DEWEY’S RICHARD SHUTRAN — RUNNING THE NUMBERS

Posted on June 7, 2012 by thebellyofthebeast

This is the fourth of a five-part series profiling Dewey & LeBoeuf’s former leaders. Richard Shutran (Trinity College, B.A., 1974; New York University, J.D., 1978) joined Dewey Ballantine in 1986 and rose to co-chair of the firm’s Corporate Department and Chairman of its Global Finance Practice Group. He left his position on Dewey’s Executive Committee in 2010, but in 2012 became a member of the four-man office of the chairman tasked to save the firm.

The Dewey & LeBoeuf website described Shutran’s transactional practice as “counseling…with respect to leveraged finance and project finance matters, mergers and acquisitions, and restructurings and reorganizations….” That makes him a numbers guy, someone especially well-suited to the challenges facing his firm when it asked him to return to leadership as one of the Gang of Four.

The 2010 bond issuance

Dewey’s 2010 private placement memorandum included Shutran’s biography in its “Senior Management” section. At the time, Bloomberg news reported on the $125 million bond offering for which Shutran said that the bonds’ interest rates were more favorable than the firm’s bank loans. That was true.

As partners were checking out two years later, the Daily Journal reported that Dewey was renegotiating those bank loans: “Richard Shutran, co-chair of Dewey’s corporate department, described the negotiations as standard.” At that point, perhaps they were.

Another “bond” issuance

Meanwhile, the firm was pursuing what fellow Gang of Four member Martin Bienenstock described as “a plan to deal with the shortage of payments to some partners.” In particular, those with guaranteed compensation deals had taken IOUs during earlier years when profits had fallen short of targets. The “plan” was to dedicate six percent of the firm’s income for six or seven years to pay them off, starting in 2014.

In addition to ongoing bank debt, the first wave of 2010 bond payments came due in 2013 and would continue through 2023. Now another debt repayment plan — to a special class of so-called partners — would take another chunk of future partnership earnings from 2014 to 2020.

Funny numbers

At about the same time, Shutran moved to the center of another controversy – also not of his making – relating to his firm’s financial health. He assured a Bloomberg reporter that the departure of Dewey’s elite insurance group “had no impact on our firm’s profitability. That group was break-even at best.” But he also said the firm had earned about $250 million in profits for 2011. The American Lawyer didn’t think that number jibed with what Dewey had provided for the magazine’s annual rankings.

On March 21, 2012, The Wall Street Journal reported The American Lawyer’s retroactive revisions to Dewey & LeBeouf revenue and profits numbers for 2010 and 2011 — by a lot. For example, Dewey’s 2011 average partner profits dropped from $1.8 million to $1.04 million. Shutran suggested methodological differences were to blame:

“‘They’re just not comparable numbers,’ Mr. Shutran said. ‘That’s something people like to pick on.’ Robin Sparkman, the editor-in-chief of the American Lawyer, said Dewey & LeBoeuf’s numbers were given to them by the firm’s management.”

About that bank loan

On April 11, 2012, Dewey identified seven key players essential to the firm’s survival. Shutran wasn’t among them, but he responded to questions about whether the wave of partner defections had triggered bank loan covenants: “It has not had any effect under (the) agreements,” he said. There’s no reason to doubt him.

But the real problem by then wasn’t the bank loans. It was the accumulated amounts owed for annual distributions to partners in excess of the firm’s net income. As Bruce MacEwen’s analysis suggests, whether it’s called mortgaging the future or something worse, the result is the same.

Something went terribly awry at Dewey & LeBoeuf, but here’s the scary part: among big law firms, some of the things that created Dewey’s predicament aren’t unique.

DEWEY’S JEFFREY KESSLER: STARS IN THEIR EYES

Posted on June 1, 2012 by thebellyofthebeast

This is the third in a series profiling Dewey & LeBoeuf’s former leaders. Apparently, Jeffrey Kessler (Columbia University, B.A., 1975; Columbia Law School, J.D., 1977) has become a prisoner of his celebrity clients’ mentality. A prominent sports lawyer, he analogizes big-name attorneys to top athletes: “The value for the stars has gone up, while the value of service partners has gone down.”

Kessler was a long-time partner at Weil, Gotshal & Manges before joining Dewey Ballantine in 2003. After the firm’s 2007 merger with LeBoeuf Lamb, he became chairman of the Global Litigation Department, co-chairman of the Sports Litigation Practice Group and a member of the Executive and Leadership Committees. Long before he became a member of the Gang of Four in Dewey & LeBoeuf’s office of the chairman, he was a powerhouse in the firm.

Blinded by their own light

Some attorneys have difficulty resisting the urge to absorb the ambitions and ethos of their clients. Many corporate transactional attorneys have long been investment banker and venture capital wannabees, at least when it comes to the money they’d like to make.

Of course, not all corporate practitioners are myopic thinkers. Kessler proves that narrow vision isn’t limited to transactional attorneys. But the rise of such attitudes to the top of many large law firms has occurred simultaneously with the profession’s devolution to models aimed at maximizing short-term profits and growth.

Kessler was a vocal proponent of the Dewey & LeBoeuf star system that produced staggering spreads between people like him — reportedly earning $5.5 million a year — and the service partners, some of whom made about five percent of that. It was the “barbell” system: top partners on one side; everybody else on the other.

In such a regime, there’s no shared sacrifice. What kind of partnership issues IOUs to star partners when the firm doesn’t make its target profits? Something that isn’t a partnership at all.

Lost in their own press releases

Kessler regularly finds himself in the presence of celebrity athletes. That can be a challenging environment. But once you start believing your own press releases, the result can be the plan that he and fellow Dewey & LeBoeuf partner Charles Landgraf “spearheaded” (according to fellow Gang of Four member Martin Bienenstock).

To deal with outstanding IOUs to Dewey partners whose guaranteed compensation couldn’t be paid when the firm underperformed for the year, Kessler helped to mortgage its future: for “a six- or seven-year period, starting in 2014, [a]bout six percent of the firm’s income would be put away to pay for this….”

It’s a remarkable notion. Partners didn’t get all of their previously guaranteed earnings because the firm didn’t do well enough to pay it. But rather than rethink the entire house of cards, it morphed into a scheme whereby future partnership earnings — for six or seven years — would satisfy the shortfall. Never mind that there was no way to know who would be among the firm’s partners in those future years. The money had to be promised away because the stars had to be paid.

Sense of entitlement

Kessler gives voice to the pervasive big law firm attitude that without stars there is no firm. It’s certainly true that every firm has to attract business and that some lawyers are more adept at that task than others. But Kessler’s approach produced yawning income gaps at Dewey. Similar attitudes have contributed to exploding inequality afflicting many equity partnerships. For insight into the resulting destabilization, read the recent article by Edwin Reeser and Patrick McKenna. “Spread Too Thin.”

But does Kessler really think that he and a handful of his fellow former Dewey partners are the first-ever generation of attorney stars? Twenty-five years ago when average partner profits for the Am Law 100 were $325,000 a year, did his mentors at Weil Gotshal earn twenty times more than some of their partners — or anything close in absolute dollars to what Kessler thinks he’s worth today? Does he believe that there are no stars at firms such as Skadden Arps, Simpson Thacher or other firms that have retained top-to-bottom spreads of 5-to-1 or less?

Beyond his prominence in the profession, Kessler is shaping tomorrow’s legal minds as a Lecturer-in-Law at Columbia. For anyone who cares about the future, that’s worth pondering.

DEWEY’S MARTIN BIENENSTOCK: PARTNERSHIP, PROFESSIONALISM AND WHAT TO TELL THE KIDS

Posted on May 24, 2012 by thebellyofthebeast

This is the second in a series profiling Dewey & LeBoeuf’s former leaders. Martin Bienenstock (University of Pennsylvania, B.S., Wharton School, 1974; University of Michigan, J.D., 1977) was heralded as “one of the most innovative, creative restructuring attorneys in the country” when the Dewey & LeBoeuf spin machine put him at the center of an April 21, 2012 article in The New York Times. He seemed to be the perfect candidate to save his firm.

One item that probably impressed NY Times’ readers was his presence on the Harvard Law School faculty. That credential showed up on the firm’s Private Placement Memorandum for its 2010 bond offering, too. According to the school’s website, he taught the Corporate Reorganization course during the spring term 2012.

