Tag Archives: Goldman Sachs

THE ILLUSION OF LEISURE TIME

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Back in January, newspaper headlines reported a dramatic development in investment banking. Bank of America Merrill Lynch and others announced a reprieve from 80-hour workweeks.

According to the New York Times, Goldman Sachs “instructed junior bankers to stay out of the office on Saturdays.” A Goldman task force recommended that analysts be able to take weekends off whenever possible. Likewise, JP Morgan Chase gave its analysts the option of taking one protected weekend — Saturday and Sunday — each month.

“It’s a generational shift,” a former analyst at Bank of America Merrill Lynch told the Times in January. “Does it really make sense for me to do something I really don’t love and don’t really care about, working 90 hours a week? It really doesn’t make sense. Banks are starting to realize that.”

The Fine Print

There was only one problem with the noble rhetoric that accompanied such trailblazing initiatives: At most of these places, individual employee workloads didn’t change. Recently, one analyst complained to the Times that taking advantage of the new JP Morgan Chase “protected weekend” policy requires an employee to schedule it four weeks in advance.

Likewise, a junior banker at Deutsche Bank commented on the net effect of taking Saturdays off: “If you have 80 hours of work to do in a week, you’re going to have 80 hours of work to do in a week, regardless of whether you’re working Saturdays or not. That work is going to be pushed to Sundays or Friday nights.”

How About Lawyers?

An online comment to the recent Times article observed:

“I work for a major NY law firm. I have worked every day since New Year’s Eve, and billed over 900 hours in 3 months. Setting aside one day a week as ‘sacred’ would be nice, but as these bankers point out, the workload just shifts to other days. The attrition and burnout rate is insane but as long as law school and MBAs cost $100K+, there will be people to fill these roles.”

As the legal profession morphed from a profession to a business, managing partners in many big law firms have become investment banker wannabes. In light of the financial sector’s contribution to the country’s most recent economic collapse, one might reasonably ask why that is still true. The answer is money.

To that end, law firms adopted investment banking-type metrics to maximize partner profits. For example, leverage is the numerical ratio of the firm’s non-owners (consisting of associates, counsel, and income partners) to its owners (equity partners). Goldman Sachs has always had relatively few partners and a stunning leverage ratio.

As most big law firms have played follow-the-investment-banking-leader, overall leverage for the Am Law 50 has doubled since 1985 — from 1.76 to 3.52. In other words, it’s twice as difficult to become an equity partner as it was for those who now run such places. Are their children that much less qualified than they were?

Billables

Likewise, law firms use another business-type metric — billable hours — as a measure of productivity. But billables aren’t an output; they’re an input to achieve client results. Adding time to complete a project without regard to its impact on the outcome is anathema to any consideration of true productivity. A firm’s billable hours might reveal something about utilization, but that’s about it.

Imposing mandatory minimum billables as a prerequisite for an associate’s bonus does accomplishes this feat: Early in his or her career, every young attorney begins to live with the enduring ethical conflict that Scott Turow wrote about seven years ago in “The Billable Hour Must Die.” Specifically, the billable hour fee system pits an attorney’s financial self-interest against the client’s.

The Unmeasured Costs

Using billables as a distorted gauge of productivity also eats away at lawyers’ lives. Economists analyzing the enormous gains in worker productivity since the 1990s cite technology as a key contributor. But they ignore an insidious aspect of that surge: Technology has facilitated a massive conversion of leisure time to working hours — after dinner, after the kids are in bed, weekends, and while on what some people still call a vacation, but isn’t.

Here’s one way to test that hypothesis: The next time you’re away from the office, see how long you can go without checking your smartphone. Now imagine a time when that technological marvel didn’t exist. Welcome to 1998.

When you return to 2014, read messages, and return missed calls, be sure to bill the time.

THE GOLDMAN MODEL FOR BIG LAW?

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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.

GOLDMAN SACHS — AN INITIAL OBSERVATION

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Media coverage since the SEC initiated its controversial enforcement action against Goldman on April 16 has reminded me of a conversation I had a few years ago with one of my kids’ twenty-something friends.

Immediately after college, he took an entry level position at Goldman. At the time, he properly regarded his offer as the ultimate reward for a distinguished record coupled with extraordinary personal charm. He didn’t know whether GS was the beginning of an investment banking career, but he hadn’t ruled it out. The pay was good and his student loan repayment program beckoned. (Sound familiar to any recent law school grads out there?)

At first, his enthusiasm was infectious:

“I’m getting pretty interesting assignments, including travel to attend presentations with more senior people. I’m working long hours, but the money is good. It’s nice to repay my loans and save a little money.”

Two years later, he was still working 16-hour days and his BlackBerry felt like a very long leash — or a choke-collar — that he could never remove.

“Here’s the real problem,” he told me. “When I look up at the successful people above me, I can’t find anyone whose life I’d want. The pressure, stress, and long hours never end. That’s a problem.”

I told him he had his eye on the right ball: look up the food chain and decide whether anyone leads the life you envision for yourself. When he completed repaying his student loans a year later, he quit to pursue a completely different line of work. He’s making less money, but his life is better.

Maybe his story doesn’t matter because he never belonged in investment banking in the first place. Then again, maybe his story — and his observations — are not unique to Goldman or investment banking or even biglaw. Like many talented young people who would have benefitted their organizations in the long-run, short-run reality drove them away.

Who will get this message to the top of such institutions? A recent NY Times article reveals the challenge, especially to any firm that is wildly successful in its financial mission of maximizing short-term profits:

“Even insiders acknowledge that Mr. [Lloyd] Blankfein [Goldman’s CEO], a former trader, has remade Goldman Sachs. He has built a giant powered by formidable trading operations rather than by bankers who give advice to corporate clients and help them raise money. In the past, Goldman was often run by two senior executives; one from trading and one from banking. Under Mr. Blankfein, the traders have consolidated their power.” (http://www.nytimes.com/2010/04/20/business/20blankfein.html?pagewanted=1)

Is it a problem? Here’s the rest of the NY Times quotation that caught my eye:

“Mr. Blankfein has surrounded himself with like-minded executives — ‘Lloyd loyalists,’ as they are known — plucked from the trading ranks….”

Are such lieutenants less likely to tell the emperor the truth about  his new clothes when he needs to hear it? It’s a question that many biglaw firm leaders might ponder as they strive to maximize profits per partner at the expense of other values that are less easily quantified. Maybe a biglaw episode of Undercover Boss would help.