COMMENDABLE COMMENT AWARD

Posted on September 21, 2011 by thebellyofthebeast

Rare candor at the top deserves recognition.

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

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

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

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

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

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

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

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

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

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

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

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

INFLATED PPP?

Posted on August 29, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IT’S THE MODEL

Posted on August 15, 2011 by thebellyofthebeast

[Thanks, readers. My big law novel — The Partnership — has been on the Amazon e-book “Legal Thrillers Best-Seller List” for more than a month. Last weekend, it was #7. Also available for iPad, Nook, and in paperback.]

Returning from vacation means tackling a pile of accumulated newspapers in a single sitting. That sounds like a chore, but it allows the mind to connect news items that otherwise might seem completely unrelated.

Consider these three from the Wall Street Journal on August 1, 2, and 3.

In “With Oracle and Dodgers Waiting, Boies Not Ready to Retire,” the Journal interviewed David Boies — 70-year-old former Cravath partner who started his own firm. He represented Al Gore in the 2000 election fight, plaintiffs challenging California’s law banning gay marriage, the NFL in its litigation with players, and a long string of high-profile litigants. Boies explains why more than half of his firm’s cases have a potential success fee:

“Hourly rate billing is bad for the client and I believe bad for the firm. It sets up a conflict between what’s good for the lawyer and what’s good for the client.”

Enter the client with the will to resist the hourly billing regime. On August 2, the WSJ‘s “Pricing Tactic Spooks Lawyers” describes clients countering high big law fees with on line reverse auctions that pit firms against each other in bidding for business. The result: cost reduction.

But economizing can be dangerous. An article in the next day’s WSJ should make every big firm attorney squirm. “Objection! Lawsuit Slams Temp Lawyers” reports that J-M Manufacturing is suing its former law firm, McDermott, Will & Emery LLP, claiming that the firm didn’t supervise adequately the work of contract attorneys from a third-party vendor. McDermott denies wrongdoing:

“J-M…keeps changing its story. Now [it]…claims that McDermott failed to supervise the contract lawyers that J-M retained….”

According to the article, J-M alleges that it paid McDermott attorneys rates as high as $925 an hour, compared to $61 an hour to the firm supplying the temps. In other words and regardless of who retained them, using contract lawyers helped shave J-M’s outside legal bills.

Here’s the common thread. In the first article, Boies just says what everyone knows: the billable hour regime is a nightmare. The second reflects ongoing client efforts to reduce resulting legal costs. The third identifies a potential peril for law firms that attempt to oblige: a malpractice suit — the ultimate conflict with a client.

I don’t know if McDermott did anything wrong, but clients should realize that putting the squeeze on outside lawyers is tricky. For example, cutting fees is one thing; expecting large firm equity partners to do the obvious — reduce their own stunning income levels to help the cause — is something else, and it isn’t happening.

Amid corporate belt-tightening that targeted outside legal costs, average equity partner profits for the Am Law 100 actually rose during the last two years. They’re now back to pre-Great Recession levels of $1.4 million a year and it’s a safe bet that next year’s profits will be even higher. If I were a client, I’d ask, “How did that happen?”

“It’s the successful model at work,” most firm leaders would say without reflection or hesitation. “Growing equity partner earnings are essential to retain and attract top talent. Firms have become more efficient, so it’s a win-win for clients and partners.”

Clients should consider the untoward implications of austerity measures that don’t dent equity partners’ pocketbooks. Increased efficiency? Operating with fewer secretaries and putting locks on supply room cabinets don’t account for the extraordinary profits wave that big law continues to ride.

Here’s another explanation. The prevailing model requires increases in billable hours — big law’s distorted definition of productivity — to offset fee reductions that clients demand. Concerned about attorney fatigue that compromises morale and work product? Too bad; the model ignores it.

Clients can and should seek lower big law fees, but they should be careful what they wish for, scrutinize what they get, and wonder why equity partners’ eye-popping profits keep growing along the way. The prevailing model rewards big law equity partners handsomely, but that doesn’t necessarily mean it’s working for their clients or anyone else.

AGING GRACEFULLY — OR NOT

Posted on June 5, 2011 by thebellyofthebeast

A recent NY Times article revealed the baby boomer’s dilemma: await marginalization or hog opportunities. It has profound implications for big law attorneys of all ages.

“[I]n my experience, it is much harder for older partners to maintain their position if their billable hours decline,” an employment lawyer told the Times.

