GREED ATOP THE PYRAMIDS

Posted on February 2, 2011 by thebellyofthebeast

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

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

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

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

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

But even that remarkable average masks growing wealth gaps within equity partnerships. One law firm management consultant observed, “Before the recession, [the top-to-bottom equity partner compensation ratio] was typically five-to-one in many firms. Very often today, we’re seeing that spread at 10-to-1, even 12-to-1.” That is stunning.

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

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

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

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

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

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

CULTURE SHOCK

Posted on January 21, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

NUMBERS TELL A STORY

Posted on January 17, 2011 by thebellyofthebeast

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

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

***

HOURS UP: “Average hours billed by associates at the nation’s top 50 law firms by revenue rose by 7% in 2010.”

***

BONUSES FLAT: “At New York-based Milbank, Tweed, Hadley & McCoy LLP, where bonuses were only slightly above last year’s payouts, hours billed by associates were up about 6%.” [According to Above the Law, the firm’s 2010 bonuses ranged from $7,500 for first-year associates to $35,000 for those in the class of 2003. That’s a big drop from 2006, when first-year associates received “special year-end bonuses” of $30,000. Student-loan repayment requirements have not experienced a similar decline.]

***

MANAGERS RATIONALIZE: “‘The actual number of [billed] hours is still low compared to what it has historically been,’ [says Milbank’s Chairman Mel M. Immergut].”

***

PARTNERS WIN: “Revenue at Milbank Tweed will be up by about 3% on flat expenses, Mr. Immergut says, adding that profit per partner will be up by 8% to 10%, depending on year-end collections.” According to The American Lawyer, Milbank Tweed’s average profits per partner in 2009 were $2.230 million. How much is enough? The answer appears to be “More.”

LAW SCHOOL DECEPTION

Posted on January 12, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

MEASURING VALUES

Posted on January 3, 2011 by thebellyofthebeast

In a recent NY Times column, David Brooks wrote about the future of our nation, but one observation applies to big law:

“In a world of relative equals, the U.S. will have to learn to define itself not by its rank, but by its values. It will be important to have the right story to tell, the right purpose and the right aura. It will be more important to know who you are.” (http://www.nytimes.com/2010/12/14/opinion/14brooks.html?_r=1&ref=opinion)

Large law firms, too, have become a world of relative equals. That has been an unintended consequence of the transformation from a profession to a business. In pursuit of rank, too many managers rely on B-school-type metrics — billings, billable hours, leverage ratios — as definitive measures of worth. They use them as substitutes for independent judgments based on values that are less easily quantified.

Behavior follows incentives. Partners jockey for internal position and managers focus myopically on short-term profits. They believe that favorable Am Law rankings will distinguish them but, Brooks argues, similar thinking would be a mistake for our country over the long-run.

It’s equally true for big firms. High-paying clients assume that only the best and brightest lawyers will work on their matters. But to attract and retain those attorneys, even the self-described top firms will have to offer more than money. In that contest, values will separate the biggest winners from everyone else.

Of course, in the very short-term, top graduates respond to the urgency of school loan repayment schedules. But as the novelty of a steady paycheck fades, the superstars will yearn for something else. They’ll understand that a firm’s “make more money” mantra limits its vision. For most, it fails to offer long-term career satisfaction. Indeed, the prevailing model doesn’t even contemplate long-term careers for the vast majority of new hires.

The most ambitious and talented new graduates are already beginning to understand the game. As greater knowledge of what lies ahead empowers students to make better decisions, firms viewing their own missions merely as maximizing this year’s equity partner profits will lose the values contest for the next generation’s talent. It won’t happen this year or next, but it will happen.

What are the winning values? Here are some suggestions:

Resisting the deceptive simplicity of short-term metrics. Embracing efforts to shed light on a troubled business model. Requiring decency in all human interactions. Punishing bullies. Providing young lawyers with mentors, training, and opportunities because even the best internal programs are no substitutes for the real thing. (Pro bono programs can help as they advance other important values.) Creating a reality that matches more closely students’ prelaw expectations of what being a lawyer would mean.

Offering realistic prospects for long-term careers. Without tolerating mediocre performers, implementing decision-making processes that minimize the impacts of internal politics and clashing personalities in determining the fate of human beings. Providing meaningful and candid reviews while also jettisoning arbitrary barriers that the leveraged pyramid model imposes on equity partnership entry. Advancing all who deserve promotion.

Conquering the billable hour and its death-grip on associate compensation. Finding a way to measure attorney productivity that rewards those who complete a task efficiently — and penalizes those whose long hours produce big client billings based on diminishing (or negative) returns.

To secure their firms’ futures, thoughtful partners will accept modest reductions from the staggering personal incomes that they’ve enjoyed in recent years. Those willing to make the investment will reap great dividends. Large firms depend uniquely on the wisdom, judgment, and intelligence of their attorneys. The best new graduates will flock to firms cherishing values consistent with a satisfying career, even if it means less money (although in the long-run, it probably won’t).

As for the rest? Much of big law will continue pursuing the highest short-term dollar — wherever it is and whatever its cost to others, their institutions, or the profession. Such is the power of greed. But those who measure everything they value risk creating an unpleasant world in which they value only what they measure.

BONUS TIME!

Posted on December 14, 2010 by thebellyofthebeast

Firms that abandoned lock-step in favor of merit-based compensation a year ago are now reversing course. Why?

The prevailing theory is backlash. Associate dissatisfaction pervades big law; some saw “competency models” as thinly disguised efforts to reduce associate wages. (http://www.lawjobs.com/newsandviews/LawArticle.jsp?id=1202443769098&rss=newswire&slreturn=1&hbxlogin=1) Restoring lock-step, the argument goes, should enhance morale.

But when firm leaders really care about morale, they’ll ask associates to evaluate partners on mentoring, training, and overall humanity — and, at least to some extent, partner compensation will reflect the results. Instead of looking into those unpleasant mirrors, managers are likely to form a new committee investigating the “associate problem,” as if it were a mystery.

One way to improve morale would be to tell associates the truth earlier. But quality merit review is tough work. Performing it properly is not in most large firms’ short-term economic interests. For starters, they can’t bill the time to clients.

When I chaired my firm’s associate review committee in the 1990s, the process focused on a single goal: Identifying the best among a distinguished group. That meant evaluating specific skills, developmental needs, and future prospects. To squeeze out personality conflicts and internal politics, partners from outside their assigned associates’ practice areas gathered performance information. Then the committee actually deliberated for an entire day.

In an era when lateral partner movement among firms was rare, promotion decisions were akin to choosing a new family member. Admittedly, subjective judgments produced the distinctions, but partners generally played fair with the next generations. The integrity of the process produced widespread respect for outcomes.

In those days, compensation didn’t turn on billable hours. High outliers (those billing over 2,400) were singled out for counseling that doesn’t happen anymore: “If you burn out, you’re no good to us or anyone else.” Low outliers (below 1,600) attracted a different concern: “Partners aren’t giving that person work. Why? Is there a performance problem?” Between those extremes, hours had little impact on reviews or compensation. As incredible as that now sounds, it was true throughout big law. Just ask the senior partner who is pressing you to “get your hours up.”

Transparency worked. Knowing relative position allowed associates to handicap prospects while they were most marketable. Performance ratings translated into monetary distinctions that spoke for themselves. Anyone displeased with the message could explore other options.

New York firms pioneered lock-step. Exploding client demand caused many more to follow. Uniform compensation to a class allowed partners to postpone the day of reckoning for those with limited futures. Unpleasant news went undelivered.

Some partners rationalized the failure to provide more candid feedback: “We need the bodies to run our business. We’re paying them decent money. So they’re doing ok.”

The first two points were true: A myopic MBA-mentality emerged and departing associates often found that their new positions paid substantially less than they had been making. But doing ok? Some lost their jobs, their lifestyle, and chunks of their self-image in a single belated conversation.

Lock-step was also supposed to improve morale by reducing internal competition. But as compensation packages ballooned, associate satisfaction plummeted and voluntary attrition skyrocketed. Bonuses tied to hours but unrelated to quality erode meritocracies and morale — as does boring work that doesn’t enhance attorney skills.

Modern mega-firms now face the toughest task. To perform truly merit-based reviews, they must develop meaningful individual assessments for legions of associates — sometimes hundreds in a single office. Without proof that the exercise contributes to the bottom line, what incentivizes firms to devote the non-billable time required to perform reviews diligently? Management’s concern for the future, you say? At most big firms, that means projecting next year’s equity partner profits. They’re counting on laterals to fill quality gaps.

Associates should be skeptical about how firms now promising merit review will deliver quality feedback. But lock-step that camouflages meaningful information is no panacea. Student loan repayment demands notwithstanding, sooner is better than later when it comes to acquiring the knowledge that frames life’s most important decisions.

