TREATING SYMPTOMS; IGNORING THE DISEASE

On May 22, 2017, The Wall Street Journal ran an article about the legal profession’s enduring problem: psychological distress. For decades, attorneys have led most occupations in the incidence of serious psychological afflictions — depression, substance abuse, even suicide. Now some law firms are “tackling a taboo,” namely, the mental health problems of their lawyers.

Some observers theorize that a special “lawyer personality” is the culprit. In other words, we have only ourselves to blame, so no one should feel sorry for us. Then again, no one ever feels sorry for lawyers anyway. But attorney psychological distress has become a sufficient problem that, as the Journal reports, some big law firms are now “offering on-site psychologists, training staff to spot problems, and incorporating mental health support alongside other wellness initiatives.”

Stated differently, law firms are following the unfortunate path that has become a dominant approach in the medical profession: treating symptoms rather than the disease. Perhaps that’s because law firm leaders know that curing it would cut into their personal annual incomes.

The Facts

Other workers have serious psychological challenges, too. But attorneys seem to suffer in disproportionately high numbers. The Journal article cites a 2016 study of US lawyers finding that 20.6 percent of those surveyed were heavy drinkers (compared to 15.4 percent for members of the American College of Surgeons). Likewise, 28 percent experienced symptoms of depression (compared with eight percent or less for the general population). According to a 2012 CDC study cited in the Journal, attorneys have the 11th-highest suicide rate.

Now add one more data point. According to an ABA survey in 2007, lawyers in big firms are the least satisfied with their jobs. Anyone familiar with the prevailing big firm environment knows that it has deteriorated dramatically since 1985.

The New World

What has changed? For starters, just getting a job at a big law firm is more difficult. Corporate clients have found cost-effective alternatives to young attorneys billing $300 an hour to review documents. At many firms, demand remains soft.

But the real psychological problems begin after a new associate enters the door. For most of them, promotion to equity partner has become a pipe dream. In 1985, 36 percent of all lawyers in The American Lawyer’s first survey of the nation’s fifty largest firms were equity partners. In  2016, the comparable number was under 22 percent. More than 40 percent of all AmLaw 100 partners are now non-equity partners. The leverage ratio of equity partners to all attorneys has doubled. Stated another way, it’s twice as difficult to become an equity partner today as it was in 1985. That’s what’s been happening at the financial pinnacle of the profession.

The Business Model

There is nothing inevitable about the underlying business model that produces these outcomes. It’s a choice. In 1985, average profits per partner for the Am Law 50 was $300,000 — or about $700,000 in 2017 dollars. Today’s it’s $1.7 million. And the gap within most equity partnerships reflects their eat-what-you-kill culture. Instead of 3-to-1 in 1985, the ratio of highest-to-lowest partner compensation within equity partnerships often exceeds 10-to-1. As the rich have become richer, annual equity partner earnings of many millions of dollars has become commonplace.

At what cost? The future. As law firm leaders rely upon short-term metrics — billings, billable hours, and leverage ratios — they’re pulling up the ladder on the next generation. Too many associates; too few equity slots. Let the contest begin!

But rather than revisit the wisdom of the model, some big firm leaders have made what the Journal characterizes as a daring move: bring in a psychologist. It’s better than nothing, but it’s a far cry from dealing with the core problem that starts with the billable hour, moves through metrics that managers use to maximize short-run partner profits, and ends in predictable psychological distress — even for the so-called winners. The Journal notes that a psychologist at one firm was offering this sad advice to its attorneys: Take a cellphone reprieve by turning off all electronic devices between 2:00 am and 6:00 am.

But even such input from mental health professionals seems anathema to some firm leaders. According to the Journal, Dentons’ chairman Joseph Andrew says that his fear of offering an on-site psychologist was that “competitors will say we have crazy lawyers.”

Former Acting Attorney General Sally Yates recently told the New Yorker about her father, an attorney who suffered from depression and committed suicide. “Tragically,” Yates said, “the fear of stigma then associated with depression prevented him from getting the treatment he needed.”

For some firm leaders, “then” is still “now.” And that’s truly crazy.