So a law firm consultant suggested this strategy: “Very few people are so skilled that they can’t be replaced by a younger, more current practitioner. You’ve got to be so connected to important clients that the firm is going to fear your departure.”

That’s unfortunate advice, but not surprising. Most elders don’t mentor talented proteges to assume increasing responsibilities, persuade clients that others can do equally first-rate work, or institutionalize relationships so that the firm weathers senior partner departures and prospers over the long run. Instead, they create silos — self-contained practice groups of clients and attorneys who will give them leverage in the internal battles to retain money, power, and status. (See, e.g., The Partnership) Rather than waste time gaining fellow partners’ respect, the prevailing big law model prefers fear — or, more precisely, fear of a senior partner’s lost billings.

Over time, intergenerational antagonisms result. Older partners become blockage because the leveraged pyramid that pervades big law requires adherence to short-term metrics. Artificial constraints block the promotion of well-qualified candidates who’ve given years of personal sacrifice. If there’s not economic room at equity partner decision time, their efforts will have been for naught; they’re left behind.

Meanwhile, young attorneys learn by example. “Firm” clients cease to exist; they’re absorbed into jealously guarded fiefdoms that become transportable business units. Traditional partnership principles of mutual respect and support yield to unrestrained self-interest.

Eventually, everyone loses. Young attorneys resent elders; wealthy equity partners erect futile defenses against their own inevitable decline to an unhappy place; firms lose the stability that comes with loyal clients.

For some aging big law partners, greed never retires. But for many others, hanging on isn’t about the money. As mortality rears its head, their real quest is for continuing relevance — the belief that they still have something to offer and are making a difference.

Another Times article suggested a possible way out of big law’s conundrum: encouraging partners to redirect their skills. The New York Legal Aid Society program, Second Acts, taps into the growing army of retired lawyers:

“The point is not to have distinct phases of working life and after-working life, but to meld the two by having pro bono work be part of a lawyer’s career. Therefore, when lawyers retire, they can somewhat seamlessly slip into meaningful volunteer work, said Miriam Buhl, pro bono counsel at…Weil, Gotshal & Manges.”

The article described 68-year-old Steven B. Rosenfield, a former Paul, Weiss, Rifkind, Wharton & Garrison partner who traded his commercial securities practice for work in juvenile rights.

Behavior follows embedded economic structures and the incentives they create. In big law, the myopic emphasis on a handful of short-term profit-maximizing metics — billings, billable hours, and leverage ratios — has produced blinding wealth for a few. But sometimes those metrics become less satisfying as organizing principles of life.

Firm demands have left all lawyers with little time to reflect on what their lives after big law might be. Someday, most successful big law partners will pay the price and need help finding a path that reshapes self-identity while preserving dignity. The challenge is to permit disengagement with honor.

Firms could do a great service — and improve their own long-term stability in the process — if they relieved the stigma of economic decline in ways that encouraged aging colleagues to do the right thing. But it requires thinking beyond today’s metrics that determine a partner’s current year compensation. It requires valuing what can’t be easily measured and embedding it in a firm’s culture so that reaching retirement age isn’t a shock, it’s a blessing. It requires empathy, compassion, and — most of all — leadership.

In short, it requires things that are, tragically, in very short supply throughout big law.

IMPROVING PROSPECTS — BUT FOR WHOM?

Posted on May 10, 2011 by thebellyofthebeast

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

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

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

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

Now consider each headline a bit differently:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BIG LAW INCIVILITY

Posted on April 14, 2011 by thebellyofthebeast

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

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

Mr. V: Please don’t throw it at me.

Mr. A: Take it.

Mr. V: Don’t throw it at me.

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

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

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

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

Mr. A: Do you deny it?

Mr. V: Eventually you threw it at me.

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

Mr. V: Keep it up.

Mr. A: Your mind belongs in the gutter.

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

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

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

— Disrespect for People’s Time

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

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

— Flagrant Misbehavior

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

Incivility counterpart: Ad hominem attacks.

— Lack of Candor About the Big Law Model

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

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

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

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

“Please say please and thank you.”

I wonder what their mothers would say.

A NEW METRIC: THE MISERY INDEX

Posted on April 6, 2011 by thebellyofthebeast

Let’s call it what it is.

