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In an ironic twist, the latest Client Advisory from the Citi Private Bank Law Firm Group and Hildebrandt Consulting warns: "Law firms discount or ignore firm culture at their peril." Really?
Law firm management consultants have played central roles in creating the pervasive big law firm culture. But that culture seldom includes "collegiality and a commitment to share profits in a fair and transparent manner," which Citi and Hildebrandt now suggest are vital.
For years, mostly nonlawyer consultants have encouraged managing partners to focus myopically on business school-type metrics that maximize short-term profits. The report reveals what has resulted from that focus: the unpleasant culture of most big firms.
DETERMINANTS OF CULTURE
For example, the report notes, associate ranks have shrunk in an effort to increase their average billable hours. That's how firms have enhanced what Hildebrandt and Citi continue to misname "productivity." From a client's perspective, rewarding total time spent to achieve an outcome is the opposite of true productivity.
Likewise, the report notes that along with the reduction in the percentage of associates, the percentage of income (nonequity) partners has almost doubled since 2001. Hildebrandt and Citi view this development as contributing to the squeeze on partner profits. But income partners have become profit centers for most firms. As a group, they command higher hourly rates, suffer fewer write-offs, and enjoy bigger realizations.
From the standpoint of a firm's culture, a class of permanent income partners can be a morale buster. That's especially true when the increase in income partners results from fewer internal promotions to equity partner. Comparing 2007 to 2011, the percentage of new equity partner promotions of home-grown talent dropped by 21 percent.
LATERAL CULTURE?
In contrast to the more daunting internal path to equity partnership, laterals have thrived, and the income gap within most equity partnerships has grown dramatically. "Lateral hiring is more popular than ever," the report observes. In contrast to the drop in internal promotions, new equity partner lateral additions increased by 10 percent from 2007 to 2011.
This intense lateral activity is stunning in light of its dubious benefits to the firms involved. The report cites Citi's 2012 Law Firm Leaders Survey: 40 percent of respondents admitted that their lateral hires were "unsuccessful" or "break even." The remaining 60 percent characterized the results as "successful" or "very successful," but, for two reasons, that number overstates reality.
First, it typically takes a year or more to determine the net financial impact of a lateral acquisition. Most managing partners have no idea whether the partners they've recruited over the past two years have produced positive or negative net economic contributions. For a tutorial on the subject, see Edwin Reeser's thorough and thoughtful analysis, "Pricing Lateral Hires."
Second, when is the last time you heard a managing partner of a big firm admit to a mistake of any kind, much less a big error, such as hiring someone whom he or she had previously sold to fellow partners as a superstar lateral hire? These leaders may be lying to themselves, too, but in the process, they're creating a lateral partner bubble.
STABILITY?
The Hildebrandt/Citi advisory gives a nod to institutional stability, mostly by observing that it's disappearing: "The 21-year period of 1987-2007 witnessed 18 significant law firm failures. In recent years that rate has almost doubled, with eight significant law firms failing in the last five years." If you count struggling firms that merged to stave off dissolution, the recent number is much higher.
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NJ Librarian
Has the relationship between legal and non-legal staff been measured in terms of culture and whether or not the relationship has any effect on success?
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Mr. Scattergood
Business schools are not the reason for the failure of law firms. In business school, the students learn strategic planning methods where the focus is on the profitability in the long-term. The focus should never be on short-term profits. Lawyers are used to hiring experts for everything, so they think they are hiring a business expert when they pay thousands to one of these so-called consultants. In business school, students are warned about these consultants and trained how to scrutinize their information.
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