A STORIED LATERAL HIRE

“Are Laterals Killing Your Firm?” is the provocative title of The American Lawyer‘s February issue. The centerpiece is a thoughtful article, “Of Partners and Peacocks,” by Bill Henderson, professor at Indiana University Maurer School of Law and Director of the Center on the Global Legal Profession, and Christopher Zorn, professor of political science, sociology, crime, law, and justice at Penn State University.

Henderson and Zorn conclude that “for most law firms there is no statistically significant relationship between more lateral partner hiring and higher profits.” As I observed in last week’s post, most big law managing partners have conceded as much in anonymous surveys. Even so, the drumbeat of lateral hiring to achieve top line revenue growth persists, even in the face of dubious bottom line results.

A timely topic

One lateral hire outcome became particularly fascinating this week. On the way out of the top spot at DLA Piper is global co-chair Tony Angel. You might remember him from one of my earlier articles, “The Ultimate Lateral Hire.”

The American Lawyer 2012 Lateral Report identified Angel as one of the top lateral hires of the year — “a typically bold and iconoclastic play by DLA. For a firm to bring in a former managing partner from another firm is rare,” Am Law Daily reporter Chris Johnson wrote in March 2012. According to the article, the 59-year-old Angel was to receive $3 million a year for a three-year term.

With great fanfare, DLA touted its coup. “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,” boasted then co-chair Frank Burch.

At the time, DLA’s press release was equally effusive: “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.”

Predictably, law firm management consultants also praised the move:  “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,” said Peter Zeughauser. Legal headhunter Jack Zaremski called it a “brave move” that “might very well pay off.”

On second thought…

The current publicity surrounding Angel’s transition is decidedly more subdued. According to a recent Am Law article, Angel and his fellow outgoing global co-chair, Lee Miller, “will remain with the firm in a senior advisory capacity, the details of which will be worked out later this year.”

Two years, plus another 10 months as a lame duck, is a remarkably short period to occupy the top spot of any big firm. Only those who work at DLA Piper can say whether Angel’s brief reign was a success (and why it’s over so soon). Not all of them are likely to provide the same answer.

Separating winners from losers

In 2008, more than three years before Angel’s arrival, the firm’s non-equity partners found themselves on the receiving end of requests for capital contributions. According to Legal Week, “275 partners contributed up to $150,000 each to join the equity.” The move was “intended to motivate partners by granting them a direct share of the firm’s profits, as well as an equal vote in the firm’s decisions.” But it also helped “DLA reduce its bank debt.”

That equitization trend continued during Angel’s tenure. In 2012, the firm’s non-U.S. business reportedly added capital totaling 30 million pounds Sterling “as a result of the move to an all-equity partnership structure.” Again according to Legal Week, the firm’s non-equity partners in the UK, Europe, and Asia Pacific paid on average 61,000 pounds Sterling each to join the equity.”

Perhaps most new equity partners discovered that their mandatory bets became winners. After all, gross profits and average profits for the DLA Piper verein went up in 2012. Then again, averages don’t mean much when the distribution is skewed. According to a Wall Street Journal article three years ago, the internal top-to-bottom spread within DLA Piper was already nine-to-one.

Anyone looking beyond short-term dollars and willing to consider things that matter in the long run could consult associate satisfaction rankings for cultural clues. In the 2013 Am Law Survey of Midlevel Associate Satisfaction, DLA Piper dropped from #53 to #77 (out of 134 firms). That’s still above the firm’s #99 ranking in 2011.

The more things change

Management changes are always about the future. It’s not clear how, if at all, incoming co-chair Roger Meltzer’s vision for DLA Piper diverges from Angel’s. Age differences certainly don’t explain the transition; both men are around 60. Likewise, both have business orientations. Meltzer practices corporate and securities law; Angel joined DLA Piper after serving as executive managing director of Standard & Poor’s in London.

Maybe it’s irrelevant, but Meltzer and Angel also have this in common: Both are high-powered lateral hires. Angel parachuted in from Standard & Poor’s in 2011; Meltzer left Cahill, Gordon & Reindel to join DLA Piper in 2007. It makes you wonder where these guys and DLA Piper will be a few years from now.