COCKROACHES, MEDICINE, AND THE BILLABLE HOUR

Posted on November 29, 2010 by thebellyofthebeast

Cockroaches should take lessons from the billable hour. Detractors notwithstanding, it has survived every economic downturn of the last 30 years including, apparently, this one. Although a recent ALM survey noted that almost 75% of client payments in 2009 were pursuant to “alternative fee arrangements,” almost 80% of those were simply discounts from attorneys’ hourly rates. (http://amlawdaily.typepad.com/amlawdaily/2010/10/billing.html)

Here’s the real problem: Whenever the regime eventually crumbles, the worst aspects of the billable hours culture will persist. Take fixed fee caps, for example. Even if they benefit some clients financially — a big “if” that’s a separate discussion — they create a Hobson’s choice for associates.

On one side is the pressure not to log all time. Keeping matters within internal budgets makes billing partners look good in their year-end reviews.

On the other side stands the billable hour as the definitive metric for measuring individual productivity. They might be working on fixed fee matters, but attorneys must still account for their time. Large firm minimum hours requirements aren’t going away.

What happens when externally fixed fees meet internal billable hours cultures? Ask your doctor.

Do you sometimes get the impression that your family physician is rushing through an appointment? That’s because the doctor is responding rationally to something called the relative value unit (RVU) — medicine’s equivalent to the billable hour.

In 1964, the AMA created reimbursement codes for the newly enacted Medicare program. Fifteen years later, a Harvard School of Public Health economist began investigating ways to compare the seemingly incomparable: the time and effort associated with doctors’ diverse tasks. The typical economist’s study sought to develop relative values for measuring productivity across a range of different activities — from well-child checkups to brain surgery.

The academic exercise remained theoretical until 1985 when Medicare expanded the inquiry: Might such a scale be used to control costs associated with spiraling “reasonable, customary and prevailing fee-for-services” payment schedules? In 1992, Congress linked the relative value unit system to the Medicare codes used for reimbursing more than 7,000 different physician tasks. Private health insurers soon adopted RVUs for reimbursement, too.

Physicians now generate RVUs to earn a living, but time becomes a critical limiting factor. For example, whether a family physician spends 10 or 30 minutes on a routine office visit, Medicare and insurance companies set physician reimbursement at the activity’s predetermined RVU value (0.7). That gets multiplied by the uniform RVU rate (about $40/RVU) for a total of $28. (The final bill exceeds $28 because practice expense and malpractice RVU-factors get added.)

Specialists’ tasks have greater RVU values than general practitioners.’ Compared to a 15-minute routine visit worth 0.7 RVU, a 30-minute colonoscopy is worth several times that. Such differences relate to physician training, skills, mental effort, judgment, stress, and other aspects of the work. But cynics note that specialists have dominated Medicare’s RVU schedule advisory boards.

Behavior has followed incentive structures:

— RVU-driven compensation differences have created shortages of family physicians.

— Specialists mean well, but they tend to view patients myopically through the prism of their expertise, rather than as entire beings. Piecemeal medicine results.

— The system encourages pills, procedures, and tests. Prescription drugs promise quick fixes that move patients out of their doctors’ offices sooner. Procedures generate high RVU values; tests requiring expensive equipment likewise reap generous reimbursement.

Meanwhile, doctors must meet minimum annual RVUs, sometimes pursuant to explicit contractual requirements. That should sound familiar to any big law associate.

As physicians ceded control of hospitals to lay managers, RVUs became a key tool by which the MBA mentality of misguided metrics overtook that profession. Don’t take my word for it. Ask your doctor — if he’ll give you the time.

What would happen if clients and the courts that approve fee petitions started “fee-capping” lawyers the way Medicare and insurance companies have sliced into doctors’ incomes since 1992? Probably unintended consequences no less dramatic than those still surprising the medical profession. Many haven’t been pretty.

Here’s the real kicker: Unlike the legal profession, most physicians have always liked their jobs.

“LIES, DAMN LIES, AND STATISTICS”

Posted on November 16, 2010 by thebellyofthebeast

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

Does anyone else find his project vaguely unsettling?

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

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

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

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

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

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

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

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

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

THE END OF LEVERAGE? JUST KIDDING.

Posted on November 11, 2010 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

ACCELERATING IN THE WRONG DIRECTION

Posted on November 5, 2010 by thebellyofthebeast

Recently, law firm management consultant Hildebrandt Baker Robbins’ Kristin Stark offered her solution to problems that she sees with many large firm compensation systems:

“Firms need to be talking to their partners about their performance every year — and throughout the year. Ongoing coaching of partners on their performance and helping them make improvements has become a powerful tool for driving partner and firm performance in successful firms. High-performing partners want to work in an environment where co-owners are engaged and actively contributing to firm growth. Without this, a firm’s top performers are at risk.” (http://www.law.com/jsp/law/article.jsp?id=1202472843670&Partner_Compensation_The_Downturns_New_Touchy_Subject)

Stark buried the lead, but her key point appears to be that a firm’s principal mission should be to keep its rainmakers happy. Otherwise, they’re “at risk” — meaning that they’ll leave to make more money elsewhere.

Wait a minute. A few lines earlier, Stark described the growing gap in high-to-low partner compensation: “Before the recession, [it] was typically five-to-one in many firms. Very often today, we’re seeing that spread at 10-to-1, even 12-to-1.”

“You can imagine that creates a lot of problems,” she continued. “It drives further tension between partners over compensation and creates an environment of the ‘haves’ and the ‘have-nots’ in law firms.”

What should firms that have become beholden to a few rainmakers and their often oversized egos do? Whatever it takes to keep them? Won’t that exacerbate the resentment of those whom Stark calls the “have-nots”? What are the limits of tolerably bad behavior by the “haves”? Big billers always get a pass for hoarding clients. How about verbally abusing subordinates? Or worse?

Meanwhile, she suggests, firms should coach other lawyers on the importance of “improving performance.” That’s code for billing more hours and bringing in more business. Forget about mentoring the next generation, encouraging collegiality, enhancing attorney career satisfaction, or focusing on other professional values for which the dominant large law firm model lacks a metrics link to bottom-line equity partner profits.

It also means reconciling the “have-nots” to their proper places in the firm:

“In this market firms have to constantly reevaluate the expectations of a partner, communicate with partners about what is required of them, and incorporate partner goals and expectations into the compensation process,” Stark said.

In other words, everyone should understand the need to work harder so that the highest paid equity partners widen their already enormous compensation advantages over all others.

All of this is an interesting commentary on a group of extraordinarily talented men and women — a firm’s longstanding (but non-rainmaker) equity partners who, apparently, somehow lost the intelligence and personality traits that caused them to excel in the first place. As students, their brains and hard work took most of them to the best colleges and law schools. As associates, their ambitions carried them past peers into equity partnerships. Presumably, they served clients who valued their work.

When did they lose it? Admittedly, a few never deserved promotion, but internal firm political stars aligned in a way that allowed them to bypass quality control criteria. Success made others fat, happy, and lazy; still others burned out. But most equity partners achieved their status because they had a lot going for them — and still do. If they continue to enjoy the practice of law, that alone pushes them as it always has.

Not so, says Stark. They need coaching to keep their expectations in check. They must pander to top billers whose eternal answer to the question “How much is enough?” will always be “More.” They should live with the anxiety accompanying ongoing performance evaluations throughout the year. Never mind that, in Biglaw as in life, individual careers experience peaks and valleys; rarely is any overall upward trajectory a straight line.

Fear isn’t a productive ingredient in the recipe for motivating talent. But try telling that to some large firm managing partners and their outside consultants. On second thought, don’t bother. They already know everything.

WHO REMEMBERS FINLEY KUMBLE?

Posted on October 14, 2010 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

KEEP FEEDING PROFITS THE BEAST. WHAT COULD GO WRONG?

Posted on October 7, 2010 by thebellyofthebeast

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

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

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

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

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

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

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

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

Now what?

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

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

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

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

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

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

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

SOLVING THE BIGLAW MYSTERY OF GROWING CAREER DISSATISFACTION

Posted on September 30, 2010 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted on September 27, 2010 by thebellyofthebeast

The medical analogy seemed familiar:

“When somebody comes to the emergency room and is on the operating table hemorrhaging, you don’t ask if [he] can pay the surgeon. You save the patient.” (http://www.nytimes.com/2010/09/02/business/02commission.html)

Lehman Brothers’ prominent bankruptcy lawyer was echoing the position of his client, former chairman Richard Fuld, a trader who rose from mail clerk to CEO. In his congressional testimony a few weeks ago, Fuld’s dominant theme was that others caused his company’s collapse. As untoward events overwhelmed the entire financial system, Lehman didn’t receive the favored treatment that saved AIG, facilitated JP Morgan Chase’s acquisition of Bear Stearns, allowed Goldman Sachs and Morgan Stanley to become classified as bank holding companies, and eventually enacted a $700 billion TARP program to buttress things.

The argument that the federal government should have stepped in to help seemed like an odd position for any ardent Wall Street capitalist, but he had a point. Back in September 2008, I wondered whether Treasury Secretary Paulson’s enthusiasm to allow the market’s creative destruction waned just a bit as Goldman Sachs, the firm Paulson had led before joining the Bush Administration, seemed to careen along the same catastrophic path as Lehman’s.