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Apart from imparting substantive knowledge, he — like any educator — is also a role model for students. In that respect, what have future attorneys been learning from Bienenstock?

What does partnership mean?

Every law student learns the basic concepts: partners owe each other fiduciary duties; they share risk, gains and losses; they’re accountable to all other partners. But theoretical partnership principles played out much differently in Bienenstock’s firm after he joined Dewey & LeBoeuf and its Executive Committee in November 2007.

— Multi-year compensation guarantees went to some partners, including Bienenstock, but their pay didn’t depend on performance. Some partners say they were unaware of the scope and magnitude of such deals until an October 2011 partner meeting.

— Partner income spreads reportedly grew to more than twenty-to-one. In “Spread Too Thin,” Patrick McKenna and Edwin Reeser describe the destabilizing effects of that ubiquitous big law trend.

— A 2010 bond issuance obligated future partners to payments of at least $125 million, starting in 2013 and continuing to 2023.

— Top partners, including Bienenstock, thought they were making great sacrifices when the firm missed its income targets in 2011: they “capped” themselves at $2.5 million and took firm IOU’s to make up annual shortfalls from their guaranteed amounts. Continuing strategies that mortgaged the future, Dewey & LeBoeuf planned to dedicate six percent of its income from 2014 to 2020 to repay those IOUs.

— Questions have surfaced about the accuracy and sufficiency of the firm’s financial disclosures to fellow partners and third parties.

What does professionalism mean?

After Steven H. Davis left his management position, the Dewey & LeBoeuf spin machine put Bienenstock center stage as the go-to person who could work a miracle. Maybe it would be a “prepack” – a prepackaged bankruptcy that would allow the firm to shed some debts and become more attractive to a merger partner.

Maybe it would be a traditional merger.

Maybe, maybe, maybe.

One thing Bienenstock made clear throughout: “There are no plans to file bankruptcy. And anyone who says differently doesn’t know what they’re talking about.”

Ten days later, he and members of his bankruptcy group were on their way to Proskauer Rose.

Parsing Bienenstock’s statement about a bankruptcy filing is akin to dissecting President Clinton’s response to questions about his sexual encounters with a White House intern: “It depends on what the meaning of is, is.”

What does leadership mean?

Did Beinenstock have an actual plan for the firm’s survival or did chaos better serve the economic interests of a few top partners? Was he personally committed for the long haul or arranging his own exit? Was anyone really in charge?

Those questions went unanswered as speculation and uncertainty swamped the firm: One-third of the firm’s partners gone by the end of April? A memo invites others to build their own lifeboats, but attorneys and staff should keep working diligently for clients? Use personal credit cards for client copying charges? No mailroom? No IT? Why do senior partners keep asking for empty packing boxes?

Leadership is needed most in times of crisis. As Dewey & LeBoeuf’s Office of the Chairman went from four to three to two to one to none, leadership was nowhere to be found.

Accepting responsibility

When asked who or what was to blame for Dewey’s demise, Bienenstock demurred: “[N]o one saw the new world coming.”

Except plenty of other people did.

Were any of the summer or permanent associates whom Dewey stiffed Bienenstock’s former students at Harvard? If so, their real life experiences of the past three months taught them more about partnership, professionalism and leadership in some big firms than Bienenstock or anyone else could have communicated in years of classes. The question now is whether Bienenstock will be on Harvard’s faculty list next year.

DEWEY’S MORTON PIERCE: ACCEPTING RESPONSIBILITY

Posted on May 20, 2012 by thebellyofthebeast

This is the first in a series profiling Dewey & LeBoeuf’s former leaders. Morton Pierce (Yale University, B.A., 1970; University of Pennsylvania, J.D., 1974) is an appropriate place to begin because on May 3, 2012, he told The Wall Street Journal that he hadn’t been actively involved in Dewey’s management for years and had stepped down from the firm’s Executive Committee in 2010.

Pierce is widely acclaimed as one of the country’s top mergers and acquisitions attorneys. He was chairman of Dewey Ballantine when its attempt to merge with Orrick, Herrington & Sutcliffe failed in 2007.

A partnership within a partnership

Pierce was a principal architect of Dewey Ballantine’s merger with LeBoeuf Lamb. Based on Bruce MacEwen’s analysis of the financial data, Dewey got the better end of that deal. As for Pierce himself, The Wall Street Journal reports that he “had negotiated a pay package that guaranteed him $6 million a year for six years, according to a person with direct knowledge of the arrangement.” The subject of my next post, Martin Bienenstock, said that there were many such deals to lock up talent for at least four years after the merger.

Early in 2010 — the year Pierce says he left the firm’s Executive Committee — Dewey mortgaged its future with a $125 million bond offering (repayment due from 2013 to 2023). In 2011, the sixty-two-year-old Pierce negotiated a new deal for himself. The Journal continues: “[H]e secured a new, eight-year contract that would pay him $8 million for several years and wind down to $6 million in later years, that person said.”

Dewey’s next gambit: IOUs to the oxymoronic group — guaranteed compensation partners — when the firm didn’t earn enough current income to pay them in full. Committing future profits to make up for prior periods of missed earnings is, at best, a dubious strategy. At worst, it transforms a partnership into something that looks like a Ponzi scheme. It’s difficult to envision an attorney recommending the idea to a client.

A firm leader?

Pierce’s effort to distance himself from management is interesting. He’s featured prominently as part of the firm’s “Executive Office” in the 2010 Private Placement Memorandum for its bonds. Two years later, an April 11 2012 article identified Pierce as “one of seven key lawyers” who determined Dewey’s fate.

Until the day he left in May 2012, the firm’s website still introduced his biographical page as follows: “Morton Pierce is a Vice Chair of Dewey & LeBoeuf and co-chair of the Mergers and Acquisitions Practice Group. He is also a member of the firm’s global Executive Committee.”

Not my job

From a self-proclaimed distance, Pierce described Dewey’s leaders in the third person. When asked about an April 2012 meeting at which senior partners supposedly recommitted themselves to the firm and its survival, Pierce’s only comment was: “There was a meeting and I was there.”

Three weeks later, he told the Journal, “I think the executive committee did the best job that they could under the circumstances.” That article continued, “Mr. Pierce didn’t assign blame for the firm’s current situation.”

Pierce told the NY Times, “I am sorry about what happened” — as if some external event or rogue actor was responsible.

The nature of leadership

Even so, Pierce kept his sense of gallows humor while packing up for White & Case. Describing how he’d like to merge all of the wonderful firms that had expressed interest in taking him as Dewey imploded, he told The Wall Street Journal on May 3: “Although looking at the Dewey & LeBoeuf merger, maybe mergers aren’t such a good idea.”

I suspect that most of the 2,000 Dewey lawyers and staffers who once worked at the firm don’t think Pierce has much of a future in comedy. He didn’t mention his other non-joke: that his resignation letter reportedly claimed that the firm owed him $61 million.

If the Dewey spin machine and website description were accurate, Pierce remained at the center of power until the moment he resigned from the firm. If, as he claims, he wasn’t involved in management after 2010, that’s worse. The notion that someone of Pierce’s professional stature would remain on the sidelines as his firm pursued misguided strategies and then would watch it spin into oblivion is stunning.

Senior partners in big firms often complain about young lawyers’ unwillingness to take responsibility for mistakes and their consequences. Perhaps some of the profession’s so-called leaders could set a better example.

DEWEY: PROFILES IN SOMETHING

Posted on May 15, 2012 by thebellyofthebeast

Some key players in the Dewey & LeBoeuf debacle are also among the profession’s leaders; that makes them role models. Some teach at law schools; that means they’re shaping tomorrow’s attorneys, too. But how do they look and sound without the Dewey spin machine?

Some readers might worry that spotlighting them erodes civility. But civility goes to the nature of discourse; it can never mean turning a blind eye to terrible things that a few powerful people do to innocent victims. Sadly, the personalities and trends that unraveled Dewey aren’t unique to it.

As to former chairman Steven H. Davis, David Lat’s analysis at Above the Law and Peter Lattman’s report at the NY Times are sufficient; there’s no reason to pile on. Rather, I’ll look at the “Gang of Four” plus one: the men comprising the four-man office of the chairman who replaced Davis as the firm came unglued, and Morton Pierce. Here’s a preview.

