Tag Archives: DLA Piper

A DIRTY LITTLE SECRET

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The Wall Street Journal’s front page headline tells only part of story: “Legal Fees Cross New Mark: $1500.” The February 9 article lists the range of partner hourly rates at some big firms: Proskauer Rose from $925 to $1475; Ropes & Gray from $895 to $1450; Kirkland & Ellis from $875 to $1445; and so on and so on and so on.

That’s great if you can get it, but most firms can’t. The 2016 Georgetown/Thomson Reuters Peer Monitor “State of the Legal Profession” tells a second part of the story: realization and collection rates have plummeted. How much a firm bills doesn’t matter; what it actually brings in the door does. In 2005, collections totaled 93 percent of standard rates. By the end of 2015, it was down to 83 percent.

The Music Stopped, Almost

Annual standard hourly rate increases have blunted the profit impact of declining collections, but trees stopped growing to the sky about ten years ago. Except in bankruptcy courts. That’s the third element of the story and the profession’s dirty little secret: one of the most lucrative big law practice areas has no client accountability for its fees. Even worse, the process facilitates pricing behavior that spills over into other practice areas.

Take the recent Journal article. Where did the reporters get the detailed hourly rates for the firms it identified? A note at the bottom of the chart reveals the answer: “Source: Bankruptcy court filings.” If managing partners exchanged their firms’ hourly rates privately, it would raise serious antitrust issues. But in bankruptcy, publicly filed fee petitions do all of that work for them.

It gets worse. In bankruptcy, no one forces attorneys into the discounting that produces the current 83 percent overall average collections rate. Remember the infamous “Churn that bill, baby” email involving DLA Piper a few years ago? That was a bankruptcy case. Traditional mechanisms of accountability are ineffective. Unlike a solvent corporate client, a company in trouble has little leverage in dealing with its outside counsel. Until it emerges from a Chapter 11 reorganization, the days of minimizing legal expenses to maximize shareholder value are suspended. If it winds up in Chapter 7 liquidation, those days are gone forever.

At the same, time, the lawyers handling the bankruptcy have little risk. They get paid ahead of everyone else. Lawyers for creditor committees are a theoretical check only. They, too, get paid first and the members of the exclusive club of big law firm attorneys reappear. Their roles may change — debtor’s counsel in one bankruptcy may be creditors’ attorney in another and the liquidating trustee’s lawyer in yet another. In none of those capacities is there any incentive to rock the long-term, “paid-in-full hourly rate” boat.

More Theoretical Accountability

The U.S. Trustee receives all attorneys’ fees petitions before courts approve them. The Trustee can object, but it doesn’t have sufficient resources to analyze detailed line item time and expense entries on the thousands of pages that firms submit. The Trustee issued new guidelines that became effective for cases filed after November 1, 2013. Perhaps they will make a difference. But in the end, they are still guidelines and the final decision on attorneys fees resides with the bankruptcy judge.

As hourly rates have increased to the $1500 level that the Journal highlights, courts have given their rubber stamps of approval to the trend. Rather than challenge the high rates that all firms charge, bankruptcy judges determine merely that they are “reasonable and customary” because, after all, comparable firms are charging them for comparable work. The circularity is as obvious as the resulting payday for the lawyers. Someday, media attention and popular outrage may force meaningful change that has yet to occur.

Worse Than It Seems

Considering the 83 percent collection rate in the context of the nearly 100 percent rate for bankruptcy lawyers yields an insight relevant to the fourth and final part of the larger big law firm story. In particular, the current 83 percent collection rate is deceptively high. If a firm’s average is 83 percent and its bankruptcy lawyers collect close to 100 percent, then firms with large bankruptcy practices have non-bankruptcy clients pushing some practice areas into deep concessions off standard rates.

Likewise, combining this fact with two conclusions from the Georgetown/Thomson Reuters Peer Monitor Report produces ominous implications for such firms:

— “Demand for law firm services…was essentially flat in 2015,” and

— Bankruptcy experienced the largest negative growth rate in demand by practice area.

Unless the country heads into a recession that few economists expect, the continuing reduction in bankruptcies will drive overall average collections dramatically lower. That’s bad news for big law firms with significant bankruptcy practices.

