DO THEY COUNT AS BILLABLES?

In “New Lawyers, New Classes,” the Wall Street Journal reports on firms sending their attorneys through business-education type programs. Describing one full-time four week example, it states the obvious: “[L]aw firms aren’t billing the 160 training hours to clients.”

But the article is silent on a more interesting question: If a lawyer has to devote 160 hours — or any other amount — to firm-required business education, will that time count toward minimum billable hour expectations?

1958 ABA pamphlet suggested that a reasonable full-time schedule produced 1,300 client hours a year. That’s right, 1,300. Today, senior partners who had no minimum billables requirements as associates run firms where some new attorney orientation sessions dictate monthly targets, as well as annual ones. Big law associates average more than 2,000 billables a year. Adding another 160 hours — a month’s worth of time — for firm-required education is no small matter.

During year-end reviews, associates typically receive spreadsheets detailing their hours by category: client billables, recruiting, training, pro bono, personal, and so forth. (Hat-tip to The American Lawyer‘s A-List, which prompts many firms to count pro bono hours as billable time.)

How about training? Back in January 2008 when law firms were more concerned about attracting and retaining good associates than they are now, the New York Times found firms attacking enormous associate attrition rates with initiatives aimed at keeping the keepers. But even that didn’t always extend to giving billable credit for training.

For example, the Times wrote, “Strasburger & Price, a national firm based in Dallas, announced last October [2007] that it was decreasing the hours new associates were expected to log, to 1,600 from 1,920 annually. (Lest you think those lawyers will be able to go home early, however, note that newcomers will now be asked to spend 550 hours a year in training sessions and shadowing senior lawyers.)”

According to the NALP directory, Strasberger’s policy is unchanged, but at least it’s transparent. Many big law counterparts have remained opaque.

Consider the public positions of the three firms in the WSJ article — Debevoise & Plimpton; Milbank, Tweed, Hadley & McCoy; and Skadden, Arps, Slate, Meagher & Flom. In their current NALP listings, none discloses its average associate billables for 2009 or 2010. But that doesn’t mean those in charge aren’t watching hours closely.

According to the Journal, “Debevoise said its associate billable hours rose by more than 10% in 2010 and are up by even more so far this year.” To what? The article doesn’t say — and neither does the firm.

Earlier this year, Milbank’s chairman, Mel Immergut, noted that billables were up, but “still low compared to what [they have] historically been.” Again, no hint of what those levels were or are.

Skadden’s culture is no secret. It became the subject of unwanted attention after one of its associates, Lisa Johnstone, died in June at age 32 — reportedly after weeks of extremely long hours.

All three firms state on their NALP forms that they have no minimum billable hours requirement. Debevoise’s website says that billable and pro bono hours “are monitored by partners to assure an associate’s full involvement in our practice and to attempt to spread workloads fairly.”

So perhaps there’s no need to worry about how those 160 business-education training hours get counted after all. Debevoise cares only about assuring full involvement and fairness for its associates, not whether they meet a minimum number of billables. Like many firms, Milbank actually uses its training programs as a sales tool: “Get paid to go to Harvard,” its website proudly proclaims. Skadden will always be Skadden.

But give credit where it’s deserved: Debevoise ranked an impressive 16th in overall mid-level associate satisfaction this year. Milbank and Skadden fared less well — placing 68th and 69th, respectively, out of 126. (The unfortunate backstory is that overall satisfaction for the survey group dropped to another record low.)

Interestingly, all three responded to this query on the NALP form:

“Billable hours credit for training time.”

Debevoise and Milbank answered “Y.” Skadden said “N.”

“Credit” toward what? Unless billables matter to evaluating or compensating associates, wouldn’t firms without a minimum requirement answer “N/A”?

Maybe their stated answers are typos.

SUFFERING IN SILENCE

The 2011 Am Law associate survey is out. Billable hours continue moving up; morale continues moving down. As I explain in “Suffering in Silence” (appearing in the September 2011 print edition of The American Lawyer), those who get to participate in the survey are the lucky ones.

It’s especially appropriate for Labor Day.

INFLATED PPP?

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

[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 iPadNook, 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.