Morton Pierce was chairman of Dewey Ballantine when merger discussions with Orrick, Herrington & Sutcliffe failed and LeBoeuf, Lamb, Greene & McRae entered the picture. After spearheading the deal with Davis, Pierce locked in a multi-year $6 million annual contract that he reportedly enhanced in the fall of 2011. In his May 3 resignation later, he reportedly claimed that the firm owed him $61 million.

As he spoke with The Wall Street Journal while packing boxes for White & Case, Pierce said that he hadn’t been actively involved in firm management since 2010. But the Dewey & LeBoeuf website said otherwise: “Morton Pierce is a Vice Chair of Dewey & LeBoeuf and co-chair of the Mergers and Acquisitions Practice Group. He is also a member of the firm’s global Executive Committee.” [UPDATE: Two days after this May 15 post, Pierce’s page on the Dewey & LeBoeuf website finally disappeared. Such are the perils of losing an IT department too early in the unraveling process.] My post on Pierce will be titled “Accepting Responsibility.”

Martin Bienenstock, one of the Gang of Four, was an early big name hire for the newly formed Dewey & LeBoeuf. In November 2007, he left Weil, Gotshal & Manges after 30 years there. He got a guaranteed compensation deal and sat on the Executive Committee as his new firm careened toward disaster. As Dewey & LeBoeuf’s end neared, he maintained a consistent position throughout: “There are no plans to file bankruptcy. And anyone who says differently doesn’t know what they’re talking about.”

No one asked if he had a realistic plan for the firm’s survival. Ten days later, he and members of his bankruptcy group were on the way to Proskauer Rose. The title of my upcoming post on Pierce could work for Bienenstock, too. But because he teaches at Harvard Law School, I’m going to call it “Partnership, Professionalism, and What To Tell the Kids.”

Jeffrey Kessler, another of the Gang of Four, was also a lateral hire from Weil, Gotshal & Manges. He joined Dewey Ballantine in 2003. As a member of Dewey & LeBoeuf’s Executive Committee, he became a vocal proponent of the firm’s star system that gave top producers multi-year, multimillion-dollar contracts — one of which was his.

A sports law expert, Kessler analogized big-name attorneys to top athletes: “The value for the stars has gone up, while the value of service partners has gone down.” The title of my post on Kessler will be “Stars In Their Eyes.”

Richard Shutran, the third of the Gang of Four, was a Dewey Ballantine partner before the 2007 merger. He became co-chair of Dewey & LeBoeuf’s Corporate Department and Chairman of its Global Finance Practice Group. At the time of the firm’s $125 million bond offering in 2010, he told Bloomberg News that the bonds’ interest rates were more favorable than those from the firm’s bank. In March 2012, he said Dewey was in routine negotiations with lenders over its credit line. He also dismissed The American Lawyer’s retroactive revision of Dewey’s 2010 and 2011 financial performance numbers as much ado about nothing. My post on Shutran will be “Running the Numbers.”

L. Charles Landgraf, the last of the four, began his career at LeBoeuf Lamb 34 years ago. I don’t know him (or any of the others), but my hunch is that Charley (as people call him) is a decent guy. My post on him will be called “The Plight of the Loyal Company Man.”

In future installments, we’ll take a closer look at each of them. Sometimes it won’t be pretty, but neither is what some of them personify about the profession’s evolution.

DEWEY: WHEN PARTNERS AREN’T REALLY PARTNERS

Posted on May 2, 2012 by thebellyofthebeast

Lost in the haze of battle over Dewey & LeBoeuf’s struggle is a remark that former chairman Steven H. Davis made in his March 22 Fortune magazine interview. That was Dewey’s first public relations initiative after it began squandering money on a crisis management/public relations expert. But it offered this kernel of inadvertent insight:

“One fundamental change in the way the firm has operated since the merger is that they moved away from the traditional lockstep compensation approach — where partners are basically paid in terms of tenure — and toward a star system in which the top moneymakers can out-earn their colleagues by a ratio of up to 10-to-1. Davis says the extremes shouldn’t define the system, though, and that the more ‘normal’ band is about 6-to-1. Still, it must chafe to be the guy who’s earning the ‘1’ and knows it. Hard to see oneself as a ‘partner’ of the ‘6s,’ let alone the ’10s.'”

In The Wall Street Journal story that the Manhattan district attorney had opened an investigation into Davis, this sentence offered a poignant flashback to his March 22 interview:

“While some junior partners made as little as $300,000 a year, other partners were pulling down $6 million or $7 million, according to former and current partners.”

That’s a twenty-to-one spread within a so-called partnership. And some of the biggest winners had multi-year guaranteed compensation deals.

There’s an asterisk. According to The American Lawyer‘s definitions, Dewey & LeBoeuf has equity and non-equity partners. Everyone knows that with respect to the internal power dynamics of two-tier firms, management pays no attention to non-equity partners. But the real kicker is that most equity partners don’t have much influence with senior leaders, either.

The growing non-equity partner bubble

Start with the non-equity partners. In January 2000, predecessor firm Dewey Ballantine had 118 equity partners and 21 non-equity partners. At the time, its eventual merger partner, LeBoeuf Lamb, had a similar ratio: 187 equity partners and 33 non-equity partners. Between them, they had 305 equity partners and 54 non-equity partners.

As of January 1, 2012, Dewey & LeBoeuf had 190 equity partners (one-third fewer than the separate firms’ combined total in 2000) and 114 non-equity partners (twice as many as in 2000).

Many firms have adopted and expanded two-tier partnership structures. That has many unfortunate consequences for the firms that create a permanent sub-class of such individuals. But non-equity partners are profit centers and most big law leaders say that ever-increasing profits are necessary to attract and retain top talent.

The equity partner income gap

That leads to a second point. Whether it’s Davis’s earlier “10-to-1” spread, the more recently reported “20-to-1,” or something in between, the income gap within equity partnerships has exploded throughout big law. That’s destabilizing.

The gap results from and reinforces a failing a business model. In the relentless pursuit of high-profile lateral hires, law firms bid up the price. Many laterals never justify their outsized compensation packages; some become serial laterals moving from firm to firm.

Even when the subsequent economic contributions of hot prospects seem to validate their worth on paper, aggressive lateral hiring erodes partnership values. The prevailing business model has no metric for collegiality, a shared sense of purpose, or the willingness to weather tough times. How badly frayed have partnership bonds become when, as at Dewey, some partners ask a district attorney to prosecute the firm’s most recent chairman? That’s the definition of bottoming-out.

It’s easy to identify the ways that Dewey’s problems were unique, such as guaranteeing partner compensation and issuing bonds. Leaders of other firms could benefit from a different exercise: assessing how their own institutions are similar to what Dewey & LeBoeuf became after their 2007 merger. Growing partnership inequality is pervasive and its implications are profound.

Legal consultant Peter Zeughauser told The Wall Street Journal, “It’s not your mother’s legal industry anymore. It’s a tougher business.” Implicit in that observation lies a deeper truth: partnerships aren’t really partnerships anymore.

They’re businesses, only worse. Those at the top of most big law firms function with far greater independence than corporate CEOs who must answer to a board of directors and shareholders. In many big firms, a growing internal wealth gap reinforces the hubris of senior leaders who answer to no one — except each other. With Dewey’s disintegration, we’re seeing where that can lead.

SPINNING DEWEY’S HEROES

Posted on April 25, 2012 by thebellyofthebeast

Dewey & LeBoeuf’s latest designated savior is Martin J. Bienenstock. The NY Times says that he faces “perhaps the most challenging assignment of his career: the restructuring of his own law firm.”

According to the Times, his challenges include bank negotiations to restructure Dewey’s outstanding loans, consideration of reorganization options, and avoiding liquidation. Given the complex array of fiduciary duties accompanying such a job description — as a partner to his fellow partners while also acting as counsel to the partnership as a whole without favoring any individual partner or group of partners — it’s a daunting task.

