The Firms

April 20, 2009 6:16 PM

The Future Comes to Bloomington

Posted by Ed Shanahan

By Aric Press

Bill Henderson, the irrepressible Indiana University law professor, had a simple idea. To test the viability of the big-firm model--and look for ways to change and rescue it--he and Anthony Kearns, the lead risk manager for the Australian lawyers insurance operation, organized a clever role-playing game, a sort of Dungeons and Dragons for lawyers. FutureFirm, as they called it, is a case study of a hypothetical Am Law 200 law firm in trouble (Download Future Firm Competition). Teams of law firm partners, clients, law students, and consultants would spend a day and a half trying to devise a strategy that would allow the tottering Marbury & Madison LLP to survive for another decade. And in the process, the emerging PowerPoints and rump partners meetings would shed light on the current thinking of what firms in peril--and others merely facing the broader economic turmoil--might do to right themselves.

In all, 44 players, 14 judges, and assorted hangers-on participated in the game last weekend at Indiana's Maurer School of Law. What emerged from the exercise was a surprising convergence of strategies that gave an outline to what a new model might look like. These strategies were not radical, and they attempted to address a variety of much-brooded-about problems among the big firms, including client billing revolts, associate dissatisfaction, peripatetic partners, and an unsustainable economic model. What emerged, of course, was governed by the choice of the participants. Included on the roster were members of experimental law firms--both the Summit and Valorem Law Groups--various refugees from big firms, clients with a record of welcoming or demanding different approaches, and a variety of agitators for change, most of whom are my friends. But in an era when the heads of major firms talk openly about abandoning the billable hour, and others admit that they've never embraced it, it's getting harder to identify the radicals by their pinstripes.

The competition was more than a game. Hildebrandt, the consulting firm, put up $15,000 in prize money (to be divided among the participating law students) and attached a consultant to each team.

These were the areas of convergence:

-New associates would be paid less, trained more, freed from some or all billable hour requirements, and helped with their law school loan payments. They'd be promoted by achieving a set of "competencies" not seniority. And there'd be fewer of them so leverage would drop. The proposed starting salaries varied from $80,000 to $125,000; bonuses were tied to firm performance. Stepped-up training ran the gamut from nostalgia for the days of "shadowing" senior partners to more efforts to bring associates to deals/depositions/other real-life events that many now only read about. Help with law school debt varied from paying third-year tuition to interest-free loans to experimenting with deferred compensation packages.

Because of the compressed game schedule, many questions went begging: Who would train; could the firms afford even these reduced pay packages; how would the loan payoffs work; and what would happen to firm structure if the associates, having found an office paradise, chose never to leave?

-Clients would be offered a smorgasbord of alternative fee arrangements, frequently based on the mining of actual billing data. Whenever possible, the firm would offer to share at least a modicum of fee risk as a sign of trust and shared enterprise. Clients would be treated to regular evaluation meetings. Their lawyers would learn the intricacies of their business; they'd know their clients even better, as one contestant put it, than "Tom Hagen knew the Corleones." With the proverbial "skin in the game," they would offer "value" and "focus" to their clients, they would build client-friendly wikis to keep them informed, they would monitor retainer-paid help lines to answer questions from line managers, and they would offer client service managers who would, among other things, be the "one throat to choke" in times of crisis or disappointment. And they all would be offered a flood of secondments.

Questions left open: Might the independent firm become too close to its client to say no; so dependent on a client that it was jeopardized if the client chose to leave; too vulnerable to outsize customer buying power? And what would keep a client loyal, especially if relationship partners left for other firms?

-Partners would have to take an initial compensation hit in the interest of making the rest of the plan work. And partners would not buckle under the pressure of their dissatisfied rainmaking brothers and sisters who threatened to bolt. They would organize into one-tier partnerships; there was no agreement about lockstep or top-bottom salary ratios. To save on overhead, they would move from center city offices to the suburbs or home; they would share secretaries; they would commit to the new order, or they could leave.