 

PRACTICAL SKILLS

A few days after the Bureau of Labor Statistics announced the loss of another 2,600 legal jobs in June, the Wall Street Journal ran “Law Schools Get Practical.” Some schools are changing curriculum to develop skills that real lawyers need; that makes sense. But some hope that more big law positions for graduates will result; that is magical thinking.

Reconsidering legal education is important. The first year teaches students to think like lawyers; the second year covers important substantive areas. To deal with the universally maligned third year, Stanford is considering a clinical course requirement involving 40-hour plus weeks of actual case work, while Washington and Lee University of Law School replaced lectures and seminars with “case-based simulations run by practicing lawyers.”

Meanwhile, Harvard has updated its curriculum significantly in recent years. Indiana University Maurer School of Law teaches “project management” and “emotional intelligence.” NYU offers courses in “negotiation” and “client counseling.” Some innovations are more valuable than others, but no one should think that improved job prospects will result.

The article quoted a recruiter at McKenna, Long & Aldridge LLP who said that clients weren’t willing to pay for new lawyer training. Likewise, Xerox’s general counsel described his company’s policy of not paying for first-year associates. The implication is that if new graduates received more practical training in school, clients would pay for them and hiring would increase. Not a chance.

First, new associates in large firms don’t need the practical skills that most law schools are promoting. If there were courses on “maximizing billable hours,” “withstanding unreasonable partner demands,” or “surviving a culture of attrition where fewer than ten percent of new associates will become equity partners,” that would be one thing. But document review, due diligence undertakings, and other mundane tasks that consume most big law associates’ early years don’t require much special training. Some don’t even require a law degree. Xerox — and many other companies sharing its dim view of first-year associate value — won’t start paying for young attorneys just because they have taken the new courses.

Second, average equity partner profits for the Am Law 100 have moved steadily upward over the last decade — to over $1.3 million in 2010. If those firms are already “suffering” from client resistance to paying for new associates, partners nevertheless seem to be thriving financially.

Finally, when asked whether current law school innovations will help students land jobs, Timothy Lloyd, chair of Hogan Lovells recruiting committee, told the Journal:

“It could enhance the reputation of the law school…as places that will produce lawyers who have practical skills. As to the particular student when I’m interviewing them? It doesn’t make much of a difference.”

Bingo. As a big law interviewer myself, I looked for intelligence, personality, and potential. Specific courses didn’t matter. Assessing candidates was and is subjective but, to adapt Justice Stewart’s pornography test, I usually knew a good one when I saw one.

Schools should expand clinical programs, but not because such student credentials matter to large firm recruiters. They don’t. However, those who don’t get big law jobs really need practical lawyering skills. Do it for them — the vast majority of today’s 50,000 annual graduates.

Schools should modernize curriculum, but not to become business school knockoffs for big law. That’s a mistake.

Even more urgently, schools should educate prospective attorneys more fully about the big law path — from the challenge of getting a job to the unforgiving billable hours culture to the elusive brass ring of equity partnership. (See, e.g., The Partnership)

That would be real reform, but at most place it won’t happen. Yale’s cautionary memo about the real meaning of 2,000 billable hours a year and Stanford’s “Alternatives to Big Law” series that compliments its outstanding student loan forgiveness program are hopeful beginnings. But such candor runs counter to the enticing big firm starting salaries that pervade law school websites aimed at the next generation of would-be lawyers. After all, their student loans pay the bills.

DESPERATELY SEEKING DOWNTIME

Couple Friday afternoon summer getaway days with a long weekend like the fourth of July and what do you get? Maybe not as much as you think.

A recent NY Times article pictures a family of four seated across their living room couch. Each has a laptop or handheld electronic device. They looked at the camera for the photo op, but the accompanying text demonstrates that they and many others are kidding themselves: physical proximity isn’t the same as spending time together.

Lawyers aren’t alone in pondering what quality time with others really means, but they confront special challenges in trying to find it. Once upon a time, work remained generally in the office; secretaries tracked down partners only for real emergencies; home was a refuge. Vacations meant that the entire family went someplace where everyone reconnected — and I don’t mean with WiFi.