ANOTHER BIG LAW FIRM STUMBLES

King & Wood Mallesons was never really a law firm. For starters, it was a verein — a structure that allowed three distinct firms to create a branding opportunity — King & Wood in China, Mallesons in Australia, and SJ Berwin in the United Kingdom. As things turned out, when SJ Berwin came on board in 2013, the verein whole quickly became less than the sum of its parts.

As The American Lawyer’s Chris Johnson and Rose Walker put it in their recent article, a verein is “a holding structure that allows member firms to retain their existing form. The structure…enabled the three practices to combine quickly and keep their finances separate.”

But the structure also means that when one member of the verein hits hard times, the others can walk away. For KWM, “the Chinese and Australian partnerships have effectively been able to stand back and watch as the European practice burned.”

Not Just a Verein Problem

To be sure, the verein structure exacerbates SJ Berwin’s current difficulties. But before leaders of big non-verein firms become too self-satisfied, they might consider whether their own firms risk the same dangers now afflicting KWM.

As Johnson and Walker report, the firm’s compensation system produced bad behavior. KWM awarded client credit to the partner who physically signed the invoice. That effectively encouraged partners to refer work to rival firms, rather than other KWM partners.

Think about that last sentence for a minute.

“It was one of the things that killed the firm,” says one former London partner. “If I sent work to other [KWM] partners, it would be out of my numbers at the end of the year. It was better for me to send it to another firm, as I’d then still be the one invoicing the client, so I’d get the credit for everything.”

A Team of One, Not One Team

When it came to cross selling among offices and practice groups, management talked a good game. Indeed, the verein’s 2013 merger tag line was “The Power of Together.” But here, too, behavior followed internal financial incentives. The compensation committee focused on individual partner performance, not the “one team, one firm” sound bite on its “vision and values” website page.

“There was a complete disconnect between what management said we should do and what the remuneration committee would reward us for doing,” says a former partner.

Lessons Not Learned, Again

As KWM’s European arm disintegrates, most law firm leaders will probably draw the wrong conclusions about what went wrong. Emerging narratives include: SJ Berwin had been on shaky ground since the financial crisis hit in 2008; the firm lacked competent management; the principal idea behind the combination — creating a global platform — was sound; only a failure of execution produced the bad outcome.

For students of law firm failures, the list sounds familiar. It certainly echoes narratives that developed to explain the 2012 collapse of Dewey & LeBoeuf. But the plight of KWM — especially the SJ Berwin piece — is best understood as the natural consequence of a partnership that ceased to become a partnership. In that sense, it resembles Dewey & LeBoeuf, too.

The organizational structure through which attorneys practice law together matters. The verein form allows King & Wood and Mallesons to back away from Sj Berwin with limited fear of direct financial exposure. But as SJ Berwin careens toward disaster, fellow verein members will suffer, at a minimum, collateral damage to the KWM brand.

What’s the Future Worth?

The lesson for big law firm leaders seems obvious. Since the demise of Dewey, that lesson has also gone unheeded. A true partnership requires a compensation structure that rewards partner-like behavior — collegially, mentoring, expansion and transition of client relationships to fellow partners, and a consensus to pursue long-term strategies promoting institutional stability rather than maximizing short-term profit metrics.

Firms that encourage attorneys to build individual client silos from which partners eat what they kill risk devastating long-term costs. They’re starving firm of their very futures. Unfortunately, too many big law firm leaders share a common attitude: the long-term will be someone else’s problem.

In a line that stretches back to Finley Kumble and includes Dewey & LeBoeuf, Bingham McCutchen, and a host of others, the names change, but the story remains the same. So does a single word that serves both as those firms’ central operating theme and as their final epitaph: greed.

BIG LAW’S SHORT-TERMISM PROBLEM

Recently, the New York Times devoted a special section of “Dealbook” to short-termism. Big law firms made a prominent appearance in an article focusing on leadership transition. Citing statistics at the managing partner level, the Times reports that only three percent of law firm managing partners are under age 50. Twelve percent are over 70. Almost half are between 60 and 70.

