he teaches at Harvard Law School, I’m going to call it “Partnership, Professionalism, and What To Tell the Kids.”

Jeffrey Kessler, another of the Gang of Four, was also a lateral hire from Weil, Gotshal & Manges. He joined Dewey Ballantine in 2003. As a member of Dewey & LeBoeuf’s Executive Committee, he became a vocal proponent of the firm’s star system that gave top producers multi-year, multimillion-dollar contracts — one of which was his.

A sports law expert, Kessler analogized big-name attorneys to top athletes: “The value for the stars has gone up, while the value of service partners has gone down.” The title of my post on Kessler will be “Stars In Their Eyes.”

Richard Shutran, the third of the Gang of Four, was a Dewey Ballantine partner before the 2007 merger. He became co-chair of Dewey & LeBoeuf’s Corporate Department and Chairman of its Global Finance Practice Group. At the time of the firm’s $125 million bond offering in 2010, he told Bloomberg News that the bonds’ interest rates were more favorable than those from the firm’s bank. In March 2012, he said Dewey was in routine negotiations with lenders over its credit line. He also dismissed The American Lawyer’s retroactive revision of Dewey’s 2010 and 2011 financial performance numbers as much ado about nothing. My post on Shutran will be “Running the Numbers.”

L. Charles Landgraf, the last of the four, began his career at LeBoeuf Lamb 34 years ago. I don’t know him (or any of the others), but my hunch is that Charley (as people call him) is a decent guy. My post on him will be called “The Plight of the Loyal Company Man.”

In future installments, we’ll take a closer look at each of them. Sometimes it won’t be pretty, but neither is what some of them personify about the profession’s evolution.

DEWEY: COLLATERAL DAMAGE

Posted on May 5, 2012 by thebellyofthebeast

The vast failure of knowledge among the nation’s brightest law students remains remarkable. Their comments in the wake of Dewey & LeBoeuf’s stunning implosion make the point regrettably clear. Even as they become collateral damage to a tragic story that has many innocent victims, some persist in allowing hope to triumph over reality.

The NY Times reported on the 30 second-year law students from the nation’s best schools who thought they’d be earning $3,000 a week as Dewey & LeBoeuf summer associates. They’re now scrambling to find another productive way to fill three months that were supposed to be a launching pad for full-time careers with starting compensation at $160,000 a year.

Idealistic dreams meet harsh reality

One Ivy League student expressed optimism that other firms would step up and offer jobs to the displaced:

“A firm may look like a corporation, yes, but we’re all part of a fraternity of lawyers. Next year one becomes a member of the bar association, a linked structure. The firms may be competitors, but at the end of the day this is still the greater legal field. I hope this sensibility that we are part of a profession will also be in the minds of people as they consider us.”

The article doesn’t say which Ivy League law school the student attends, but it — along with his undergraduate institution — has failed the educational mission miserably. Most large law firms, including Dewey & LeBoeuf, ceased membership in a profession years ago and, during the last decade, that trend has accelerated. A myopic focus on short-term business school-type metrics, two of which are growth and equity partner profits — has taken Dewey and many others down a road to unfortunate places.

Most big firms are no longer “part of a profession” that will step up to offer law students or anyone else a life preserver. If they hire people, such as former Dewey lawyers and staff, it’s because they fit those firms’ own business plans. Another student who thought he had a job at Dewey for the summer got it right: “Now every other program is full, and it’s not like they’re going to adjust their plans to accommodate the failure of this one.”

It’s all connected

Everyone wonders why the number of law school applicants continues to outpace the number of law school openings that, in turn, dwarf the demand for lawyers. One answer is that colleges and law schools don’t educate prospective law students about the daunting challenges ahead. In fact, those institutions have the opposite incentives: colleges want to maximize the placement of their graduates in professional schools because that makes them look good; law schools maximize applicants because it pumps up the selectivity component of their U.S. News & World Report rankings.

Those already in the legal profession are well aware of the true state of affairs. The great disconnect is the failure of information to make its way to prospective lawyers who could benefit most from it. The press has increased its attention to the topics — the glut of lawyers; staggering law school debt that now averages more than $100,000; increasing career dissatisfaction among practicing lawyers.

Of course, ubiquitous confirmation bias will continue to encourage prospective lawyers to see what they want to see as they rationalize that they’ll be the lucky ones running the gauntlet successfully. Some will; too many won’t. The remarks of the Ivy Leaguer who spoke with the Times shows how much work remains for those who truly care about the fate of the next generation — lawyers and non-lawyers alike. There are miles to go before any of us should sleep.