Those good old days weren’t idyllic, but the lines separating work from everything else were clearer. The erosion began with voicemail. The ability to leave a message made it easier to do so while creating subtle pressure for recipients to check in periodically, even during vacations. E-mail made things worse. To the sender, it’s less intrusive than a phone call and, therefore, isn’t considered an interruption. BlackBerrys, text-messaging, and smart phones sped connection times and completed the melding of personal and professional existences.

Self-delusion about the consequences has become a special problem for attorneys who measure their lives in billable hours. They’ve convinced themselves that these technological innovations have come with no downside. Especially in big law, it’s all positive because everyone is just utilizing time more productively, i.e., it’s getting billed and the equity partners in particular are getting richer.

Associates supposedly benefit, too. Unlike earlier, “tougher” times, they can go home and continue billable activities in their virtual offices.

Clients? They get 24/7 access to their lawyers.

Everyone wins because the human mind can simultaneously do many things well, right? Not really.

The human brain processes information sequentially, that is, one thing at a time. When interrupted, the mind disengages from the original task, turns to the second one, and then disengages again before returning to what it was doing first. Not surprisingly, a recent scientific study found that young people (average age 24) switched tasks more quickly and easily than old ones (average age 69).

But another study reveals that people of all ages underestimate the extent to which they are, in fact, distracted in ways that burden the brain and diminish productivity. Using television and computer screens concurrently, the subjects multitasked between TV and internet content. On average, they switched between the two media four times per minute — or 120 times during the 27-minute experiment.

That’s stunning, but less shocking than the gap between reality and the subjects’ perceptions. Compared to the actual number of 120, they thought they’d switched between TV and computer screens only 15 times. The report concluded:

“That participants underreported their switching behavior so drastically echoes recent work in the applied multitasking field that illustrates how individuals tend to overestimate their multitasking ability and how heavy multitaskers are prone to distraction…[P]eople have little self-insight into multitasking behavior.”

If you’re checking for messages between innings at a ballgame or between shots on a golf course, you may not even know you’re doing it.

I’m not a technophobe. You’re reading this article because I sat at a computer, typed away, and then hit a button that propelled my musings into cyberspace. This very blog proves that technology has opened communication channels that facilitate intelligent interactions across continents and oceans. That won’t change and it shouldn’t.

But the next time you see couples or families at a restaurant, resort pool, or some other venue that’s supposed to bring them together, consider whether whatever each is doing independently proves that technology run amok may also be closing some important channels, too.

My recent family vacation reminded me that live conversations with all participants in the same place are still the best entertainment. Yes, even better than Skype and FaceTime. And no, I didn’t tweet while I was gone.

AGING GRACEFULLY — OR NOT

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.

A NEW LAW SCHOOL MISSION

What ails the profession and is there a cure?

If you haven’t already seen it, you might want to take a look at Part I of my article, “Great Expectations Meet Painful Realities,” in the Spring 2011 issue of Circuit Rider. My latest contribution to the debate on the profession’s growing crisis begins on page 24 of the Seventh Circuit Bar Association’s semi-annual publication.

Part II begins at page 26 of the December 2011 issue.

BIG LAW INCIVILITY

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

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?

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

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

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.

LAW SCHOOL DECEPTION — PART II

The National Law Journal just published its annual list of “go-to” schools — those that supply the most new associates to large law firms. Clearly, lower tier students aren’t alone in struggling to find jobs. One top school’s ride on the NLJ 250 rankings roller coaster is particularly interesting and instructive.

Northwestern jumped from eleventh to second place on the list in 2007. Then-Dean David Van Zandt credited the “tremendous effort to reach out to employers,” along with the emphasis on enrolling students with significant postgraduate work experience, as attracting big firm recruiters. Last year, Northwestern took the number one spot.

But in 2010, the school dropped to eighth — a relative decline that overall market trends don’t explain, but growing class size does. Northwestern awarded 234 JDs in 2007; the 2010 class had 50 more — 284. One reason: misguided short-term metrics became guiding principles.