Still, omitted from Fuld’s analysis was his own mindset. In a single sentence at the end of his prepared remarks, he acknowledged “some poorly timed business decisions and investments, but we addressed those mistakes…” (http://www.fcic.gov/hearings/pdfs/2010-0901-Fuld.pdf ). He gave little attention to his own attitudes that created the institutional culture described in the Lehman Bankruptcy Examiner’s Report (authored by former U.S. attorney Anton Valukas):

“In 2006, Lehman made the deliberate decision to embark upon an aggressive growth strategy, to take on significantly greater risk, and to substantially increase leverage on its capital. In 2007, as the sub‐prime residential mortgage business progressed from problem to crisis, Lehman was slow to recognize the developing storm and its spillover effect upon commercial real estate and other business lines. Rather than pull back, Lehman made the conscious decision to “double down,” hoping to profit from a counter‐cyclical strategy. As it did so, Lehman significantly and repeatedly exceeded its own internal risk limits and controls.”

Presumably, the Lehman lawyer’s “saving the patient” point was that taxpayer-funded loans to the company in September 2008 would have allowed time for more orderly asset sales and, perhaps, avoided bankruptcy altogether.

Maybe he and Fuld are right, but the Fed’s lawyer saw things differently:

“If the Federal Reserve had lent money to Lehman, this hearing and all other hearings would only have been about how we wasted taxpayers’ money.”

I was less interested in who’s right than in the medical analogy, which seemed familiar. Then I remembered that, in a different context, the same lawyer said this in May:

“If you had cancer and you were going into an operation, while you were lying on the table, would you look at the surgeon and say, ‘I’d like a 10 percent discount’? This is not a public, charitable event.” (http://www.nytimes.com/2010/05/02/business/02workout.html?pagewanted=1&_r=1&hpw)

Back then, this attorney was commenting on requests from Kenneth Feinberg (court-appointed monitor in the Lehman bankruptcy) and Brady Williamson (examiner in the GM bankruptcy) for discounts in his Biglaw legal fees that reportedly ranged from $500/hour for first-year associates to more than $1,000/hour for some senior partners.

His concluding line — “this is not a public, charitable event” — was interesting. Bristling at the scutiny that Biglaw’s hourly rates had generated, he must have known that his firm had already billed $16 million in GM bankruptcy fees. Wasn’t “public” taxpayer money involved in GM’s dissolution?

The problem — universal throughout Biglaw — is this senior lawyer’s attitude of entitlement. (According to Am Law‘s 2010 list, his firm’s average equity partner profits exceeded $2.3 million in 2009.) The irony is the frequency with which partners make that complaint about younger lawyers: “They act like they’re entitled…they aren’t willing to work hard, like I did…they think they’re special.” I’ll bet such critics never thought that these traits merely qualified the upstarts to inherit their Biglaw thrones.

At the end of the day, I don’t know whether federal loans would have saved Lehman, but I’m sure of this: I hope I’m never on a operating table while a Biglaw attorney possessing such hubris holds the scalpel or the tourniquet.

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

Posted on September 17, 2010 by thebellyofthebeast

An earlier post considered Nassim Nicholas Taleb’s bestseller, The Black Swan. (https://thebellyofthebeast.wordpress.com/2010/09/06/biglaw-and-the-black-swan/ ). Taleb describes the folly of relying on supposedly proven models of the past to anticipate the smooth continuation of existing trends. Such myopic thinking ignores the wholly unexpected Black Swans that actually shape history. The essence of the Black Swan is its serendipity, coupled with its power. It can be good or bad, but it’s always transformative. September 11 was a Black Swan, as were Microsoft and Facebook.

If you accept Taleb’s theory, I think Am Law introduced Biglaw to a Black Swan in 1985 with its profits per equity partner rankings. They encouraged internal behavior that, over time, dramatically changed most large firms’ cultures. Today, accepting conventional wisdom means following managers (few of whom are leaders — a crucial distinction for Taleb) who focus on supposedly proven metrics: billings, billable hours, and associate/partner leverage ratios. Free markets dictate decisions; important things that don’t impact the current year’s bottom-line drop out of key calculations; equity partner profits trees grow to the sky.

But wait! The U.S. News evaluations seem to ignore this crucial Am Law metric. They utilize client and attorney surveys assessing lawyer quality, not firms’ bottom-line profits. In seeking to attain or retain the highest available practice group rating (Tier 1), will firms teach to this new test that the criteria appear to use?

Not so fast. Even as U.S. News released the rankings, big firms began setting the goalposts for the new competition. Because U.S. News departed from its typical numerical approach in favor of tiers for practice groups, Sidley Austin and K&L Gates each claimed the overall #1 position based on their total Tier 1 rankings.

If I’m right, the new rankings will simply accelerate an embedded trend toward lateral recruiting at the highest levels. (http://amlawdaily.typepad.com/amlawdaily/2010/09/lateral-uptick.html) Big firms will compete even more ferociously for top partners to fill particular U.S. News practice group holes — and they’ll jettison incumbents to make room. How will high-powered partners decide where to plant themselves? They’ll take their books of business and follow the money. The definitive Am Law metric — average equity partner profits — will remain inviolate. Too many Biglaw partnerships will continue their devolution into collections of attorneys whose principal bond is financial.

So there’s no Black Swan here — just another log on the bonfire that is already consuming much of the profession.

But these developments favor the emergence of a Black Swan that I identified in my earlier post. Australia now has publicly traded law firms. Attorneys in Great Britain have begun preparing to follow that lead when the Legal Services Act becomes effective next year. (http://www.law.com/jsp/law/international/LawArticleIntl.jsp?id=1202463691626)

Biglaw’s ongoing transformation to a species of Big Business could culminate in non-lawyer shareholders and boards. What will stop them? Equity partners who have been hired to buttress a firm’s claim to Tier 1 status in the U.S. News rankings? As relative newcomers, their allegiance to their new firms will be more tenuous. The idea of preserving whatever remains of a unique professional culture will seem antiquated, particularly with the big bucks for their shares of an initial public offering (IPO) dangling before them.

It sure looks to me like the same country that introduced the first black swan to the New World is now exporting something far more ominous for the legal profession.

ABOUT THOSE BIGLAW ASSOCIATE SATISFACTION SURVEYS….

Posted on September 9, 2010 by thebellyofthebeast

The 2010 American Lawyer survey reports the lowest overall level of associate satisfaction since 2004.

The firms faring poorly will take comfort in standard disclaimers: response rates are low and negatively biased; survey questions are flawed; the poll captures attitudes from a generation of young attorneys who feel entitled. We all know the list. Lawyers specialize in explaining away bad facts and sometimes the critique is valid.

But before lower-ranked firms throw these results into a sea of self-serving rationalizations, they should consider the criteria by which others did quite well: relations with partners and other associates, interest in and satisfaction level of the work, training and guidance, policy on billable hours, management openness about firm strategies and partnership chances, the firm’s attitude toward pro bono work, compensation and benefits, and the respondents’ inclination to stay at their firms for at least two more years.

Now correlate each factor to the metrics that dominate today’s Biglaw business models — billings, billable hours, and associate/partner leverage ratios, all of which produce equity partner profits. For too many, the relationship is inverse. The absence of a metric by which firms hold partners accountable for associate satisfaction means that it gets ignored.

What’s the solution? Pay them more money? They won’t object, but according to a recent survey published in the Proceedings of the National Academy of Sciences, additional income beyond $75,000 a year doesn’t increase happiness. (http://www.pnas.org/content/early/2010/08/27/1011492107.full.pdf+html?sid=61f259ad-92a2-470f-b218-23537d8e2972)

How about just telling them to suck it up and push through to a better day? Doesn’t time cure all ills? Another NAS study suggests that our sense of global well-being is U-shaped. We start at a high point around age 18, move down until 50, and take a major upward turn until 85. (http://www.pnas.org/content/107/22/9985.abstract?sid=61f259ad-92a2-470f-b218-23537d8e2972) This comes from a 2008 telephone survey asking 340,000 people how they felt on the day the researchers called them. No attempt was made to control for health, employment, marital status, or anything else. It’s just a cross-sectional slice of the population at a moment in time. In short, draw conclusions at your peril.

Still, it’s interesting to compare these results with recent evidence about the happiness life-cycle of many Biglaw attorneys.

There no need for melodrama or hyperbole. Many lawyers of all ages have fulfilling careers and lead satisfying lives. Generalizations are always treacherous. Within and among firms, there are always exceptions to whatever is typical or predominant.

But the big picture can be informative. In the ABA’s 2007 survey of the profession, about 60% of attorneys in practice fewer than 5 years said they would recommend a legal career to a young person. That’s not exactly a ringing endorsement; however, it’s better than more senior attorneys’ views. For those practicing more than 10 years, it dropped to 40%.

Of course, “more than 10 years” covers lawyers from 35 to 90. So it’s difficult to know if the data support a U-shaped theory. They lend some credence to the notion that there’s a steep slide for people in their 20s, 30s, and 40s. But is there an uptick when attorneys hit the mid-century mark? That’s not clear — and it seems like a long wait.

It’s not all bad news. In the ABA survey, 84% found the practice of law to be intellectually stimulating. When I’ve invited lawyers of different ages and stages of their careers to make guest appearances in my undergraduate course on the profession, Biglaw attorneys spoke enthusiastically about tackling cutting-edge legal problems. Then they heard this question:

“What has been your happiest time as a lawyer?”

