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How to Succeed in BigLaw While Really Trying: A Four Act Unfinished Play, Now Playing at a Law Firm Near You

Posted on March 12, 2012 by kowalskiandassociates

Is that Herman above the tree?

Is that Herman above the tree? (Photo credit: mali mish)

Jerome Kowalski

Kowalski & Associates

March, 2012

 

Dramatis personae:

Herman Laforge; 64 year-old chairman of Biglaw, Global and Powers, an international law firm with roots in the Midwest.

Marvin Shades; managing partner of BG&P;

Sheila Shuster; CFO of BG&P;

Setting:

Tower floor of Manhattan skyscraper overlooking the canyons of Manhattan.  Act I takes place in late January 2009.

Act I

Laforge:

I am still breathless.  What a year 2008 has been! Those banks going out of business weren’t as harmful to our business as I feared.

Shuster:

I don’t know Herman. We had some deals and some litigation work from these banks for which we collected fees through the third quarter, but then new deal flow stopped and the lawsuits were then stayed by the bankruptcy filings. New matter openings in the firm slowed by about 40% in the fourth quarter and hourly billings were down about the same in Q4.  I don’t see those picking up during the first few weeks of this year. We could be in for a disaster this year. We just don’t have enough work to keep everybody busy.  If this continues, we may be in for a disaster this year.

Laforge:

Have we got the preliminary numbers for 2008 yet?

Shuster:

Yes, Herman, they are in your packet. Be careful about these – these are the real numbers – not what we release to the media.  As you can see, our gross was down 11% and our net was down by 14%.  The net might have been worse, but, fortunately, we laid off about 60 lawyers and about 100 support staff.

Laforge:

How does our profits per equity partner look?

Shuster:

We took a pretty big hit here. PPEP was down about 16%.  We may take a beating from the media on this one, but from what I hear, there are lots of firms that are in the same shape.

Laforge:

That doesn’t make me any happier.  Look, I built this firm by growing, merging and opening offices in the major US markets. I was only able to do that by boasting about our growing PPEP and showing potential acquisitions that our PPEP was up there with the top New York, California and Washington firms.  I had to get it out of everybody’s head that we were just another sleepy Midwestern law firm. That’s why I move to New York. If our PPEP takes a dip, I am afraid that we’re going to have trouble growing.  We’ve got to get our PPEP back up there.  Shirley – you got any bright ideas?

Shuster:

Well, Herman, PPEP is just a function of dividing up profits among our equity partners. We could increase PPEP by either raining profits, which are is going to pretty impossible in this economy or having fewer equity partners.

Laforge:

You may be on to something there, Shiela. Look, our partners are actually paid pretty much what I tell them they are going to be paid. Our budgeting is pretty good in stable years. Why don’t we take a bunch of our equity partners and take them out of the equity class – we’ll de-equitize them. We’ll just call them income partners. We’ll just explain to them that at the end of the year, they’ll make as much money as before and that we just have to make this adjustment temporarily to please the media. We’ll give them contracts so that their incomes will be protected.

Shuster:

But, Herman, we already have a problem with our non-equity partners. They weren’t as busy as they had been in the past. In fact, their hours billed were down about 20% last year.

Laforge:

Tough times require tough decisions. Let’s lay off about 10% of our income partners. That should seal the deal. And as long as we’re at it, let’s take another look at our associates and support staff and see if more cuts should be made there. If we’re going to take on some hard nasty news, let’s do it all at once. Get O’Brien in the media department to have a press release ready if word about this gets out to Above the Law. Say something about aligning our partnership and support structures to an ever changing and challenging economy.  And throw something about how we are very strong and confident. Oh – and say something about how we’re looking forward to a great year.

Shades:

Can we do all of this?  I mean, legally. These guys are partners, after all.

Laforge:

These are tough decisions, but we get paid big bucks to make these tough decisions. We made these folks partners and I guess we can unmake them as partners.  Everybody will understand that we are doing this for the good of the firm. Let’s also be strict about our mandatory retirement policy. No waivers. Period.