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

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

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

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

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

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

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

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

50% > 2,000 = 50 AMI points

40% > 2,100 = 40

25% > 2,200 = 25

10% > 2,300 = 10

None > 2,400

AMI: 125

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

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

90% > 2,000 = 90 points

75% > 2,100 = 75

60% > 2,200 = 60

45% > 2,300 = 45

30% > 2,400 = 30

15% > 2,500 = 15

None > 2,600

AMI: 315

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

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

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

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

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

THE GOLDMAN MODEL FOR BIG LAW?

Posted on March 31, 2011 by thebellyofthebeast

Goldman Sachs has been in the news a lot lately. Taken together, several articles suggest parallels to big law. Anyone wondering where many large law firm leaders want to take their institutions — and how they might get there — should look closely at Goldman. As law firms have embraced metrics that maximize short-term partner profits, they’ve moved steadily in Goldman’s direction. If America follows Australia and the UK in permitting non-attorneys to invest in law firms, a tipping point could arrive.

Others ponder this possibility. Professor Mitt Regan, Co-Director of the Georgetown Center for the Study of the Legal Profession, has been thinking, writing, and speaking thoughtfully about non-lawyer investment in law firms for a long time. Understandably, most academic observers focus on the outside — how smaller firms’ access to capital could affect competition, the interaction with attorneys’ ethical obligations, and the like.

Those are important issues, but I’m more interested on the inside. Presumably, the process would involve current equity partners selling ownership interests to investors. Many of those in big law who already take a short-term economic view of their institutions would leap at the opportunity for a one-time payday that discounted future cash flows to today’s dollar. In fact, a big lump sum will tempt every equity partner who worries about next year’s annual review.

Then what? Perhaps Goldman has devised an adaptable mechanism. When it went public in 1999, Goldman Sachs retained a partnership system within a larger corporate structure. As the Times notes, “Goldman’s partners are its highest paid executives and it biggest stars….”

Consider the similarities to big law:

— Management

Traders displaced traditional investment bankers and chairman Lloyd Blankfein surrounded himself with “like-minded executives — ‘Lloyd loyalists,'” according to the Times. Transactional attorneys have similarly risen to lead many big law firms; dissent is not always a cherished value.

— Resulting culture changes

Seeking to represent all sides of a deal, Goldman became adept at managing conflicts rather than avoiding them, a former insider told the Times. Large law firms have developed standard retention letters that maximize their representational flexibility to take on more lucrative matters that might arise.

— Metrics

Goldman’s leverage ratio is stunning: 475 partners out of more than 35,000 employees. As a group, large firms have pulled up ladders, widened the top-to-bottom range within equity partnerships, and doubled attorney-to-equity partner leverage ratios between 1985 and 2010.

— Partner Wealth

Goldman’s partners are famously rich. Many big firm equity partners now enjoy seven-figure incomes previously reserved for media celebrities, professional athletes, and investment bankers.

All of this raises an important question: How well is the model working — and for whom? Maintaining the stability of such a regime presents challenges. Goldman partners maximize their continuing influence as minority shareholders by acting in unison on shareholder votes. But the cast of characters constantly changes. According to the Times, “Every two years, roughly 70 executives leave the club, by choice or because they are no longer pulling their weight. The average tenure is about seven years…Within five years of the IPO, almost 60 percent of the original partners were gone…”

In the end, the environment is problematic for many, as one former Goldman partner told the Times:

“It’s a very Darwinian, survival-of-the-fittest firm.”

It could also be big law’s future. Then again, some firms may already be there.

Here’s a concluding thought: perhaps Goldman Sachs will become a big law outside investor that buys its way into the legal profession. That shouldn’t bother anyone. After all, Lloyd Blankfein graduated from Harvard Law School.

HOWREY’S LESSONS: A NATIONAL CONVERSATION

Posted on March 21, 2011 by thebellyofthebeast

My latest “Commendable Comments” award goes to a non-lawyer, the Washington Post’s Pulitzer prize-winning columnist Steven Pearlstein.

Since I started my blog a year ago, two of my most popular articles have been “Howrey’s Lessons” and “Howrey’s Lessons — Part II.” Versions recently ran on Am Law Daily, where they also attracted widespread attention.

I don’t know if Pearlstein was among the thousands who saw my analysis of Howrey’s end and its relationship to ubiquitous big law trends, but his March 20 column reinforces my themes. If I hadn’t been attending the Virginia Festival of the Book in Charlottesville to discuss The Partnership, I might have missed it. I’m glad I didn’t.