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.

SPINNING DEWEY’S HEROES

Posted on April 25, 2012 by thebellyofthebeast

Dewey & LeBoeuf’s latest designated savior is Martin J. Bienenstock. The NY Times says that he faces “perhaps the most challenging assignment of his career: the restructuring of his own law firm.”

According to the Times, his challenges include bank negotiations to restructure Dewey’s outstanding loans, consideration of reorganization options, and avoiding liquidation. Given the complex array of fiduciary duties accompanying such a job description — as a partner to his fellow partners while also acting as counsel to the partnership as a whole without favoring any individual partner or group of partners — it’s a daunting task.

Last month’s star was Steven H. Davis, whose assurances during an interview for Fortune magazine produced an article titled “Dewey & LeBoeuf: Partner exodus is no big deal.” Right — Dewey started the year with 300 partners; 30 were gone by the time of Davis’s interview; 40 more have left since then. Among his least prescient remarks: “If the direction we’re taking the firm in was somehow disapproved of, then the reality is that there ought to be a change in management. But I don’t sense that.”

The more things change…

Less than a week later, a five-man executive committee replaced Davis. One member of the new “office of the chairman” is Bienenstock. It’s ironic because he exemplifies Dewey’s business strategies that may have worked well in his case, but less so in others’, namely, lateral hiring and compensation guarantees. Prior to joining Dewey & Leboeuf in November 2007 (a month after the merger creating it), he’d spent 30 years at Weil, Gotshal & Manges. While he sat on Dewey’s management committee that Davis chaired, his new firm became one of the top-10 in 2011 lateral partner hiring.

According to The Lawyer, Bienenstock was reportedly among those who recently agreed to cap personal earnings at $2.5 million. That’s a start, but the article also said that some partners’ deferred income took the form of promissory notes due in 2014. It’s interesting that a firm already on a $125 million hook for something that law firms rarely do — offering bonds that begin to come due in April 2013 — would add even more short-term debt to its balance sheet. Add it to the list of unexpected complications that accompany partnership compensation guarantees.

The real Dewey heroes

This rotating focus on a handful of lawyers at the top obfuscates the importance of everyone else. Rainmakers come and go — and their seven-figure incomes survive. Bienenstock is an example. So are the many former Dewey management committee members who have already left, including John Altorelli, whose parting words showed little compassion for his former partners, associates, paralegals and staff. Even top partners who managed firms that went bust seem to land on their feet. After Howrey failed, its former vice chairman, Henry Bunsow, got a reported multi-million guaranteed compensation deal at Dewey in January 2011. Welcome to the lateral partner bubble.

Lost in the headlines about the stars are the worker bees with limited options and real fears. An Above the Law post from a seasoned Dewey paralegal captures the angst:

“I know these facts do not necessarily make for sexy headlines but I do ask that you report on the following. While some laugh and play their lyre as the city of Rome burns, it will be well over one thousand staff members who will also be gainfully unemployed.”

Add the nearly one thousand Dewey lawyers who have been watching quietly at the unfolding public relations nightmare since Davis’s bizarre interview. As Dewey’s publicity machine pumps out celebrity saviors of the moment, each has drawn more unwanted attention to the firm’s plight than the last. Martin Bienenstock’s appearance in the Times along with the proffered “pre-packaged bankruptcy” option is the latest example.

If Dewey survives the current crisis, Bienenstock’s suddenly magical touch won’t be the reason. Rather, it will survive because an entire law firm — partners, associates and staff — kept noses to the grindstone. The real heroes didn’t go looking for more media coverage of a troubled situation.

Perhaps Dewey’s leaders thought that better press could solve the firm’s crisis. But that approach reverses the relationship between public relations and crisis management, which is simple: manage a crisis properly and the resulting story will write itself.

Here’s the obvious corollary: manage the firm properly and there is no crisis to manage.

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.

UNFORTUNATE (AND IRONIC) COMMENT AWARD

Posted on April 10, 2012 by thebellyofthebeast

If Dewey & LeBeouf has so-called friends like its former partner John Altorelli…well, you know the rest.

