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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Rob Millard (Venturis Consulting Group LLP)
It is a little facile, I think, to place the blame for law firms focusing "myopically" on short-term economic performance so squarely at the door of "non-lawyer law firm management consultants." It is probably true that some have been guilty of encouraging their clients to focus too heavily on "business school-type metrics that maximize short-term profits" (i.e. at the expense of the long term) - but certainly not all. I think also that the market's obsession with how law firms compare to their peers is a far greater culprit in encouraging such imbalance. Observe how quickly the predictions flow that a firm is heading the same way as Dewey, if it slips a few places in the Amlaw or other league tables.
Nor is the tension between short-term results and long-term sustainable economic sustainability unique to the legal profession. It is a malaise that affects most businesses. Observe how quickly the market penalizes a corporation if its quarterly earnings slip, irrespective of any brilliant strategy that it may have for the longer term. With a plunging share price goes the value of executive share options and shareholder support ... so small wonder that when faced with a choice between propping up today's share price or enhancing the long-term, most executives opt for the former.
For law firms, the pace and depth of change under way in the legal profession makes this tension between short-term performance and long-term sustainability even more profound. Over the course of probably less than the next decade, we can expect the practice of law to fundamentally transform. Client pressure on price is inexorable and probably not going to go away anytime soon. I don not think that we have even begun to see the impact of technology on the practice of law (as opposed to on legal business services) .... in particular technology displacing significant work now done by attorneys .... and in sophisticated firms - not just in commoditized services. New legal markets with unique challenges are emerging as previously undeveloped economies grow and develop more sophisticated legal needs. The 'alternative business structure' experiment under way in England and Wales, induced by the Legal Services Act, has yet to spawn the major unanticipated consequences that, in time, it no doubt will.
Against this challenging canvas, we have managing partners and executive committees trying to balance peering ahead into an ever-more-confusing future and crafting strategies to address that, while simultaneously keeping their eyes very closely focused on those very same " business school-type metrics that maximize short-term profits." Money in, as Dan de Pietro is fond of quoting from Dickens, must exceed money out. In the midst of such uncertainty, it is difficult to find too much fault with a strategy of focusing on optimizing performance in the short term while evolving as best one can as the future emerges and begins to make sense.
So what of culture amidst all this? Of course it is critical. Of course it is difficult to properly describe, let along alone manage (although there are ways to achieve this effectively.) A "good culture," though, is responsive to market realities and drives the firm's strategy (assuming that the strategy is well-conceived.) A "bad culture" is the opposite. In my opinion, in many firms it is the culture that needs to evolve in order to become more focused on business requirements. "Collegiality," after all, means shared responsibility - not comradeship. The whole notion that equity partnership is a reward for long service to a club of professionals is now so far removed from reality that I doubt any lucid associate truly clings to that belief any longer.
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