The Tip of the Graying Iceberg

The core problem of transition runs deeper than a single demographic data point about the age of those at the top of the big law pyramid. The developing crisis goes far beyond the question of who the next managing partner will be.

At most firms, aging partners at all partnership levels are hanging on to clients and billings. For them, it’s a matter of survival. Except for lock-step firms, equity partners “eat what they kill” — that is, their closely guarded silos of clients and billings determine their annual compensation.

In that culture, hoarding becomes essential to preserving annual compensation that partners come to regard as rightfully theirs — and theirs alone. Stated in language that many senior partners use in criticizing today’s young attorneys, these aging lawyers have developed a wrong-headed sense of entitlement.

The fact that they’re making far more than they dreamed of earning in law school doesn’t matter to them. Neither does the fact that they are compromising the future of their firms. But their short-term gains could become the institution’s long run catastrophe.

See the Problem

Surveys confirm that law firm leaders recognize the resulting problem. Seven years ago, Altman Weil issued the first of its annual “Law Firms in Transition” series. Since then, the survey has documented a fundamental failure of leadership on this issue.

For example, in the 2011 survey, Altman Weil asked firm leaders to name the areas in which they had the greatest concerns about their firms’ preparedness for change: “The top issue, identified by 47% of all firms, was the retirement and succession of Baby Boom lawyers in their law firms.”

In the 2012 survey, 70 percent of managing partners had “moderate” or “high” concern about client transition as senior partners retire. On a scale of one (no concern) to ten (extreme concern), the median score was seven.

In the 2013 survey, only 27 percent of managing partners reported that they had a formal succession planning process in place.

Ignore the Problem

How have these leaders responded to what they have identified for years as the most pressing long-term problem facing their firms? Poorly.

The 2015 survey observes, “In 63% of law firms, partners aged 60 or older control at least one quarter of total firm revenue, but only 31% of law firms have a formal succession planning process.”

There’s a reason that law firm leaders balk at meaningful transition planning. It requires them to accept the fact that they won’t run their firms forever. But contemplating one’s own mortality can be unpleasant.

It also requires them to rethink their missions. Leadership is not about maximizing this year’s partner profits or pursuing growth for the sake of growth to create illusory empires over which a dictator can preside. It requires a willingness to create incentive structures that encourage long-term institutional stability.

Toward that end, lofty aspirations are easier to state than to achieve. But here are a few governing principles:

— Client service should be central to everything a law firm does.

— Partner cooperation should trump partner competition.

— Clients and billings should flow seamlessly to the next generation while allowing aging partners to retain a sense of self-worth as firms encourage them to prepare for their “second acts,” whatever they may be.

— The culture of a firm should encourage partners to sacrifice some short-term financial self-interest in the effort to leave the firm better than they found it — just as their mentors did for most of them.

Become the Problem

The most creative leaders understand that all of this means thinking outside the conventional billable hour box that remains central to the short-term growth and profit-maximizing mindset. In that respect, the contrast between the absence of true leadership and clients’ desires is striking.

Since 2009, Altman Weil has done an annual survey of corporate chief legal officers, too. The survey asks the CLOs: “How serious are law firms about changing their legal service delivery model to provide greater value to clients?”

The responses are on a scale of one (not at all serious) to ten (doing everything they can), Every year since the survey began, the median score has been three. Three out of ten. Stated differently, as far as clients are concerned, their outside lawyers have little interest in responding to demands for change.

Likewise, LexisNexis/Counsel Link’s most recent semi-annual report analyzing six key metrics confirms the impact of short-termism:

— Clients want alternative fee arrangements. AFAs account for only seven percent of all billings.

— Clients want relief from high hourly rates. For the trailing 12-month period ending on June 30, 2015, big firms of more than 750 attorneys had a median partner billing rate of $711 an hour — up 6 percent from the period ending on December 31, 2014. (For firms of 501-750 lawyers the median hourly rate during the same period increased by only $5 an hour.)