Act II

January 2010.

Laforge:

It’s been another doozie this year.

Shades:

At least cutting some of our equity partners last year kept our PPEP respectable.

Laforge:

But our gross still keeps slipping. We have to pump that up.

Shades:

Any ideas, Herman?

Laforge:

Let’s get back to our game plan for growth. We got to 1,200 lawyers by lateral hiring. Lots of it.  A lot of other law firms have done what we have done – de-equitize partners.  Partners at law firms are just free agents. Let’s now hire some real big producers and shell out some real money for these guys. Real money invested begets real returns if you hire carefully. If necessary, we’ll lean on some of our partners to defer some of their comp to cover these costs. After all, it’s for the good of the firm. Make sure O’Brien sends out a great release saying how we are continuing to grow.

Shades:

Sounds like a plan.

Act III

January 2011

Shades:

It looks like we are beginning to bounce back. We got some really good talent and bought some nice business. Even after paying for our ramp up expenses, we are showing some real improvement in gross, net and PPEP.

Shuster:

Yes, but the expense side keeps going up at a higher rate than the profit margin.

Laforge:

Sheila – you’re going to have to cut some support staff again.

Shuster:

I’m on it, Herman.

Laforge:

What are we going to grow the revenue side this year, Marvin?

Shades:

We are going to continue to buy talent and business. I’ve also been speaking to a bunch of other managing partners whose firms have pretty good numbers. A lot of these guys have pretty good networks of international offices. They say that these networks of international branches are great for servicing clients with global needs. They also say that having these networks gets them on the short lists for big ticket items where clients have the needs for international resources on matters where the stakes are high and they can charge big bucks. They also say that these international offices are pretty good feeders of business to the US offices.

Laforge:

You’re saying –

Shades (Interrupting):

Yes, let’s go global big time.

Laforge:

Sounds like a plan.

Act IV

January, 2012

Shades:

Hermann, on paper, we’re looking pretty good. Our gross is up 4%; Sheila got our net up by 11% but we are still getting killed with expenses rising quicker than revenues. On top of that, in order to get the cash in the bank, we have squeezed our clients to pay every bill possible before year end. We did a pretty good job on that with the help of Sheila’s staff. Sheila also did a great job on juggling our accounts payable, deferring payments until 2012 to keep our net as high as possible.

Shuster:

Thanks you, Marvin. But, we now have some new problems. Getting those clients to pay quickly ate in to our inventory. Our accounts receivable are at an almost unacceptable level.  The banks have noticed that and have raised some questions. On the expense side, we are cutting and pruning and we are way down on what we can cut. Our accounts payable numbers are much higher as a percentage of revenue than they ever have been. And while a 4% increase in revenue seems commendable, it is only slighter better than flat. We still need to increase the revenue side.

Laforge:

Look, guys – this isn’t a complicated business- we put in hours, charge by the hour and get paid by the hour. Just tell everybody to bill more hours. I’ve read that a couple of firms are doing that.

Shuster:

We have another problem, Herman. We lost a couple of our old time producers last year. They took a chunk of business with them and the press is starting to ask questions. The truth is that I tool this pretty hard – after all I’ve known these lawyers for thirty years and I found it hard to believe that they didn’t appreciate what we were doing for them in building the firm.

Laforge:

I don’t get it. What ever happened to loyalty?

Shuster:

It’s just not like the good old days, is it, Herman, is it?

But we have another problem brewing, you know when we went on that lateral hiring spree a couple of years ago, we asked some of our second and third tier partners to defer their comp to help pay for the new business. Well the total of deferred comp is getting a little out of hand and some of our partners and the banks are beginning to worry about that.  Some of the guys leaving are telling me that the whole deferred comp idea is one of the reasons they decided to bail out. And the press is starting to ask some hard questions.

Lafarge:

Look, Marvin, you get O’Brien to prepare another press release saying how we’re really doing well and that these partners leaving is part of our ongoing efforts to align ourselves with market realities. And you may as well let everybody know that we’re going to be laying off some more lawyers and support staff. You know, the alignment thing.  We’re not the only ones going through this.