Two years ago, the ABA Journal reported that Northwestern had become one of the most aggressive recruiters of transfer students (adding 43 to the first-year class). Such students were a win-win for short-term metrics-lovers: Their undisclosed LSATs didn’t count in the U.S. News rankings and their added tuition boosted the financial bottom line.

Meanwhile, Northwestern’s “go-to” position could continue dropping next year because the class of 2011 will include another new contingent — the first group of accelerated JDs. That program emerged from focus groups of large law firm leaders — part of the dean’s outreach program — who helped to shape Northwestern’s long-range strategic document, Plan 2008, Building Great Leaders for the Changing World.

That leads to another point: leadership. Defining a law school’s proper mission is critically important. There’s nothing wrong with getting input from all relevant constituencies, including large law firms. But retooling curriculum to fulfill big law’s stated desires for associate skills is a dubious undertaking.

In February 2010, Van Zandt explained his contrary rationale during a PLI presentation to large firm leaders. Simply put, he saw starting salaries as setting the upper limit that a school can charge for tuition. Accordingly, attending law school makes economic sense only if it leads to a job that offers a reasonable return on the degree’s required financial investment. However valid that perspective may be, the slipperiness of the resulting slope became apparent when Northwestern’s laudable goal — updating curriculum — focused on satisfying big firms that paid new graduates the most.

Tellingly, in the ABA’s Litigation quarterly, Van Zandt explained that high hourly rates made clients “unwilling to pay for the time a young lawyer spends learning on the job…As a result, the traditional training method of associate-partner mentoring gets sacrificed.” Law schools, he urged, should pick up that slack.

But the traditional training method gets sacrificed only because the firms’ prevailing business model doesn’t reward such uses of otherwise billable time. Rather than challenge leaders to reconsider their own organizations that produce staggering associate attrition rates and many dissatisfied attorneys, the dean embraced their short-term focus — maximizing current year profits per partner.

Relatively, Northwestern still fares well in the “go-to” rankings, but the data depict a dynamic exercise in magical thinking. Among the top 20 schools, it led the way in increasing class size as the school’s absolute big law placement numbers steadily declined: 172 in 2007; 154 in 2008; 142 in 2009; 126 in 2010.

Most law schools feel the continuing crunch. Overall, the top 50 law schools graduated 14,000 new lawyers in 2010; only 27% went to NLJ 250 firms — a drop of three percentage points (400 lawyers) from 2009. But that only highlights an obvious question: Why should that shrinking tail wag any dog? A diversified portfolio of career outcomes less dependent on large firms is a more prudent plan for schools and their students.

Even if jobs reappear, there’s another reason to combine balance with candor: Recent surveys indicate that a majority of large firm attorneys become dissatisfied with their careers anyway. Those metrics never appear on law school websites. Deans are uniquely positioned to help prospective students make informed decisions. They could serve the profession by focusing less on marketing and more on giving prospective students the truth, the whole truth, and nothing but the truth. If only there were a metric for it.

HOURLY RATES: PLEASE DON’T READ

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.

HOWREY’S LESSONS

If Howrey LLP disappears, most big law leaders will make distinctions; they’ll focus on how their organizations are different from Howrey’s. More interesting are the similarities, especially the universal forces that might render others vulnerable to the highly respected firm’s current plight.

First is the speed with events can overtake seemingly secure institutions — and I’m not referring to the fall of Mubarak in Egypt. On May 19, 2008, the Legal Times hailed Howrey LLP’s chairman Robert Ruyak as one of the profession’s “Visionaries.” He deserved it. During the prior 30 years, his distinguished career enhanced Howrey’s reputation and the business of law in DC. But on February 1, 2011, he and Winston & Strawn’s managing partner Thomas Fitzgerald together urged Howrey partners to act quickly on Winston’s offers to hire about three-quarters of them. The big law world can rapidly take a dramatic and unexpected turn.

Second is the way unprecedented demand for big law services combined with the prevailing business model to create enormous financial paydays that became even larger as firms grew. When Ruyak became chairman in January 2000, Howrey ranked near the middle of the Am Law 100 in average profits per equity partner (PEP — $575,000). It had 325 attorneys (89 equity partners).