The Future Is Here

As big firm leaders drag their feet, clients aren’t waiting for them. They have figured out that the biggest of big law premiums isn’t always worth it. An October 2013 study of $10 billion in client fee invoices by LexisNexis/Counsel Link concluded the “large enough” firms of 201-500 lawyers are eating into the market share of firms with more than 750 lawyers.

From 2010 to 2013, the biggest firms saw their market share drop from 26 percent to 22 percent. Meanwhile, the market share of the “large enough” firms increased from 18 to 22 percent. For high-fee matters totaling $1 million or more, the shift was even more dramatic: “large enough” firms increased their market share from 22 to 41 percent.

Anyone believing that most big law firm leaders are long-term thinkers preparing their firms for a challenging future is ignoring the actual behavior of those leaders. Most of them are focused on getting rich today. That’s not a strategy for success tomorrow.

THE PERVASIVE AMAZON JUNGLE

Amazon’s founder and CEO, Jeff Bezos, hates the recent New York Times article about his company. He says it “doesn’t describe the Amazon I know.” Rather, it depicts “a soulless, dystopian workplace where no fun is had and no laughter heard.” He doesn’t think any company adopting such an approach could survive, much less thrive. Anyone working in such a company, he continues, “would be crazy to stay” and he counts himself among those likely departures.

The day after the Times’ article appeared, the front page of the paper carried a seemingly unrelated article, “Work Policies May Be Kinder, But Brutal Competition Isn’t.” It’s not about Amazon; it’s about the top ranks of the legal profession and the corporate world. Both are places where the Times’ version of Amazon’s culture is pervasive — and where such institutions survive and thrive.

The articles have two unstated but common themes: the impact of short-termism on working environments, and how a leader’s view of his company’s culture can diverge from the experience of those outside the leadership circle.

Short-termism: “Rank and Yank”

Bezos is hard-driving and demanding. According to the Times, his 1997 letter to shareholders boasted, “You can work long, hard or smart, but at Amazon.com you can’t choose two out of three.”

The Times reports that Amazon weeds out employees on an annual basis: “[T]eam members are ranked, and those at the bottom eliminated every year.” Jack Welch pioneered such a “rank and yank” system at General Electric long ago and many companies followed his lead. Likewise, big law firms built associate attrition into their business models.

Theoretically, a “rank and yank” system produces a higher quality workforce. But in recent years, a new generation of business thinkers has challenged that premise. Even GE has abandoned Welch’s brainchild.

As currently applied, the system makes no sense to Stanford Graduate School of Business professor Bob Sutton, who observed, “When you look at the evidence about stack ranking…. The kind of stuff that they were doing [at GE], which was essentially creating a bigger distribution between the haves and the have nots in their workforce, then firing 10% of them, it just amazed me.”

If Amazon uses that system, which focuses on annual short-term evaluations, it’s behind the times, not ahead of the curve.

Haves and Have Nots

Professor Sutton’s comment about creating a bigger gap between the haves and the have nots describes pervasive law firm trends as well. The trend could also explain why Bezos and the Times may both be correct in their contradictory assessments of Amazon’s culture. That’s because any negative cultural consequences of Bezos’ management style probably don’t seem real to him. Bezos is at the top; the view from below is a lot different.

This phenomenon of dramatically divergent perspectives certainly applies to most big law firms. As firms moved from lock-step to eat-what-you-kill partner compensation systems, the gap between those at the top and everyone else exploded. Often, the result has been a small group — a partnership within the partnership — that actually controls the institution.

Those leaders have figured out an easy way to maximize short-term partner profits for themselves: make the road to equity partner twice as difficult than it was for them. As big firm attorney-partner leverage ratios have doubled since 1985, today’s managers are pulling up the ladder on the next generation. It’s no surprise that those leaders view their firms favorably.

Their associates have a decidedly different impression of the work environment. Regular attrition began as a method of quality control. At many firms, it has morphed into something insidious. Leadership’s prime directive now is preserving partner profits, not securing the long-run health of the institution. Short-term leverage calculations — not the quality of a young attorney’s lawyering — govern the determination of whether there is “room” for potential new entrants.

