ABA Journal

Paul, I think your “trust the leadership” point is right, but there is more than trust involved.  I suspect all the Dewey, Howrey, Heller etc. lawyers would say they trusted their leadership, and that their trust is why these leaders were able to run the firm into the ground.  So trust is a critical element, but it seems more is involved.  While the leadership must be trusted, it also needs to have a degree of transparency—public companies, for example, operate under certain disclosure requirements and answer to independent directors (at least theoretically).  Firms seem to operate under a much more closed system of management.  So perhaps the issue isn’t trust alone, but trust and openness.  In other words, trust that is earned instead of simply givien.

By Patrick Lamb on 2012 05 15, 9:18 am CDT

Nice piece, Paul
I would suggest perhaps a thirteenth item, rounding out to a neat baker’s dozen: Governance:

The demise of Dewey & LeBoeuf seems largely attributable to a complete and abject failure of proper governance. The tragic irony is that Dewey still boasts on its web site of its superlative corporate governance practice group. Read it now, while the web site is still up and running. If you missed it, here is a pertinent excerpt:

“Based on decades of experience in corporate law, governance, restructuring and litigation, Dewey & LeBoeuf has assembled a next generation capability to achieve clients’ goals… Our multidisciplinary approach enables us to develop special tools that allow directors and management to avoid ‘not knowing.’”

We can apparently now conclude based on the public record to date,  that Dewey did not capitalize on its “generations of experience” in establishing a system for itself of checks and balances, oversight and accountability required of this generation of commercial enterprises. The interview you mention in your Item 10 says it all. The firm’s culture seems to have been built on partners proudly “not knowing.” The firm’s mascot may well have been an ostrich; the firm seems to be a paradigm of the cobbler’s children going barefoot. The lesson seems obvious and the question inescapable:  Does the firm’s system of governance provide for adequate controls?

By Jerry Kowalski on 2012 05 15, 10:07 am CDT

I would add “is there something binding the partners together other than a sincere love of money?”  If there is not, at some point in the Firm’s life when things get tight, the partners bringing in the business at that time will immediately bail-out to make more money somewhere else.  And really, that is why all big firms are unstable.

By Bob Loblaw on 2012 05 15, 5:37 pm CDT

Pat, thanks for the comment.  It is of course true that leadership has to be trustWORTHY, but they also just have to be trustED, which is reciprocal and breeds trust and healthy behaviors. The basis for trust can’t be perfection.

By Paul Lippe on 2012 05 16, 1:44 am CDT

@3 - I agree with most of your comment, Bob, except for the “that is why all big firms are unstable”. It is possible to create the “glue” that holds a firm together - but I believe it is impossible if partner compensation varies at such an enormous scale. Law firms are not like internet start-ups or Broadway shows. Ok, some partners may think they are like top-Broadway stars. However, the quality of partners in a law firm must be much more consistent, and much higher, if the firm wants to be successful. Otherwise, the firm has no credibility for the clients. An internet start-up or a broadway show may depend on one or two “shooting stars” and will be organized in a much more hierarchical way than a law firm - and everybody will know that the success of the internet start-up or the broadway show will depend just on the shooting stars, and all others are just assistants to make them work. If a law firm wants to be successful, it has to ensure the partners have the same top qualifications, and that there are no significant differences. A partner whose performance is only 1/20 of a top partner’s performance should not be a partner.

Of course, it may be possible to create a different form of “firm”, with just a few top lawyers who are at the top, and the others are mere bodies to get the work done. That type of structure would be very different, and much more prone to fluctuations in the market, than a firm that is based on the principle that partners should be equally qualified and equally successful, which then also means to pay them more or less equally, i.e. within a smaller bandwidth of compensation.

If there is no glue that ties the partners together, and if the clients are not tied to the firm but to the individual partner, then the firm is fragile. In that respect, Bob is entirely correct.

By Sitting on the Fence on 2012 05 16, 8:53 am CDT

Sitting on the Fence—point well taken.  Your view on this is probably more accurate than mine.

By Paul Lippe on 2012 05 16, 4:30 pm CDT

Paul makes this statement:

“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?”

