Whenever a big law firm implodes, lawyers and business reporters start looking at why, and the demise of Dewey & LeBoeuf is no exception. They are always able to find a reason, one that makes this failure unique and that has nothing to do with the law firm model. In the 1980s and 1990s, we saw an occasional meltdown of famous firms such as Finley Kumble, Donovan Leisure and Shea & Gould. But now, with so many formerly noted firms collapsing during the past few years, perhaps it is time to realize that it is not just an occasional bad management decision, a toxic mix of personality or an economic downturn that is causing these problems, but the very big law firm business model that is causing firms to go belly up.
The reality is that the traditional top-tier law firm model is based on an antiquated business structure. Despite all evidence to the contrary, big firms still deluded themselves into believing that the firm names alone, put in big bold letters by the elevator banks, are what clients and top attorneys are drawn to. They don’t realize they are a collection of expert professionals who can and do move to different firms when a better opportunity comes by. They claim to be a partnership, but automatically freeze out junior partners and associates. As we found out with Dewey, firms can even ignore their most important attorneys in order to maintain a tight hold on power.
In order to maintain this illusion, law firms are operating inefficiently. In the best of times, this inefficiency can be glossed over, and, with loans, law firms can try to ride out their disastrous decision-making. Of course, once those best of times ends and the tide rolls out, they are exposed. The damage can be fatal, careers can be ruined, and attorneys who were completely ignorant of the decision-making process are suddenly left holding a very expensive bill.
There are a plethora of problems with the big firm model. Compensation might seem not to be one of them. But in fact, as we saw with Dewey’s massive overuse of guarantees, it may be the most important one. And it is a problem shared by many firms, whether or not they are guaranteeing money to new partners.
The traditional law firm business model pays attorneys based on a black-box calculation, factors of which typically include seniority, expectations and perceived benefit to the firm. Clearly, the calculation is often very speculative, arbitrary and perceived to be “unfair.” Attorneys are recognized and compensated for bringing business to the firm — but the compensation is not often clearly tied to the value of their efforts. Attorneys who produce a lot of business rarely keep a majority of what they bring in, while attorneys bringing in less business and doing less work often end up making more money. This unpredictability creates a disincentive to bring in business and embitters rainmakers, leaving them to waste their talents on bureaucratic paperwork and firm politics.
At the same time, attorneys are pressured to meet an arbitrary billable-hour requirement. As a result, partners are discouraged from focusing on their core strengths, such as business development or counseling. It also leaves clients getting the short end of the stick, as they end up having to pay for work that should be done by paralegals, associates or contract lawyers. Numerous top-tier law firm partners tell us they would prefer to focus their efforts on their clients’ big-picture issues and have others do the more routine work at a far more cost-effective rate.
This would allow them to charge lower flat fees for the routine work, which would be much less expensive for the clients, who are already very concerned about fees. The result would be higher profits for the firm, more recognition for the attorneys and better value to the clients.
Instead, firms produce overworked attorneys who do not have adequate time (or sleep) to properly focus on each and every one of their clients; clients complaining about excessive bills; and partners wondering if other partners are making some multiple of their salary for a fraction of the work. It is no wonder every time a bad moon rises, attorneys immediately start looking for the exits.
Newer firms have turned this model on its head, focusing on compensating attorneys based on a transparent model that is easily understood when the attorneys join the firm. Arbitrary billing thresholds are removed, thereby lessening artificial pressure on attorneys. Without the big firm billing needs, attorneys are freed up to create alternative billing options, recognizing that one size does not fit all.
The Big Law firm model has been very successful for a very small group of attorneys for a very long time period. As we’ve found in recent years, this model is crumbling under its own weight, leaving behind a wreckage of embittered attorneys, dissatisfied clients and potentially ruinous costs when things go bad. Cognitive dissonance may cause law firms to ignore big-picture messages from Dewey’s collapse — much as they ignored the end of Thelen, Howrey, WolfBlock, Brobeck and so many others. But it’s not going to be their choice. If they don’t start changing the model, they may very well end up on the same list.