About the Long-Run

Such short-term thinking weakens the institutions that pursue it. As Professor Sutton observes: “We looked at every peer reviewed study we could find, and in every one when there was a bigger difference between the pay at of the people at the bottom and the top there was worse performance.”

That’s understandable. After all, workers behave according to signals that leadership sends down the food chain. Dissent is not a cherished value. Resulting self-censorship means the king and the members of his court hear only what they want to hear. People inside the organization who want to advance become cheerleaders who suppress bad news. Being a team player is the ultimate compliment and the likeliest path to promotion.

One More Thing

Bezos’ letter to his employees about the Times article encourages anyone who knows of any stories “like those reported…to escalate to HR.” He says that he doesn’t recognize the Amazon in the article and “very much hopes you don’t, either.”

One former employee frames Bezos’ unstated conundrum correctly: “How do you possibly convey to your manager the intolerable nature of your working conditions when your manager is the one telling you, point blank, that the impossible hours are simply what’s expected?”

Note to Jeff B: Escalating to HR won’t eliminate embedded cultural attitudes.

Then again, maybe I’m wrong about all of this. On the same day the Times published its piece on the increasingly harsh law firm business model, the Wall Street Journal ran Harvard Law School Professor Mark J. Roe’s op-ed: “The Imaginary Problem of Corporate Short-Termism.”

It’s all imaginary. That should come as a relief to those working inside law firms and businesses that focus myopically on near-term results without regard to the toll it is taking on the young people who comprise our collective future.

2015: THE YEAR THAT THE LAW SCHOOL CRISIS ENDED (OR NOT) — CONCLUSION

My prior two installments in this series predicted that in 2015 many deans and law professors would declare the crisis in legal education over. In particular, two changes that have nothing to do with the actual demand for lawyers — one from the ABA and one from the Bureau of Labor Statistics — could fuel false optimism about the job environment for new law graduates.

Realistic projections about the future should start with a clear-eyed vision of the present. To assist in that endeavor, the Georgetown Law Center for the Study of the Legal Profession and Thomson Reuters Peer Monitor recently released their always useful annual “Report on the State of the Legal Market.”

The Importance of the Report

The Report does not reach every segment of the profession. For example, government lawyers, legal aid societies, in-house legal staffs, and sole practitioners are among several groups that the Georgetown/Peer Monitor survey does not include. But it samples a sufficiently broad range of firms to capture important overall trends. In particular, it compiles results from 149 law firms, including 51 from the Am Law 100, 46 from the Am Law 2nd 100, and 52 others. It includes Big Law, but it also includes a slice of not-so-big law.

The principal audience for the Georgetown/Peer Monitor Report is law firm leaders. The Report’s advice is sound and, to my regular readers, familiar. Rethink business models away from reliance on internally destructive short-term metrics (billable hours, fee growth, leverage). Focus on the client’s return on investment rather than the law firm’s. Don’t expect a reprise of equity partner profit increases that occurred from 2004 through 2007 (cumulative rate of 25.6 percent). Beware of disrupters threatening the market power that many firms have enjoyed over some legal services.

For years, law firm leaders have heard these and similar cautions. For years, most leaders have been ignoring them. For example, last year at this time, the Georgetown/Peer Monitor Report urged law firm leaders to shun a “growth for growth’s sake” strategy. Given the frenzy of big firm merger and lateral partner acquisition activity that dominated 2014, that message fell on deaf ears.

The Demand for Lawyers

The 2015 Report’s analysis of business demand for law firm services is relevant to any new law graduate seeking to enter that job market. Some law schools might prefer the magical thought that aggregate population studies (or dubious changes in BLS methodology projecting future lawyer employment) should assure all graduates from all law schools of a rewarding JD-required career. But that’s a big mistake for the schools and their students.

For legal jobs that are still the most difficult to obtain — employment in law firms — the news is sobering. While demand growth for the year ending in November 2014 was “a clear improvement over last year (when demand growth was negative), it does not represent a significant improvement in the overall pattern for the past five years.”