Altorelli’s recent comments to Am Law Daily include so many candidates for my Unfortunate Comment Award that it’s difficult to choose just one. So let’s go with the most ironic. In discussing whether Dewey could have done a better job managing information — presumably referring to publicity about attorney layoffs, partner departures and financial results — Altorelli said:

“In most law firms, I think, as good as the lawyers are at advising clients, they’re not as good at taking their own advice. They are surprisingly obtuse when it comes to their own situation.”

He then proceeded to reveal himself as someone surprisingly obtuse about his own situation. Before listing those inadvertent revelations, consider how Altorelli himself embodies the lateral partner hiring phenomenon that has overtaken much of big law as a dominant business strategy.

The revolving lateral door

After graduating from Cornell Law School in 1993, Altorelli made his way through four law firms in only fourteen years — LeBeouf, Lamb, Greene & MacRae, Paul Hastings, Reed Smith, and Dewey Ballantine (shortly after the collapse of Dewey’s merger talks with Orrick, Herrington & Sutcliffe and a few months before its October 2007 merger with his original firm, LeBeouf Lamb). Such a journey is not likely to produce deep institutional loyalties anywhere.

He’s not unique. For example, as I composed this post The Wall Street Journal reported that Brette Simon had left Jones Day to join Bryan Cave. Since graduating in 1994, she’s also worked at O’Melveney & Myers, Gibson, Dunn & Crutcher, and Sheppard, Mullin, Richter & Hampton.

Still, Altorelli’s book of business apparently qualified him for a place on Dewey & LeBeouf’s executive committee. He says former chairman Steven H. Davis will “take the axe” for whatever is going wrong now, but surely the firm’s executive committee wasn’t a collection of potted plants. It seems improbable that Davis alone could have forged and executed Dewey initiatives that issued bonds and used guaranteed multi-year compensation contracts to lure prominent lateral partners.

But now Altorelli says: “The only people who need contracts are those who are not so secure. I feel bad that firms have to go that way, in competition for laterals and the like.”

Not my fault

Then again, Altorelli also suggests that management hasn’t contributed to Dewey’s current problems. Rather, it was just “bad timing” of a long recession that didn’t allow the firm to burn off expenses associated with the Dewey-LeBeouf merger: “We kept thinking it’ll get better tomorrow, then it doesn’t get better. The next thing you know it’s been four years.”

Magical thinking rarely results in a winning strategic plan. Curiously, Altorelli also notes that during that same period while he was at the firm, he and Dewey prospered: “I had five of the best years of my career.”

As he headed for his fifth big firm in nineteen years, Altorelli offered several additional insights that qualify for stand alone Unfortunate Comment Awards, especially coming from one of the firm’s recent executive committee members who professes continuing hope for Dewey’s future:

— “I’m not sure how they can weather the departures.”

— “It doesn’t take a rocket scientist to say, I don’t know how many more they can suffer.”

— “[There] could be a survival path for a smaller Dewey. I don’t know how that would work. They seem to have a strategy. Or the firm will be busted up into a bunch of little pieces and survive in the hearts and souls of a lot of good people.”

Yet perhaps the unkindest cut of all came in contrasting his professional life at Dewey with things that will be better at DLA Piper, where he will serve on its executive committee:

“Altorelli says he was drawn to his new firm by the chance to help change the way he practices law. Altorelli…says the firm is experimenting with ways to ‘try to get back to more of an intellectual pursuit, rather than just grinding out the paper.'”

If Altorelli’s interview had appeared five days earlier, I would have looked for this concluding line: “April Fool!”

Just delete “April.”

THE GOLDMAN CULTURE

Posted on March 20, 2012 by thebellyofthebeast

After twelve years at Goldman Sachs, 33-year-old Greg Smith decided he’d seen enough. He resigned because, as he put it, “The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.”

Let’s do what lawyers do best: distinguish him away and move on.

The Times op-ed describes Smith as former executive director and head of the firm’s U.S. equity derivatives business in Europe, the Middle East and Africa. After Smith’s public condemnation, CEO Lloyd Blankfein and President Gary Cohn sent employees a memo saying that he was one of 12,000 vice presidents out of 33,000 employees. He reportedly earned $500,000 last year, which would put him far down the Goldman food chain.

Analogizing to a big law firm, Smith would probably be the equivalent of a non-equity partner. That doesn’t make his observations irrelevant or wrong, but context matters.

As for what Goldman stands for, what did Smith think the firm was when he joined in 2000? An eleemosynary institution? It seems unlikely that the radical transformation he depicts occurred only after Blankfein and Cohn took over in 2006. After all, they rose to the top for reasons relating to the firm’s culture and values.

