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 AGE-OLD PROBLEM OF AGE

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.

AGING GRACEFULLY — OR NOT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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?

A BETTER ALTERNATIVE OR A LEAP FROM THE FRYING PAN?

Thirty years ago, New York was a scary place for me — mostly because I’d never been there. Midwestern curiousity led me to interview with Cravath, Swaine & Moore’s on-campus representative.

I’d heard that its road to success was the toughest. Rumors circulated that it hired twenty new attorneys for every one or two it might promote to equity partner eight or more years later. Not surprisingly, most of my fellow Harvard students regarded Cravath as the quintessential competitive sweatshop — a characteristic that many of my peers actually found attractive.

Not me. I went elsewhere because, in those good old days, there was an elsewhere to go. Cravath is probably not much different from what it was back then. It’s just that most of the biglaw world has followed its example. As other top-50 firms tightened equity partner admission requirements, Cravath just kept doing what it had always done.

Why did firms emulate Cravath? Law student lore made it the best by some undisclosed criteria. In retrospect, I think money had a role. Even back in 1980, it was one of a very few firms where advancement to equity partner meant wealth that was immense, at least for a lawyer.

According to the first ever listing of the Am Law 50 in 1985, Cravath ranked 2nd in profits per partner with $635,000. For those behind it, the descent was steep: the #10 firm was under $400,000; #30 was $255,000; #50 was $170,000.

Cravath blazed a trail to riches that now accompany those who reach biglaw’s summit: average equity partner profits for the entire Am Law 100 exceeded $1.26 million last year.

But Cravath remains different. Most of biglaw moved to two-tier partnerships and eat-what-you-kill systems where a few key metrics — billings, billable hours, and leverage ratios — now determine individual equity partner compensation.  Cravath’s single-tier model has reportedly remained lock-step: admission to its partnership means fixed financial rewards over an entire career without regard to individual books of business.

I don’t know if Cravath’s lawyers as a group are any happier than attorneys in other big firms. But the firm is now courting its Generation X’ers. According to the Wall Street Journalpartners in their late-30s and early-40s have “taken a more pro-active approach, building new relationships and handling much of the work that historically would have been taken on by partners in their 50s.” (WSJ, May 28, 2010, C3)

Referring to Cravath’s deferential culture in which young partners traditionally forwarded big deals to older colleagues, the article notes that senior partners have nurtured the new environment that gives younger lawyers earlier name recognition.

Why has it worked so far?

“The older attorneys didn’t mind, partly because the pay they received didn’t get cut as a result,” the Journal observes.

In other words, lock-step allows elders to step out of the spotlight without hits to their pocketbooks.

In the current biglaw world, Cravath’s experiment is risky. Will young partners remain loyal or use their newly gained client power to pursue financial self-interest elsewhere? Will Cravath be forced to modify or abandon lock-step so that it can retain young partners controlling clients and billings?

I don’t know. Equally significant, I suspect those most directly affected by what the article characterizes as a “sea change at one of the best-known and most conservative of white-shoe law firms” don’t know, either.

And what does it mean for new associates trying to understand how this affects the firm’s culture and their own career prospects?

Ah, the things I didn’t think to consider when I was a second-year law student looking for a job about which I knew almost nothing.

Fortunately, students are wiser now, right?

PUZZLE PIECES – Part 12

[Concluding the imaginary cross-examination of a real senior partner profiled in the April 2010 issue of ABA Journal (http://www.abajournal.com/magazine/article/not_done_yet) — and connecting the final dots to the ongoing associate compensation squeeze-plays…]

Q: “Adversity tests leadership, doesn’t it?”

Partner: “I agree.”

Q: “And 2009 was a tough year, wasn’t it?”

Partner: “It was a difficult time for many people.”

Q: “For many people — but not for your firm’s equity partners, right?”

Partner: “Wrong. Our revenues were down and the decisions we made to let people go were agonizing.”

Q: “But not so agonizing that they slowed your mission to keep billable hours up and average equity partner profits at $2 million a year, correct?”

Partner: “Some things can’t be measured in dollars.”

Q: “True. But Am Law reported recently that your firm’s 2009 average equity partner profits were just under $2 million, right?”

Partner: “That’s the report.”

Q: “If we return to your earlier comments about free market capitalism, who has borne the owner’s risk to your firm in the current economic downturn, Dechert’s equity partners who on average saw their incomes drop from $2.35 to $2 million a year, or the salaried workers — associates, non-equity partners, and staff — who lost their jobs in 2009?”

Partner: “We shared the pain. But we’re no different from other large, successful law firms. Someone running another big firm made the point three years ago: We have to keep our stock price high.” http://www.mlaglobal.com/articles/JCashmanMayerBrownCutsTrib.pdf; http://blogs.wsj.com/law/2007/03/02/more-on-the-mayer-brown-departures/tab/article/

Q: “When you say other large, successful firms, are you referring to the ones that, according to a NY Times April 1 article  (http://dealbook.blogs.nytimes.com/2010/04/01/at-law-firms-reconsidering-the-model-for-associates-pay/), are now developing ways to cut associate salaries?”

Partner: “I can’t speak to what other firms are doing.”

Q: “That article wasn’t an April Fool’s Day joke, was it? Underlying all of those efforts is the mission to preserve equity partners’ seven-figure incomes, isn’t it?”

Partner: “If you say so.”

Q: “And now many people like you — aging senior partners who’ve become accustomed to making millions — don’t know what to do next with your lives, do you?”

Partner: “Speaking for myself, time has crept up on me.”

Q: “You were so focused on pulling up the ladder as a way to protect what you had that you forgot to plan your own exit strategy, didn’t you?”

Partner: No answer.

Q: “Justice can be ironic, can’t it? You don’t have to answer that. No further questions at this time.”

PUZZLE PIECES – Part 11

[The imaginary cross-examination of a real biglaw senior partner continues…]

Q: “By the way, when Am Law reports a firm’s average equity partner profits, that doesn’t tell us anything about the range, does it?”

Partner: “An average is an average. A range is a range.”

Q: “In some big firms, the range can be pretty substantial, can’t it?”

Partner: “Sure.”

Q: “In fact, at the top of elite firms like yours, the equity partners typically earn several million dollars a year more than the average, right?”

Partner: “We don’t comment on such matters.”

Q: “The point is, when you say ‘everything is relative,’ that’s true even within the equity partnership, right?”

Partner: “What’s your point?”

Q: “Even among the select group of winners who make it into the equity partnership, the even fewer who go on to become firm leaders — as you did — are the real success stories, aren’t they?”

Partner: “That’s the American way, isn’t it? A successful business depends on leaders and the market rewards us accordingly. In that sense, we all become products of the decisions we make.”