Unknown: Could the hypothetical firm actually survive the departure of several of its key business generators; when the economy improved and new offers came along, would the glue of "culture" hold or flake?

This is, of necessity, a brief report. Henderson will publish a much more complete discussion and analysis. The value of the exercise is that it gave an organized venue for the airing of grievances and a place for like-minded lawyers to share ideas. We all know that many of these complaints have been sounded for decades. What seems to be different this time is that they are being voiced amid an economic calamity that has called into question whether clients will continue to operate on a business-as-usual basis. We all know of examples where customers have recently been insistent on changing their arrangements with their law firms; the clients who spoke during the working group sessions at Indiana were not different. They did not speak as supplicants. The existence of this rump agenda is no more powerful than any game; the client demands did not seem like the stuff of fantasy campfires.

To add urgency to this climate, the weekend began with Kearns, the Australian lawyer, offering an amusing but sharply focused description of the American big-firm landscape. Here's what he sees:

1. The big-firm bubble is about to burst. Choose your pin: angry clients; the exodus of talented people from the practice of law; the competition for associates that firms can't afford; the increased competition for business between and among the firms.
2. The prevalence of bigger and stronger in-house departments.
3. The presence of three generations in the law firm workplace.
4. The global financial crisis, which has broken the old relationships.
5. The utter failure of firms to differentiate themselves to clients or recruits. (And, I might add, to themselves.)

And then he compared this situation to the lot of turkeys. On average, he said, they live 1,000 days. Each day when they wake up, everything seems exactly the same, except that some friends are not around anymore. Everything else seems to be okay. Get to day 1,000, however, and things change, suddenly and with extreme prejudice. He didn't think a lot of firms would die like a slaughtered fowl. Nor did he think that large law firms were going away. But some were in jeopardy, even though they didn't know it. Deaths take a while, and intensive care can prolong all sorts of partnerships.

The question: Is it too late to get healthy?

Or, as the great man wrote, are you busy being born or busy dying?

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The fear of rainmakers leaving has constrained many needed innovations in law firms. That's understandable. Even a $300m firm, during the best of times, will feel the effect of $10-15m walking down the street to a competitor.

The obvious "shame on you" part is that most partners were all too happy to let a small cadre of rainmakers shoulder the exhausting job of financing the entire firm year after year, enabling the other partners to avoid the unpleasant task themselves. That the rainmakers ended up with inordinate financial impact, which translates into inordinate power, is the price of partners having abdicated responsibility for a mission-critical business function, i.e., sales.

If some big rainmakers have become latter-day monsters in certain respects, well, you created them.

Now, however, I believe firms will see big rainmakers' influence beginning to decline. Whenever an industry goes through seismic change, incumbencies get destroyed. BigLaw is going through seismic squared, i.e., not only is the law biz going through recession, but every client's industry is going through it, too. That means that the old rules will be shattered.

Ox-goring time: There is another factor that will contribute to rainmakers' ebb (one that I'm almost certain to be pilloried for pointing out).

In every boom market, particularly in one as protracted as this has been for law firms, you have rainmakers who acquired their business through real effort, but who rarely had any reason to acquire the kind of selling skills that down markets demand. When demand for your category is high and everyone is buying, if you represent a prestigious brand and you work your tail off, you will capture a disproportionate share of that buying behavior. When demand drops, sheer effort is not enough. As is proven every day in every other industry, salespeople have to actually know what they're doing.

I predict that lots of rainmakers' legacy business portfolios will drop precipitously due to a combination of a) the virtual or actual disappearance of the biggest financial and corporate buyers, and b) sellers' lack of knowledge of how to generate business in low-demand markets.

As rainmakers' business declines, so will their stranglehold on their firms. Here's hoping that the firms will be bold enough to recognize that the industry is permanently changed and act in the broader self-interest of the entire partnership.

It goes without saying, however, that unless the partners enhance their collective ability to generate business and thereby offset at least part of the rainmakers' impact, the political benefits of rainmakers' diminished power will ring hollow to an impoverished firm.

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