Ruyak’s strategy targeted growth in three core practice areas: antitrust, IP, and litigation. As the Legal Times observed, “To achieve that vision, Ruyak knew that the firm had to be bigger, so Howrey went on a merger spree.” It added Houston-based patent firm Arnold, White & Durkee, acquired the antitrust practice of Collier, Shannon, Rill & Scott, and established European offices in London, Amsterdam, Brussels, Paris, Munich, and Madrid.

By 2006, Howrey had 555 attorneys; its 127 equity partners averaged $1.2 million each. After profits dropped in 2007, they soared by almost 30% in 2008 — the biggest percentage revenue-per-lawyer gain in the Am Law 100. Howrey’s 2008 profits were $1.3 million per equity partner — an all-time high.

Third is the fragility that such financial prosperity created for the fabric of many law firm partnerships. When profits plunged 35% in 2009, Ruyak’s partial explanation was that 2008 had been aberrational. Large contingency receipts accounted for much of that year’s non-recurring spike. The firm was still “figuring out how to do [alternative fee arrangements] well.” (The American Lawyer, May 2010, p. 101)

Unfortunately, the revolution of rising expectations was underway; the short-term bottom-line mentality is an impatient and unforgiving two-edged sword. In 2000, Howrey had a clear identity and average equity partner profits of almost $600,000 — seemingly sufficient to keep partners satisfied and any firm stable. Certainly, that amount far exceeded any current big law equity partner’s wildest financial dreams when entering the profession. A decade later, disappointing projections that the firm might reach only 80-90% of its $940,000 PEP target (or $750,000 to $850,000) fed rumors and a perilous media downdraft.

Heller Ehrman proved that lateral hiring and law firm mergers risk sacrificing firm culture in ways that inflict unexpected damage. I don’t know if that has happened at Howrey, but when cash becomes king, partnership bonds remain only as tight as the glue that next year’s predicted equity partner profits provide, assuming those predictions are believed.

That leads to a final lesson: leadership requires credibility. Only two weeks before the remarkable joint message from Ruyak and Fitzgerald, Howrey spokespersons insisted that all was well: “The amount of costs taken out of the firm at all levels — which includes leases, partners, associates, and the like leaving the firm — have made the firm much more efficient,” vice-chairman Sean Boland said. “It’s done wonders for our cost structure, such that we’re going to see some major advantages in 2011. We’re very encouraged by the cost cutting that we’ve done.”

Likewise, one of its outside consultants said that the firm was “getting back to its strengths… What’s happening at Howrey is largely by design.” Maybe so. But from this distance, the parade of top partner departures and Ruyak’s involvement in Winston’s outstanding offers make the design appear curious, indeed.

In May 2008, the Legal Times, concluded with a senior partner’s observation that Howrey had become “a very exciting place to work.” I suspect that’s still true. As with most things legal, the definition is everything.

LOCATION, LOCATION, LOCATION?

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?

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

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.

FROM KENTUCKY TO CRAVATH TO CHASE

Six months ago, I wrote about a new development at Cravath. (https://thebellyofthebeast.wordpress.com/2010/06/03/a-better-alternative-or-a-leap-from-the-frying-pan/) The Wall Street Journal reported that the firm was allowing lawyers in their 30s and 40s to “make a name for themselves” by taking the lead on client deals. Tradition dictated deference to elders in such matters, but Cravath’s lock-step system meant that “older attorneys didn’t mind because the pay they received didn’t get cut” as younger attorneys gained a higher profile. (http://online.wsj.com/article/SB10001424052748703630304575270472434024454.html)

“‘We’re more aggressive than we used to be,’ said 41-year-old Cravath partner James Woolery. ‘This is not your grandfather’s Cravath.’ He said the new approach means more ‘hustling for loose balls’ than in the past.”

When the article appeared, I wondered if Cravath’s experiment would backfire, leading young partners to consolidate clients, billings, and power for personal gain — even, perhaps. chafing at Cravath’s vaunted lock-step system. After all, financially motivated defections now pervade big law.

Alternatively, I speculated that allowing eager lawyers to run with client batons could be a win-win situation. If they remained loyal, the upstarts could grow the entire pie in true partner-like fashion.

