ABA Journal

The New Normal

Dewey or Don’t We: Abnormal or New Normal?

By Paul Lippe

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The continuing revelations about uncertain accounting and significant partner defections at Dewey & LeBoeuf, have me mulling whether the problems at Dewey are unique or emblematic of broader trends.

Back in the day, coal miners would take canaries into the mine because the birds were more sensitive to build-up of carbon monoxide and methane than humans, and would serve as a leading indicator of dangerous conditions. So is Dewey a canary in the legal market mine-shaft, a more sensitive indicator of tricky conditions, or is it just an outlier?

The best description of Dewey’s travails can be found on Bruce MacEwan’s AdamSmith blog, including comments that were first shared on Legal OnRamp by one of the foremost experts on law firm economics, Ed Reeser.

In simple terms, it appears that Dewey (a) overpaid for M&A both big (firm mergers) and small (lateral partners), and (b) acted like it was making more money than it was, while not fully recognizing liabilities. One key to the Dewey story is the degree to which the wounds are self-inflicted, so the tendency of most folks will be to say “Well, there are no lessons there for us to learn, we would never make those mistakes.”

I have no unique insights about Dewey, so I’ll keep my observations more general.

From my perspective, Dewey has tried to do what most big firms have tried to do, convince the world that it is a big and important firm and therefore the right firm to hire and the right firm to work for. Independent of any other factor, these are legitimate management goals – firm reputation drives business. And keeping and retaining successful lawyers drives the firm.

The problem is that in the absence of clearer standards for performance, we seem to default to short-term financial performance as the only metric. (See “Where Are the Legal Jeremy Lins” for a discussion of moving to more outcomes-based measures.) That’s not a great strategy in normal times, but in New Normal times it is probably a recipe for catastrophic failure, because it requires constantly putting a brave face on current performance and suppressing information that suggests change is needed.

The irony is that law, which should be managing to longer-term time horizons, seems to be more short-term oriented than most other businesses. When the Great Recession struck in 2008, most companies were able to do a “great reset,” re-setting stakeholder expectations by cleaning up balance sheets, lowering short-term profit expectations and making the case for strategic investments. But the folks running law firms don’t seem to feel they have the latitude to fess up that firms need to revamp to focus on client value, not near-term profits.

That’s partly because in a cash-basis business they do have less latitude to clean things up, but also reflects deeper issues for which Dewey is an avatar, not an outlier.

If you think about it, there’s no particular reason to imagine that the people running large firms are well-prepared to manage change. As lawyers, we’re oriented to a particular style of thinking—detail oriented, somewhat abstract, risk-averse, not especially emotionally intelligent, very short-term focused in terms of business activities, and with a somewhat odd presumption both that we’re more virtuous than other people and that more selfishness is usually a good thing.

If you have those attributes, spend 20-30 years working hard and loyally as a lawyer, find yourself in a position of middle or upper middle management, and then are selected to run the firm, what would have prepared you to lead a few thousand people in many offices with hundreds of millions or even a billion dollars of revenue? In a time of stability, maybe 90 percent of law firm heads could manage continuity. But in a time of change, how many are “wartime consiglieres”?

Of course there’s a clear exception – people who start their own firms. Whereas a successor manager of a larger firm will benefit from institutional momentum and be beholden to legacy stakeholders, a new firm has to be aligned with reality or it will be quickly extinguished.

I had the good fortune this week to be at a conference with Joe Morford from Tucker Ellis and Fred Bartlit from Bartlit Beck. In a discussion of how to set a non-hourly fee, whereas most firm managing partners might have said “we need more data,” Joe said (I’m paraphrasing a little) “have a little courage…as long as we think about this and execute better than other firms, we can always do these fees more profitably than other firms.” In a discussion around starting his firm, Fred said “we knew when we started the firm we could practice law the way we thought we should and make less money. We were wrong about one of those ideas.” (A previous commenter accused me of having a “man crush” on Jeremy Lin, so be assured I also have a man crush on both Joe and Fred, as well as my firm-starting confrere Pat Lamb.)

If you were the “Bain Capital of Law” and invested in a large firm that was struggling, would you:

a. Stick with existing management;
b. Hire another large firm CEO;
c. Hire from outside law? or
d. Try to woo someone who’d successfully built a smaller firm from scratch?

I’m going with d.

Let me suggest that Dewey—like Howrey and Heller before it—is not simply an ill-fated miner, but further proof that pumping up short-term revenues instead of re-setting for the New Normal is a bit like lighting a match to look for methane build-up.

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.

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