Case closed. Move on.

Any big law analogies?

Not so fast. If Goldman has accelerated in a particular direction, it’s not alone. In that respect, some parallels between trends at Goldman and the prevailing big law model are interesting:

– Management

At the top of Goldman, traders displaced traditional investment bankers. That bespeaks a shift from long-term thinkers to short-term profit-maximizers. Once in power, Blankfein (a former commodities trader) surrounded himself with “like-minded executives — ‘Lloyd loyalists,’” according to the Times in 2010.

Transactional attorneys have similarly risen to lead many big law firms. Along the way, they have absorbed the business school mentality of corporate clients. Dissent is not always a cherished value.

– Resulting culture changes

Goldman’s determination to represent all sides of a deal recently became the subject of Delaware Chancellor Leo Strine’s highly critical opinion of the firm. Likewise, large law firms have perfected techniques to maximize their representational flexibility. Those techniques have been essential to the remarkable growth that many firms have experienced.

– Metrics

Goldman’s leverage ratio is stunning: 442 partners out of more than 33,000 employees. As a group, large law firms have pulled up ladders, widened the top-to-bottom range within equity partnerships, and doubled attorney-to-equity partner leverage ratios since 1985.

– Partner Wealth

Goldman’s partners are famously rich. Many big law equity partners now enjoy seven- and even eight-figure incomes previously reserved for media celebrities, professional athletes, corporate CEOs, and — yes — their investment banker clients.

Yet the most important question is mission. Smith’s op-ed suggests that Goldman had become focused on squeezing money out of clients. Last year, The Wall Street Journal wrote about “Big Law’s $1,000-Plus an Hour Club” — senior partners who command four-figure hourly rates from clients. It quoted Weil, Gotshal & Manges’s bankruptcy leader Harvey Miller: ”The underlying principle is if you can get it, get it.”

A year earlier, Miller was resisting discount requests from the court-appointed monitors in the Lehman and GM bankruptcies:

“If you had cancer and you were going into an operation, while you were lying on the table, would you look at the surgeon and say, ‘I’d like a 10 percent discount’? This is not a public, charitable event.”

(Miller’s concluding line was ironic. At the time, his firm had already billed $16 million for the GM bankruptcy, which “public” taxpayer money was facilitating. Through January 31, 2012, Lehman ran up a $383 million tab at Weil Gotshal. Meanwhile, Weil recently reported average profits per partner of more than $2.4 million — an all-time high.)

Attitudes such as Miller’s are pervasive. It’s easy to single him out because he’s been publicly blunt about them. Greg Smith’s indictment was his way of revealing truth as he saw it. Sometimes statements from those at the top of large law firms allow the truth to reveal itself for all to see. Often, it’s not pretty.

DEWEY’S DILEMMA

Posted on March 7, 2012 by thebellyofthebeast

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

Lessons about communicating

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

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

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

Mixed messages

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

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

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

Misleading metric?

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

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

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

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

THE BIG LAW PARTNER LOTTERY

Posted on February 29, 2012 by thebellyofthebeast

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

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

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

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

The long odds

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

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

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

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

Irrational behavior?

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

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

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

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

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

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

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

THE NON-EQUITY PARTNER BUBBLE

Posted on February 22, 2012 by thebellyofthebeast

In May 2009, The American Lawyer reported that Am Law 100 firms had increased the number of non-equity partners threefold since 1999, but the number of equity partners grew by less than one-third. As big law leaders continue to pull up the ladder, what will come from the growing cadre of partners-in-name-only? Other than some short-term money for equity partners, nothing good.

Historically, most two-tier firms employed a simple strategy for non-equity partners: up-or-out. Within a reasonable period of time (for no benign reason, it’s gotten longer), non-equity partners either proved themselves worthy of elevation or moved on. Limited exceptions included specialized niche players who could stay indefinitely.

An article in the February 2012 issue of The American Lawyer, “Crazy Like a Fox,” suggests another option: permanent non-equity partners.

The Economic Case

Authors Edwin B. Reeser and Patrick J. McKenna offer financial justifications for the strategy. First, they say, clients unwilling to pay high hourly rates for first- and second-year associates have an easier time swallowing non-equity partner rates, even though they are much greater.

Sometimes, maybe. But clients are now scrutinizing the match between attorneys and their tasks. Using an unnecessarily expensive non-equity partner to perform associate work is dangerous.