I would suggest that clients, not their law firms, determine whether they are clients of individual lawyers or of the firm.  If they are the former, they have little if any institutional loyalty to the firm, and likely will follow the lawyer to his/her new firm should s/he leave.  CIients are more likely to have institutional loyalty if they feel that the firm adds value to what the individual lawyer provides/produces.  That value could be quality backup on substantive issues (i.e., the so-called “substantive expert” or “minder”) so that the client knows that it can gain the advice that it needs quickly and cost-effectively even if the “relationship” partner is unavailable.  It also could be the ability to produce quality written work product on an urgent basis when needed (and consistently over time in all types of situations).  This is an example of where quality staff can be valuable. 

Of course, if the relationship partner is able to replicate at the new firm what s/he provided at the old firm (same people, processes, etc.), the client likely will both follow and stay with him/her.  The problem is that partners who change firms every several years for more money probably will have trouble replicating what made the client so satisfied at the first firm.  This reality no doubt has to have hurt Dewey badly.

In my experience, to an increasing extent, clients retain firms because they have the particular lawyer that can solve their problem, not because of the name or reputation of the firm.  Of course, if a firm consistently provides great work/insightful advice and exceptional value, the client may be more inclined to use that firm on other matters.  This is “where the rubber meets the road”: the failure of the firm to handle a matter in a new area for the client with the same quality that it has come to expect can be devastating, not only to the firm but also to the relationship partner.  Credibility can be lost very easily. 

The quality of almost all BigLaw firms varies widely depending on the lawyer or substantive area.  Firms that can consistently maintain the highest quality (along with providing very good value) firmwide will fare best in converting clients into “institutional” clients.  Maybe this is where the Cravaths ultimately win, because they rarely hire laterally and train new associates in the “Cravath way” (see Paul’s points 1, 3 and 4).  Even the Cravaths, however, will have to demonstrate that they deliver sufficiently efficient processes to compete with other top-quality firms.

By JDNUL on 2012 05 16, 5:48 pm CDT

While it is a truism that clients determine whether they are clients of the firm or of an individual lawyer, it also is true that there are many things a firm can do to influence the client’s viewpoint.  Thus the question always is whether the firm does these things, or not.  For example, some lawyers do not allow anyone else in the firm to talk directly to his clients.  If the firm promotes or even allows that behavior, it is plain that the relationship will be between lawyer and client, and there is no chance of developing the kind of firm-client relationship that stands the firm in good stead.  There are many other ways lawyers try to insulate their relationships so they maintain control over their “book”—all to enhance their marketability, compensation and so forth—and the point of this comment is not to start a discussion on what those control artifacts are, but simply to underscore Paul’s point that institutional loyalty is something that exists in some firms because of their approach to it, while it does not exist in others.

By Patrick Lamb on 2012 05 17, 8:38 am CDT

Very well said, Patrick Lamb. Firms that do not have the culture that fosters institutional loyalty are more vulnerable, because the clients are likely to follow the lawyer they know and trust, and if that is only one partner and his group, a move of that partner leaves a hole.

The real problem these firms have is that they are not consequent in their behavior: the firm takes care of the infrastructure, pays the rent etc., and the partner takes his profit without really bearing the full economic risk. If the firm struggles, he simply leaves, taking “his” business - but only the revenue side of it, not the economic risk side, the obligations etc. Consequently, the firm gets stuck with the partners who are either more loyal to the firm or can’t move as quickly, which means lower revenues over the same risk and liability exposure as before.

Firms that have that type of structure must make sure that those who are perceived as rainmakers and get their nice deals and guaranteed payments (how absurd! guaranteed payments in a profession where no lawyer can seriously guarantee what revenues his clients will generate!) also have to bear a corresponding share of the liabilities and, actually, economic risks. In that sense, a structure that would be closer to the internet start-ups referred to by Paul Lippe would seem more appropriate for firms that do not have a true “firm culture” (where the client is served by many parts of the firm, and feels well served by many partners) but are nothing more than an association of so-called partners (for lack of a better word) whose sole interest is maximizing their own profit. Such a structure would allow to pool the economic risks and have everyone bear their share. Firms would not fall apart as quickly (as Howrey or Dewey) if partners had to think how to deal with the economic risks and liabilities. Leaving those, and the space they occupied (and the rent of which the firm continues to pay), behind and heading for that “better deal” is just too convenient, and it actually benefits those who leave first.