BAD NUMBERS REVEALING WORSE TRENDS

By now, everyone interested in the job prospects for new lawyers has seen two recent headline items:

— Nine months after graduation, only 55 percent of the class of 2011 had full-time, long-term jobs requiring a legal degree, and

— The median starting salary for all employed attorneys in the class of 2011 has dropped to $60,000 — from $72,000 only two years earlier.

The New York City Bar Association just formed a task force to wring its hands over the lawyer oversupply crisis — as if it were something new. A closer analysis of the salary data reveals several underlying realities that are even worse than that declining number suggests.

Digging deeper

For example, NALP’s press release about the median salary number came with this concluding sentence: “Salary information was reported for 65% of graduates reported to be working full-time in a position lasting at least one year.” If that means 35 percent of such workers with full-time jobs didn’t report their salary information, then the published median probably overstates the actual number — perhaps by a lot.

more detailed breakdown reveals that for the class of 2011, the $40,000 to $65,000 category accounted for 52 percent of all reported salaries. Compare that to the class of 2009: Two years ago, starting salaries of between $40,000 and $65,000 accounted for 42 percent of reported salaries. Today, more new lawyers are working for less money, but they’re still the lucky ones — law graduates who got full-time jobs.

The trend in law firm starting salaries is more dramatic: The median starting salary for law firms of all sizes dropped from $130,000 in 2009 to $85,000 in 2011.

Whither big law?

Two more bits of information offer some insight into what’s happening in the biggest law firms:

Only eight percent of 2011 graduates landed jobs in big firms of more than 250 attorneys.

— Entry level jobs that paid $160,000 a year accounted for only 16 percent of reported salaries in 2011. Even for the class of 2009 — graduating into the teeth of the Great Recession and widespread big firm layoffs — the $160,000 category accounted for 25 percent of reported salaries. And the 2009 denominator was bigger: 19,513 reported salaries v. 18,630 salaries in 2011. Importantly, the decline hasn’t resulted because big law firms have reduced their starting salaries; most haven’t.

Rather, as NALP’s Executive Director James Leipold explains, “[T]he downward shift in salaries is not, for the most part, the result of individual legal employers paying new graduates less than they paid them in the past. Although some firms have lowered their starting salaries, and we are starting to see a measurable impact from lower-paying non-partnership track lawyer jobs at large law firms, aggregate starting salaries have fallen over the last two years because graduates found fewer jobs with the highest-paying large law firms and many more jobs with lower-paying small law firms.”

Big law firms’ self-inflicted wounds

Surely, things are better than they were during the cataclysmic days of early 2009; equity partner profits have returned to pre-2008 peaks. So what’s happening? One answer is that large firms are increasing the ranks of non-equity partners. According to The American Lawyerthe number of non-equity partners grew by almost six percent in 2011. They now comprise fifteen percent of all attorneys in Am Law 100 firms.

As The American Lawyer’s editor in chief Robin Sparkman explains, “Some firms deequitized partners and pushed them into this holding pen. Other firms expanded the practice of moving potential equity partners (either homegrown or laterals) into this category — both to keep their PPP high and to give the lawyers a little breathing room before they face the rainmaking pressures of equity partnership.” I’d add one more category: some firms have increased the ranks of permanent non-equity partners.

Perilous short-termism

Edwin Reeser and Patrick McKenna have described how non-equity partners are profit centers. Keeping them around longer makes more money for equity partners, but creating that non-equity partner bubble comes at significant institutional costs. One is blockage.

For any firm, there’s only so much work to go around. Ultimately, the burgeoning ranks of non-equity partners has an adverse trickle down impact on those seeking to enter the big firm pipeline. Whether new graduates should have that aspiration is a different question, but the larger implications for the affected firms are clear: There’s less room for today’s brightest young law graduates.

Some leaders have decided that maximizing current equity partner profits is more important than securing, training and developing a future generation of talent for their law firms. Sooner than they realize, their firms will suffer the tragic consequences of that mistake.

THE NON-EQUITY PARTNER BUBBLE

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.