Both of my Howrey articles focused on a central point: What matters most are not the things that make the once venerable institution different from other large firms. Rather, the true significance of its death lies in what makes the firm similar to many, many others. Intelligent lawyers who specialize in distinguishing adverse precedent prefer to think otherwise; they do so at their peril.

Noting as I had that, as recently as 2008, the DC-oriented Legal Times hailed Howrey’s final chairman, Robert Ruyak, as one of 30 “visionaries,” Pearlstein describes how quickly the world turned. In the end, I found Ruyak’s litany of claimed contributors to the firm’s demise — clients demanding contingency fee arrangements; conflict problems that made European growth problematic; and the rise of competitive electronic discovery vendors — unpersuasive; I explained why in “Howrey’s Lessons — Part II.” Pearlstein is more charitable in accepting such excuses at face value. That’s understandable because he’s never worked in a large firm.

But on the big picture, his assessment echoes my earlier observations:

1. Howrey’s global expansion through lateral hiring created a firm of free agents who lacked the deep loyalties that once characterized the firm. That phenomenon wasn’t unique to Howrey.

2. Pearlstein notes that profits per partner has become “not only the key determinant of how much partners take home, but it is the metric by which the very competitive and ambitious people in the legal business keep score.” My regular readers know that the business school mentality of misguided metrics — billings, billable hours, and leverage ratios aimed at increasing partners’ short-term profits — has transformed a once noble profession in unfortunate ways.

3. Pearlstein observes that when Howrey’s average partner profits took a downward turn, the partnership — which wasn’t really a partnership in the way most people understand that concept — found that its “bonds of loyalty [were] not strong enough to hold Howrey together.” In “Howrey’s Lessons,” I put it this way: “[W]hen cash becomes king, partnership bonds remain only as tight as the glue that next year’s predicted equity partner profits provide….”

Likewise, Pearlstein’s overall conclusion is identical to mine: The most troubling aspect of Howrey’s death is that “the industry seems to have learned nothing from such episodes.” He closes with an acknowledgement of the widespread problem of partner and associate dissatisfaction that the prevailing big law culture has exacerbated.

On only one point would I offer this limited qualification to Pearlstein’s survey of the legal blogosphere concerning Howrey. He suggests that the media (press and blogs) offer “the same uncritical acceptance of…a world in which firms are held together by nothing more than a collective determination to increase profit per partner.” Respectfully, I offer my ongoing commentary over the past year as a consistent voice in challenging the prevailing big law model.

When an intelligent, sophisticated observer such as Steven Pearlstein takes a seemingly isolated issue involving lawyers — that is, Howrey’s disintegration — and uses his national platform to shine a welcome light on a deeper professional problem, it becomes that much more difficult for big law leaders to ignore. They’ll continue to turn a blind eye to the incubating crisis, but perhaps they’ll rest just a little bit less easily in doing so.

Pearlstein’s prize is a copy of The Partnership, which I will send him this week. I’m confident that, as an interested outsider, he’ll find it fascinating.

HOWREY’S LESSONS — PART II

Posted on March 13, 2011 by thebellyofthebeast

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

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

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

1. European offices:

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

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

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

2. Document discovery vendors.

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

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

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

3. Contingent and alternative fees

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

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

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

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

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

HOURLY RATES: PLEASE DON’T READ

Posted on February 24, 2011 by thebellyofthebeast

For a long time, big law’s high-flying hourly rates remained under popular radar screens. Not anymore. On the heels of Jamie Wareham’s $5 million move to DLA Piper, The Wall Street Journal recently added “Big Law’s $1,000-Plus an Hour Club.”

Will big law leaders react with shame and embarrassment to such disclosures? Doubtful. Most partners will defend their rates as market-driven. As Weil, Gotshal & Manges’s bankruptcy partner Harvey Miller told the Journal bluntly: “The underlying principle is if you can get it, get it.”

He’s not alone. According to the article, “the average law-firm partner now asks $635 an hour and bills $575.” Ashby Jones’s companion online report quoted a law firm management consultant’s prediction that $2,000/hour for top partners could be only five years away.

“Get it if you can” is unworthy of a noble profession and a dangerous business plan. Some clients pay enormous rates to those who, as one in-house lawyer put it, are worth it. But rising resistance to $500+/hour associates creates problems for big law’s leveraged pyramid. At $1,000/hour, 2,000 partner hours generate $2 million in gross revenues, which is a lot less than these marquee players pocket annually. When younger attorneys’ hourly rates multiplied by their billables (less salary and bonus) no longer make up the difference, clients squeezing the bottom will dramatically reduce profits at the top. Along the way, the effort to preserve equity partner earnings will exacerbate the most unpleasant aspects of big law culture.