By Sitting on the Fence on 2012 05 17, 9:01 am CDT

Overall, I just don’t see large firms surviving this new economy. There is a new landscape that big firms refuse to master. This landscape calls for flatter organizations to bypass all the hierarchy and bureaucracy. Strategies must be client-centered. Yet, they remain in denial. They believe their names and history will save them. Here in Florida, I have witnessed partners and practice groups leave big firms decimated when they defect and the clients follow. The future belongs to effective, efficient, economical, expeditious, and empathetic mid-size and small firms. Truth is that most of law practice will soon be commoditized. I always ask, what happens if Westlaw and Lexis changes their business model from supporting lawyers to going directly to the consumer? They can easily provide advisors to explain the legal needs and considerations to the consumer, who then would purchase products based off that advice. They could easily meet the ethical requirements to accomplish that strategy. As a business lawyer, I always tell my clients, “It’s pointless to be #1 in a dying market.”

By Skinner Louis on 2012 05 18, 5:53 am CDT

The local press has centered on the loans and have basically called it a “bust out”.  bust out look it uo

By John on 2012 05 18, 6:36 am CDT

I would add to your Don’t Be (Dewey) Dozen checklist to join the American Bar Association’s Law Practice Management Section.  Each and every solution that the various legal pundits have offered is offered in the meetings, the CLE, the publications and the opportunity to network with the nation’s law practice leaders.  Whether you are a solo or small firm or one of the world’s largest mega-firms, all can benefit from depth and substance that can readily be found in the ABA Law Practice Management Section.

By Tom Bolt on 2012 05 18, 6:48 am CDT

Great post, but this can pretty much be summed up in one line: law firm management needs to stop thinking like lawyers and learn to think like the officer team of a corporation. Everything you’ve discussed here is Executive Functions 101. I have spent most of my career in the corporate world, but the years I spent in Big Law were shocking. How can anyone think they can run a business this way?  Most directors at my current company has a better awareness of these tenets than the managing partners of most large firms.

By In-house Counsel on 2012 05 18, 6:54 am CDT

A client who generates enough business to justify paying a rainmaker $10 million per year is a client who (a) is using multiple equity partners at that firm to provide a range of advice, and (b) has other choices when it comes to lawyers; in fact, right at this moment it is using five giant firms with multi-disciplinary practices.  Moreover, a considerable amount of business at a giant firm has been inherited from the now-retired lawyer who had a relationship with the now-retired founder of giant client. While it may be portable, i.e., one partner has the saturday golf game relationship with the GC, there is nothing special that guy can do that many other lawyers can’t do. 

Frankly, a disparity in partner comp that ranges from $300K to $10 million is not a partnership.  It is a transitory economic relationship, with an emphasis on transitory.

By John Reilly on 2012 05 18, 7:43 am CDT

There is a fundamential conflict between the laws’ rules and other business’ practice. That is, under the rules lawyers represent clients, not law firms. It is not productive to think of clients as firm clients, under the rules there is no such thing—only lawyer(s)’ clients.

The best internal discipline is that every equity owner is jointly and severally liable for the professional conduct of every other equity owner. Make that the rule for law firms (not “firms that do legal work”, see below) and most of these problems would go away.

For 30 of my 40+ years at the bar my advice to young lawyers has been that their compensation above “salary wages”  after 5 years is how many clients they can walk out the door with. I have not seen much to cause me to change that advice, in fact the “firm deaths” of the past year or two confirm it.

Clients may want a lot of things but the sooner we impress upon them that they can’t have them the better off they and we will be. For example, every client wants to have (“hide behind”) the attorney client priviledge. The terms should be: “If you want it (e,g., the attorney client priviledge) you must deal with us on our terms”.

The reality is that clients can get many “legal things” done by non-lawyers and don’t really need or want services that include such as the attorney client priviledge, no conflicts of interest, or in court representation. Maybe its time to recognize that there should be “law firms” and “firms that do legal things”. The latter will only be held to the morals of the market the same as stock brokers, investment bankers, and insurance agents.

For years the legal market has evolved this way; we should accept it and adjust to it.

By T Rankin Terry, Jr. on 2012 05 18, 8:54 am CDT

When you say “partners should have enough of their net worth tied up in the firm that its collapse would cause them some pain.”  How do you develop a structure where that happens?

By Rich Campbell on 2012 05 18, 10:16 am CDT

@16 - Rich, how about a firm not taking loans on its own, but have the partners do the financing? I know, this sounds really old-fashioned, but if the firm has no debt, but the partners have the debt - pro rata to their share of income -, that is pretty likely to prevent the attitude of “I am leaving for the better deal, and ‘après moi le déluge’” (as the French would say, or in plain English, I don’t care about the rest).