ABOUT THOSE BIGLAW ASSOCIATE SATISFACTION SURVEYS….

The 2010 American Lawyer survey reports the lowest overall level of associate satisfaction since 2004.

The firms faring poorly will take comfort in standard disclaimers: response rates are low and negatively biased; survey questions are flawed; the poll captures attitudes from a generation of young attorneys who feel entitled. We all know the list. Lawyers specialize in explaining away bad facts and sometimes the critique is valid.

But before lower-ranked firms throw these results into a sea of self-serving rationalizations, they should consider the criteria by which others did quite well: relations with partners and other associates, interest in and satisfaction level of the work, training and guidance, policy on billable hours, management openness about firm strategies and partnership chances, the firm’s attitude toward pro bono work, compensation and benefits, and the respondents’ inclination to stay at their firms for at least two more years.

Now correlate each factor to the metrics that dominate today’s Biglaw business models — billings, billable hours, and associate/partner leverage ratios, all of which produce equity partner profits. For too many, the relationship is inverse. The absence of a metric by which firms hold partners accountable for associate satisfaction means that it gets ignored.

What’s the solution? Pay them more money? They won’t object, but according to a recent survey published in the Proceedings of the National Academy of Sciences, additional income beyond $75,000 a year doesn’t increase happiness. (http://www.pnas.org/content/early/2010/08/27/1011492107.full.pdf+html?sid=61f259ad-92a2-470f-b218-23537d8e2972)

How about just telling them to suck it up and push through to a better day? Doesn’t time cure all ills? Another NAS study suggests that our sense of global well-being is U-shaped. We start at a high point around age 18, move down until 50, and take a major upward turn until 85. (http://www.pnas.org/content/107/22/9985.abstract?sid=61f259ad-92a2-470f-b218-23537d8e2972) This comes from a 2008 telephone survey asking 340,000 people how they felt on the day the researchers called them. No attempt was made to control for health, employment, marital status, or anything else. It’s just a cross-sectional slice of the population at a moment in time. In short, draw conclusions at your peril.

Still, it’s interesting to compare these results with recent evidence about the happiness life-cycle of many Biglaw attorneys.

There no need for melodrama or hyperbole. Many lawyers of all ages have fulfilling careers and lead satisfying lives. Generalizations are always treacherous. Within and among firms, there are always exceptions to whatever is typical or predominant.

But the big picture can be informative. In the ABA’s 2007 survey of the profession, about 60% of attorneys in practice fewer than 5 years said they would recommend a legal career to a young person. That’s not exactly a ringing endorsement; however, it’s better than more senior attorneys’ views. For those practicing more than 10 years, it dropped to 40%.

Of course, “more than 10 years” covers lawyers from 35 to 90. So it’s difficult to know if the data support a U-shaped theory. They lend some credence to the notion that there’s a steep slide for people in their 20s, 30s, and 40s. But is there an uptick when attorneys hit the mid-century mark? That’s not clear — and it seems like a long wait.

It’s not all bad news. In the ABA survey, 84% found the practice of law to be intellectually stimulating. When I’ve invited lawyers of different ages and stages of their careers to make guest appearances in my undergraduate course on the profession, Biglaw attorneys spoke enthusiastically about tackling cutting-edge legal problems. Then they heard this question:

“What has been your happiest time as a lawyer?”

Here are some answers:

A 20-something senior associate: “Certainly not now. My life is not my own. I’m billing long hours in the hope of becoming a partner. Then I’ll gain more autonomy and control.”

A 30-something non-equity partner: “Life was easier when I was an associate. But I work hard now because I think things will get better if I make equity partner. Of course, that’s a big ‘if”.”

A 40-something equity partner: “I never realized how good I had it as an associate. Now I feel pressure to bring in clients so I can justify my equity compensation; that process never ends. You think that becoming an equity partner means you’ve crossed some finish line, but that’s when the race really begins.”

A 50-something equity partner: “I don’t know what I’ll do when I’m not a partner in my firm anymore. I haven’t had time to think about what’s next for me. Now, when I consider that prospect, the future becomes a source of anxiety.”