Shades:

Herman – with all due respect, I think we need a more comprehensive approach on the media side.  Look, we saw Howrey go down last year.  The leadership there just didn’t appreciate how what they were telling the media helped sink them.

Lafarge (rising, very agitated):

Are you saying that we’re in danger of sinking? Is that what you’re saying?

Shades:

No Herman. Calm down. Every law firm is at its essence a fragile business. The point is that we need to recognize the realities. We must level with all of our partners. We need to make sure we are all working together as a team for a common purpose.

We also need to make sure that our partners understand that if we continue to get bad press and they continue to bail, we could, heaven forbid, be this year’s Howrey. We need to make sure that every partner understands that the personal consequences to the partners if we tank are extremely dire.

Let’s take our own statements seriously. Let’s really make sure that all of our partners are actually properly aligned and that all are compensated fairly.

Lafarge:

Sounds like a plan.

Curtains Draw to a Close

Author’s Curtain Call invitation to his audience:  Please help me with writing the fifth act. How do you think this production should end?

 

 

© Jerome Kowalski, March, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310.

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Filed under: Crisis management, Global law firms, Hiring and training lawyers, Lateral law firm partner, Lateral law firm partner movement, Lateral Partner, Law Firm Crisis Management, Law Firm Dissolution, Law Firm Dissolutions, Law firm financial reporting, Law Firm Implosions, Law firm management, Law firm management strategies, Law firm partner layoffs, Law Firm Risk Management, Media Relations, Navigating the Perfect Storm: Recruiting, Public Relations, Retaining and Training Lawyers in the Coming Decade, Strategic law firm planning, The Law Firm of the Twenty-first Century | Tagged: , , | 8 Comments »

Leverage is Back: The Return of the Pyramid Business Model for Law Firms, with a Twist

Posted on February 21, 2012 by kowalskiandassociates

English: Great Pyramid of Giza.

Image via Wikipedia

Jerome Kowalski

Kowalski & Associates

February, 2012

 

Yesterday marked the 35th anniversary of my admission to the bar. The day passed quietly, without note or fanfare. But it did cause me to reflect on how things have changed.

In 1976, when I graduated from law school, there were some basic covenants to which all subscribed: If you did well in college, you got in to law school; if you worked hard in law school, you got a job at a good law firm; if you worked very hard as an associate, had the tenacity, appropriate degree of intellectual rigor and good humor, managed not to offend for the term of your clerkship, you were promoted to the partnership and looked forward to lifetime tenure, a sinecure from which you could not be removed and would not dream of leaving until you entered your dotage. Many, if not most, large law firms had a lockstep system of compensation for associates and partners. The AmLaw 200 listings, the source of more tall tales than any gathering of fishermen at a tavern, would not surface for a decade. Lateral partner movement was as rare as hen’s teeth. If a law firm partner in those days suggested that the firm should de-equitize partners so that the firm’s numbers would look better, he would be directed to a psychiatrist for emergency treatment. Partnership had real meaning, it was not an at will employment status and partners would not for a moment think of themselves as free agents, available to the highest bidder. Partners were proud owners of the enterprise. There was genuine esprit de corps, mutual respect, pride, loyalty and genuine collaboration.

These ruminations were prompted by the piece recently written by my friend, Professor Steve Harper, entitled “The Lateral Bubble,” a must read for anyone toiling away at or near BigLaw. Frankly with all of the buzz in the blogosphere and elsewhere concerning Harper’s piece, it seems that all have read it already or pretended to have done so, at the very least.

Professor Harper, no fan of partner free agency, observes that partners are no longer proud owners of the enterprise. Rather, he observes that BigLaw’s “currently prevailing business model encourages partners to keep clients in individual silos away from fellow partners, lest they claim a share of billings that determine compensation. Paradoxically, such behavior also maximizes a partner’s lateral options and makes exit more likely. In other words, the institutional wounds are self-inflicted.”