There are large firms where the partners, individually, sign the large lease agreements and are jointly and severally liable for the obligations. Another pretty efficient way of preventing someone to depart and leave lots of unused space (formerly occupied by his team) behind without compensating adequately for it….(at least, I haven’t heard from any partner heading for a better deal that he had to pay some serious money to get out of his obligations…)

The main problem in some firms seems to be that those partners in management have ensured they have a high share of revenue, but they don’t like the idea of having to bear a large share of the obligations. Thus, everything is shifted to the LLP, that can go bust if things get bad…and the guys in management walk away to the next firm, repeating the same mistakes.

By Sitting on the Fence on 2012 05 18, 10:47 am CDT

The fact is that partners at large law firms, heavy hitters as well as more junior partners, do experience a great deal of financial and other real pain when their firms go into bankruptcy, as described in http://kowalskiandassociatesblog.com/2011/02/03/the-financial-and-legal-consequences-of-a-law-firm-dissolution-on-the-partners-of-the-defunct-firm/ .

The greater the amounts paid to individual partners prior to bankruptcy, the greater the pain.

By Jerry Kowalski on 2012 05 18, 10:59 am CDT

In response to ##8 and 9, I still maintain that if a client highly values the advice and service of a particular partner, and that partner moves to another firm, it is highly likely that the client will follow the partner.  Even if that partner has expanded the relationship so that several other equity partners are doing substantial work for the client, the client may conclude the “other” partner’s matter at the old firm (to avoid disruption as well as learning curve at the new firm), but likely will move future such work that is tied to the departing partner (e.g., litigation or transactions in the relationship partner’s area of expertise) to the new firm.  Some of those “other” partners may receive most of their work from the relationship partner, in which case they are likely to join him/her at the new firm. 

The key point is that the source of the confidence the client has in the old firm is tied to the relationship partner.  That partner is responsible for overseeing the work of the other partners and the associates on those matters, and the client trusts his/her judgment and oversight.  Attempts by the old firm to “institutionalize” the relationship by not allowing the relationship partner to restrict access to the client and by building relationships between other partners and the client may keep some or all of the residual work at the old firm, but in the great majority of cases this work also will leave when the key partner departs (assuming that the new firm has the capability and expertise to handle it).

If a partner becomes a serial “firm-switcher,” however, the client may lose confidence in the partner’s judgment or ability to work with other lawyers.  Apart from this situation, however, all or nearly all of the client’s business will follow the key partner in the overwhelming majority of key partner departures (provided that my assumption holds).  To quote Bruce Hornsby and paraphrase Walter Cronkite, “that’s just the way it is.”

By JDNUL on 2012 05 18, 12:23 pm CDT

All large firms claim to be unions.  In reality they’re confederacies.  I doubt there’s any other way of doing it, but hats off to Cravath if they have figured this out.

By Lewislaw on 2012 05 18, 12:26 pm CDT

Whoever heard of taking out loans to pay for bonuses?.....Oh, yeah, how about Wolf Block in Philly, and elsewhere, I surmise.  What mental giant turned the definition of ‘bonus’ upside-down..and all of the lemmings that believe they are “entitled” to an annual ‘bonus’ even if they lost money that year.  Many have complained of the “entitlement” mentality of the poor on welfare. In my view, that mentality is running rampant everywhere and is why many are in deep doo-doo today.

By The Jet on 2012 05 18, 12:50 pm CDT

What a great article, thank you.  Some extremely valuable tips and insights for running a professional services firm ... regardless of the size.

By Marcus Lawson on 2012 05 18, 1:55 pm CDT

Yeah, great article, etc etc, but when was the last issue of this journal that didn’t have an article with “dewey” in the headline?
Seriously, not all of Law is big firms and making partner. Some of it has to do with clients with problems and solving them. No, really, it’s true.