I don’t know to what extent these attorneys’ comments represent their respective demographic groups in Biglaw or elsewhere. But it’s no surprise to me that surveys consistently find practicing lawyers to be among the least satisfied workers and that attorneys in large firms today have the most difficulty finding the upward leg of the U-shaped happiness curve, assuming it’s out there.

The Biglaw business model has provided some of its attorneys with a lot more money than their predecessors. Career satisfaction that contributes to overall happiness?

That’s more complicated.

BABY BOOMERS STRIKE AGAIN

Getting old is tough. But not nearly as tough as being young these days.

Recently, the National Law Journal reported that an Am Law  top 20 firm adopted a new policy allowing partners two addtional years before they must “begin giving business to younger colleagues.” Instead of 65, they’ll now have to start that process at 67. (http://www.law.com/jsp/article.jsp?id=1202458271311)

Meanwhile, a prominent 63-year-old white-collar defense attorney left his big firm of 16 years to avoid its mandatory retirement age (65). He declined his old firm’s offer of a two-year exemption that would have given him until 67. (http://legaltimes.typepad.com/blt/2010/05/mark-tuohey-leaves-vinson-elkins-for-brown-rudnick-cites-retirement-policy.html)

And the June ABA Journal includes the following admonition from the organization’s president:

“In August 2007, the ABA adopted a policy rejecting mandatory age-based retirement policies. The recommendation urging this advance is worth considering and adoption by all legal employers.”

Yes, she’s a 60-something baby boomer in a big firm, too.

What’s going on? Forget lip-service paid to the old age-discrimination argument against forced departure of equity partners. That sword of Damocles has floated over the profession forever, yet somehow current big firm leaders replaced their predecessors.

So why the big outcry now? The current chorus reflects an unintended consequence of a flawed biglaw business model: resistance to intergenerational transition. But extending check-out time is a bad move for the firm that does it, the younger attorneys working there, and aging baby boomers unwilling to contemplate life after the law.

Aging rainmakers have books of business that make them indispensable to many large  firms. Why? Throughout biglaw, simplistic metrics (billings, billable hours, and leverage) have determined individual partners’ annual compensation with an eye toward maximizing short-term average profits-per-partner that appear in Am Law‘s annual rankings.

It’s become bad long-term news for the firm. In such a culture, partners have every incentive to retain client responsibilities and none to mentor proteges or promote intergenerational transition. As they age, the old-timers hoard their marbles and threaten to take them elsewhere. Does that sound like a prescription for long-term institutional stability?

What about younger lawyers hoping to inherit clients? Many will find themselves in the position of the wealthy parents’ child awaiting a large bequest. By the time it comes, the kid will be in his 50s. Meanwhile, blockage wreaks havoc all the way down the food chain.

How about the aging attorneys themselves? Encouraging them to deny their own mortality isn’t helpful. Sorry, but once you’re over 65, you may be young at heart, but to the rest of the world, your colorists and/or your combovers aren’t persuasive.

Here’s the painful truth: we baby boomers are not that special. Think you’re indispensable? Put your hand in a pail of water, pull it out, and look at the size of the hole you leave. That’s how indispensable you are. Do you remember any of your own mentors fondly? Well, someday that’s what you’ll be to others — if you truly succeed in the ways that matter most.

Those who have followed this blog from the beginning know that its first series of posts, “PUZZLE PIECES — Parts 1 through 12” (now archived in “CONNECTING THE DOTS”), dramatizes the problem of aging partners who hang on too long.  (https://thebellyofthebeast.wordpress.com/category/connecting-the-dots/) Special ciriticism goes to those who have also inculcated their firms with a business school mentality of misguided metrics. Such baby boomers are now positioning themselves to extract one  final pound of flesh on the way to dotage.

Are these aging leaders who retain literal death grips on their billings positive role models for successors? If the firms themselves don’t survive them, it won’t matter, will it?

“SEND THE ELEVATOR BACK DOWN…”

Kevin Spacey regards late actor Jack Lemmon as a key influence in his life. He often quotes Lemmon’s famous remark:

“If you’re lucky enough to have done well, then it’s your responsibility to send the elevator back down.”