Last month’s star was Steven H. Davis, whose assurances during an interview for Fortune magazine produced an article titled “Dewey & LeBoeuf: Partner exodus is no big deal.” Right — Dewey started the year with 300 partners; 30 were gone by the time of Davis’s interview; 40 more have left since then. Among his least prescient remarks: “If the direction we’re taking the firm in was somehow disapproved of, then the reality is that there ought to be a change in management. But I don’t sense that.”

The more things change…

Less than a week later, a five-man executive committee replaced Davis. One member of the new “office of the chairman” is Bienenstock. It’s ironic because he exemplifies Dewey’s business strategies that may have worked well in his case, but less so in others’, namely, lateral hiring and compensation guarantees. Prior to joining Dewey & Leboeuf in November 2007 (a month after the merger creating it), he’d spent 30 years at Weil, Gotshal & Manges. While he sat on Dewey’s management committee that Davis chaired, his new firm became one of the top-10 in 2011 lateral partner hiring.

According to The Lawyer, Bienenstock was reportedly among those who recently agreed to cap personal earnings at $2.5 million. That’s a start, but the article also said that some partners’ deferred income took the form of promissory notes due in 2014. It’s interesting that a firm already on a $125 million hook for something that law firms rarely do — offering bonds that begin to come due in April 2013 — would add even more short-term debt to its balance sheet. Add it to the list of unexpected complications that accompany partnership compensation guarantees.

The real Dewey heroes

This rotating focus on a handful of lawyers at the top obfuscates the importance of everyone else. Rainmakers come and go — and their seven-figure incomes survive. Bienenstock is an example. So are the many former Dewey management committee members who have already left, including John Altorelli, whose parting words showed little compassion for his former partners, associates, paralegals and staff. Even top partners who managed firms that went bust seem to land on their feet. After Howrey failed, its former vice chairman, Henry Bunsow, got a reported multi-million guaranteed compensation deal at Dewey in January 2011. Welcome to the lateral partner bubble.

Lost in the headlines about the stars are the worker bees with limited options and real fears. An Above the Law post from a seasoned Dewey paralegal captures the angst:

“I know these facts do not necessarily make for sexy headlines but I do ask that you report on the following. While some laugh and play their lyre as the city of Rome burns, it will be well over one thousand staff members who will also be gainfully unemployed.”

Add the nearly one thousand Dewey lawyers who have been watching quietly at the unfolding public relations nightmare since Davis’s bizarre interview. As Dewey’s publicity machine pumps out celebrity saviors of the moment, each has drawn more unwanted attention to the firm’s plight than the last. Martin Bienenstock’s appearance in the Times along with the proffered “pre-packaged bankruptcy” option is the latest example.

If Dewey survives the current crisis, Bienenstock’s suddenly magical touch won’t be the reason. Rather, it will survive because an entire law firm — partners, associates and staff — kept noses to the grindstone. The real heroes didn’t go looking for more media coverage of a troubled situation.

Perhaps Dewey’s leaders thought that better press could solve the firm’s crisis. But that approach reverses the relationship between public relations and crisis management, which is simple: manage a crisis properly and the resulting story will write itself.

Here’s the obvious corollary: manage the firm properly and there is no crisis to manage.

THE AGE-OLD PROBLEM OF AGE

Posted on April 18, 2012 by thebellyofthebeast

When Kelley Drye recently settled the age discrimination complaint that the EEOC had filed on behalf of a seventy-nine-year old former equity partner, the focus turned to whether law firms could adopt mandatory retirement policies. The conventional wisdom is that they’re a bad idea — maybe even unlawful age discrimination. The policy argument is that people live longer; those who are productive should be able to keep working; everyone should be compensated according to the value added.

The legal defense of mandatory retirement policies is that true partners are employers and, therefore, outside the law’s protections afforded employees. The rebuttal is that most partners in today’s big firms have little say over their fate, so should they get whatever benefits the law provides, including compensation based on their contributions.

As framed, the debate is incomplete.

Definitional confusion

Mandatory retirement is a misnomer. The issue isn’t whether partners can continue practicing law at their firms. Rather, the question is whether they should remain equity partners in a world where achieving that status is increasingly difficult. In other words, the dispute isn’t about any senior attorney’s devotion to the practice of law; it’s about the money he or she should get paid for doing it.

No one told Eugene D’Ablemont that he couldn’t continue working on his client matters. Indeed, he did for more than a decade after reaching Kelley Drye’s equity partner age limit of seventy. He simply wanted compensation appropriate for his economic contribution to the firm.

Salary as a “lifetime partner” (plus a bonus) wasn’t enough for him, even though Kelley Drye reportedly asserted in response to the original complaint that D’Ablemont billed only between 195 and 324 hours a year during the late 2000s. But he’d mustered letters from two clients who said that his personal involvement in their affairs over many years meant that his inability to take the lead on future matters “created a rather difficult situation” for the company.

Ay, there’s the rub.

The problematic dark side

Most big law firms have evolved — or devolved — into short-term bottom-line businesses. An eat-what-you-kill approach to compensation encourages partners to keep client relationships away from others who might claim billing credit when year-end reviews roll around. Likewise, the lateral hiring frenzy makes such behavior even more important to attorneys who want to preserve their options and demonstrate their dollar value.

As a result, aging partners have no reason to institutionalize clients by nurturing relationships with younger lawyers. For those who have little or no desire to confront either their own mortality or the prospect of life after their big firm careers, the incentives of most firms are unambiguous: keep what you have and try to keep anyone else from claiming any part of it.

Who benefits from this system? Equity partners who have already pulled up the ladder on the next generation by promoting fewer lawyers and making them wait longer.

Who suffers? Young attorneys who want opportunities and training. Apart from blockage and embedding economic interests in an aging group that is myopically self-interested, the system offers no reason for senior lawyers to become mentors.

What is collateral damage? The firms themselves. The failure of elders to encourage their clients to trust the firm’s next generation produces long-term institutional instability.

At the heart of the problem is a short-term metrics-driven model that fails to guide aging partners to productive lives after the law. Aric Press suggests ways that firms could do better. Meanwhile, the absence of mandatory retirement rules for equity partners will make existing intergenerational tensions worse as they undermine the fabric of many firms.

Again, no one is saying that such elders can’t continue practicing for as long as they want. But that doesn’t require hanging on to a slice of the equity pie.

As for clients who worry about a “difficult situation” that might result if their long-time counselor will no longer be lead attorney into his or her eighties, consider this: eventually, everyone dies. There’s nothing that even the EEOC can do about that.

UNFORTUNATE (AND IRONIC) COMMENT AWARD

Posted on April 10, 2012 by thebellyofthebeast

If Dewey & LeBeouf has so-called friends like its former partner John Altorelli…well, you know the rest.

Altorelli’s recent comments to Am Law Daily include so many candidates for my Unfortunate Comment Award that it’s difficult to choose just one. So let’s go with the most ironic. In discussing whether Dewey could have done a better job managing information — presumably referring to publicity about attorney layoffs, partner departures and financial results — Altorelli said:

“In most law firms, I think, as good as the lawyers are at advising clients, they’re not as good at taking their own advice. They are surprisingly obtuse when it comes to their own situation.”

He then proceeded to reveal himself as someone surprisingly obtuse about his own situation. Before listing those inadvertent revelations, consider how Altorelli himself embodies the lateral partner hiring phenomenon that has overtaken much of big law as a dominant business strategy.

The revolving lateral door

After graduating from Cornell Law School in 1993, Altorelli made his way through four law firms in only fourteen years — LeBeouf, Lamb, Greene & MacRae, Paul Hastings, Reed Smith, and Dewey Ballantine (shortly after the collapse of Dewey’s merger talks with Orrick, Herrington & Sutcliffe and a few months before its October 2007 merger with his original firm, LeBeouf Lamb). Such a journey is not likely to produce deep institutional loyalties anywhere.

He’s not unique. For example, as I composed this post The Wall Street Journal reported that Brette Simon had left Jones Day to join Bryan Cave. Since graduating in 1994, she’s also worked at O’Melveney & Myers, Gibson, Dunn & Crutcher, and Sheppard, Mullin, Richter & Hampton.

Still, Altorelli’s book of business apparently qualified him for a place on Dewey & LeBeouf’s executive committee. He says former chairman Steven H. Davis will “take the axe” for whatever is going wrong now, but surely the firm’s executive committee wasn’t a collection of potted plants. It seems improbable that Davis alone could have forged and executed Dewey initiatives that issued bonds and used guaranteed multi-year compensation contracts to lure prominent lateral partners.