In other words, the economy has recovered, but the law firm job market remains challenging. “Indeed,” the Report continues, “since the collapse in demand in 2009 (when growth hit a negative 5.1 percent level), demand growth in the market has remained essentially flat to slightly negative.”

Past As Prologue?

The Report notes that business spending on legal services from 2004 to 2014 grew from about $159.4 billion to $168.7 billion — “a modest improvement over a ten-year period. But if expressed in inflation-adjusted dollars, the same spending fell from $159.4 to $118.3 billion, a precipitous drop of 25.8 percent.”

What does that mean for future law graduates? The Report resists taking sides in the ongoing debate over whether the demand for law firm services generally will rebound to anything approaching pre-recession levels. It doesn’t have to because, the Report concludes, “it is increasingly clear that the buying habits of business clients have shifted in a couple of significant ways that have adversely impacted the demand for law firm services.”

One of the two shifts that the Report identifies doesn’t necessarily mean less employment for lawyers generally. Specifically, companies are moving work from outside counsel to in-house legal staffs. That should not produce a net reduction in lawyer jobs, unless in-house lawyers become more productive than their outside law firm counterparts.

The second trend is bad news for law graduates: “[T]here has also been a clear — though still somewhat modest — shift of work by business clients to non-law firm vendors.” In 2012, non-law firm vendors accounted for 3.9 percent of legal department budgets; it grew to 7.1 percent in 2014.

Beware of Optimistic Projections

The Georgetown/Peer Monitor Report is a reminder that the recent past can provide important clues about what lies ahead. For lawyers seeking to work in firms serving corporate clients, it sure doesn’t look like a lawyer shortage is imminent.

So what will be the real-life source of added demand sufficient to create market equilibrium, much less a true lawyer shortage? Anyone predicting such a surge has an obligation to answer that question. As the Report suggests, general claims about population growth or the “ebb and flow” of the business cycle won’t cut it. Along with the rest of the economy, the profession has suffered through the 2008-2009 “ebb.” The economy has returned to “flow” — but the overall demand for lawyers hasn’t.

Here are two more suggestions for those predicting a big upswing from recent trends in the demand for attorneys. Limit yourselves to the segment of the population that can actually afford to hire a lawyer and is likely to do so. Then take a close look at individual law school employment results to identify the graduates whom clients actually want to hire.

THE BINGHAM CASE STUDY: PART II

Starting with the introduction, Harvard Law Professor Ashish Nanda’s case study on Bingham McCutchen depicts Jay Zimmerman as the architect of the firm’s evolution “from a ‘middle-of-the-road-downtown-pack’ Boston law firm in the early 1990s to a preeminent international law firm by 2010”:

“Zimmerman was elected chairman in 1994. Over the next 15 years, he shepherded the firm through 10 mergers, or ‘combinations’ in the Bingham lexicon, the establishment of 11 new offices, and a ten-fold increase in the firm’s revenues to $800 million… Given its impressive expansion, [journalist Jeffrey] Klineman said, ‘Bingham McCutchen has shown it could probably open an office on the moon.'” (p. 1)

Harvard published the study in September 2011.

Another Case Study

Ten months later, Nanda released another case study, “The Demise of Howrey” — a firm that was dying as he considered Bingham. Interestingly, several footnotes in the Howrey study refer to articles explaining how aggressive inorganic growth compromised that firm’s cohesiveness and hastened its collapse. (E.g., “Howrey’s Lessons” by me, ““Why Howrey Law Firm Could Not Hold It Together”, by the Washington Post’s Steven Pearlstein, and “The Fall of Howrey,” by the American Lawyer’s Julie Triedman) But Nanda’s 15-page narrative of Howrey barely mentions that topic.

Instead, he invites consideration of “the alternative paths Howrey, and managing partner Robert Ruyak, might have taken to avoid dissolution of the firm” after that growth had occurred. The abstract concludes with these suggested discussion points:

“What could Howrey have done differently as clients demanded contingency payment plans and deep discounts? Should Ruyak have been more transparent about the financial difficulties the firm faced? Should he have consulted with a group of senior partners instead of relying on the counsel of outside consultants? Is a litigation-focused firm at a disadvantage when it comes to leadership, as compared to a corporate practice? Participants will reflect on the leadership structure of Howrey while discussing issues related to crisis management.”