Second, they argue, associate recruitment and training are expensive, with each new associate costing $250,000 to $300,000. As a class, Reeser and McKenna assert, “associates do not make money for the firm until sometime in the end of the third or even the fourth year.”

Maybe. But at current hourly rates and required minimum billables, the payback is probably sooner. (Do the math using an average profit margin of forty percent, which is conservative.) But their larger point is correct: non-equity partners are a source of leverage that for the Am Law 50 has doubled since 1985 — from an average of 1.75 to 3.54.

The Problems

Whatever the debatable short-term economic gain, the long-run cost of expanding the non-equity ranks and making them permanent is far greater.

For starters, such lawyers become second class citizens. They know it. Everyone in the firm knows it. They may be decent, hard-working people. But once they receive the scarlet letter of permanent non-equity status, their morale plummets.

It’s understandable. After all, throughout their lives they succeeded at everything they tried — outstanding college record, good grades at a top law school. They’re intelligent and ambitious, otherwise firms wouldn’t have hired them in the first place. But then, after years of hard work they learn that they won’t reach the next level and never will. Only magical thinking can wish away the demoralizing impact of that message.

Any firm creating a permanent subclass of such attorneys takes an individual problem and makes it an institutional one. For example, if permanent non-equity partners do meaningful and fulfilling work, they’ll deprive younger attorneys of those increasingly scarce opportunities. That expands the morale problem into the senior associate ranks where career satisfaction languishes at historic lows.

Conversely, if the permanent non-equity partners are performing tasks that other attorneys avoid, that creates other difficulties. Reeser and McKenna note that such practitioners sometimes “take on non-billable leadership positions…involving pro bono, diversity, recruiting, training, and professional development.” Unfortunately, there’s no better way to send a message of management’s indifference to such pursuits than by putting the B-team in charge.

Finally, the authors suggest that a non-equity track enables firms to “retain some whiz-bang lawyers who have young children they want to spend more time with or who just want to get off the equity partner treadmill.” Remarkably, no one seems willing to rethink the wisdom of a system that produces that unhappy treadmill in the first place.

The presence of more non-equity partners in big law might simply be a residue of the enormous associate classes hired in earlier years. But for firms using them to create a permanent subclass generating short-term dollars, the strategy makes no long-term sense. Because there’s no metric to capture the downside, big law leaders will ignore it.

But if the trend continues, the non-equity partner bubble will grow and the prevailing big law model will develop another enduring chink in its increasingly fragile armor.

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The Belly of the Beast

Steven J. Harper, Esq.

Tag Archives: biglaw

THE TRUE COST OF THE WEIL LAYOFFS

PROOF OF THE PROFESSION’S CRISIS

UGLINESS INSIDE THE AM LAW 100 – PART 2

UGLINESS INSIDE THE AM LAW 100 — PART I

WHY THE BILLABLE HOUR ENDURES

SOMEBODY’S CHILD

FROM CRAVATH TO CHASE TO CADWALADER

MORE LAW SCHOOL NON-REFORM

BIG LAW’S 2012 PERFORMANCE — NUMBERS AND NUANCE

THE CULTURE OF CONTRADICTIONS

BONUS TIME – 2012

A BIG LAW FIRM THREE-WAY

BIG LAW FIRM MANAGEMENT PUZZLES

BAD NUMBERS REVEALING WORSE TRENDS

IS IT REALLY MORE COMPLEX THAN GREED?

DEWEY’S L. CHARLES LANDGRAF: THE PLIGHT OF THE LOYAL COMPANY MAN

DEWEY’S RICHARD SHUTRAN — RUNNING THE NUMBERS

DEWEY’S JEFFREY KESSLER: STARS IN THEIR EYES

DEWEY’S MARTIN BIENENSTOCK: PARTNERSHIP, PROFESSIONALISM AND WHAT TO TELL THE KIDS

DEWEY’S MORTON PIERCE: ACCEPTING RESPONSIBILITY

DEWEY: PROFILES IN SOMETHING

DEWEY: COLLATERAL DAMAGE

DEWEY: WHEN PARTNERS AREN’T REALLY PARTNERS

SPINNING DEWEY’S HEROES

THE AGE-OLD PROBLEM OF AGE

UNFORTUNATE (AND IRONIC) COMMENT AWARD

THE GOLDMAN CULTURE

DEWEY’S DILEMMA

THE BIG LAW PARTNER LOTTERY

THE NON-EQUITY PARTNER BUBBLE

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