Here are some answers:

A 20-something senior associate: “Certainly not now. My life is not my own. I’m billing long hours in the hope of becoming a partner. Then I’ll gain more autonomy and control.”

A 30-something non-equity partner: “Life was easier when I was an associate. But I work hard now because I think things will get better if I make equity partner. Of course, that’s a big ‘if”.”

A 40-something equity partner: “I never realized how good I had it as an associate. Now I feel pressure to bring in clients so I can justify my equity compensation; that process never ends. You think that becoming an equity partner means you’ve crossed some finish line, but that’s when the race really begins.”

A 50-something equity partner: “I don’t know what I’ll do when I’m not a partner in my firm anymore. I haven’t had time to think about what’s next for me. Now, when I consider that prospect, the future becomes a source of anxiety.”

I don’t know to what extent these attorneys’ comments represent their respective demographic groups in Biglaw or elsewhere. But it’s no surprise to me that surveys consistently find practicing lawyers to be among the least satisfied workers and that attorneys in large firms today have the most difficulty finding the upward leg of the U-shaped happiness curve, assuming it’s out there.

The Biglaw business model has provided some of its attorneys with a lot more money than their predecessors. Career satisfaction that contributes to overall happiness?

That’s more complicated.

ALONG CAME LAW FIRM MANAGEMENT CONSULTANTS

Posted on August 27, 2010 by thebellyofthebeast

In the final analysis, Biglaw leaders have only themselves to blame, but they didn’t stumble into the world of misguided metrics on their own. They paid outside experts to guide the way — and they’re still doing it.

Thirty years ago, few undergraduates went to law school because they thought that a legal career would make them rich. For example, most students at Harvard with that ambition were on the other side of the Charles getting MBAs; the river formed a kind of natural barrier. The law was something special — a noble profession — or so most of us believed.

Particularly in large firms, nobility has yielded to business school-type metrics that focus on short-term profits-per-partner. The resulting impact on the internal fabric of such firms is depicted in my legal thriller, The Partnership (http://www.amazon.com/Partnership-Novel-Steven-J-Harper/dp/0984369104/ref=sr_1_1?ie=UTF8&s=books&qid=1273000077&sr=1-1) But other collateral damage includes the decline of mentoring that produced great lawyers in my baby boomer generation. (See my article, “Where Have All The Mentors Gone?” – http://amlawdaily.typepad.com/amlawdaily/2010/07/harpermentors.html).

Among the reactions to my mentoring observations was this:

“I am particularly intrigued by your reference to the role modern legal consulting firms have played in the demise of law as a profession. This is worthy of a blog post in and of itself and I look forward to it.”

I discussed this subject in an earlier post, but it’s worth another look.

Hildebrandt Baker Robbins is the successor to Hildebrandt, Inc., one of the early pioneers in what became a cottage industry: law firm management consulting. The company’s 2010 Client Advisory includes this line:

“In our view, one of the serious misuses of metrics in the past few years has been the overreliance on profits per equity partner as the defining index of a firm’s value and quality.” (http://www.hildebrandt.com/2010ClientAdvisory)

Really? Who encouraged the use of this ubiquitous metric on which Hildebrandt has now soured? As Dana Carvey’s church lady character might say, “Could it be….Hildebrandt?”

Of course, it wasn’t alone. When The American Lawyer published its first ranking of the Am Law 50 (now grown to 100) in 1985, what was once off limits in polite company — how much money a person made — became an open and notorious measuring stick of law firm performance: average profits per partner. Greed became respectable as inherently competitive firm leaders began teaching to the Am Law test so they could gain or retain position in its annual listing.

When the 1990-1991 recession rattled a much smaller version of what is now called biglaw, the National Law Journal’s annual survey of the largest 250 firms in 1991 quoted Bradford Hildebrandt, who 16 years earlier had founded the company bearing his name:

“In most firms, current management has never operated within a recession and didn’t know how to deal with it…” (“The NLJ 250: Annual Survey of the Nation’s Largest Law Firms — Overview — The Boom Abates,” The National Law Journal, September 30, 1991 (Vol. 14, No. 4))

So who could save us from ourselves? As they watched profits slide, worried law firm leaders turned to Hildebrandt and other experts who could assist in bringing business school principles and MBA-type metrics to their big firms. By 1996, Mr. Hildebrandt himself had diagnosed the situation and offered his remedy in that year’s NLJ 250 issue:

“The real problem of the 1980s was the lax admissions standards of associates of all firms to partnership. The way to fix that now is to make it harder to become a partner. The associate track is longer and more difficult, and you have a very big movement to two-tiered structured partnership.” (“The NLJ 250 Annual Survey of the Nation’s Largest Law Firms: A Special Supplement — More Lawyers Than Ever In 250 Largest Firms,” The National Law Journal, September 30, 1996 (Vol. 19, No. 5))

With such cheerleaders at their sides, senior partners focused on the three legs supporting the PEP (profits per equity partner) stool: billings, billable hours, and associate/partner leverage ratios.

Hourly rates marched skyward — even during recessions — increasing an average of 6% to 8% annually from 1998 to 2007. Billable hours targets likewise rose. Yet talented attorneys who would have advanced to equity partner a decade earlier received their walking papers as firms increased leverage ratios, which doubled between 1985 and 2010 for the Am Law 50. (http://amlawdaily.typepad.com/amlawdaily/2010/05/classof1985.html) With a few sharp turns of the costs screw, the game was won.

The results were mixed. For equity partners in the Am Law 100, average profits soared to more than $1 million annually — and rose during the Great Recession. Yet today, attorneys in big firms have become the law’s most dissatisfied workers — even though lawyers as a group were already leading most occupations in that unpleasant race.

The law firm as collection of men and women bound together in common pursuit of a noble profession yielded to an MBA mentality that relied on business school metrics to produce more dollars — the new measure of individual status and firm success. Valued partners who wouldn’t have considered leaving in earlier times began to follow the money — eroding concepts of loyalty and shared mission that created a firm’s identity over generations.

Oh, what a mistake, Hildebrandt now urges — not unlike Harvard’s new business school dean who looks hopefully (but in vain) to the law as an alternative model that might restore integrity to that world. (See my earlier article, “The MBA Mentality Rethnks Itself?” — http://amlawdaily.typepad.com/amlawdaily/2010/05/harper1.html)

What does Hildebrandt now propose to replace profits per equity partner as the key measure of overall firm performance? Profits per employee. But it simultaneously suggests that client satisfaction ratings should replace billable hours while employee satisfaction ratings supplant leverage.

Is your head spinning over the interplay among these complicated and confusing new metrics? Hildebrandt has the answer:

“As always, we stand ready to assist our clients in negotiating through these new and uncertain waters.”

How comforting.

OUTSOURCING: THE BEGINNING OF A NEW AND IMPROVED BIGLAW BUSINESS MODEL?

Posted on August 16, 2010 by thebellyofthebeast

If you’re a new law school graduate looking for work, or an equity partner seeking to profit this year (and maybe next) from the leverage that high-priced associates add to your firm’s bottom line, outsourcing sounds like a bad idea. But for those concerned about the long-run psychological well-being of the profession, the implications are more ambiguous.

It’s not novel. Throughout corporate America, outsourcing has been an important profit-maximizing technique for a long time. Lawyers have made a lot of money assisting clients in the development and implementation of such strategies. The resulting loss of American jobs has been sold as a necessary price paid to remain competitive in the world economy.

Such cost-minimization makes sense where protocols can assure a quality finished product. But when lead turns up in the paint on children’s toys from China, well….

Now, as the NY Times recently reported, outsourcing has pushed its nose into the biglaw tent. (http://www.nytimes.com/2010/08/05/business/global/05legal.html) If the trend continues, what is the fate of the dominant large law firm business model that relies on associate/partner leverage as the source of equity partner wealth? (See my earlier article, “Send The Elevator Back Down” at http://amlawdaily.typepad.com/amlawdaily/2010/07/harper3071410.html)

Its days may be numbered but, then again, its days may be numbered with or without outsourcing.

As the Times article notes, outsourcing is particularly advantageous for mundane legal tasks — due diligence on corporate deals and document review for major litigation matters. What client can resist paying “one-third to one-tenth” of a big firm’s hourly rates for such work?

The challenge will be to find the limits and assure quality output. Due diligence seems unimportant until a major potential liability gets overlooked. Document review is dull, but large lawsuits have turned on an internal memo buried in a gigantic collection; a discerning eye made all the difference.

Still, it seems likely that clients will gravitate toward firms that can offer lower rates for outsourced attorneys performing necessary but non-critical work. It is equally clear that clients will continue to “pay a lot of money” to lawyers with special experience and expertise — “world-class thought leaders and the best litigators and regulatory lawyers around the world,” as one corporate leader put it in the Times.

With these trends, new law school graduates will face shrinking labor markets, especially at entry level positions in big firms. But for the fortunate few who get jobs, their work could get better as outsourced labor performs some of the menial tasks that now account for most young associates’ billable hours.

Meanwhile, senior attorneys will have new incentives to mentor proteges so they become their firms’ next generation of “world-class thought leaders.” (See my earlier article, “Where Have All The Mentors Gone?” at http://amlawdaily.typepad.com/amlawdaily/2010/07/harpermentors.html)

What will all of this mean for equity partner profits? The big firm leaders who do the right things — strict quality control of outsourced work coupled with a serious investment in the development of inside talent — will thirve as their firms deleverage. Unfortunately, others intent on maximizing short-term dollars by prolonging the lives of their leveraged business enterprises will do okay, too — at least for a while. But such a myopic focus runs enormous long-term risks for the affected institutions.

And here’s a wild card: Small and mid-sized firms with talented senior attorneys may find that these new pools of outsourced talent enable them to compete with the mega firms. Size may no longer be everything. In fact, it may not be anything at all.

If I’m correct, the resulting transformation will slow biglaw’s growth rate and, perhaps, shrink that segment of the profession. But instead of the mind-numbing tasks that are the bane of any young attorney’s biglaw existence, associates will find themselves doing work that more closely resembles what they thought being a lawyer meant when they first decided to attend law school. If that happened — and reality began to resemble expectations — lawyers as a group could become more satisfied with their jobs. The unthinkable might even happen: a slow reversal in the tide of recent surveys that consistently rank attorneys near the bottom of all occupations in career fulfillment.

Such a scenario would be an ironic turn of events. The extraordinary wealth that clients now confer on those running today’s highly leveraged big firms could be providing the impetus to upend the profession and force the emergence of a new business model in which leverage no longer mattered.

Of course, everything could careen wildly in a different direction –toward further corporatization of law firms as non-attorneys provide private investment capital, become shareholders, and complete the MBA takeover of the profession. That movement is clearly afoot in Great Britain. (See http://www.abanet.org/legaled/committees/Standards%20Review%20documents/AnthonyDavis.pdf) Once senior partners become accountable to non-attorney boards of directors, the individual autonomy that once defined being a lawyer will have disappeared.

But it doesn’t cost any more to be optimistic, does it?

MIRED IN METRICS? HAVE SOME MORE!

Posted on August 5, 2010 by thebellyofthebeast

Once a bad situation spins out of control, is there any way to corral it? When all else fails, try making things worse.

The ABA recently released its report detailing just a few of the ways that U.S. News law school rankings have been counterproductive for prospective lawyers and the profession — from driving up the costs of legal education to driving down the importance of diversity. (http://www.abanet.org/legaled/nosearch/Council2010/OpenSession2010/F.USNewsFinal%20Report.pdf)

As U.S.News now develops law firm rankings, the report concludes with an ominous warning:

“Once a single rankings system comes to dominate a particular field, it is very difficuly to displace, difficult to change and dangerous to underestimate the importance of its methodology to any school or firm that operates in the field. This, we believe, is the most important lesson from the law school experience for those law firms who may be ranked by U.S. News in the future.”

In other words, rankings sometimes function as any so-called definitive metric: They displace reasoned judgment. Independent thought becomes unnecessary because the methodology behind the metric dictates decision-makers’ actions.

Since 1985, many big firms have become living examples of the phenomenon. That year, The American Lawyer published its first-ever Am Law 50 list of the nation’s largest firms. Most firm leaders now teach to the Am Law test, annually seeking to maximize revenues and average profits per equity partner. The resulting culture of billings, billable hours, and associate/partner leverage ratios begins to explain why surveys report that large firm lawyers lead the profession in career dissatisfaction.(http://www.abajournal.com/magazine/article/pulse_of_the_legal_profession/print/) Without a metric for it, attorney well-being — and the factors contributing to it — drop out of the equation.

Courtesy of U.S. News, large firms now stand on the threshhold of more metrics. Will they make working environments of firms that have succcumbed to the profits-per-partner criterion worse?

It depends, but more of yet another bad thing — rankings — could produce something good — forcing individuals to sift through contradictory data, think for themselves, and make a real decision. But that can happen only if U.S. News produces a list of “best law firms” that bears little resemblance to the rank ordering of the Am Law 100 in average equity partner profits. Such contradictory data would confuse newly minted attorneys and force them to develop their own criteria for decision.

The American Lawyer itself provides a useful example of the possibilities. Eight years ago, it began publishing the Am Law “A-List,” which has gained limited traction as a moderating influence on the Am Law average profits-per-equity-partner metric that otherwise dominates decision-making at most big firms. The A-List’s additional considerations bear on the quality of a young lawyer’s life — associate satisfaction, diversity, and pro bono activities. The myopic focus on short-term dollars still dominates decisions in most big firms, but the A-List has joined the conversation.

What methodology will U.S. News employ in evaluating law firms? If it follows the approach of its law school ranking counterparts, many firms will game the system, just as some law schools have. (See my earlier article, “THE U.S. NEWS RANKINGS ARE OUT!” (https://thebellyofthebeast.wordpress.com/2010/04/16/the-us-news-rankings-are-out/)) But misguided and manipulatable metrics aren’t inevitable.

Talent is essential for any successful firm, large or small. Other qualities — collegiality, mentoring, community, high morale accompanying a shared sense of professional purpose — make a workplace special. Can the U.S. News find ways to measure those qualities?

That’s the challenge. But I fear that students won’t bother focusing on the U.S. News methodology or its flaws. More likely, whatever rankings emerge from the process will provide — as they have for so many deliberating the choice of a law school — an easy final answer.

Ceding such control over life’s direction to others is rarely a good idea. There is no substitute for personal involvement in deciding the things that matter most. That means asking recruiters tough questions, scrutinizing the lives of a firm’s senior associates and partners, and finding role models who are living a life that a new attorney envisions for her- or himself.

In the end, the current large firm business model and its self-imposed associate/partner leverage ratios will continue to render success — defined as promotion to equity partnership — an elusive dream for most who seek it. For those who become dissatisfied with their jobs, time passes slowly. So everyone joining a big firm — even a person intending to remain only for the years required to repay student loans — has ample incentive to get that first big decision after law school correct.

So why would intelligent young attorneys let U.S. News’ self-proclaimed experts make it with something as silly as a ranking? Probably for the same reasons that they relied on U.S. News to make their law school decisions for them three years earlier.

Someday, maybe there will be a U.S. News formula for choosing a spouse. Then won’t life be simple?

“SILENT GRIEF” – “DEADLY SERIOUS” FOLLOW-UP

Posted on July 30, 2010 by thebellyofthebeast

Two especially useful comments to “DEADLY SERIOUS” — retitled in “SILENT GRIEF” in the Am Law Daily version posted Friday — illustrate why I continue this blog.

One came from “Recovering Attorney,” who wrote:

“There are some resources devoted to attorneys who need assistance. For law students, the Dave Nee Foundation promotes suicide prevention and education http://www.daveneefoundation.com/. The Lawyers With Depression website also has many helpful articles and robust discussions http://lawyerswithdepression.com/. Check out the many links at both sites.”

A longer comment came from “Former Big Law Partner.” It can be viewed in its entirety by clicking on the right side of The Belly’s home page, but here’s an excerpt:

“For starters, we have to recognize that the personalities of most of us who make the cut and are hired as associates at BigLaw firms are, by nature, extremely competitive and accustomed to success…I think that we need to recognize that we tend to have personalities that make us particularly susceptible to the kinds of excesses that occur at BigLaw firms when there are not other mechanisms in place, either in our personal lives or at the firms themselves, that can help us to draw back and retain a proper perspective on our professional lives.

“Second, I agree that the overriding profit motive of nearly all law firms, not just BigLaw, is driving lawyers to desperation…Without question, I believe that it is the motive not just to make a comfortable living, but to be wealthy, that is robbing our profession of its soul.

“Third, the law schools know that there will not be job offers for all of the graduating law students, many of whom will be saddled with tremendous debt when they graduate, but nevertheless, the schools gladly take incoming students’ tuition money. Many of those students have so much debt that, if they are lucky enough to get a job (because of the glut of lawyers churned out by the law schools), they have little choice but to remain in that job as long as they can to pay down their loans, which causes many to be trapped in situations where they are unhappy…

Finally, I think that society has changed in ways that have removed many of the safety nets that might have, at an earlier time, prevented some of us from reaching such depths of despair over our jobs…[O]ur shared political or civic community has eroded to a substantial degree and, I think, exacerbates the sense of alienation and depression that we sometimes can feel.

I went through a very difficult time as I rose through the ranks of a BigLaw firm and struggled with many of these tensions…I was lucky to have moved to a different situation at the time that I did, when there were such opportunities. Unfortunately, many of those don’t exist given the current state of the economy and glut of lawyers.

And that is the real crux of the matter with attorney suicides, as I see it: It is when people see no alternatives and have given up any hope that they take such a drastic and tragic action. I hope that structural changes in law firms and law schools can be made that will give lawyers real alternatives. In the meantime, I think that all we can do is what you are doing in your college seminar and here: bringing these issues into the light and trying to raise the consciousness of current and prospective lawyers to these dangers.”

Thanks for these thoughtful contributions.

BABY BOOMERS STRIKE AGAIN

Posted on June 9, 2010 by thebellyofthebeast

Getting old is tough. But not nearly as tough as being young these days.