But now Altorelli says: “The only people who need contracts are those who are not so secure. I feel bad that firms have to go that way, in competition for laterals and the like.”

Not my fault

Then again, Altorelli also suggests that management hasn’t contributed to Dewey’s current problems. Rather, it was just “bad timing” of a long recession that didn’t allow the firm to burn off expenses associated with the Dewey-LeBeouf merger: “We kept thinking it’ll get better tomorrow, then it doesn’t get better. The next thing you know it’s been four years.”

Magical thinking rarely results in a winning strategic plan. Curiously, Altorelli also notes that during that same period while he was at the firm, he and Dewey prospered: “I had five of the best years of my career.”

As he headed for his fifth big firm in nineteen years, Altorelli offered several additional insights that qualify for stand alone Unfortunate Comment Awards, especially coming from one of the firm’s recent executive committee members who professes continuing hope for Dewey’s future:

— “I’m not sure how they can weather the departures.”

— “It doesn’t take a rocket scientist to say, I don’t know how many more they can suffer.”

— “[There] could be a survival path for a smaller Dewey. I don’t know how that would work. They seem to have a strategy. Or the firm will be busted up into a bunch of little pieces and survive in the hearts and souls of a lot of good people.”

Yet perhaps the unkindest cut of all came in contrasting his professional life at Dewey with things that will be better at DLA Piper, where he will serve on its executive committee:

“Altorelli says he was drawn to his new firm by the chance to help change the way he practices law. Altorelli…says the firm is experimenting with ways to ‘try to get back to more of an intellectual pursuit, rather than just grinding out the paper.'”

If Altorelli’s interview had appeared five days earlier, I would have looked for this concluding line: “April Fool!”

Just delete “April.”

DEWEY’S DILEMMA

Posted on March 7, 2012 by thebellyofthebeast

Dewey & LeBoeuf has talented lawyers, great clients, and 2011 average equity partner profits exceeding $1.7 million. So what required a March 2 firmwide memo from Chairman Steven H. Davis in response to “press stories on U.S. legal blogs”? If the firm paid some media relations consultant to advise him on the missive, it should demand a refund.

Lessons about communicating

Davis says that he planned to outline cost-cutting and other measures when he “knew exactly how they would impact individual offices and departments, but given the press attention,” he advanced his timetable. There’s the first lesson to learn from his approach: When management makes decisions, it shouldn’t attribute the timing of announcements to outside media influences, even if they are a factor.

The second lesson is to avoid firmwide memoranda on sensitive issues. That’s not because transparency is bad (although sometimes less is more). Rather, it’s because difficult news should be communicated in a way that best serves the institution, its people, and its clients.

In the age of global mega-firms, it’s difficult to bring all personnel — or even all partners — together for a candid conversation about what’s happening and why. But there’s no better use for all of that fancy videoconferencing technology than promoting the right narrative, rallying the troops, and instructing partners to inform clients and staff directly about internal firm situations that generate press.

Mixed messages

The substance of the memo presents other issues. Davis starts with the “many successes last year” and “improved financial performance” in 2011 that continued during the first two months of 2012. The problem, he suggests, is a “significant increase in our cost base.” Taking “proactive steps to align the firm’s resources with anticipated demand,” he notes that “[s]ome recent departures have been consistent with the firm’s strategic planning for 2012, and we expect some additional partners to leave.”

That leads to a third lesson about these situations. If a firm is pushing some partners out, don’t make a big deal about it while also touting the firm’s improved financial performance. As they’re losing their jobs, let subpar performers who were once valued firm assets keep their dignity. In fact, public characterizations invite scrutiny. For example, attrition and pruning are one thing, but did the firm’s strategic plan really contemplate losing current and former practice group leaders?

Then comes the punch line: the firm will reduce another five percent of attorneys and six percent of staff. Perhaps, as Davis suggests, the firm does “very much regret the impact” on affected colleagues, but with average equity partner earnings well above the million dollar mark, describing layoffs of 50 to 60 lawyers as “necessary to ensure the firm’s competitiveness” seems disingenuous to most observers.

Misleading metric?

Underlying all of this could be the fact that a key firm metric — average equity partner profits — is misleading. Perhaps, like many big firm trends, the real story is the internal gap between the highest and lowest equity partners.

According to the February issue of The American Lawyer, “Davis says that the firm resisted making mass lateral hires for three years after it was created in October 2007 through the merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, choosing to focus on integration first. ‘Now, we’re moving into a new part of the cycle….'”

One new part of the cycle is lateral partner hiring, for which Dewey was among the top ten firms in 2011. Some of its newest partners were probably expensive, such as former chairs of their previous firms’ practice areas. In 2009, Davis said that the firm rewarded superior performance and denied giving compensation guarantees to rainmakers. If, as recent reports suggest, that policy changed, guarantees could present risks. When a lateral bubble pops, it can inflict significant collateral damage.

Even so, Dewey remains a great firm. On the strength of its ranking surge from 33 to 14 in the Midlevel Associate Satisfaction survey, together with its numerous awards for diversity and pro bono initatives, the firm made the 2011 Am Law “A-list.” That requires decent people creating a culture worth preserving. Hopefully, “moving to the new part of the cycle” hasn’t taken the firm in an errant direction — or, alternatively, any detour is temporary.

THE BIG LAW PARTNER LOTTERY

Posted on February 29, 2012 by thebellyofthebeast

In last Sunday’s The New York Times Magazine, Adam Davidson suggests that many of today’s most intelligent and educated young people have entered an employment lottery. He draws on the best-selling Freakonomics by Stephen J. Dubner and Steven D. Levitt, who use the unlikely prospect of hitting it big to explain otherwise irrational economic behavior in drug dealer gangs: legions of foot soldiers seek to become kingpins someday.

Davidson focuses on the entertainment industry where people with solid academic credentials and big dreams go to work in mail rooms. In passing, he identifies large law firms as another example where, for most young attorneys, analogous dreams meet a similarly unfortunate fate.

The topic is particularly timely. The National Law Journal just released its annual list of the NLJ 250 “Go-to law schools” from which the nation’s biggest firms draw the most new associates. In 2007, the top twenty law schools sent fifty-five percent of graduates to big firms; in 2011, that percentage was down to thirty-six.

As the job market for new attorneys languishes, most of last year’s 50,000 law school graduates would count those new associates as already having won a lottery. But the real story is that they have actually acquired a ticket to one or two more.

The long odds

As more firms have developed two-tier partnerships, the big law lottery has become a two-step ordeal. Merit still matters, but attaining even the highest skill level is only a necessary and not sufficient condition for advancement. To get a sense of the odds against success, consider the most recent data on NLJ 250 associates who were promoted to partner last year (non-equity partners in two-tier systems).

In 2011, forty-seven Harvard law graduates went from associate to big firm partner. That sounds like a lot, except that five years earlier — in 2006 — Harvard sent 338 graduates into large firms. Although that fifteen percent rate isn’t as bad the lottery, winnowing the number down to include only those who will become equity partners gets closer. (A time lag of five years isn’t quite long enough for the groups of new and promoted associates to match exactly, especially as partner tracks have become longer. But it’s adequate to illustrate the point.)

Other top schools’ graduates face even worse odds. Columbia law sent 313 graduates to big firms in 2006; thirty-one of its grads went from associate to partner in 2011. In 2006, 143 Northwestern law grads got big firm jobs; in 2011, fourteen NU graduates advanced from associate to partners. The University of Pennsylvania’s 2006 class sent 187 into big firms; those firms promoted fifteen U Penn associates to partner last year.

A few schools fared better in this comparative sweepstakes: the University of Texas placed 194 of its 2006 graduates in big firms; last year twenty-nine UT grads went from associate to big law partners. Vanderbilt also broke the twenty percent barrier.

Irrational behavior?

Why do associates continue to play such long odds in a game that doesn’t yield any outcome for years and, for the vast majority of participants, turns out badly?

Understandably, some associates take big law jobs solely to burn off student loan debt before pursuing the dreams that actually took them to law school in the first place. But others are playing the big law lottery.