By Robert on 2012 05 18, 2:40 pm CDT

Everyone post excellent comments from Paul’s article and on today’s legal profession dilemma from different point of views.  However, I am more inclined to agree with the In-house counsel’s point of view.  While everyone is more geared to “how to strategize in legal industry from here onward”, I think we must look at the change of the fundamental of legal landscape since the occurrence of unprecedented global financial crisis. Legal profession has changed ever since a “commercial advertising is permitted”, and we are still in the stage of “honorable professional” mind-set where 1/20 or 20/1 and leading producer of the firm can carry weight, including among others to own his/her “client base” instead of the firm.  No clear partnership agreement however written between partners indicate to perpetuate the firm instead of individual.  Now, therefore, we need to change our mind-set to treat legal industry as a business industry like a corporation.  We need to run a legal firm then as a business entity in which a good “management team” could produce quality service and product for their clients.  That means managing partners with appointed CEO type of function shall lead the firm in lateral functions; (a) relationship (marketing), (b) transactional (executive officers) and (c) documentation (back-house operations).
The combined efforts of these 3 lateral functions shall be able, in my view, to provide quality products and services.  For example, (a) shall be able to go out and market the firm through “personal relationship” but for the firm’s benefit (this can be written in the agreement); (b) With personal legal skill could come out every solution needed for the clients.  Remember, business is always “doable” in business person’s mind since beginning of barter or guild society but may not be legitimate in today’s ever-changing business transactions, then our skill to structure within the legal frame work to deliver “innovative” solutions will do justice for the clients;(c) Without legal technology, the products may cause “higher costs” to produce and with some human’s error.  Remember, in the old days, “look for the law” became a must in research where you were forced to search in the firm’s huge library (18 ft high ceiling) rolled the ladder and climbed for certain precedents, it was a “nightmare” should we look back now.  Thanks for Nexis/lexis and Westlaw through Internet, spelling correction by computer etc. etc.  But, with what we have today is insufficient to deliver high quality products and services by lowering costs. A good back-house operations could address these issues. Although, PWC, KPMG, Deloitte and Ernst & Young accounting firms may not be “100%” business model but they could be as our “references”.
Finally, what I want to say is, please, to change our mind-set of our profession in confronting today’s socioeconomic changes and proliferation of “unskilled and untrained” lawyers, and hope that we should look at a legal industry as a commercial industry if the big firms wish to sustain for years to come.

By Jurist on 2012 05 19, 12:47 pm CDT

I agree particularly with Skinner Louis’ and Jurist’s comment.  The raison d’etre of lawyers and law firms (or any professional services firm, for that matter) should be to serve clients. It means doing what is best for the client, and not what is best for the lawyer or law firm.  It means helping the client succeed. It means delivering true value to the client in the most efficient and cost effective way. In the end, what is good for the client is invariably good for the firm.

General counsels, the law firms the biggest clients, are under enormous pressure to reduce expenses. While legal was never just a rounding error, in recent years litigation, regulations and other legal complexities have driven legal costs up significantly; and the cost has gotten much more attention.  As a result, general counsels are demanding more value from law firms and want to pay less.  In addition, law firm services are being replaced with increased hiring by corporate legal groups—7 to 10% last year. It’s now cheaper to hire experienced lawyers to work in-house than to hire law firms, even if the new hires sit on the bench a little. As law firms reduce employees, there is plenty of talent out there. Once a rarity, hiring of recent law school grads by law departments is up. They will work for virtually nothing, and can be trained “right” from the very beginning. Lastly, the use of smaller firms is on the rise because the value and lower cost is there. This is the New Normal.

General counsel are, with increasing speed, taking control of legal spending and are refusing to pay the escalating rates of large firms.  Law firms that recognize this will survive, and those that don’t will wither and die. This demands a significant makeover for many law firms.  Those changes will include meaningful and value based alternative fee arrangements; outsourcing of commodity work to lower cost labor and implementing state of the art technolgy; developing and maintaining project management and resource deployment expertise; more realistic compensation for partners; investing in trust based client relationships, creating firm brand that attracts and retains clients and employees; and training lawyers how to be client focused and deliver real value. 

Dewey had a lot of problems, and probably no one thing brought the firm down.  But staying focused on servicing clients and delivering higher value efficiently and at the lowest cost would surely have helped the firm, and should be a message to others in the BigLaw crowd.

By Old Bailey on 2012 05 20, 10:33 pm CDT

Time to think like a business and bring in professional management.

By S.Smith on 2012 05 21, 8:44 am CDT

S. Smith makes an excellent point.  As a non-lawyer I am clearly biased, but large complex organizations could use more executives in decision-making roles that have business management experience and expertise.  Some firms are already doing this but the senior business person in most firms has little true influence on strategy and often does not have sufficient authority to make a real difference.

By Chris Poole on 2012 05 21, 12:25 pm CDT

Hilary Clinton?  LOL!

By lsoprano on 2012 05 25, 12:45 pm CDT