Tag Archives: Thomas Clay

BIG LAW LEADERS “GET IT”? SERIOUSLY?

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This article won the “Big Law Pick of the Week.” BigLaw‘s weekly newsletter reaches the world’s largest law firms and the corporate counsel who hire them.

The concluding lines of this year’s Client Advisory from Hildebrandt/Citi are defensive, if not petulant:

“Unlike the commentary of many observers of the legal profession suggesting that today’s senior management do not ‘get it,’ we believe the large law firms today have every capability to adjust to the changing market….”

That nifty non sequitur is also a rhetorical sleight of hand. Having “every capability to adjust” is not the same as actually adjusting. The suggestion that today’s senior law firm leaders “get it” implies that they are responding in healthy and productive ways to a period of dramatic change.

Well, most of them aren’t. Instead, they’re maximizing current income at great expense to the future of their institutions. But don’t take my word for it; take theirs.

Facts get in the way

Consider the dominant big firm strategy: lateral hiring and mergers to achieve top line revenue growth. In Citi’s 2012 Law Firm Leaders Survey, senior leaders self-reported that only 60 percent of their laterals were above “break even.” For 2013, the rate dropped to 57 percent. As for mergers, anyone who thinks bigger is always better should look at the decline in operating margins that has followed most recent big firm combinations. That phenomenon is called diseconomies of scale.

Moreover, even the self-reported “success rate” is inflated. It takes years to determine the true financial impact of a lateral hire, so most managing partners touting those efforts actually have no idea whether their recent acquisitions will benefit their firms’ bottom lines. In fact, if leaders already admit to mediocre results for the laterals they personally sponsored, imagine how much worse the reality must be.

Beyond the numbers

Notwithstanding previous failures on a massive scale, managing partners are still pursuing growth for the sake of growth. Unfortunately, it can be a loser in ways that go far beyond mere financial losses. The negative impact on a firm’s culture, morale, and long-term institutional stability can be devastating.

For example, the 2013 Hildebrandt/Citi Client Advisory reported that between 2007 and 2011, law firms increased the number of lateral partners by 10 percent. Meanwhile, homegrown promotions to partner during the period dropped by 21 percent. That trend is undermining already low associate morale.

The lateral hiring frenzy has demoralized partners, too. A loss of community afflicts partnerships of people who don’t know each other. That’s one reason that forty percent of respondents to Altman Weil’s May 2013 survey of firm leaders said their partners’ morale was lower than it was at the beginning of 2008.

Another reason for diminished partner morale is the way lateral hiring has contributed to higher internal equity partner compensation spreads. Bidding to attract so-called rainmakers has pushed the high end of the range up. So have existing partners who threaten to test the lateral market. In that zero sum game of dividing the partnership pie, the bottom end of the range has moved down. (For an example, take a look at James B. Stewart’s New York Times profile of a former Dewey & LeBoeuf partner who reportedly earned $350,000 while his “protector” earned $8 million.)

More collateral damage ignored

Accompanying the lateral hiring frenzy and short-term metrics that drive the prevailing big firm business model are destructive client silos. More than 70 percent of law firm leaders responding to the Altman Weil survey said that older partners were hanging on too long. In the process, they’re hoarding clients, billings, and opportunities in ways that block the transition of firm business to younger lawyers.

But leadership’s response to this problem is perverse: 80 percent of managing partners admit that they plan to continue tightening equity partner admission standards.

The ongoing failure of leadership also reveals itself in managing partners’ overall agendas. When asked to prioritize goals for their firms, they placed “client value” number eight — behind (1) increasing revenue, (2), generating new business, (3) growth, (4) profitability, (5) management change, (6) cost management, and (7) attracting talent.

Closer to the mark

In contrast to the Hildebrandt/Citi 2014 Client Advisory, the Georgetown Law Center/Peer Monitor 2014 Report on the State of the Legal Profession concludes that most law firm leaders don’t “get it” at all:

“[G]rowth for growth’s sake is not a viable strategy in today’s legal market…Strategy should drive growth and not the other way around. In our view, much of the growth that has characterized the legal market in recent years fails to conform to this simple rule and frankly masks a bigger problem – the continuing failure of most firms to focus on strategic issues that are more important for their long-term success than the number of lawyers or offices they have.”

The report explains that, in an effort to justify the counterproductive urge to grow, “law firm leaders feel constrained to articulate some kind of strategic vision…and the message that we need to ‘build a bigger boat’ is more politically palatable than a message that we need to fundamentally change the way we do our work.”