Recently, the National Law Journal reported that an Am Law top 20 firm adopted a new policy allowing partners two addtional years before they must “begin giving business to younger colleagues.” Instead of 65, they’ll now have to start that process at 67. (http://www.law.com/jsp/article.jsp?id=1202458271311)

Meanwhile, a prominent 63-year-old white-collar defense attorney left his big firm of 16 years to avoid its mandatory retirement age (65). He declined his old firm’s offer of a two-year exemption that would have given him until 67. (http://legaltimes.typepad.com/blt/2010/05/mark-tuohey-leaves-vinson-elkins-for-brown-rudnick-cites-retirement-policy.html)

And the June ABA Journal includes the following admonition from the organization’s president:

“In August 2007, the ABA adopted a policy rejecting mandatory age-based retirement policies. The recommendation urging this advance is worth considering and adoption by all legal employers.”

Yes, she’s a 60-something baby boomer in a big firm, too.

What’s going on? Forget lip-service paid to the old age-discrimination argument against forced departure of equity partners. That sword of Damocles has floated over the profession forever, yet somehow current big firm leaders replaced their predecessors.

So why the big outcry now? The current chorus reflects an unintended consequence of a flawed biglaw business model: resistance to intergenerational transition. But extending check-out time is a bad move for the firm that does it, the younger attorneys working there, and aging baby boomers unwilling to contemplate life after the law.

Aging rainmakers have books of business that make them indispensable to many large firms. Why? Throughout biglaw, simplistic metrics (billings, billable hours, and leverage) have determined individual partners’ annual compensation with an eye toward maximizing short-term average profits-per-partner that appear in Am Law‘s annual rankings.

It’s become bad long-term news for the firm. In such a culture, partners have every incentive to retain client responsibilities and none to mentor proteges or promote intergenerational transition. As they age, the old-timers hoard their marbles and threaten to take them elsewhere. Does that sound like a prescription for long-term institutional stability?

What about younger lawyers hoping to inherit clients? Many will find themselves in the position of the wealthy parents’ child awaiting a large bequest. By the time it comes, the kid will be in his 50s. Meanwhile, blockage wreaks havoc all the way down the food chain.

How about the aging attorneys themselves? Encouraging them to deny their own mortality isn’t helpful. Sorry, but once you’re over 65, you may be young at heart, but to the rest of the world, your colorists and/or your combovers aren’t persuasive.

Here’s the painful truth: we baby boomers are not that special. Think you’re indispensable? Put your hand in a pail of water, pull it out, and look at the size of the hole you leave. That’s how indispensable you are. Do you remember any of your own mentors fondly? Well, someday that’s what you’ll be to others — if you truly succeed in the ways that matter most.

Those who have followed this blog from the beginning know that its first series of posts, “PUZZLE PIECES — Parts 1 through 12” (now archived in “CONNECTING THE DOTS”), dramatizes the problem of aging partners who hang on too long. (https://thebellyofthebeast.wordpress.com/category/connecting-the-dots/) Special ciriticism goes to those who have also inculcated their firms with a business school mentality of misguided metrics. Such baby boomers are now positioning themselves to extract one final pound of flesh on the way to dotage.

Are these aging leaders who retain literal death grips on their billings positive role models for successors? If the firms themselves don’t survive them, it won’t matter, will it?

A BETTER ALTERNATIVE OR A LEAP FROM THE FRYING PAN?

Posted on June 3, 2010 by thebellyofthebeast

Thirty years ago, New York was a scary place for me — mostly because I’d never been there. Midwestern curiousity led me to interview with Cravath, Swaine & Moore’s on-campus representative.

I’d heard that its road to success was the toughest. Rumors circulated that it hired twenty new attorneys for every one or two it might promote to equity partner eight or more years later. Not surprisingly, most of my fellow Harvard students regarded Cravath as the quintessential competitive sweatshop — a characteristic that many of my peers actually found attractive.

Not me. I went elsewhere because, in those good old days, there was an elsewhere to go. Cravath is probably not much different from what it was back then. It’s just that most of the biglaw world has followed its example. As other top-50 firms tightened equity partner admission requirements, Cravath just kept doing what it had always done.

Why did firms emulate Cravath? Law student lore made it the best by some undisclosed criteria. In retrospect, I think money had a role. Even back in 1980, it was one of a very few firms where advancement to equity partner meant wealth that was immense, at least for a lawyer.

According to the first ever listing of the Am Law 50 in 1985, Cravath ranked 2nd in profits per partner with $635,000. For those behind it, the descent was steep: the #10 firm was under $400,000; #30 was $255,000; #50 was $170,000.

Cravath blazed a trail to riches that now accompany those who reach biglaw’s summit: average equity partner profits for the entire Am Law 100 exceeded $1.26 million last year.

But Cravath remains different. Most of biglaw moved to two-tier partnerships and eat-what-you-kill systems where a few key metrics — billings, billable hours, and leverage ratios — now determine individual equity partner compensation. Cravath’s single-tier model has reportedly remained lock-step: admission to its partnership means fixed financial rewards over an entire career without regard to individual books of business.

I don’t know if Cravath’s lawyers as a group are any happier than attorneys in other big firms. But the firm is now courting its Generation X’ers. According to the Wall Street Journal, partners in their late-30s and early-40s have “taken a more pro-active approach, building new relationships and handling much of the work that historically would have been taken on by partners in their 50s.” (WSJ, May 28, 2010, C3)

Referring to Cravath’s deferential culture in which young partners traditionally forwarded big deals to older colleagues, the article notes that senior partners have nurtured the new environment that gives younger lawyers earlier name recognition.

Why has it worked so far?

“The older attorneys didn’t mind, partly because the pay they received didn’t get cut as a result,” the Journal observes.

In other words, lock-step allows elders to step out of the spotlight without hits to their pocketbooks.

In the current biglaw world, Cravath’s experiment is risky. Will young partners remain loyal or use their newly gained client power to pursue financial self-interest elsewhere? Will Cravath be forced to modify or abandon lock-step so that it can retain young partners controlling clients and billings?

I don’t know. Equally significant, I suspect those most directly affected by what the article characterizes as a “sea change at one of the best-known and most conservative of white-shoe law firms” don’t know, either.

And what does it mean for new associates trying to understand how this affects the firm’s culture and their own career prospects?

Ah, the things I didn’t think to consider when I was a second-year law student looking for a job about which I knew almost nothing.

Fortunately, students are wiser now, right?

IT’S NOT JUST ME

Posted on May 25, 2010 by thebellyofthebeast

They acknowledge it’s a tough sell.

The co-chairman of a large, well-respected law firm has teamed with the former senior vice president and general counsel of General Electric to write an article that appeared in the May issue of The American Lawyer. The title says it all: “Noblesse Oblige: Firms must teach the younger generation what it means to be a true professional.” (http://www.law.harvard.edu/programs/plp/pdf/Noblesse_Oblige.pdf)

Here’s the first paragraph.

“Law firms have been moving from loosely managed associations of professionals to disciplined business organizations for more than a generation. This shift has caused an erosion of professional values (lawyers’ traditional commitment to enhancing society) and has increased the focus on economic return (firms’ relentless quest for escalating profits per partner).”

So how did that happen? Why doesn’t the younger generation already know what it means to be a true professional? Who have been their role models?

Better not to ask. Like me, the authors are members of the baby boomer generation that, as a group, bears responsiblity for a culture that some of us hope younger attorneys can change. In other words, do as we now say, not as too many of us did and still do.

Their suggestions start with the toughest job of all: persuading firm partners to move away from “inward-looking economics (more hours, more leverage, more profits, regardless of value)….”

For example, consider the concept of “productivity” — a bill of goods that self-styled legal consultants have sold to willing biglaw buyers for the past two decades. Increasing productivity has become a nice way of saying: “Get your billable hours up.” In the Great Recession, it has translated into layoffs so that survivors worked harder.

The authors’ approach would revolutionize most firms’ fundamental cultures. The resulting benefits would flow to partners, associates, the unrepresented, and the community.

But it all begins with a willingness to jettison the business school mentality of misguided metrics that has made profits per partner biglaw’s pervasive measuring stick — in substantial part because it has made most biglaw equity partners wealthy beyond their wildest law school dreams.

How will equity partners respond to the news that they’ll have to earn less now for the promise of longer-term non-economic gains to the profession and, I dare say, to their own improved psychological well-being?

Sophocles wrote in Antigone, “No one loves the messenger who brings bad news.”

Shakespeare’s formulations — subsequently condensed to “don’t kill the messenger” — were likewise on point: “Though it be honest, it is never good to bring bad news” (Antony and Cleopatra) and “Yet the first bringer of unwelcome news Hath but a losing office.” (Henry IV, Part 2.)

And when it comes to a willingness to hear unpleasant news about average equity partner profits, those of us familiar with the profession know too well the pervasive presence of biglaw’s equivalents to Alice in Wonderland’s Queen of Hearts:

“Off with their heads!”

EARLY RETURNS

Posted on May 19, 2010 by thebellyofthebeast

No, the title of this post doesn’t refer to Tuesday’s primary election results in a handful of states, although they confirm what I’ve thought for a while. Voters are anti-incumbent, not just anti-Democratic or anti-Obama. That’s one reason Rand Paul trounced Mitch McConnell’s guy in Kentucky. But this is not a space for ideological diatribe or political spin.