Harper quotes admiringly another recent article by Ed Reeser and Pat McKenna entitled “Crazy Like a Fox” in which the authors articulately demonstrate in cogent fashion how meaningless the Profits Per Partner metric is  (disclosure: Ed Reeser is also a good friend of mine and has been an occasional contributor to these pages; Ed and Steve do not know each other, but I can assure you that they are kindred spirits in every possible respect).

Say Reeser and McKenna:

“Over the last few years there has been a dramatic change in the balance of compensation, to a large degree undisclosed, in which increasing numbers of partners fall below the firm’s reported average profits per equity partner (PPP)…Typically, two-thirds of the equity partners earn less, and some earn only perhaps half, of the average PPP.”

In 2010, I wrote about the emergence of a three tiered caste system for associates in BigLaw:  Firms now employ “partner track associates”, “non-partner track associates” and “staff lawyers”.  The partner track associates are those from the best schools, with the best grades who toil away the hardest and whose academic credentials are touted to clients and potential lateral partners. Non-partner tracks associates are those who fared a little less well, and who have a fairly short shelf life. The staff lawyers are those who are most akin to day laborers, who float from gig to gig, often paid subsistence wages and receive no benefits.

Well, then, what’s good for the sauce for the goose  is good for the gander. Partner ranks have now evolved into a new three tiered caste system as well:  Highly compensated equity partners, a second tier of less handsomely paid equity partners and a great swathe of contract partners. As Harper, Reeser and McKenna observe, the ratio of compensation from the most highly compensated equity partner to the lowest is staggering; in some firms it’s ten or twelve to one.  The ratio for most highly compensated equity partner to the lowest level of contract partner is often even greater.

While we may have thought that The Great Recession brought about the demise of the leverage model for law firms and that the new model for the Twenty-first Century Law Firm is an inverted pyramid, the good news, folks, is that leverage is back and the pyramid has similarly returned to its old footings.  Except that the pyramid is no longer one with a broad base of associates and partners decreasing in number at each higher level of the edifice. With the devolution of associate ranks to the caste system, the refusal of clients to pay for first and second year associates and clients’ not permitting law firms to mark up and sell at a profit the work of temporary staff lawyers, associates no longer make up the base of the pyramid. Rather, it’s the ranks of contract partners who lie at the base of the pyramid and support those at its summit. As those at the top need more support for their compensation requirements, some equity partners find themselves cast into supporting roles keeping the rich and famous comfortably enjoying the view from the top. If more financial support is needed, partners are simply de-equitized, move down a notch and then fill out the base of the pyramid. Partners deemed insufficiently productive are asked to leave. The notion that partners are owners of the enterprise is gone.

Ample anecdotal evidence from the field corroborates the return of the leverage model, albeit at the nominal partner level. We have heard from scores of managing partners that those at the partner at the partner ranks busier than ever, working longer hours and grinding out the work as never before. Equity partner compensation at the pinnacle is at eye popping numbers.

The only issue not yet adequately addressed is the future of the pyramid when those at the top see the lush neighboring pyramid across the expanse with a taller peak, more lavish accommodations emitting a siren call for all those who want even more. Collapse of the structure comes not from erosion at the supporting base, but rather from the loss of the pinnacle.

Keeping the structure erect and enduring simply requires a return to the days of yore when all partners truly felt like they were proud owners of the enterprise, and a return to feelings of genuine esprit de corps, mutual respect, pride, loyalty and genuine collaboration.

© Jerome Kowalski, February, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310.

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Filed under: Crisis management, Global law firms, Hiring and training lawyers, Lateral law firm partner, Lateral law firm partner movement, Lateral Partner, Law firm associates, Law Firm Crisis Management, Law firm financial reporting, Law Firm Implosions, Law firm management strategies, Law firm partner layoffs, Navigating the Perfect Storm: Recruiting, Retaining and Training Lawyers in the Coming Decade, The Law Firm of the Twenty-first Century | Tagged: , , , | 19 Comments »

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