With all due respect, those inquiries don’t reach a key lesson of Howrey’s (and now Bingham’s) collapse. The following sentence in the study does, but it goes unexplored:

“Howrey continued to add laterals over the concerns of some partners that increased lateral expansion might detract from the firm’s strategic focus and weaken its cultural glue.” (p. 6)

The Metrics Trap

Nanda’s case studies report that at Howrey. as at Bingham, a few key metrics suggested short-term success: revenues soared, equity partner profits increased, and Am Law rankings went up. But beneath those superficially appealing trends was a long-term danger that such metrics didn’t capture: institutional instability. When Howrey’s projected average partner profits dipped to $850,000 in 2009, many ran for the exits and the death spiral accelerated.

Likewise, Bingham’s record high equity partner profits in 2012 of $1.7 million dropped by 13 percent — far less than Howrey’s 2009 decline of 35 percent — to $1.5 million in 2013. But a steady stream of partner departures led to destabilization and a speedy end.

Balancing the Presentation

According to the final sentence of the Bingham case study abstract, “The case allows participants to explore the positives and negatives of following a strategy of inorganic growth in professional service firms….”

The negatives now dwarf the positives. No one should fault Nanda for failing to predict Bingham’s collapse two years later. The most spectacular law firm failures have come as surprises, even to many insiders at such firms. But the Bingham study emphasizes how Zimmerman conquered the challenges of an aggressive growth strategy, with little consideration to whether the overall strategy itself was wise over the long run.

For example:

— The study notes that after Bingham’s 2002 merger with 300-attorney McCutchen Doyle, “Cultural differences…loomed over the combined organization….” But the study goes on to observe, “[T]hese issues did not slow the firm’s growth on the West Coast.” (p. 11) By 2006, “Bingham had achieved remarkable success and unprecedented growth.” (p. 14)

— The study reports that the firm’s American Lawyer associate satisfaction ranking improved from 107 in 2007 to 79 in 2008, which Bingham’s chief human resources officer attributed to “an appreciation for the leadership of the firm. People have confidence in Jay’s competence.” (p. 17). The study doesn’t mention that the firm’s associate satisfaction ranking dropped to 100 in 2009 and to 106 (out of 137) in 2010. (American Lawyer, Sept. 2010, p. 78)

— “Our management committee has people from all over,” the study quotes Zimmerman. “You don’t have to have been at Bingham Dana forever to lead at the firm.” (p. 15) But the study doesn’t consider how too many laterals parachuting into the top of a firm can produce a concentration of power and a problematic distribution of partner compensation. When Bingham began to unravel, the spread between its highest and lowest paid partners was 12:1.

— Bingham’s final acquisition — McKee Nelson — was the largest law firm combination of 2009. The study doesn’t discuss the destructive impact of accompanying multi-year compensation guarantees that put some McKee Nelson partners at the very top of the Bingham McCutchen pay scale. To be fair, Nanda probably didn’t know about the guarantees, but the omission reveals the limitations of his investigation. The guarantees came to light publicly when the American Lawyer spoke recently with former partners who said that “the size and scope of the McKee Nelson guarantees led to internal fissures…that caused at least some partners to leave the firm.”

No Regrets

Looking to the future, Zimmerman told the Harvard researchers, “[W]e’re competing with the best every day. We know we are among the best.” (p. 19)

I wonder if he would now offer the same self-assessment of his leadership that Robert Ruyak provided to the American Lawyer at the time of Howrey’s bankruptcy, namely, “I don’t have any regrets.” Nanda’s case study on Howrey’s demise concludes with “Ruyak’s Reflections.” The “no regrets” line could lead to interesting classroom discussions about accepting responsibility, but it doesn’t appear in the Howrey study. Ruyak’s explanations for the firm’s failure do.