Meanwhile, those at the top of law firm pyramids have worsened the odds. They have pulled up the ladder by lengthening the equity partner track, reducing the rate of new equity partners, increasing leverage, and running their firms to maximize short-term equity partner wealth at the expense of long-run institutional stability and their colleagues’ personal well being.

Rationalizing these actions, many big law leaders have convinced themselves that the current generation of young lawyers is inferior to their own. They complain about those who act as if they’re entitled to everything and unwilling to work hard, as they once did. Three concluding points:

First, many large firm attorneys in the baby boomer generation act entitled, too.

Second, when today’s big law leaders were associates, no one was telling them to get their hours up.

Third, motivation and behavior follow incentive structures. If some of today’s young attorneys sometimes behave as if they don’t have a reasonable shot at winning the equity partner lottery, it’s because they don’t.

THE NON-EQUITY PARTNER BUBBLE

Posted on February 22, 2012 by thebellyofthebeast

In May 2009, The American Lawyer reported that Am Law 100 firms had increased the number of non-equity partners threefold since 1999, but the number of equity partners grew by less than one-third. As big law leaders continue to pull up the ladder, what will come from the growing cadre of partners-in-name-only? Other than some short-term money for equity partners, nothing good.

Historically, most two-tier firms employed a simple strategy for non-equity partners: up-or-out. Within a reasonable period of time (for no benign reason, it’s gotten longer), non-equity partners either proved themselves worthy of elevation or moved on. Limited exceptions included specialized niche players who could stay indefinitely.

An article in the February 2012 issue of The American Lawyer, “Crazy Like a Fox,” suggests another option: permanent non-equity partners.

The Economic Case

Authors Edwin B. Reeser and Patrick J. McKenna offer financial justifications for the strategy. First, they say, clients unwilling to pay high hourly rates for first- and second-year associates have an easier time swallowing non-equity partner rates, even though they are much greater.

Sometimes, maybe. But clients are now scrutinizing the match between attorneys and their tasks. Using an unnecessarily expensive non-equity partner to perform associate work is dangerous.

Second, they argue, associate recruitment and training are expensive, with each new associate costing $250,000 to $300,000. As a class, Reeser and McKenna assert, “associates do not make money for the firm until sometime in the end of the third or even the fourth year.”

Maybe. But at current hourly rates and required minimum billables, the payback is probably sooner. (Do the math using an average profit margin of forty percent, which is conservative.) But their larger point is correct: non-equity partners are a source of leverage that for the Am Law 50 has doubled since 1985 — from an average of 1.75 to 3.54.

The Problems

Whatever the debatable short-term economic gain, the long-run cost of expanding the non-equity ranks and making them permanent is far greater.

For starters, such lawyers become second class citizens. They know it. Everyone in the firm knows it. They may be decent, hard-working people. But once they receive the scarlet letter of permanent non-equity status, their morale plummets.

It’s understandable. After all, throughout their lives they succeeded at everything they tried — outstanding college record, good grades at a top law school. They’re intelligent and ambitious, otherwise firms wouldn’t have hired them in the first place. But then, after years of hard work they learn that they won’t reach the next level and never will. Only magical thinking can wish away the demoralizing impact of that message.

Any firm creating a permanent subclass of such attorneys takes an individual problem and makes it an institutional one. For example, if permanent non-equity partners do meaningful and fulfilling work, they’ll deprive younger attorneys of those increasingly scarce opportunities. That expands the morale problem into the senior associate ranks where career satisfaction languishes at historic lows.

Conversely, if the permanent non-equity partners are performing tasks that other attorneys avoid, that creates other difficulties. Reeser and McKenna note that such practitioners sometimes “take on non-billable leadership positions…involving pro bono, diversity, recruiting, training, and professional development.” Unfortunately, there’s no better way to send a message of management’s indifference to such pursuits than by putting the B-team in charge.

Finally, the authors suggest that a non-equity track enables firms to “retain some whiz-bang lawyers who have young children they want to spend more time with or who just want to get off the equity partner treadmill.” Remarkably, no one seems willing to rethink the wisdom of a system that produces that unhappy treadmill in the first place.

The presence of more non-equity partners in big law might simply be a residue of the enormous associate classes hired in earlier years. But for firms using them to create a permanent subclass generating short-term dollars, the strategy makes no long-term sense. Because there’s no metric to capture the downside, big law leaders will ignore it.

But if the trend continues, the non-equity partner bubble will grow and the prevailing big law model will develop another enduring chink in its increasingly fragile armor.

THE LATERAL BUBBLE

Posted on February 15, 2012 by thebellyofthebeast

Most big law leaders say that they have to keep pushing equity partner profits higher to attract and retain rainmakers. They have repeated that mantra so often and for so long that the rest of the profession has accepted it as an article of faith.

Perhaps it’s true, but two items in the February issue of The American Lawyer prompt this heretical question:

What if the lateral hiring frenzy is creating a bubble?

Victor Li’s “This Time It’s Personal” describes the state of play: lateral hiring is way up. Law firm management consultants, including my friend Jerry Kowalski, predict more of the same for 2012 as firms counter revenue losses from departing partners to prevent the death spiral that can result. Such fear-driven behavior can easily lead to overpayment for so-called hot lateral prospects that turn out to be, well, not so hot.

As I’ve observed previously, the reasons for the lateral explosion have much to do with big law’s evolution. Its currently prevailing business model encourages partners to keep clients in individual silos away from fellow partners, lest they claim a share of billings that determine compensation. Paradoxically, such behavior also maximizes a partner’s lateral options and makes exit more likely. In other words, the institutional wounds are self-inflicted.

But the article quotes several firm leaders who emphasize that, while money was important in motivating some of the partners they acquired, the search for a global platform also mattered. Frank Burch, cochair of DLA Piper, acknowledges that enticing a lateral hire requires that the money offered be comparable. But he also says that his firm “did a lot of hiring from firms that reported higher profits per partner” than DLA Piper. The article cites four: Paul Hastings; Skadden, Arps, Slate, Meagher & Flom; White & Case; and Morgan, Lewis & Bockius.

Except “Crazy Like a Fox” by Edwin B. Reeser and Patrick J. McKenna (also in The American Lawyer February issue), makes the correct observation that a firm’s average PPP is not all that informative. The authors’ focus principally on the growing cohort of non-equity partners in a climate where clients are unwilling to pay for first- and second-year associates. But they make a telling point on a seemingly unrelated topic: the income gap within equity partnerships has exploded.

They note that a few years ago the equity partner pay spread was typically three-to-one; some places it’s now ten-to-one or even twelve-to-one:

“Over the last few years there has been a dramatic change in the balance of compensation, to a large degree undisclosed, in which increasing numbers of partners fall below the firm’s reported average profits per equity partner (PPP)…Typically, two-thirds of the equity partners earn less, and some earn only perhaps half, of the average PPP.”

(Trying to justify this trend, some firm leaders have offered silly explanations, such as geographical differences.)

Now apply this learning to Li’s article. A firm’s average PPP isn’t luring high-powered lawyers; the money at the top is. Perhaps the desire to provide clients with a better global platform plays a role in some laterals’ decisions, but most of the firms experiencing the highest number of lateral partner departures in 2011 are already worldwide players. In fact, four firms — DLA Piper, K&L Gates, Jones Day, and SNR Denton — are simultaneously on both the most departures and most hires list.

Consider an example. Last year when Jamie Wareham became big law’s highly public $5 million man, did leaving Paul Hastings for DLA Piper improve his ability to serve clients? Doubtful. But the bubble question is far more important to the firm: Has Wareham been worth it? Only he and his new partners know for sure.

That leads to a final heretical question: Where a lateral bubble develops, what happens when it bursts or, perhaps more pernicious, develops a slow profitability leak? Nothing good. For the answer, ask those who once worked at Howrey, Heller Ehrman or one of the many other now-defunct firms whose leaders thought that acquiring high-profile laterals offered only upside.

THE ULTIMATE LATERAL HIRE

Posted on January 25, 2012 by thebellyofthebeast

Among 2011’s “Lateral Partner All-Stars,” Tony Angel’s symbolic importance seems unrivaled. As I write, I don’t know who will make The American Lawyer‘s annual February list. But when Angel became DLA Piper’s leader, his new firm became the definitive poster child for big law’s transformation. Celebrate at your peril.