I missed the obvious: Some rising young partners at Cravath didn’t want to be lawyers anymore. Woolery himself is now leaving to co-head JP Morgan Chase’s North American mergers and acquisitions. ((http://dealbook.nytimes.com/2011/01/20/cravaths-woolery-to-join-jpmorgan-as-senior-deal-maker/)

“I’ve had a business management focus, even at Cravath, and this opportunity allows me to expand that,” Wollery told the Times. He said the move would allow him to build on skills that he’d been honing, including business development.

Business development?

He elaborated for the Am Law Daily:

“Woolery points to his experience running Cravath’s business development group as the driving factor behind his decision to move to J.P. Morgan. In the five years that he has led the group, it has evolved from a pitch book operation to a more substantial research and development group consisting of 30 professionals — corporate and litigation attorneys, and analysts.

“‘Doing that work was what led me to wanting to do this job [at J.P. Morgan].'” (http://amlawdaily.typepad.com/amlawdaily/2011/01/woolery.html)

From the University of Kentucky College of Law to Cravath partner, he now moves to a position that doesn’t even require a law degree. Maybe there’s more behind Woolery’s move — more money, more challenges — who knows? But a successful young lawyer in search of more clients found a client in search of him, albeit not for his skills as an attorney.

Big firm lawyers are increasingly assuming non-attorney corporate positions. (http://amlawdaily.typepad.com/amlawdaily/2010/12/lawyers-ceos.html) It’s additional proof of the profession’s transformation to a business: Many large law firms have developed cultures that make them training grounds for corporate leaders. Fully corporatized lawyers don’t even need an MBA to advance. (Woolery doesn’t have one.)

As an educator of students tracking themselves toward the law, I wonder how rising legal stars now leaving the profession altogether would answer these questions:

ON LAW SCHOOL

Why did you attend law school in the first place? Like many others, did you view it as the last bastion of a liberal arts major who couldn’t decide what to do next? Did you regard it as a circuitous path to a corporate career? If so, wouldn’t getting an MBA have been more efficient?

ON THEIR JOBS

Did your legal work and resulting career match your expectations? If not, in what ways — good and bad?

ON LIFE

Have you enjoyed a satisfying career? Have changes in you, your firm, or the profession played a role in your departure from the profession? It’s not just about money, is it?

Most big law attorneys say they’re too busy billing hours to consider these questions at all, much less on a regular basis. It reminds me of Yogi Berra’s response to his wife’s complaints as they got lost while he drove to Cooperstown for his Hall of Fame induction ceremony.

“I know we’re lost,” he finally admitted, “but we’re making good time!”

Yogi arrived at his desired destination. Too many lawyers never think about theirs — and then wonder why they’re dissatisfied professionally.

CULTURE SHOCK

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.htmlhttps://thebellyofthebeast.wordpress.com/2010/07/09/summer-associates-take-note-inadvertent-revelations/)

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

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

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

NUMBERS TELL A STORY

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

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

***
HOURS UP: “Average hours billed by associates at the nation’s top 50 law firms by revenue rose by 7% in 2010.”
***
BONUSES FLAT: “At New York-based Milbank, Tweed, Hadley & McCoy LLP, where bonuses were only slightly above last year’s payouts, hours billed by associates were up about 6%.” [According to Above the Law, the firm’s 2010 bonuses ranged from $7,500 for first-year associates to $35,000 for those in the class of 2003. That’s a big drop from 2006, when first-year associates received “special year-end bonuses” of $30,000. Student-loan repayment requirements have not experienced a similar decline.]
***
MANAGERS RATIONALIZE: “‘The actual number of [billed] hours is still low compared to what it has historically been,’ [says Milbank’s Chairman Mel M. Immergut].”
***
PARTNERS WIN: “Revenue at Milbank Tweed will be up by about 3% on flat expenses, Mr. Immergut says, adding that profit per partner will be up by 8% to 10%, depending on year-end collections.” According to The American Lawyer, Milbank Tweed’s average profits per partner in 2009 were $2.230 million. How much is enough? The answer appears to be “More.”

LAW SCHOOL DECEPTION

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

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.