I thought about those comments as I read this year’s Am Law 100 listings and then took another look at last year’s. Rather than sending the elevator back down, most biglaw leaders seem to be pulling the ladder up.

A year ago, the editors of American Lawyer observed that since 1999, the number of non-equity partners in Am Law 100 firms increased threefold. But  the equity ranks rose by only one-third. For context, that was a decade when demand for all legal services surged and large firms in particular experienced explosive growth in revenues, headcount, and profitability.

In other words, there was more room everywhere — except at the top, apparently.

The May 2010 issue of American Lawyer noted that as gross revenues for the Am Law 100 fell, average equity partner profits for the group actually increased to over $1.26 million. How did that happen?

Answer: A multi-pronged attack.

First, firms increased productivity — which is another way of saying that some associates lost their jobs so the survivors could bill more hours. Remember Black Thursday in mid-February 2009 — a second St. Valentine’s Day massacre?

Second, they reduced staff, slashed summer programs, deferred or withdrew previous offers to new hires, and cut other expenses.

Finally and less publicly, some firms quietly moved equity partners to income status while putting the brakes on new entrants to the equity ranks. As a result, the number of non-equity partners rose again in 2009. That bulge in the biglaw python now comprises almost 40% of all Am Law 100 law firm partners.

Where will they go?

Maybe someday the biglaw benefactors bankrolling the National Association for Law Placement (NALP) will allow that organization systematically to gather tracking data that will tell us, just as it does for associates. You might think that all of the free market proselytizers in large firms would embrace more transparency on a topic of such central importance to law students trying to make career decisions.

Think again. NALP tried, but the organization ceased collection efforts in December 2009 because firms balked at providing it. In April, a prominent group of judges, professors, and attorneys wrote a letter criticizing NALP’s capitulation. In response, its executive director offered assurances that the board would consider the issue on April 26.

Now what?

SECOND AND THIRD THOUGHTS?

Business school deans searching for professional models that will restore ethical legitimacy to MBA programs and principles aren’t the only ones second-guessing their earlier impacts.

At last week’s annual meeting of the Seventh Circuit Bar Association, Hildebrandt Baker Robbins participated in a panel discussion as a representative of the cottage industry it spawned: law firm management consulting. A 2010 Client Advisory on the legal profession’s immediate past and predicted future included this line:

“In our view, one of the serious misues of metrics in the past few years has been the overreliance on profits per equity partner as the defining index of a firm’s value and quality.”

Great. Now you tell us. Or I should say, now you change your mind. Or do you?

As the 1990-1991 recession decimated a much smaller version of what is now called biglaw, the National Law Journal’s annual survey of the largest 250 firms in 1991 quoted Bradford Hildebrandt, who in 1975 founded the company bearing his name:

“In most firms, current management has never operated within a recession and didn’t know how to deal with it…”

So who could save us from ourselves? Hildebrandt Inc. became one of the leading players in bringing business school principles and MBA-type metrics into law firm management.

By 1996, Mr. Hildebrandt himself had analyzed our situation and offered this assessment in that year’s NLJ 250 issue:

“The real problem of the 1980s was the lax admissions standards of associates of all firms to partnership. The way to fix that now is to make it harder to become a partner. The associate track is longer and more difficult, and you have a very big movement to two-tiered structured partnership.”

Did most big firms heed his advice? And how. It was an easy sale based on the promise of higher equity partner profits. That was the definitive metric, wasn’t it?

Now Hildebrandt offers a new metric to replace profits per equity partner as the key measure of overall firm performance: profit per employee.

What’s the new goal?

“Greater efficiency in the delivery of legal services,” the Advisory asserts.

Does the new guiding metric embody a more extreme version of an approach that has dominated most big firms for the past 20 years? Perhaps. But some proposals for individual partner evaluation hint at the need for a mid-course correction. Instead of billable hours, Hildebrandt suggests client satisfaction ratings. Rather than leverage, employee satisfaction ratings would matter.

Confused? Hildebrandt knows just the consulting firm to help implement these complex and seemingly contradictory metrics:

“As always, we stand ready to assist our clients in negotiating through these new and uncertain waters.”

Thanks so much for all of your help.