Rather, today’s caption refers to personal referenda of sorts.

First, the Belly’s audience is growing.

The American Lawyer is now running some of my posts. On May 10, Am Law Daily published “The MBA Mentality Rethinks Itself?” (http://amlawdaily.typepad.com/amlawdaily/2010/05/harper1.html) I’m grateful to editors willing to air a controversial voice.

Second — and speaking of controversy — my new legal thriller, The Partnership, (http://www.amazon.com/Partnership-Novel-Steven-J-Harper/dp/0984369104/ref=sr_1_1?ie=UTF8&s=books&qid=1273000077&sr=1-1), is selling well and generating strong reactions.

Big firm attorneys have offered these responses:

“Great read…It’s a very fair and accurate representation of large law firms. This is how we operate.”

“I enjoyed reading your novel — and was reminded how things changed over the years…and hardly for the better.”

“Great stuff…highly enjoyable.”

In contrast, non-lawyers have said:

“Now I have a more informed concept of ‘billable hours.’ Wow!”

“Your book has disturbed me. Greatly. Do lawyers really behave this way?”

Quite a juxtaposition, isn’t it? Lay persons become shocked and outraged at attorney attitudes that most lawyers themselves take for granted.

“How can we change people, so they look at things differently — without a myopic view that maximizes short-term profits at the expense of other things that matter?” the last commentator asked.

Here’s what I told him:

1. You can’t. The trends that trouble you are too imbedded; the resulting financial rewards flowing to the few are too great. Perhaps more significantly, the things that disturb you most — including undue reliance on misguided short-term metrics — aren’t unique to the legal profession. Big firm lawyers use billings, billable hours, leverage ratios, and profits per equity partner. Ask journalists, doctors, college professors, and others to describe the metrics by which they’re held accountable. Then ask them if they regard themselves as members of a profession or participants in a business enterprise.

2. Sometimes you can hold up a mirror to a person who then doesn’t like the image that appears. A book can try to do that, but it’s hard to dislodge internal rationalizations that justify a lifetime of unfortunate behavior.

3. Real hope resides with the next generation. Our kids and grandchildren will have to decide that they want things to be different. That’s what we baby boomers did, only to discover that different didn’t always mean better.

Unfortunately, without mentors and models of success that can compete with the MBA-mentality of misguided metrics now dominating too many big law firms and other once-noble professions, our progeny face a daunting task.

Now you understand the twin thoughts appearing immediately following The Partnership‘s inside title page:

“Sunlight is the best disinfectant” and “Forewarned is forearmed.”

“SEND THE ELEVATOR BACK DOWN…”

Posted on May 17, 2010 by thebellyofthebeast

Kevin Spacey regards late actor Jack Lemmon as a key influence in his life. He often quotes Lemmon’s famous remark:

“If you’re lucky enough to have done well, then it’s your responsibility to send the elevator back down.”

I thought about those comments as I read this year’s Am Law 100 listings and then took another look at last year’s. Rather than sending the elevator back down, most biglaw leaders seem to be pulling the ladder up.

A year ago, the editors of American Lawyer observed that since 1999, the number of non-equity partners in Am Law 100 firms increased threefold. But the equity ranks rose by only one-third. For context, that was a decade when demand for all legal services surged and large firms in particular experienced explosive growth in revenues, headcount, and profitability.

In other words, there was more room everywhere — except at the top, apparently.

The May 2010 issue of American Lawyer noted that as gross revenues for the Am Law 100 fell, average equity partner profits for the group actually increased to over $1.26 million. How did that happen?

Answer: A multi-pronged attack.

First, firms increased productivity — which is another way of saying that some associates lost their jobs so the survivors could bill more hours. Remember Black Thursday in mid-February 2009 — a second St. Valentine’s Day massacre?

Second, they reduced staff, slashed summer programs, deferred or withdrew previous offers to new hires, and cut other expenses.

Finally and less publicly, some firms quietly moved equity partners to income status while putting the brakes on new entrants to the equity ranks. As a result, the number of non-equity partners rose again in 2009. That bulge in the biglaw python now comprises almost 40% of all Am Law 100 law firm partners.

Where will they go?

Maybe someday the biglaw benefactors bankrolling the National Association for Law Placement (NALP) will allow that organization systematically to gather tracking data that will tell us, just as it does for associates. You might think that all of the free market proselytizers in large firms would embrace more transparency on a topic of such central importance to law students trying to make career decisions.

Think again. NALP tried, but the organization ceased collection efforts in December 2009 because firms balked at providing it. In April, a prominent group of judges, professors, and attorneys wrote a letter criticizing NALP’s capitulation. In response, its executive director offered assurances that the board would consider the issue on April 26.

Now what?

25 YEARS…

Posted on May 12, 2010 by thebellyofthebeast

There are no other lawyers in my family. One of my sons has a rock band, Harper Blynn, that just released its new album, The Loneliest Generation. (http://www.myspace.com/harperblynn)

It’s an anthem for young adults, but it also engages my Beatles-era baby boomer mind. The album’s first track — 25 Years — resonates on many levels. Fortuitously, it also marks the end of a time span that began with the first ever Am Law listing of the nation’s largest firms.

In its 1985 inaugural appearance, there were only 51 Am Law firms. (A tie required expanding the first group from its intended 50.) For a while, the annual lists were of passing interest, mostly to the profession’s voyeurs. But eventually, the rankings assumed a status that revolutionized the profession — in a very big way.

Once upon a time, how much money a person made wasn’t the subject of polite conversation. At least in the large law firm world, Am Law changed all of that. It didn’t happen overnight, but it happened.

For many firms, a key metric became definitive: average equity partner profits. Wrapped in illusory objectivity, decisions became easier:

“The numbers don’t lie.”

As firm leaders themselves became armed with MBAs, more business school-type metrics and jargon began to displace meaningful discussion about quality lawyering:

“What are your billable hours?”

“What’s the leverage ratio of non-equity lawyers working on the matter?”

“What client billings comprise the ‘business case’ for promoting an attorney to equity partner?”

And now the rhetoric is simpler as the transformation from profession to bottom-line business has become complete:

“A dollar of revenue is a dollar of revenue, period.”

“I’m just trying to run a business.”

Along the way, attorneys at many firms found the road to equity partnership longer and less certain. But things played out well for the winners, although retaining that status became more challenging, too. In 1990, average equity partner profits for the Am Law 100 were $565,000. Last year, in the midst of economic recession, they were still over $1.26 million.

How did all of this affect the culture of many firms? There’s no convenient metric for measuring that impact, but try this one:

In surveys identifying those who are the unhappiest and least satisfied workers in any occupation, lawyers — especially those in big firms — consistently lead the pack. It’s a race no one wants to win.

Which takes me to the chorus of Harper Blynn’s 25 Years:

“You don’t have to go the lonely way —

— That wrecks your heart with sorrow and leaves your mind in disarray —

Don’t pretend that you don’t know –

— Twenty-five years….and nothin’ to show.”

SECOND AND THIRD THOUGHTS?

Posted on May 10, 2010 by thebellyofthebeast

Business school deans searching for professional models that will restore ethical legitimacy to MBA programs and principles aren’t the only ones second-guessing their earlier impacts.

At last week’s annual meeting of the Seventh Circuit Bar Association, Hildebrandt Baker Robbins participated in a panel discussion as a representative of the cottage industry it spawned: law firm management consulting. A 2010 Client Advisory on the legal profession’s immediate past and predicted future included this line:

“In our view, one of the serious misues of metrics in the past few years has been the overreliance on profits per equity partner as the defining index of a firm’s value and quality.”

Great. Now you tell us. Or I should say, now you change your mind. Or do you?

As the 1990-1991 recession decimated a much smaller version of what is now called biglaw, the National Law Journal’s annual survey of the largest 250 firms in 1991 quoted Bradford Hildebrandt, who in 1975 founded the company bearing his name:

“In most firms, current management has never operated within a recession and didn’t know how to deal with it…”

So who could save us from ourselves? Hildebrandt Inc. became one of the leading players in bringing business school principles and MBA-type metrics into law firm management.

By 1996, Mr. Hildebrandt himself had analyzed our situation and offered this assessment in that year’s NLJ 250 issue:

Did most big firms heed his advice? And how. It was an easy sale based on the promise of higher equity partner profits. That was the definitive metric, wasn’t it?

Now Hildebrandt offers a new metric to replace profits per equity partner as the key measure of overall firm performance: profit per employee.

What’s the new goal?

“Greater efficiency in the delivery of legal services,” the Advisory asserts.

Does the new guiding metric embody a more extreme version of an approach that has dominated most big firms for the past 20 years? Perhaps. But some proposals for individual partner evaluation hint at the need for a mid-course correction. Instead of billable hours, Hildebrandt suggests client satisfaction ratings. Rather than leverage, employee satisfaction ratings would matter.

Confused? Hildebrandt knows just the consulting firm to help implement these complex and seemingly contradictory metrics:

“As always, we stand ready to assist our clients in negotiating through these new and uncertain waters.”