Back in 2011, an icon of the bankruptcy bar, the late Harvey Miller of Weil, Gotshal and Manges, defended his firm’s approach to legal fees: “The underlying principle is, if you can get it, get it.”

Miller isn’t around anymore, but his unfortunate credo for a noble profession survives — for now.

[NOTE: The trade paperback edition of my book, The Lawyer Bubble – A Profession in Crisis (Basic Books) — complete with an extensive new AFTERWORD — will be released on March 8, 2016 and is now available for pre-order at Amazon and Barnes & Noble.]

A STORIED LATERAL HIRE

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

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

A timely topic

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

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

With great fanfare, DLA touted its coup. “He’s got great values and he believes in what we’re trying to do and he shares our view of what’s going on in the world,” boasted then co-chair Frank Burch.

At the time, DLA’s press release was equally effusive: “Tony will work with the senior leadership on the refinement and execution of DLA Piper’s global strategy with a principal focus on improving financial performance and developing capability in key markets.”

Predictably, law firm management consultants also praised the move:  “It’s hard to get a guy that talented. There just aren’t that many people out there who have done what he has done,” said Peter Zeughauser. Legal headhunter Jack Zaremski called it a “brave move” that “might very well pay off.”

On second thought…

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

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

Separating winners from losers

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

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

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

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

The more things change

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

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

THE LATERAL BUBBLE

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

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

What if the lateral hiring frenzy is creating a bubble?

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

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

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

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

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

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

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

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

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

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

THE ULTIMATE LATERAL HIRE

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

Whither goest thou?

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

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

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

Ascertaining shared values and visions

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

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

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

DLA Piper’s press release offered a hint:

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

Translation: Get bigger and make surviving equity partners richer.

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

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

Ignored in the financial shorthand are questions no one asks:

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

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

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

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

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

Probably not. After all, Linklaters ranked 108th.

Are You Worth $5 Million?

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The Wall Street Journal’s front page reported that litigator Jamie Wareham “will make about $5 million a year, a significant raise from his pay at Paul, Hastings, Janofsky & Walker LLP, where he has been one of the highest paid partners.”

This phenomenon – superstar lateral hiring – is nothing new, but in recent years it has become more common. For those who remember the 1980s, it’s vaguely reminiscent of the period when ill-fated Finley Kumble turned that strategy into a losing business model.

Of course, Finley failed for many reasons that may distinguish it from current trends. Still, those running that firm into extinction as they signed up marquee players who couldn’t carry their own economic weight probably wished they’d asked this question:

How can you determine whether a lawyer is worth $5 million?

Reserved for another day are the broader implications, including the challenges that significant lateral desertions and insertions at the top present to the very concept of firm partnership. This article focuses solely on underlying financial considerations associated with the superstar lateral hire.

Presumably, bringing in a big-name player makes economic sense for a firm operating under the prevailing business model, which means that at least one of the following conditions are met:

First, the proposed lateral has an independent book of business suitable for delivery to the new firm. That would be simple, but for the clients themselves. Even if they hired and regularly use a particular partner, they probably also like his or her package of assembled talent. Consequently, the lateral must bring along a team of capable junior lawyers. Alternatively, the new firm may have excess attorney inventory that it can deploy, but that requires the lateral to persuade clients to use new lawyers who can quickly and efficiently climb their learning curves.

Second, even absent a short-term economic justification, a firm could rationally conclude that anticipated events make the talent investment worthwhile for its future strategic positioning. Recent examples include firms that loaded up on bankruptcy attorneys when the economy was still strong. The crash of 2008 made them look like geniuses. More speculative are the “if you hire them, clients will come” bets that managers sometimes make. Former government employees, along with high-profile attorneys who lack a portable client following but are on everyone’s short-list of best lawyers, fall into this category.

For the first category, short-term value is simple arithmetic. According to the latest Am Law 100 report, Wareham’s old firm, Paul Hastings, had a 41% profit margin in 2009. If the “substantially less” than $5 million he’ll make at DLA Piper was — say, $4 million – he would have needed revenues of $10 million to earn his keep there, assuming no other equity partners claimed any part of that gross. At a total blended attorney rate for all attorneys on his client matters of $500/hour, that translates into 20,000 billable hours.

But at DLA Piper and its reportedly lower profit margin (26%), Wareham will have to produce almost $20 million to support a $5 million share of firm profits. At a blended hourly rate of $500, that means more than 40,000 hours. (If he is selling clients on a move with him on the promise of lower hourly rates, the billables requirement at DLA Piper would become even higher.)