Similarly, the author of the 2013 Altman Weil survey, Thomas Clay, says that too many firms are “almost operating like Corporate America…managing the firm quarter-to-quarter by earnings per share.” That shortsighted approach is “not taking the long view about things like truly changing the way you do things to improve client value and things of that nature.”

Even clients recognize that most outside law firms aren’t adapting to new realities. An October 2013 Altman Weil Survey asked chief legal officers to evaluate the seriousness of their outside law firms in changing the legal service delivery model to provide greater value. On a scale from zero (not at all serious) to ten (doing everything they can), “for the fifth year, the median was a dismal ‘3.’”

Perhaps the authors of the Hilebrandt/Citi 2014 Client Advisory actually believe that most of their big law managing partner constituents “get it.” No one else does.

PROOF OF THE PROFESSION’S CRISIS

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This article won the “Big Law Pick of the Week.” BigLaw‘s weekly newsletter reaches the world’s largest law firms and the general counsel who hire them.

Someone should remind law firm leaders that the Fifth Amendment protection against self-incrimination isn’t just for clients. It can work for them, too. The latest Altman-Weil survey of firm leaders is proof of widespread management incompetence, stupidity, and worse.

The survey went to the chairs or managing partners of 791 firms with 50 or more lawyers. Firms with more than 250 lawyers (that is, mostly Am Law 200 firms) had a much higher response rate (42 percent) than smaller firms (26 percent). In other words, the survey results tilt toward big law firm attitudes.

The troubling big picture

The Am Law Daily’s summary includes comments from the survey’s author, Thomas Clay, who said that too many firms are “almost operating like Corporate America…managing the firm quarter-to-quarter by earnings per share.” That shortsighted approach is “not taking the long view about things like truly changing the way you do things to improve client value and things of that nature.”

For example, 95 percent of respondents view increased pricing competition as an ongoing trend, and 80 percent expect shifts to non-hourly billing structures. But only 29 percent have made significant changes to their own pricing practices in the wake of the recession.

Group stupidity

It gets worse. When asked to identify their greatest challenges over the next 24 months, the item that managers cite most often is “increasing revenue.” The rest of the list is, in order: new business, growth, profitability, management transition, cost management, and attracting talent. If you’re wondering where clients fit — other than as a source of revenue and profits in items one, two, and three — “client value” finished eighth.

Long-term thinking? Forget it. The client silo mentality and resulting culture of short-termism are widespread and deep. Almost 30 percent of law firm leaders say their firms lack adequate mid-level partners to whom they could transition clients. In another set of responses, they reveal why: 78 percent say that “senior partners don’t want to retire”; 73 percent admit that “senior partners don’t want to forfeit current compensation by transitioning client work.”

Lateral incompetence

Meanwhile, lateral hiring remains the prevailing strategy to achieve growth. Ninety percent of respondents plan to hire laterals in 2013; more than 60 percent seek entire practice groups. For firms of more than 250 lawyers, the numbers are even more startling: 100 percent plan to acquire laterals; 92 percent plan to acquire groups.

How much time do lateral partners get to prove their worth? Almost 60 percent of responding firm leaders say two years or more; 30 percent don’t set a time frame.

What happens when laterals don’t meet the expectations that brought them into the firm? Two-thirds of firm leaders said that they “sometimes, rarely or never” tell unproductive lateral hires to leave.

Institutional ineptitude

Almost 40 percent of respondents say their partners’ morale is lower compared to the beginning of 2008. And those partners survived the purges of 2009 and beyond.

If you’re looking for contributors to declining morale, try these. Seventy-two percent of firm leaders report that fewer equity partners will be a permanent trend going forward. Three-fourths have either tightened their standards or take them more seriously. Meanwhile, 92 percent of responding two-tier firms don’t have an up-or-out policy as non-equity partner profit centers grow.

To summarize:

Managing partners know that change is coming and clients are demanding it, but firms aren’t revisiting their basic strategies or business models.

Growth and profits finish far ahead of enhancing client value as most law firm leaders’ top concerns.

Leaders view aggressive lateral hiring as critical to law firm growth, but when laterals don’t produce, most firms don’t do much about it.

Succession planning is problematic because senior partners don’t want to relinquish compensation that is tied to their client billings.

As senior leaders continue to pull up the equity partner ladder on the next generation, morale plummets and managing partners worry about the absence of mid-level talent to serve clients in the future.

Taking all of this together, psychologists would call it a severe case of cognitive dissonance — simultaneously holding contradictory thoughts in your head. Those who assert that most big firms are resilient and face no life-threatening problems are wrong. A crisis of leadership is already upon us as lot of supposedly smart people continue to do some really dumb things. Don’t take my word for it; they’re outing themselves.