Legal Business Blogs

Comment: Where do you want your firm to be in 2020? How short-termism has come to define the modern law firm

To judge from the way law firms behave – it’s helpfully instructive to ignore what they say – the answer to the rhetorical question of the above headline is: ‘Who gives a fig?’

Consider the following facts and ask yourself what philosophy of management underlies and ties all law firms together:

We strip the balance sheet of all available cash every year-end.

The most oft-cited ‘key strategic priority’ to generate growth for US managing partners polled on their intentions for the following year – chosen by over 95% – will be acquiring laterals. This level of near unanimity has been achieved annually at least since 2008, according to the annual survey of managing partners by Altman Weil.

And more than half of those plan on giving those laterals two years or less to demonstrate acceptable performance, with one committing the classic political gaffe of inadvertently speaking the truth: ‘Years?! We expect them to produce in the first six months.’

Three quarters of firms admit to having no real succession planning process in place, the primary obstacle being ‘senior partners who don’t want to forfeit their current compensation’.

Finally, consider the little-remarked but sobering figures on how the proportionate composition of lawyers at the largest 250 law firms in the US based on headcount has changed over the last decade:

Associates: from 55% to 47% (down 15%).

Equity partners: from 31% to 26% (down 16%).

Non-equity partners: from 7% to 16% (up 129%).

‘Other’ lawyers (staff, of counsel, contract, etc): from 7% to 10% (up 43%).

I submit that the managerial approach underlying all of these is extreme short-termism. The time horizon for far too many firms is one, two or (at a stretch) three years.

Might we stipulate that this is no way to build, or even to conserve, an institution for the ages?

The lack of anything resembling ‘retained earnings’ or an R&D, or a capital investment budget, means we live hand to mouth, as it were, not only without a rainy day fund (a circumstance our increasingly tetchy bank lenders have recognised forcefully, if belatedly), but without reliable means of building human and physical capital that will deliver competitively advantageous returns in future.

The all but universal fixation on pursuing laterals – a kind of professional arms race of escalation without logic – is the single most glaring and toxic result of our fixation on the short term. Rather than developing and investing in strategies for genuine sustainable growth, virtually all firms opt for the quick fix of an immediate top-line boost through laterals (that may or may not contribute to the bottom line). Moreover, our batting average with laterals is mixed or poor, depending on how elastic one’s definition of success is. We’re not even buying revenue – we’re just renting it.

Not only aren’t we much good at playing one of our most addictive games, it too often comes at great cost to the morale, and sometimes the wallets, of our loyal incumbent partners.

If someone has designed a more potent technique for engendering envy, I have yet to see it.

And while we’re at it, we impose potentially unrealistic expectations on the lateral arrival.

Succession planning? Evidently it’s for wimps. Actually, it’s for firms who believe that strong and effective management actually matters.

Succession planning? Evidently it’s for wimps. Actually, it’s for firms who believe that strong and effective management actually matters, a bedrock presumption in the 98% of the economy outside Law Land, yet one that most lawyers are instinctively suspicious of.

A particularly wise law firm leader I know believes we will only achieve maturity as organisations when we actively seek and recruit senior managerial talent from other firms, so as to have a deep bench of available leaders ready to step forward. You scoff? Have you looked at what major corporations do every week? When they need a new chief executive, they either have internal candidates who’ve been groomed for just this event for decades, or they hire fresh chief executives from the likes of General Electric, McKinsey and – yes – the competition. I for one am loathe to jump to the conclusion that law firms are right and the rest of the business world is wrong. Then again, that’s just my opinion and lawyers are convinced they do in fact know better than everyone.

And what, exactly, is the point about the aforementioned morphing composition of lawyers at large law firms? Simple, I believe:

First, that shrinking pool of associates. Associates require investment in training, professional development and, yes, time write-offs. (Don’t be tempted to jump to the conclusion that firms have merely responded to client preferences by cutting associates since 2008, when clients began to get serious about refusing to pay for juniors. The decline at top 250 US firms was almost entirely before that, from 2000 [55%] to 2008 [48%].)

Yes, associates can cost money, but they are, or ought to be, the future of the firm.

Equity partners, also down, are costly in another way: to firms’ reported profits per equity partner (PEP). If the top line and the bottom line are essentially flat year after year (putting aside inflation and headcount growth), what’s a body to do? Cut the denominator of the PEP calculation.

Non-equity partners and ‘other’ lawyers, both up dramatically, can provide a particularly quick jolt to the income statement. Realisation rates for both are high, because experienced non-equity partners enjoy few write-offs and ‘other’ lawyers are inexpensive to begin with. Firms can plausibly and sincerely claim they are simply being responsive to the market – clients like experienced lawyers with kinder and gentler rates than full partners – but what do they contribute to the next generation of leadership?

Worse, keeping a large swathe of non-equity partners around too often results from managerial failings when it comes to performance reviews, or a cowardly preference for avoiding awkward conversation. Yet their growing ranks deprive associates of complex work, short-circuiting the associates’ professional development, impeding their career paths, and ultimately contributing to voluntary and involuntary attrition. Yet again, we have found an ingenious technique to pay the present while mortgaging the future.

The all but universal fixation on laterals – a professional arms race of escalation without logic – is the single most glaring and toxic result of our fixation on the short term.

Speaking of pay, what are the key ingredients in your partner compensation system? At an increasing number of major global law firms, the uber-variables are billable/collected hours worked and new client originations – primarily if not exclusively for the 12 months immediately past. Note a familiar theme? True, this model is still more American than European in character, but it has been increasingly imported into the old world through the steady expansion of European branches of US advisers over the last 15 years. There is a clear pressure and direction of travel and it is not in favour of long-term thinking.

Contributions to firm-building for the long run, including mentoring and professional development, community and civic leadership, and even institutionalising the bonds with existing clients, are relegated to exercises in self-abnegating volunteerism. It’s actually worse than that.

Self-preservation dictates that far too many partners actively avoid unrewarded firm-building investments. They fear it could cost them not just monetarily, but at a more existentially threatening level, in their very stature at the firm in the eyes of their colleagues. At firm after firm over the past couple of years, I have heard managing partners express – always in confidence – that one of their greatest fears for the future is senior partners’ hoarding key client relationships, deliberately or passively managing not to share, in order to ‘keep their numbers up’. And given the rules of the compensation road that most firms have laid down, they’re behaving entirely rationally. It is we who are engaging in the irrational, potentially self-destructive, behaviour.

Now, it would be fair of you to ask, how would I propose we do things differently?

Resurrect the concept of stewardship. At the start of our careers, each of us comes into a firm we did not create and have not built, but we inherit an inescapable moral (yes, moral) obligation to contribute to the greater wellbeing of that institution, or leave. Monetary rewards need to be sufficient, compensation needs to be fair and I would be the last to suggest anyone shortchange the firm’s financial success – you do that at your peril – but they aren’t why people get up and come back to the same elevator the next day.

Loyalty to a firm, and inspired and creative work there, depend on a purposeful sense of building something greater than oneself. The measure of achievement shouldn’t be entirely the size of one’s bank account or the covetousness one’s possessions can inspire. Nor should it be for our firms the comparison of this year’s income statement over last year’s.

I mentioned that in our youth we all joined firms we didn’t create. But some individuals did create them, some still living and some dead for generations. Despite enormous differences in time and place, in circumstance and opportunity, in motivation and in temperament, I can guarantee you one thing all those people had in common: a long-term and not a short-term outlook. Take heed.

The author is the president of Adam Smith, Esq, the strategic legal consultancy.