In 1984 and again in 1987, I worked hard to get Gary Hart elected president.
Suffice to say I wasn’t happy about the way that experience ended, and for a long time thereafter whenever someone saw the Hart reference on my resumé they would give me a sideways glance and an awkward chuckle.
I suspect that for the next decade, anyone who has “Dewey & LeBoeuf” on his or her resumé will likewise get a sideways glance and an awkward chuckle.
My further guess is that at least 10 Am Law 250 firms will fail between now and the end of 2013, for reasons more or less identical to Dewey’s. So here’s a checklist of 12 questions so to make sure you’re not one of them:
1. Does the firm trust its leadership? It is unlikely the people running a law firm will be the perfect mix of George Washington, Steve Jobs and Hillary Clinton, but at minimum they must be viewed as competent, trustworthy and doing their best to put the long-term interests of the firm first.
2. Is the firm sufficiently liquid? There should be at least 4-6 months of expenses in cash or cash equivalents in the bank throughout the year. Borrowing should be minimal (and never used to hide financial shortfalls—there will be a perfect correlation between debt and firm failure) and partners should have enough of their net worth tied up in the firm that its collapse would cause them some pain. Yes, I understand that shoring up the balance sheet will mean less distributable cash this year.
3. Can everyone articulate the strategy and value proposition? If the firm’s strategy is “be a leading global firm for demanding clients’ bet-the-company needs and maintain the highest standards of client service and ethics”—well, pretty hard to call that a strategy. A strategy should be clear and distinct—“be the leading energy finance firm in Asia and Latin America, representing governments and lenders, as measured by …” That implies that strategy largely resides at the practice group level, which would be fine. A strategy that is vague, amorphous and the same as every other firm is not a strategy.
4. Do mergers and acquisitions advance the strategy? Whether it’s merging with another firm or bringing in a lateral partner, law firms are constantly engaged in some form of M&A. When I was running M&A for my old company, our one-question test was” “What do we say to our top 20 customers the morning after the deal is announced explaining how they are better off?” The answer “now you can buy the same thing from us” is not adequate. You have to be able to explain how what you can deliver is better by combining lawyers in the same firm. The client could always hire the other lawyer(s) from the other firm without you merging with them. Then after merging, make sure you deliver on that promise, which leads to …
5. Are clients firm clients or individual-lawyer clients? If clients are viewed primarily as clients of individual lawyers, then what’s the institutional value of the firm to the client, and where are the scale economies to compensate for the costs and hassles of being part of a big firm? Sadly, many lawyers will take away from Dewey’s demise that they should act to preserve client mobility in case they need to head for the next set of lifeboats, which will all but ensure that those lifeboats will be launched again.
6. Does management render unto Caesar? Lawyers use logic and reason to argue indeterminate facts, and they do it well. One day you might convince me that Obamacare is permitted under the commerce clause, and the next day you might convince me that is it prohibited. But numbers are pretty determinate. There’s no way you can persuade me that a $75 million obligation is not a $75 million obligation, or $780 million in revenues is $915 million, or that combining a $200 million firm and an $600 million dollar firm to create a $700 million firm is growing. Managing professional firms will always require balancing between professional and commercial norms, but at minimum firms need to recognize that there are some inarguable facts. As my old boss Sen. Daniel P. Moynihan said: “Everyone is entitled to his own opinion, but not his own facts.”
7. Does compensation make enough sense that it can be defended? Many of the smartest people I know, like Bruce MacEwen and Ed Reeser, have written that a 20-1 compensation ratios between partners—as was the case at Dewey, MacEwen notes—make cultural glue impossible. I respect that argument, but the fact is there are lots of high-performing organizations (Broadway shows, Internet start-ups) with large disparities in compensation. But those disparities are well-understood, and they are accepted when things are working. If the law firm thinks paying one partner 20 times more than another makes sense, it has to be fairly transparent and consistent about it. Certainly you can’t act like all partners are created equal, and then treat some as more equal than others. And obviously if the people in the executive committee pay themselves unfairly, it will be a problem.
8. Does the firm understand what clients think—part 1? Lawyer professional norms resist the notion of client feedback, but the No. 1 predictor of future success and improving performance is client feedback. Sophisticated clients like Pfizer and FMC Technologies give systematic feedback to outside lawyers to help them improve performance and provide an early warning system of issues.
9. Does the firm understand what clients think—part 2? The best way to understand what clients think is by what they do. Here’s another simple test imported from my old company. “For our top 20 clients, is our share of their total spending growing or shrinking?” From 1992-2007, the law market boomed and firms grew along with it. But even as they grew revenues from clients, they didn’t realize those clients were moving more work in-house or to other firms. If the client likes you enough that your share of their work is growing, you are in good shape; if it’s not, you can always come up with a rationalization. But whatever your rationalization, it hides an inconvenient truth. “But,” my lawyer friends will reply, “how could we find out whether our share of spending is growing?” Just ask—that’s half the battle, anyway.
10. Does the firm listen to critics? Everybody I knew recognized months ago that Dewey was in trouble, and many of them published their analyses. Yet apparently most folks at Dewey had no idea. Check out the “recruiters ate my firm-work” interview by departed Dewey partner Stuart Saft on Bloomberg News (assuming it is an actual interview and not a Jon Stewart parody). So people outside Dewey had a better understanding of what was going to happen than people supposedly in leadership positions in the firm? If that’s the default position, then whenever a firm gets criticized (or challenged) by external voices, they better have the ability to listen and respond thoughtfully, not just hire spinmeisters to attack the critics.
11. Does the firm believe value can be improved? My own experience is that you can almost always improve the quality and reduce the costs of legal work. I recognize this isn’t everybody’s experience. But if you assume it is impossible to do better, you assuredly won’t. Given continued flat growth in the legal market, firms need to find ways to compete more effectively and should start the conversation with the assumption that any work can be delivered at least 20 percent better. More often than they expect, they will find a way.
12. Does the firm experiment with at least 5 percent of the work? Given increased pressure on value and price, firms should target at least 5 percent of their work as an “innovation laboratory” and look for ways to deliver work at least 20 percent better. Not every experiment will work, but many will, and every experiment will lead to learning. As the saying goes, you don’t have to outrun the bear—you just have to outrun the other campers. Firms don’t have to be perfect, they just have to outperform the competition. Look at the recent essay by Seyfarth Shaw chairman J. Stephen Poor.
Like Inspector Louis Renault in Casablanca, some folks were “shocked, shocked” at the collapse of Dewey. But now there’s no more room for denial. If your firm can answer yes to eight or nine of the questions above, all will be well. If you can’t, there’s probably a 30 percent or higher chance of failure in the next 20 months, and when it happens folks will point to some exigency or another, but in reality it will be simply a failure of leadership. None of this is anything other than common sense—but every day we see more evidence how far folks can deviate from common sense.
The Dewey Dozen: Capital Sufficiency and Survival
Paul Lippe is the CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering.