Former managing partner Edwin Reeser is one of my favorite analysts of the legal profession (or industry, as the case may be). He recently wrote an interesting and thoughtful piece for the ABA Journal with a great title: “Law firms in the Great Recession: looking for change in all the wrong places.”
I’m a sucker for a good double entendre. Here, “looking for change” has at least two meanings. First, there’s “change” in the sense of reform. Second, there’s “change” in the sense of “spare change,” reflected in the sad way that law firm are rifling through the couch cushions — de-equitizing partners, laying off associates and staff, and cutting other costs here and there. These marginal steps have helped keep profits per partner up in the wake of the Great Recession, but they’re no recipe for winning the future.
So what should Biglaw be doing to promote long-term success?
We’ll start with what firms should not be doing, at least in Ed Reeser’s view:
Answers are not bold stroke mergers, absorption of chic specialty practices, or expansion to new markets in new locations. Those are all strategies that send the following message to the entire firm: “The future success, indeed survival, of this firm depends on people who are not here now, and are yet to be found.” Is that the message of a successful organization that motivates its membership to move forward with energy, enthusiasm, passion and resolve? Such moves by those occupying leadership roles exhaust the spirit of everyone in the firm and waste financial resources desperately needed to work real change, increasing the difficulty of recovery. For five years, this has been the approach of too many firms.
And some firms that are no longer around. Boy Dewey know of some examples….
Reeser argues that firms have their priorities wrong, in at least two ways:
The first level is that there has been abandonment of the “people business” essence of law. This impacts upon the investment made internally, and externally on the oft-discussed price/value proposition for clients. The most precious and essential element of professional practice is identifying, recruiting, hiring, training, mentoring, promoting and retaining those professionals, and the properly skilled staff to support them.
Law firm managers often think of a tension between “people” and “profits”: slash the number of people, increase the amount of the profits. But Reeser reminds us that the best firms invest in their people and see that investment pay off in the long term.
If you don’t invest in your people, you can watch them walk out the door — which costs you money:
The cost of each professional is very high compared with most other businesses. Every time a firm loses one, it costs a small fortune. This is an incredibly wasteful yet almost institutionalized feature of the industry. Let’s say it costs a firm an unrecovered investment of more than $350,000 each time an associate with less than four full years of service leaves the firm. What does that do to all those cost reductions elsewhere? Capital is important, but compared with manufacturing and other businesses, it is a smaller contributor to the creation of revenue. In law firms, it is people who create revenue.
Four years might seem high to some. But in light of how clients increasingly resist paying for the work of first- and second-year associates, it seems reasonable to me.
It’s a tricky thing, attrition. Firms want a certain amount of it, especially among underperformers, and if they don’t get enough naturally, they’ll induce it (read: layoffs). At the same time, they want strong performers to stay. But those strong performers might be interested in other options, such as in-house or government work, and the optimal departure points may fall earlier than the law firm might like. So holding on to the talent you like while getting rid of the talent you don’t is easier said than done.
If a firm can figure out how to accomplish this feat, the returns could be significant, Reeser suggests:
[M]odel a business with an industry average 18 to 20 percent annual associate attrition rate with those costs, and see what devastation it does to the bottom line. Then try cutting the attrition rate in half and running the numbers again. The difference is millions of dollars a year Adjust the assumptions to fit the firm, but the answer is clear: Hire less, train more, keep them longer.
This is certainly the solution in theory, but again, it’s challenging to implement in practice. Many of the most promising recruits end up leaving after not very long, while others turn out to be pleasant surprises. Some interesting research is underway regarding predictors of law firm success — see, e.g., the work of Bill Henderson and Lawyer Metrics — but it’s fair to say that, at the current time, law firms could be much, much better at selecting and developing talent.
Here is the second area where law firms get it wrong, according to Reeser:
The second level is in the definition of what the “right” things are that firms should be doing: specifically, a very definite, clear and uncompromising definition of a moral “right” thing that is communicated to all and embraced and adhered to by all with rigor. It is through the pursuit and achievement of the “right” thing that the culture of a firm is built, and the team commitment by people to each other and for each other can be framed to achieve everything else that matters in the enterprise.
I don’t disagree with this either. But it can be tough advice to follow in the age of the Biglaw Hunger Games.
These are just selected highlights of Reeser’s essay, which you can and should read in full. It will be followed by a sequel post later in the week. You can also check out additional writings of his over at JDSupra.