One explanation that receives no serious attention in the case study is Ruyak’s observation that the partnership lacked patience and loyalty to the firm: “The longer-term Howrey people realized that our profitability jumped around a bit,” he said. “The people who were laterals, maybe, did not.” (p. 15)

Perhaps the potential for institutional instability that can accompany aggressive inorganic law firm growth receives greater emphasis in classroom discussions of Howrey and Bingham than it does in Nanda’s written materials. In that respect, both firms are case studies in management failure that is regrettably pervasive: a wrongheaded vision of success and a reliance on misguided metrics by which to measure it.

THE BINGHAM CASE STUDY — PART I

“For the first time since I’ve been in this job, we have all the pieces we need to do our job.”

That was former Bingham McCutchen chairman Jay Zimmerman’s penultimate line in the September 2011 Harvard Law School Case Study of his firm.

Oops.

Harvard Law School Professor Ashish Nanda and a research fellow developed the study for classroom use. According to the abstract, it’s a textbook example of successful management. It demonstrates how a firm could evolve “from a ‘middle-of-the-downtown pack’ Boston law firm in the early 1990s to a preeminent international law firm by 2010.”

Oops, again.

Familiar Plaudits

At the time of Nanda’s study, the profession had already witnessed a string of recent big firm failures. He should have taken a closer look at them. In fact, only seven months before publication of the Harvard Study, Howrey LLP was in the highly publicized death throes of what was a preview Bingham’s unfortunate fate.

Bingham’s Zimmerman and Howrey’s last chairman, Robert Ruyak, had several things in common, including accolades for their leadership. Just as Nanda highlighted Zimmerman’s tenure in his study, two years before Howrey’s collapse, Legal Times honored Ruyak as one of the profession’s Visionaries. Along similar lines, less than a month after publication of the Harvard study, Dewey & LeBeouf’s unraveling began as partners learned in October 2011 that the firm was not meeting its revenue projections for the year. But Dewey chairman Steven Davis continued to receive leadership awards.

Perhaps such public acclaim for a senior partner is the big firm equivalent of the Sports Illustrated curse. Being on the cover of that magazine seems to assure disaster down the road. (According to one analyst, the SI curse isn’t the worst in sports history. That distinction belongs to the Chicago Cubs and the Billy Goat hex. But hey, anyone can have a bad century.)

Underlying Behavior

The Lawyer Bubble investigates Howrey, Dewey, and other recent failures of large law firms. The purpose is not to identify what distinguishes them from each other, but to expose common themes that contributed to their demise. With the next printing of the book, I’m going to add an afterword that includes Bingham.

If Nanda had considered those larger themes, he might have viewed Bingham’s evolution much differently from the conclusions set forth in his study. He certainly would have backed away from what he thought was the key development proving Bingham’s success, namely, aggressive growth through law firm mergers and lateral hiring. He might even have considered that such a strategy could contribute to Bingham’s subsequent failure — which it did.

To find those recent precedents, he need not have looked very far. Similar trends undermined Howrey, Dewey, and others dating back to Finley Kumble in 1988. As a profession, we don’t seem to learn much from our mistakes.

The MBA Mentality Strikes Again

What caused Professor Nanda to line up with those who had missed the fault lines that had undone similar firms embracing the “bigger is always better” approach? One answer could be that he’s not a lawyer.

Nanda has a Ph.D in economics from Harvard Business School, where he taught for 13 years before becoming a professor of practice, faculty director of executive education, and research director at the program on the legal profession at Harvard Law School. Before getting his doctorate, he spent five years at the Tata group of companies as an administrative services officer. He co-authored a case book on “Professional Services” and advises law firms and corporate inside counsel.

It’s obvious that Nanda is intelligent. But it seems equally clear that his business orientation focused him on the enticing short-term metrics that have become ubiquitous measures of success. They can also be traps for the unwary.

In Part II of this series, I’ll review some of those traps. Nanda fell into them. As a consequence, he missed clues that should have led him to pause before joining the Bingham cheerleading squad.

Meanwhile, through December 6, Amazon is offering a special deal on my novel, The Partnership: It’s FREE as an ebook download. I’m currently negotiating a sale of the film rights to the book.