Another fault line runs through today’s high rates: Taxpayers are bearing some of those fees directly, not just through price elasticity curves that push some legal cost increases into the consumer price of a client’s goods or services. For example, last May, Harvey Miller’s firm had received $16 million in legal fees for work on the GM bankruptcy that taxpayers funded. With hubris that ignored the public’s financial contribution, Miller defended his resistance to discounts from Weil Gotshal’s reported rates of $500+/hour for associates to more than $1,000/hour for some senior partners: “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.” He was only half-right.

Similarly, Congress is now investigating legal fees that the federal government has paid to firms representing Fannie Mae and its former executives. When shareholders sued the company in 2004, each defendant retained separate counsel. That’s typical because a single attorney’s simultaneous representation of multiple defendants can create conflicts that inhibit zealously advocacy on behalf of any particular client. In such circumstances, indemnification agreements usually obligate the company to pay its former executives’ separate lawyers, as well as its own.

Normally, none of this would be controversial, but Fannie Mae isn’t normal. When it collapsed in 2008, the government assumed control. Taxpayers are now footing the legal bills — really big ones — for defending the company and its former executives in the pending lawsuits. The Times reported:

“The amount advanced by the government to pay legal bills for Fannie Mae and its former executives was a well-kept secret for more than two years. But the bills add up quickly. In the main lawsuit [overseen by Ohio attorney general Mike DeWine on behalf of two state pension funds that owned Fannie Mae shares], 35 to 40 lawyers representing Fannie defendants attend monthly conferences by the judge.”

It’s a tragic irony. In Ohio, state and local workers have taken to the streets in protesting budget reductions that would reduce their wages and end collective bargaining. Meanwhile, the attorney general leads a lawsuit against Fannie Mae and its former executives while federal taxpayers — some of whom are Ohioans — finance the defense that creates big paydays for a relatively few lawyers.

I don’t know these attorneys or their hourly rates. But generating national bipartisan outrage isn’t a good development for them or big law generally.

Sunlight can be a disinfectant, unless you’re a vampire.

LOCATION, LOCATION, LOCATION?

Posted on February 14, 2011 by thebellyofthebeast

In “Greed Atop the Pyramids,” I observed that the internal spread between the top and the bottom within large firm equity partnerships has grown dramatically in recent years. No one feels sorry for those at the low end, but the compensation for many top partners has reached staggering heights. My title suggested an explanation.

K&L Gates Chairman Peter Kalis — whom I’ve never met — has offered another reason: It’s not greed; it’s geography. His photograph appeared with The Wall Street Journal article on Jamie Wareham, “The $5 Million Dollar Man.” According to the Journal, at K&L Gates “top partners earn up to nine times as much as other partners. Pay spreads widen as firms become more geographically diverse, operating in cities with varying costs of living, said Peter Kalis, chairman of K&L Gates. The firm’s pay spread rose from about 5-to-1 to as much as 9-to-1 in the past decade as it expanded. ‘Houses cost less in Pittsburgh than they do in London,’ Mr. Kalis said.”

Let’s consider that proposition. It’s certainly true that London is more expensive than New York, and New York is more expensive than Pittsburgh. It’s also true that some firms consider cost-of-living differences when setting compensation; some apply formulaic across-the-board geographical adjustments. But the issue involves the top of a widening range, not the relative cost of comparable talent across offices.

Here’s how to test the hypothesis that geography accounts for this relatively new phenomenon: Are all of a firm’s top equity partners located in the city of the firm’s most expensive office? I doubt it. Or try it from the other side: Are any of the biggest paydays going to partners working in less expensive cities? Almost certainly.

I don’t know how much Kalis makes, but he might even be a useful example. His K&L Gates website biography page shows a commendable involvement in a number of Pittsburgh-area civic organizations. In addition to his Pittsburgh office, the page also lists a New York phone number, but his only bar admission is Pennsylvania. He’s certainly not headquartered in the most expensive cities where K&L Gates has offices — Tokyo, Moscow, Hong Kong, Singapore, Beijing, London, or Paris. My hunch is that, as Chairman and Global Managing Partner, he’s not at the low end of his firm’s equity partner compensation range, either. So why the superficially appealing but ultimately unpersuasive “houses are cheaper in Pittsburgh” line to explain away a pervasive big law trend?