“IT’S A WONDERFUL [BIG LAW] LIFE?”

‘Twas the week before Christmas when all through the firm,

The coming New Year caused every body to squirm.

Associates awaited the annual time,

When they’d learn of a bonus, oh so sublime.

***

The seasoned had worked a lot harder this year,

As dreams of a partner’s life blurred hope and fear.

Equity partners were again in a squeeze:

They ate what they killed. Who was ever at ease?

***

As happens whenever there is a recession,

Clients sought value; their lawyers fought depression.

While pondering how most large law firms had changed,

I overheard rustling, peculiar and strange.

***

The holidays! I remembered at last.

Hard to believe, one more year had now passed.

Whispers foreshadowed the annual display,

“The Chairman is here…he’s in town for the day.”

***

Chance and fortuity determine one’s fate,

Except for our Chairman who thought himself great.

A new breed of leader who’d come to the fore,

How much is enough? He will answer you: “More.”

***

I sprang from my desk for a glimpse of the man

Who’d been somewhere warm; he was sporting a tan.

With a custom made suit, crisp shirt, and red tie,

I knew in a moment that this was The Guy.

***

He walked not alone but with minions galore,

They seemed like a dozen, but there were just four.

The group strode by briskly – as followers massed,

I stepped forward slowly. Who cares if I’m last?

***

“The large conference room,” I heard someone say,

“That’s where the Chairman will speak this grand day.”

I dutifully followed the gathering throng

To where The Great Man was to sing us his song.

***

As dry mouth with oral argument arises,

I feared he’d be off’ring unpleasant surprises.

He was dressed to the nines – impressively so.

I prayed that he’d speak his piece quickly and go.

***

With the crowd settling in to hear his remarks,

I knew what was coming – pure brimstone and sparks.

“It’s that time again,” he began with a cheer,

“As we near the end of our firm’s fiscal year.”

***

“Get bills out at once and then follow them through.

Be relentless with clients; be tough; be true.

If our profits decline, it’s trouble for all,

Money binds us as one – without it, we’ll fall.”

***

He turned to associates, awaiting the news,

Another bad year? They looked closely for clues.

They all knew the truth: The firm’s profits still soared.

But what partners share their great wealth with the horde?

***

“We’re a business,” the Chairman silenced the joint.

“All else is, well, really quite outside the point.

It takes a whole team to keep the wheels turning,

Billed hours are key – although some call it churning.”

***

“Billables – that is the firm’s soul and its heart,

That means you associates must all do your part.”

As this aging hypocrite climbed the ladder,

Mentors told him that his hours did not matter.

***

I hoped he was done, but alas he was not:

“Associate morale is stuck deep in a pot.

So you’ll each get a bonus matching our peers,

And we’ve formed a committee – they’ll dry your tears.”

***

“I can’t promise mentors, good training, or more,

But you’ll out-earn friends for whom life’s less a chore.

You still have school loans that will not go away.

So happy or not, you will all want to stay.”

***

“Remember the job that you have in this crash,

Your unemployed friends would take on in a flash.

Keep making me rich – as much as you’re able,

What else can you do? Wash dishes? Wait tables?”

***

“Lest you think that I’m heartless, greedy, or crass,

I’m running a business, not being an ass.

A handful of metrics rule everything now,

Billables, leverage, the pyramid – Wow!”

***

His message delivered, he soon left the floor.

He picked up his iPad and walked out the door.

But I heard him exclaim as he vanished from view,

“Keep those hours rising – your worst enemy is you!”

—— Steven J. Harper, December 2010

*****************************************************

Thanks to all of you, the editors of the ABA Law Blawg chose The Belly of the Beast as one of the 100 best blogs of 2010. To be selected from more than 3,000 in the ABA directory is humbling, especially for this novice blogger.

Happy Holidays – and please return in the New Year! I will.

BONUS TIME!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EXPLAINING BAD BEHAVIOR

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.

COCKROACHES, MEDICINE, AND THE BILLABLE HOUR

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

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

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

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

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

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

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

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

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

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

Behavior has followed incentive structures:

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

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

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

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

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

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

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

THANKSGIVING

“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”

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?