Whither goest thou?

DLA Piper resulted from the combination of several large firms comprised of once-independent enterprises: DLA’s three U.K. components were Dibb Lupton Broomhead, Alsop Stevens, and Wilkinson Kimbers; Piper Rudnick’s predecessors included Baltimore-based Piper & Marbury, Chicago-based Rudnick & Wolfe, and San Diego-based Gray, Cary, Ware & Freidenrich.

According to its website, DLA Piper grew from 2700 lawyers in January 2005 to 4200 today. The attorneys it added during that period would comprise one of the 20 largest firms in the world — eclipsing Kirkland & Ellis, Weil Gotshal & Manges, and Gibson, Dunn & Crutcher.

But is it really a law firm? K&L Gates chairman Peter Kalis makes the telling point that, as a verein, it may be more like a confederation of different firms that share a common name, but not profit pools. Still, adding 1500 attorneys in six years makes any observer wonder about DLA Piper’s global partner conferences. The 2010 meeting took place in Orlando, Florida, home of Disney World. There’s a metaphor in there someplace.

Ascertaining shared values and visions

According to Am Law Daily, the whirlwind courtship between Angel and DLA Piper began with a May 2011 breakfast meeting that included Frank Burch and others on the leadership team. The idea of naming him global co-chair gained momentum as Angel lined up partner support from the firm’s 76 offices. On November 7, he got the top spot. How?

“He’s got great values and he believes in what we’re trying to do and he shares our view of what’s going on in the world,” said Burch, who now shares DLA Piper’s global chair with Tony Angel. “So, we didn’t hesitate for a second and worry about the fact that the guy was not in the firm.”

Didn’t hesitate for a second? Didn’t worry about the fact that the guy was not in the firm? Why not? When Burch said that Angel has “great values,” “believes in what we’re trying to do,” and “shares our view,” what did he mean?

DLA Piper’s press release offered a hint:

“Tony will work with the senior leadership on the refinement and execution of DLA Piper’s global strategy with a principal focus on improving financial performance and developing capability in key markets.”

Translation: Get bigger and make surviving equity partners richer.

Consultant Peter Zeughauser said that Angel is a hot property: “It’s hard to get a guy that talented. There just aren’t that many people out there who have done what he has done.”

Zeughauser was referring to Angel’s management of Linklaters from 1998 to 2007. When he left, it had a global presence and average partner profits of $2.4 million. Although DLA Piper’s 2010 average partner profits exceeded $1 million in 2010, Angel’s job is to take them even higher.

Ignored in the financial shorthand are questions no one asks:

— Most big firms prospered wildly during big law’s go-go years. Does the person at the top deserve all the credit? The partners who bring in clients, orchestrate deals, and win trials don’t think so.

— Conversely, according to Am Law‘s Global 100, by 2010 Linklater’s 2010 average profits per partner slipped to $1.8 million. Does anyone think that happened because Angel left three years earlier? Not likely.

— What gets sacrificed in the myopic quest for growth and short-term profits? That’s becoming clearer: things that aren’t easily quantified, including a sense of community and a culture that mentors home-grown talent from which a firm’s future leaders can emerge.

Rather than consider the heresy implicit in such questions, the spin zone focuses on what legal headhunter Jack Zaremski called a “brave move” that “might very well pay off.”

Pay off, indeed. In the latest Am Law Mid-level Associates Survey, DLA Piper ranked 99th out of 126 firms. In reviewing their shared values and vision, did Angel and his new DLA Piper partners discuss the rewards that might come with addressing the firm’s attorney morale problems?

Probably not. After all, Linklaters ranked 108th.

FED TO DEATH

Posted on December 20, 2011 by thebellyofthebeast

Most of today’s big law leaders think they’ll be able to avoid traps that have destroyed great firms of the recent past. Are they that much smarter than their predecessors? Or are they oblivious to the lessons of history?

My article, “Fed to Death,” in the December issue of The American Lawyer, suggests that most respondents to the magazine’s annual survey of Am Law 200 firm leaders have have forgotten what true leadership is. Consider it my seasonal gift to those who need it most — and want it least.

Happy Holidays and thanks for your continuing attention to my musings. I’m especially grateful to the thousands who have kept my novel, The Partnership, on Amazon’s Kindle e-book Legal Thrillers Best-Seller list for the past six months.

OCCUPY BIG LAW

Posted on December 7, 2011 by thebellyofthebeast

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

“We’re the 99-percenters.”

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

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

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

Destabilizing trends

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

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

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

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

Big law winners

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

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

So what?

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

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

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

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

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

THE ARROGANCE OF OVERCONFIDENCE

Posted on November 8, 2011 by thebellyofthebeast

Most of us hate admitting our mistakes, especially errors in judgment. Lawyers make lots of judgments, which is why they should pay special attention to two recent and seemingly unrelated NY Times articles.

In the October 23 NYT Magazine, psychologist and economics Nobel laureate Daniel Kahneman describes an early encounter with his own character flaw that led him to research its universality. Assigned to observe a team-buidling exercise, he was so sure of his predictions about the participants’ future prospects that he disregarded incontrovertible data proving him wrong — again, and again, and again.

In subsequent experiments, he discovered that he wasn’t alone. A similar arrogance of overconfidence explains why, for example, individual investors insist on picking their own stocks year after year, notwithstanding the overwhelming evidence that their portfolios are worse for it.

In the same Sunday edition of the Times, philosopher Robert P. Crease discusses the two different measurement systems. One relates to traditional notions: how much something weighs or how far a person runs. Representatives from 55 nations met recently to finalize state-of-the-art definitions for basic units of such measurements — the meter, the second, the kilogram, and so forth.

The second system is less susceptible to quantification. Crease notes: “Aristotle…called the truly moral person a ‘measure,’ because our encounters with such a person show us our shortcomings.” Ignoring this second type in favor of numerical assessments gets us into trouble, individually and as a society. Examples include equating intelligence to a single number, such as I.Q. or brain size, or evaluating students (and their teachers) solely by reference to standardized test scores.

Lessons for lawyers — and everyone else

Now consider the intersection of these two phenomena — the arrogance of overconfidence and the reliance on numbers alone to measure value. For example, in recent years, a single metric — partner profits — has come to dominate every internal law firm conversation about attorney worth. Billings, billable hours, and leverage ratios have become the criteria by which most big law leaders judge themselves, fellow partners, their associates, and competitors. They teach to the same test — the one that produces annual Am Law rankings.

The arrogance of overconfidence exacerbates these tendencies. It’s one thing to press onward, as Kahneman concludes most of us do, in the face data proving that we’re moving in the wrong direction. Imagine how bad things can get when a measurement technique appears to validate what are really errors.

I’m not an anarchist. (I offer my advanced degree in economics as modest support.) But the relatively recent notion that there is only one set of law firm measures for defining success — revenues, short-term profits, leverage — has become a plague on our profession. Of course, we’re not alone. According to the Times, during the academic year 2005-2006, one-quarter of the advanced degrees awarded in the United States were MBAs. Business school-type metrics are ubiquitous and, regrettably, often viewed as outcome determinative.

But lawyers know better than to get lost in them, or once upon a time they did. The metrics that most big firm leaders now worship were irrelevant to them as students two or three decades ago. Like today’s undergraduates, they were pursuing a noble calling. Few went to law school seeking a job where their principal missions would be maximizing client billings and this year’s partner profits.

Will the profession’s leaders in the next generation make room for the other kind of measure — the one Aristotle had in mind — that informs the quality of a person’s life, not merely it’s quantitative output? Might they consider the possibility that focusing on short-term metrics imposes long-run costs that aren’t easily measured numerically but are far more profound?

Reviewing the damage that their predecessors’ failures in that regard have inflicted — as measured imprecisely by unsettling levels of career dissatisfaction, substance abuse, depression, and worse — should motivate them to try.

Meanwhile, they’ll have to contend with wealthy senior partners telling them to keep their hours up — a directive that those partners themselves never heard. Good luck to all of us.