Perhaps it’s because reality is sometimes harsh and unflattering. Citing a former pay consultant for law firms, the Journal article noted, “A majority of big law firms have begun reducing the compensation level of 10% to 30% of their partners each year, partly to free up more money to award top producers.”

I don’t know if that has happened at K&L Gates, but other law firm management consultants have suggested that the need to attract and retain rainmakers in a volatile market has widened the top-to-bottom equity partner range in many firms:

“Before the recession, [the top-to-bottom equity partner compensation ratio] was typically five-to-one in many firms. Very often today, we’re seeing that spread at 10-to-1, even 12-to-1.”

Finally, the Journal article itself provides additional evidence that something other than geography is at work: “A small number of elite firms, such as Simpson Thacher & Bartlett LLP and Cravath, Swaine & Moore LLP, still hew to narrower compensation bands, ranging from 3-to-1 to 4-to-1, typically paying the most to those with the longest service….”

Cravath has a London office. Simpson Thacher has offices in Beijing, Hong Kong, London, Los Angeles, New York, Palo Alto, Sao Paolo, Tokyo, and Washington, DC. Yet they have avoided the surging top-to-bottom equity partnership pay gaps that Kalis attributes to geography.

To understand what has really happened recently inside big firms — and why — read The Partnership.

There is, indeed, greed atop the pyramids — even in Pittsburgh.

Are You Worth $5 Million?

Posted on February 10, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

GREED ATOP THE PYRAMIDS

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].”

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.

EXPLAINING BAD BEHAVIOR

Posted on December 2, 2010 by thebellyofthebeast

I’ve never met Steven Pesner, who lit up the legal blogosphere with his now infamous e-mail to Akin Gump’s New York office litigation billers and their secretaries. (http://abovethelaw.com/2010/11/akin-gump-partner-pens-email-fantasy-about-firing-delinquent-time-keepers/) Some say he’s typical of big law partners; others argue hopefully that he is an exception. Someone else can tackle that survey. I’m interested in what the episode reveals about the prevailing large firm business model that put him in a position to disseminate the words that now define him.

First, his fundamental point applies to almost all large firms: Get your time in because the billable hour remains big law’s cornerstone. People working for Pesner undoubtedly log lots of them; they lead to revenue — an essential prerequisite to his internal power. That’s not unique.

Second, the model has many problems, only one of which he targets: Tardy time submission. Some attorneys wait a week — or even a month — before trying to “reconstruct” their billable activities. That allows them to believe that doing their best to remember earlier tasks isn’t lying. Insofar as Pesner sought to deter creative writing at week’s or month’s end, he was protecting clients and his firm. Of course, that doesn’t justify his rhetoric. Nothing can. But his topic reveals one of many flaws infecting the billable hour regime.

Third, economic self-interest looms large. His message went exclusively to all New York litigation personnel — a point commentators have ignored. Pesner’s departmental billings may well frame a larger internal debate: His NY litigation group’s near-term economic standing. He might have been preparing to defend his memo’s recipients against annual intra- and interoffice warfare with corporate, restructuring, and transactional group leaders. Most large firm equity partners eat what they kill, along with what they successfully claim to have killed. In many firms, allocating profits often starts geographically by office practice group before proceeding to rainmakers who then decide the fate of individuals within each group.

Fourth, Pesner’s valid points morphed into a tirade that reveals pervasive equity partner hubris, especially among big law managers: He believes his own press releases.

“9. For those of you who think you are exempt from doing time sheets on a daily basis, I’d suggest that you reevaluate your importance and get ready to prove that (a) you are busier than I am on legal work, (b) you are busier than I am on client development work, (c) you are busier than I am on firm work and (d) [Redacted] and I do not have better things to do with our time than beg you to be responsible.”

The word “I” appears five times. That’s how some senior partners orient their world — around themselves. Few, if any, others compare favorably to their own idealized self-images. Their constant refrain is “today’s young people just don’t want to work as hard as I did.” But as associates, none had the challenge of a BlackBerry keeping them on-call 24/7. In fact, they didn’t even have annual minimum billable hours requirements. Their hypocrisy is stunning.