If one of the 20 or so attorneys on Wareham’s team is another equity partner earning, say, $1 million, then the minimum break-even billables bogey moves proportionately higher. (Assuming a 26% profit ratio, it takes about $4 million gross — 8,000 hours at a blended rate of $500/hour — to net $1 million.)

Insofar as the lateral acquisition’s value relates to the second category – future payoff — big name players get a grace period. But at some point, the economic imperatives of the first category will surface. When that happens, they’ll feel the revenue and related billable hours heat even more than everyone else — except, of course, the attorneys working for them.

Such is the economically successful lateral hire outcome. Failure on a sufficiently large scale produces Finley Kumble.

WHO REMEMBERS FINLEY KUMBLE?

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“I just don’t see the need to cram two firms with around a thousand lawyers [each] together. It made no sense,” one Akin partner reportedly told the National Law Journal shortly after the collapse of Akin-Orrick merger talks.

The number of law firm mergers in 2010 is down from recent years, but look at the headliners: Sonnenschein – Denton; Hogan & Hartson – Lovells; Reed Smith – Thompson & Knight; Orrick and anyone. An earlier consolidation wave produced K&L Gates, DLA Piper, Bingham McCutcheon and others.

How much of this activity proceeds from the simplistic premise that bigger is always better?

When I was a young partner in my large firm, Finley Kumble became a disaster that struck fear in the hearts of big firm expansionists. During the early 1980s, Finley rocked the legal world as it signed up high-profile figures and raided other firms’ superstars, some of whom earned the then-staggering sum of $1 million annually. From only 8 lawyers in 1968, Finley became the nation’s second largest firm by 1985.

It promoted itself as a national powerhouse run on principles of meritocracy. The more business a lawyer generated, the more money he or she took home. Money was the glue that held the partnership together. Does that sound familiar?

But Finley grew too fast, assuming debt for office expansions and promising outsized paychecks to big name lateral hires. As revenue dollars dwindled, the firm disintegrated. With more than 650 attorneys at the time of its dissolution in 1987, it was still one of the nation’s largest firms.

The ghost of Finley Kumble haunted Biglaw leaders for years. Some saw its end as confirming that even large, diverse firms possessed their own identities. Mixing cultures through aggressive recruitment of name players with portable practices was a mistake. Others concluded that senior attorneys and their egos couldn’t survive as a single cohesive unit if their sole point of intersecting common purpose was greed. Still others saw the failure as an inevitable consequence of unrestrained growth. Finley proved that there was a limit on the size that any healthy large law firm could attain. No one knew the outside boundary with certainty, but crossing it was fatal.

What did today’s Biglaw managers learn from the lessons of Finley Kumble’s demise? Probably very little. After all, lawyers excel at distinguishing away precedent that undermines their preferred positions.

In that respect, modern proponents of growth through merger and high-profile lateral acquisitions can point to many differences between Finley and today’s firms. For example, the use of MBA-type metrics that focus on short-term profits at the expense of non-monetary values is now pervasive throughout Biglaw. In that respect, the earlier potential for cultural clashes has diminished as  current year equity partner profits have become the universal coin of the realm. Likewise, lateral movement at all levels — especially among rainmakers who were Finley Kumble’s signature recruits — has become commonplace. Indeed, the legal world has become more hospitable to Finley’s central mission and modus operandi.

It would be interesting to hear from former Finley attorneys on the question of how today’s large firms differ from what their old firm once was. Perhaps Finley was just ahead of its time. Or perhaps some major players in Biglaw law are about to see their times change. Or maybe the large firm segment of the profession is proceeding toward the same countdown that big accounting firms have already experienced: From Big 8 to Big 6 to Big 5 to Big 4 — and the race is on to be one of those few.

Here’s the key question: Who benefits in the long run from the rise of mega-firms? Management consultants embrace strategic fits producing scale economies that supposedly benefit clients and equity partners. Perhaps they are correct. But who considers whether hidden costs include undermining community, exacerbating attorney dissatisfaction, or imperiling broader professional values?

Personally, I enjoyed the time when I recognized most of my equity partners at the firm’s annual meetings. Who is willing to develop or consider a metric by which to measure that?