ANOTHER DAY, ANOTHER LAW FIRM MERGER

Posted on October 26, 2011 by thebellyofthebeast

It’s now ancient history, but in 2002 Chicago-based Mayer, Brown & Platt (850 lawyers) joined with U.K-based Rowe & Maw (250 lawyers) in a law firm merger that seemed breathtaking. Today, combining firms has become a universal business strategy. Fourteen law firm mergers in the third quarter of 2011 alone brought this year’s total to 43.

Evaluating these ultimate lateral hiring events — wholesale combinations of independent enterprises — is a two-step process: first, defining success and, second, allowing sufficient time (measured in years) to observe results. Senior partners orchestrating such transactions have vested interests in making them look good. So do the management consultants cheering them on. Once they undertake a merger strategy, leaders take herculean steps to vindicate it. Their spin can distract from the downside, but it’s there.

Defining success

Management and its outside consultants often define success in deceptively simple terms: getting bigger and growing equity partner profits. That can be superficial and misleading.

Growth alone doesn’t create value. Recently, Minneapolis-based Faegre & Benson and Indianapolis-based Baker & Daniels announced the creation of Faegre Baker Daniels. Whatever economies of scale exist in the delivery of legal services, firms the size of Baker (320 lawyers) and Faegre (450 lawyers) seem large enough individually to have triggered them long ago. Will their 770-attorney firm operate more efficiently than two components half that size? Doubtful.

But this is certain: combined firms face more potential client conflicts than if they’d remained separate. That results from the interaction between the Rules of Professional Responsibility and arithmetic.

Some leaders promote a “bigger platform” as a way to entice prominent laterals. But bringing in seasoned outsiders makes preserving any firm’s culture even more challenging.

Culture shock

Then again, maybe there’s little culture to preserve after most significant combinations. Baker & Daniels is in the Am Law 200; so is Faegre. Together they’ll move into the Am Law 100. Is that a good thing?

Merger leaders always proclaim their determination to preserve each firm’s culture. But, those attending the first Faegre Baker Daniels partnership meeting won’t know half the people in the room. Likewise, being one of 100 equity partners is different from being one of more than 200 — and not in a way that enhances collegiality or a sense of community. Looking for a central identity or a geographic core from which senior partners working together can produce common principles? The new Faegre Baker Daniels firm won’t even have a national headquarters.

The winners

In the end, most merger proponents pander to the simplistic hope that synergy of the combined entity will produce value greater than the sum of its partner profits parts. If that happens, it’s a good deal economically for the survivors at the top. But many others may find themselves on the wrong side of a merger’s “restructuring opportunities” — a euphemism for shrinking the new equity partnership.

According to the latest Am Law listing, Baker & Daniels’ partnership has two tiers (equity and non-equity) and an equity partner leverage ratio of 1.71. Faegre has a single equity partner tier and a leverage ratio of 1.09. Something’s gotta give.

Faegre’s chairman Andrew Humphrey, a transactional attorney who will serve as the combined Faegre Baker Daniels chief executive partner, said the new firm would have a “unified compensation structure.” He plans to manage “partner expectations” and “incentivize people the right way.” I don’t know what he has in mind, but some current partners probably won’t like the results of that exercise.

Likewise, mergers put pressure on leaders to push everyone harder. They want to cite increases in billings, billable hours, and leverage as proof that the new institution is better. Never mind that no one will ever know what the base case — no merger — would have produced for either firm independently.

Even a short-term increase in partner profits doesn’t prove the long-term value of the transaction. For example, Howrey’s merger and lateral hiring binge began in 2001. Seven years later it had record profits, but by early 2011 the firm was gone.

I know, I know — Howrey was different. As I warned at the outset, beware of that spin-thing.

INFLATED PPP?

Posted on August 29, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IT’S THE MODEL

Posted on August 15, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AGING GRACEFULLY — OR NOT

Posted on June 5, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BIG LAW INCIVILITY

Posted on April 14, 2011 by thebellyofthebeast

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

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

Mr. V: Please don’t throw it at me.

Mr. A: Take it.

Mr. V: Don’t throw it at me.

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

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

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

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

Mr. A: Do you deny it?

Mr. V: Eventually you threw it at me.

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

Mr. V: Keep it up.

Mr. A: Your mind belongs in the gutter.

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

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

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

— Disrespect for People’s Time

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

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

— Flagrant Misbehavior

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

Incivility counterpart: Ad hominem attacks.

— Lack of Candor About the Big Law Model

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

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

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

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

“Please say please and thank you.”

I wonder what their mothers would say.

A NEW METRIC: THE MISERY INDEX

Posted on April 6, 2011 by thebellyofthebeast

Let’s call it what it is.

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

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

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

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

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

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

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

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

50% > 2,000 = 50 AMI points

40% > 2,100 = 40

25% > 2,200 = 25

10% > 2,300 = 10

None > 2,400

AMI: 125

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

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

90% > 2,000 = 90 points

75% > 2,100 = 75

60% > 2,200 = 60

45% > 2,300 = 45

30% > 2,400 = 30

15% > 2,500 = 15

None > 2,600

AMI: 315

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

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

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

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

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

THE GOLDMAN MODEL FOR BIG LAW?

Posted on March 31, 2011 by thebellyofthebeast

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

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

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

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

Consider the similarities to big law:

— Management

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

— Resulting culture changes

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

— Metrics

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

— Partner Wealth

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

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

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

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

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

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

HOWREY’S LESSONS: A NATIONAL CONVERSATION

Posted on March 21, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

HOWREY’S LESSONS — PART II

Posted on March 13, 2011 by thebellyofthebeast

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

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

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

1. European offices:

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

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

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

2. Document discovery vendors.

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

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

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

3. Contingent and alternative fees

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

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

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

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

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

HOURLY RATES: PLEASE DON’T READ

Posted on February 24, 2011 by thebellyofthebeast

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

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

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

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

Another fault line runs through today’s high rates: Taxpayers are bearing some of those fees directly, not just through price elasticity curves that push some legal cost increases into the consumer price of a client’s goods or services. For example, last May, Harvey Miller’s firm had received $16 million in legal fees for work on the GM bankruptcy that taxpayers funded. With hubris that ignored the public’s financial contribution, Miller defended his resistance to discounts from Weil Gotshal’s reported rates of $500+/hour for associates to more than $1,000/hour for some senior partners: “If you had cancer and you were going into an operation, while you were lying on the table, would you look at the surgeon and say, ‘I’d like a 10 percent discount’? This is not a public, charitable event.” He was only half-right.

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

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

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

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

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

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

HOWREY’S LESSONS

Posted on February 18, 2011 by thebellyofthebeast

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?

Posted on February 14, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

Are You Worth $5 Million?

Posted on February 10, 2011 by thebellyofthebeast

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Belly of the Beast

Steven J. Harper, Esq.

Tag Archives: law partners

DEWEY’S RICHARD SHUTRAN — RUNNING THE NUMBERS

DEWEY’S JEFFREY KESSLER: STARS IN THEIR EYES

DEWEY’S MARTIN BIENENSTOCK: PARTNERSHIP, PROFESSIONALISM AND WHAT TO TELL THE KIDS

DEWEY’S MORTON PIERCE: ACCEPTING RESPONSIBILITY

DEWEY: PROFILES IN SOMETHING

DEWEY: WHEN PARTNERS AREN’T REALLY PARTNERS

SPINNING DEWEY’S HEROES

THE AGE-OLD PROBLEM OF AGE

UNFORTUNATE (AND IRONIC) COMMENT AWARD

DEWEY’S DILEMMA

THE BIG LAW PARTNER LOTTERY

THE NON-EQUITY PARTNER BUBBLE

THE LATERAL BUBBLE

THE ULTIMATE LATERAL HIRE

FED TO DEATH

OCCUPY BIG LAW

THE ARROGANCE OF OVERCONFIDENCE

ANOTHER DAY, ANOTHER LAW FIRM MERGER

INFLATED PPP?

IT’S THE MODEL

AGING GRACEFULLY — OR NOT

BIG LAW INCIVILITY

A NEW METRIC: THE MISERY INDEX

THE GOLDMAN MODEL FOR BIG LAW?

HOWREY’S LESSONS: A NATIONAL CONVERSATION

HOWREY’S LESSONS — PART II

HOURLY RATES: PLEASE DON’T READ

HOWREY’S LESSONS

LOCATION, LOCATION, LOCATION?

Are You Worth $5 Million?

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