The concluding lines of this year’s Client Advisory from Hildebrandt/Citi [PDF] sound 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 their 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; pursuing some combination of lateral hiring and mergers in order to achieve top-line revenue growth. In Citi’s 2012 Law Firm Leaders Survey [PDF], senior leaders reported that only 60 percent of their recent lateral partners did more than “break even.” In last year’s version of the same survey, the rate dropped to 57 percent for 2008–12 lateral hires. 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—a phenomenon that might be called diseconomies of scale.
Moreover, even the self-reported “success rate” is probably inflated. It takes years to determine the true financial impact of a lateral hire, so most managing partners touting the positive effects of their efforts actually have no idea whether their recent acquisitions will benefit their firm’s bottom line. In fact, if leaders are willing to admit that the laterals they personally sponsored have produced mediocre results, imagine how much worse the reality must be.
Beyond the Numbers
Notwithstanding the disastrous results that this dominant strategy has occasionally yielded in recent years (see, e.g., Dewey & LeBoeuf and Howrey), managing partners continue to pursue growth for growth’s sake. Unfortunately, that approach can be damaging in ways that go far beyond 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, the number of new equity partners added laterally increased by 10 percent. Meanwhile, homegrown promotions to partner during the same 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 40 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 morale among partners: the contribution that lateral hiring has made to wider internal equity partner compensation spreads. Bidding to attract so-called rainmakers has pushed the high end of the range up. So have the demands of existing partners who threaten to test the lateral market if they don’t get the money they think they deserve. In the zero sum game of dividing the partnership pie, the bottom end of the range has moved down. For example, Am Law Daily’s Sara Randazzo recently wrote about the plight of former Dewey & LeBoeuf partner Gregory Owens, who reportedly earned less than 5 percent of what senior partner Mort Pierce made.
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.
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 [PDF] concludes that most law firm leaders don’t “get it” at all: “Growth 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 Georgeteown 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, tells The Am Law Daily 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 how serious their outside law firms are about changing the legal service delivery model to provide greater value. On a scale from zero (not at all serious) to 10 (doing everything they can), “for the fifth year, the median was a dismal ’3.’”
Perhaps the authors of the Hildebrandt/Citi 2014 Client Advisory actually believe that most of their big-law managing partner constituents “get it.” No one else does.
Steven J. Harper is an adjunct professor at Northwestern University and author of “The Lawyer Bubble: A Profession in Crisis” (Basic Books, April 2013) and other books. He retired as a partner at Kirkland & Ellis in 2008, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at http://thebellyofthebeast.wordpress.com/. A version of the column above was first published on The Belly of the Beast.