Finally, he acknowledges the life-or-death power that all senior partners wield over subordinates’ careers:

“10. Candidly, I’d put every future material violator’s name in a hat, randomly pick out a name, and publicly fire the person on the spot—to demonstrate that time sheet compliance is serious business. And incidentally, it is my understanding that the job market is not so good right now in case you did not know.”

The immediate issue was time submissions, but the underlying attitude infects working relationships throughout big law. Pesner was unique in his candor, but not in his views. Few dare to challenge such a partner in a position to make or break careers. Pesner’s threatening finale leaves no doubt in that respect:

“11. Also, please remember that I have a long and excellent memory.

If you have any questions, think long and hard before asking them—this simply is not very complicated.”

Sometimes a few words from one man are worth a thousand pictures of what too many others in his profession have become.

THANKSGIVING

Posted on November 23, 2010 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

“LIES, DAMN LIES, AND STATISTICS”

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?

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?

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?

WHERE HAVE ALL THE MENTORS GONE?

Posted on July 19, 2010 by thebellyofthebeast

Many biglaw leaders should take heed.

In last weekend’s edition of the Wall Street Journal, columnist Peggy Noonan lamented the loss of what she called “adult supervision.” (http://www.peggynoonan.com/article.php?article=531)

Commemorating the 50th annivesary of To Kill A Mockingbird, she recalls the “wise and grounded Atticus Finch, who understands the world and pursues justice anyway, and who can be relied upon.”

She then rattles off a list of world leaders whom she regards as young — President Obama is 48; British Prime Minister Cameron is 43; Canadian Prime Minister Stephen Harper (no relation) is 51. Noonan says they could benefit from the presence of wise advisers like the venerable Finch.

Of course, there’s an obvious problem with her analysis: Finch himself was about the age of the “young men” she now finds in need of wise older counsel. So she misses an essential point: Wisdom is neither the exclusive province of the old nor the assured destination of advancing age.

But Noonan states an important truth when she views the modern world and observes that “there’s kind of an emerging mentoring gap going on in America right now.” She sees it in “a generalized absence of the wise old politician/lawyer/leader/editor who helps the young along, who teaches them the ropes and ways and traditions of a craft.”

That is undoubtedly true for much of biglaw. Why?

There are exceptions within and among firms, but this development flows directly from the MBA-mentality that now dominates most large law firms. It forces leaders and everyone else to focus on short-term metrics — individual billings, billable hours, associate-partner leverage ratios.

The resulting behavior is predictable. Each individual’s drive to attain and preserve position in accordance with such metrics leaves little room (or time) for the personalized mentoring that turns good young lawyers into better older ones. There’s no metric for measuring the future contribution that mentoring makes to the current year’s average profits-per-equity-partner.

For firms adhering to the pervasive biglaw model, the absence of a mentoring metric makes all the difference. In Hildebrandt Baker Robbins’s 2010 Client Advisory to the legal profession, one of the pioneering consultants responsible for the proliferation of biglaw’s misguided metrics aimed at short-term profit-maximizing concludes, “There is a management adage that ‘what gets measured gets done.'” (http://www.hildebrandt.com/2010ClientAdvisory)

I would add this corollary: Throughout biglaw in particular and the world generally, that which lacks a metric gets ignored.

Unfortunately, some of those things are important.

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?

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The Belly of the Beast

Steven J. Harper, Esq.

Tag Archives: equity partners

COMMENDABLE COMMENT AWARD

INFLATED PPP?

IT’S THE MODEL

AGING GRACEFULLY — OR NOT

IMPROVING PROSPECTS — BUT FOR WHOM?

BIG LAW INCIVILITY

A NEW METRIC: THE MISERY INDEX

THE GOLDMAN MODEL FOR BIG LAW?

HOWREY’S LESSONS: A NATIONAL CONVERSATION

HOWREY’S LESSONS — PART II

HOURLY RATES: PLEASE DON’T READ

LOCATION, LOCATION, LOCATION?

Are You Worth $5 Million?

GREED ATOP THE PYRAMIDS

CULTURE SHOCK

LAW SCHOOL DECEPTION

MEASURING VALUES

EXPLAINING BAD BEHAVIOR

THANKSGIVING

“LIES, DAMN LIES, AND STATISTICS”

THE END OF LEVERAGE? JUST KIDDING.

WHO REMEMBERS FINLEY KUMBLE?

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!

WHERE HAVE ALL THE MENTORS GONE?

BABY BOOMERS STRIKE AGAIN

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