Thanks so much for all of your help.

WHEN IS BAD NEWS REALLY GOOD NEWS IN DISGUISE?

Posted on May 7, 2010 by thebellyofthebeast

One of my former undergraduate students sent me a link to a WSJ.com article on the dismal job market for graduating law students. (http://online.wsj.com/article/SB10001424052748704866204575224350917718446.html)

Of course, the focus is where it always is: on reduced hiring at the nation’s largest firms.

This is not news to most of us in the profession. Big firms started laying off associates in big numbers shortly after the financial collapse in the fall of 2008. Last year, the Am Law 100 saw its first year-over-year reduction in attorney headcount since 1993. (http://www.law.com/jsp/tal/PubArticleTAL.jsp?id=1202448340864&Lessons_of_The_Am_Law_&hbxlogin=1)

Large firms always get the editorial lead on this subject, in part because that’s where most top students in the best law schools seek to begin their careers. Why they flock in that direction is a complicated question. Herd behavior accounts for some of it, but one factor has assumed overwhelming power in their decision-making calculus: When law degrees come with six-figure student loan debt, financial reality pushes graduates toward biglaw, which shows them the money.

Here’s the hitch. Few know what awaits them if they land one of those increasingly elusive starting positions. For some, the fit works. But for too many, the surprise turns out to be unpleasant.

In its 2007 “Pulse of the Profession” survey, the ABA found that big firm attorneys were unhappier with their careers than any lawyer group. Only 44% gave a positive response to the statement: “I am satisfied with my career.” (http://www.abajournal.com/magazine/article/pulse_of_the_legal_professionunhappiest)

In contrast, lawyers working in the public sector reported an overall satisfaction rate of 68%.

Getting a public sector law job isn’t easy, either. But it’s curious that the nation’s largest firms continue to dominate the discussion, even though the biggest 250 firms employ fewer than 15% of all attorneys. When you consider associate and non-equity partner attrition rates from those places, the myopia becomes even more puzzling. Very few graduates who begin their careers in such places will stay for more than a few years.

So for current and prospective law students (and attorneys who have lost their jobs), short-term unemployment could become a catalyst for reassessment that leads to longer-term personal rewards.

But I also understand human nature. In the end, the shiny brass ring will continue to blind many people. American Lawyer recently reported that as headcount and average gross revenues declined in 2009 for the Am Law 100, average equity profits per partner increased — to $1.26 million.

How, you might ask, could that happen and what does it mean for those on the inside? I have my own views; they’re in my new novel, The Partnership. (http://www.amazon.com/Partnership-Novel-Steven-J-Harper/dp/0984369104/ref=sr_1_1?ie=UTF8&s=books&qid=1273000077&sr=1-1)

THE MBA MENTALITY RETHINKS ITSELF?

Posted on May 5, 2010 by thebellyofthebeast

Yesterday, the Harvard Business School named its new dean.

According to the Wall Street Journal (May 5, 2010, p. B9), Professor Nitin Nohria says “his focus will be on business ethics, a cause he has long championed, particularly during the financial crisis. He has also been a vocal critic of management education and the leaders it produces.”

What does that have to do with the legal topics that usually occupy this space?

As the Great Recession deepened, Nohria and a colleague wrote that management should become a profession, complete with a code of ethics similar to that for lawyers. (“It’s Time To Make Management a True Profession,” Harvard Business Review, October 2008) Nohria wants to move business leaders away from a myopic focus on maximizing shareholder value toward a broader social vision of their roles as institutional custodians and citizens. Looking to the legal profession as a model, he hopes to restore legitmacy lost over the last decade.

Maybe he has Atticus Finch in mind. Sadly, Finch is a fictional character. It’s too late for the most lucrative and influential segment of the profession to help him.

The tide has already taken most of biglaw out to sea in the direction he seeks to reverse. Following their corporate clients’ examples, firm leaders have embraced an MBA-mentality. Increasingly over the past 20 years, large law firm managers themselves have MBAs and have relied on business-school metrics — billable hours, leverage ratios, and profits-per-partner — to dictate decisions that shape the culture of such places.

How that happened and the unfortunate behavior that adherence to such deceptively objective metrics can produce are subjects for another day (and the novel I just published — The Partnership.

For now, the point is this: If Dean Nohria is looking for a new model of something that is a profession, rather than a collection of bottom-line businesses where MBA-type metrics set the tone, he’ll have to look elsewhere.

Does anyone have any candidates?

LIFE IMITATES ART

Posted on May 2, 2010 by thebellyofthebeast

Sunday’s lead article in the Business section of the May 2 NY Times brought to mind a passage in my forthcoming novel, The Partnership. It’s a legal thriller set against a power struggle at a fictional firm that has embraced biglaw’s twenty-year transformation from a profession to a bottom-line business.

First, the passage from my book, which will be available later this month:

“The crash of 2008 stalled a great run for most large firm equity partners. A year earlier, Michelman & Samson’s average partner profits had grown to almost $3 million. The reasons were obvious: the ratio of all attorneys to equity partners — a number that managers called leverage — doubled from three to six in only ten years. The firm tripled in size to more than two thousand attorneys in a dozen offices around the world. Average hours climbed as yearly billing rate increases far outstripped inflation. Trees, it seemed, really did grow to the sky.

“Michelman & Samson’s balanced portfolio of client work had historically provided protection against the vagaries of the business cycle…For some reason that mystified the firm’s Executive Committee, diversification wasn’t working as well this time. The lucrative corporate venture capital practice had led the firm’s fortunes upward, and it experienced the leading edge of the coming collapse. The transactional pipeline dried up first…The restructuring group picked up some of the slack, but not enough to maintain the historic profits of earlier times. Even worse, the uproar over executive compensation threatened to spill over into bankruptcy courts….”

Which brings me to the Sunday Times article. (http://www.nytimes.com/2010/05/02/business/02workout.html?) Throughout the current Great Recession, some lucrative pockets of biglaw have fared pretty well. For example, overall average equity partner profits of the Am Law 100 (released last Thursday) actually rose slightly in 2009 — even though gross revenue, headcount, and revenue per lawyer fell.

Is the leverage-billable hours model that produces such results sustainable? I don’t know, but it faces a new assault. Kenneth Feinberg, the Washington lawyer who serves as the “pay czar” for banks receiving tax dollars, received another assignment last June. The court in the Lehman bankruptcy appointed him to monitor attorneys’ fees in the case.

“Unemployment is over 9 percent, and to be paying first-year associates $500 an hour angers the public,” the Times quotes him. “People read about all of this and say that lawyers and the legal system are one more example of Wall Street out of control.”

The 77-year-old dean of the bankruptcy bar, Harvey Miller, responded with a spirited defense of the $164 million that his firm reportedly has incurred as Lehman’s lead counsel since its 2008 bankruptcy filing:

“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 sat on his firm’s management committee for 25 years. Where should I begin an analysis of what his remarks reveal about my once noble profession?

Here’s one place: American Lawyer reported last week that the average equity partner profits of Miller’s firm — Weil Gotshal — increased to more than $2.3 million in 2009; their percentage of equity partners declined.

Here’s another: how many doctors make more than $1,000 an hour?

Here’s yet another: the Times noted that Miller’s firm also received $16 million in connection with the General Motors bankruptcy. Weren’t “public” taxpayer dollars involved in that one?

More thoughtful biglaw law attorneys declined to take the bait and refused comment to the Times.

Harvey won’t enjoy my novel.

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The Belly of the Beast

Steven J. Harper, Esq.

Tag Archives: equity partner profits

GREED ATOP THE PYRAMIDS

CULTURE SHOCK

NUMBERS TELL A STORY

LAW SCHOOL DECEPTION

MEASURING VALUES

BONUS TIME!

COCKROACHES, MEDICINE, AND THE BILLABLE HOUR

“LIES, DAMN LIES, AND STATISTICS”

THE END OF LEVERAGE? JUST KIDDING.

ACCELERATING IN THE WRONG DIRECTION

WHO REMEMBERS FINLEY KUMBLE?

KEEP FEEDING PROFITS THE BEAST. WHAT COULD GO WRONG?

SOLVING THE BIGLAW MYSTERY OF GROWING CAREER DISSATISFACTION

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

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

ABOUT THOSE BIGLAW ASSOCIATE SATISFACTION SURVEYS….

ALONG CAME LAW FIRM MANAGEMENT CONSULTANTS

OUTSOURCING: THE BEGINNING OF A NEW AND IMPROVED BIGLAW BUSINESS MODEL?

MIRED IN METRICS? HAVE SOME MORE!

“SILENT GRIEF” – “DEADLY SERIOUS” FOLLOW-UP

BABY BOOMERS STRIKE AGAIN

A BETTER ALTERNATIVE OR A LEAP FROM THE FRYING PAN?

IT’S NOT JUST ME

EARLY RETURNS

“SEND THE ELEVATOR BACK DOWN…”

25 YEARS…

SECOND AND THIRD THOUGHTS?

WHEN IS BAD NEWS REALLY GOOD NEWS IN DISGUISE?

THE MBA MENTALITY RETHINKS ITSELF?

LIFE IMITATES ART

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