OCCUPY BIG LAW

The encampments are gone, but Occupy Wall Street leaves behind a slogan that should make any history student shudder and some big law leaders squirm:

“We’re the 99-percenters.”

It’s not a leftist fringe rant. During a recent Commonwealth Club of California appearance, presidential debate moderator Jim Lehrer said that, if becoming President turned on the answer to a single question, he’d pose this one to every candidate:

“What are you going to do about the growing disparity of wealth in the United States of America?”

Once-great civilizations collapsed under such weight. A similar internal phenomenon is quietly weakening some mighty law firms.

Destabilizing trends

“Don’t redistribute wealth — that’s class warfare” has become a popular rhetorical rallying cry. (See, for example, the Wall Street Journal‘s lead editorials on December 2  and 7.) But a stealth class war has already produced massive economic redistribution — from the 99-percenters to the one-percenters.

Nobel laureate Joseph Stiglitz writes in Vanity Fair that the top one percent control 40 percent of the nation’s wealth — up from 33 percent 25 years ago. In a recent interview, Jeffrey Winters of Northwestern University notes: “[In America], wealth is two times as concentrated as imperial Rome, which was a slave and farmer society. That’s how huge the gap is.”

Both Winters and Stiglitz suggest that today’s oligarchs use wealth to preserve power. One effective tactic is to encourage the pursuit of dreams that, for most 99-percenters, are largely illusory. My favorite New Yorker cartoon is a bar scene with a scruffy man in a T-shirt telling a well-dressed fellow patron: “As a potential lottery winner, I totally support tax cuts for the wealthy.”

For today’s young attorneys, one largely illusory dream has become the brass ring of a big firm equity partnership atop the leveraged pyramid.

Big law winners

So far, wealthy lawyers have avoided public outrage. But between 1979 and 2005, the top one percent of attorneys doubled their share of America’s income — from 0.61 to 1.22 percent. For the Am Law 50, average equity partner profits soared from $300,000 in 1985 ($630,000 in today’s dollars) to $1.5 million in 2010.

Even so, the really big gap — in society and within large law firms — is inside the ranks of the privileged, and it has been growing. By one estimate, the top one-tenth of one percent of Americans captured half of all gains going to the top one percent. Similarly, management consultant Kristin Stark of Hildebrandt Baker Robbins observes that before the recession, the top-to-bottom ratio within equity partnerships “was typically five-to-one in many firms. Very often today, we’re seeing that spread at 10-to-1, even 12-to-1.”

So what?

Meritocracies are vital and valuable, but for nations as well as for institutions, extreme income inequality reveals something about the culture that produces it. A recent study found that only three nations in the Organization for Economic Cooperation and Development — Chile, Mexico and Turkey — have greater income inequality than America. Perhaps it’s coincidental, but all OECD countries with less inequality — including Norway, Denmark, Sweden, Switzerland, Canada, Germany, Austria, and Britain — likewise surpass the U.S. in almost every quality of life measure.

In big law, exploding inequality is one symptom of a profound ailment: The myopic focus on short-term compensation metrics that reward bad behavior — hoarding clients, demanding more billables, raising leverage ratios. As the prevailing model creates stunning wealth for a few, it encourages attitudes that poison working environments and diminish the profession.

Unlike imperial Rome, today’s large firms won’t fall prey to Huns and Vandals. Rather, modern casualties include mentoring, training, collegiality, community, loyalty, and building institutional connections between clients and young lawyers. Those characteristics once defined the very concept of professional partnership. Today’s business of law makes precious little room for them. Clients who think that these relatively new trends aren’t compromising the quality and cost of their legal services are kidding themselves.

A meaningful Occupy Big Law movement would require that: 1) clients (and courts approving attorneys’ fees petitions) finally say, “Enough!” and 2) would-be protesters stop viewing themselves as future equity partner lottery winners. Meanwhile, senior partners need not worry about disaffected lawyers and staff taking to the streets.

After all, there’s no way to bill that time.

KEEP FEEDING PROFITS THE BEAST. WHAT COULD GO WRONG?

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

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

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

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

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

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

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

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

Now what?

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

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

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

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

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

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

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

ALONG CAME LAW FIRM MANAGEMENT CONSULTANTS

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.