Wall Street Journal writes about “The End of BigLaw” and it goes on our to-do list.
Adam Smith, Esq. says it’s a bunch of hooey and we start outlining.
Jason Mendelson says Adam Smith “doesn’t understand crap about law firm economics” and we start typing.
Our two cents (and then some), after the jump.
The Players:
Douglas McCollam wrote the piece for the WSJ. He’s styled “a former correspondent for BusinessWeek, [and] a contributing writer for The American Lawyer.” In a move near and dear to our hearts, Adam Smith googled him, not recognizing the name:
“So far as Google and I can tell, he has actually written a grand total of one article for BusinessWeek and perhaps two or three for The American Lawyer, the most recent in 2005.”
Adam Smith is the nom de plume of Bruce MacEwen, a consultant to law firms. Just as MacEwen questioned McCollam’s credentials, Mendelson challenges MacEwen’s impartiality.
Mendelson is a BigLaw veteran (Cooley Godward) and venture capitalist who writes about the future of the practice, and invests in, among other things, disruptive technologies in the practice of law. [To disclose our own potential bias, Mendelson has said we're "one of his favorite blogs."]
The Points:
Both Mendelson and MacEwen attempt to put aside their own biases against the preceding author and respond objectively to the arguments.
Basically, McCollam said what we’ve all heard a thousand times before:
It seems plain that a great many members of the American bar fell prey to the same strain of hubris that infected their clients. They embarked on empire building—opening offices from Beijing to Bucharest—and snapping up smaller rivals, confident that the future belonged not so much to the best and the brightest as to the biggest. The movement toward gigantism was virtually uniform across the legal industry.
Now that the fuel to run their massive law machines has been choked off, big law firms find themselves just another smokestack industry with too much capacity and too much real estate. Yet unlike their corporate clients, law firms have a culture ill-suited to the bloody work of downsizing. They hire incoming classes of associates a year or even two in advance and are loath to be caught out in public doing something so down market as layoffs.
You know where MacEwen is going to come out before he even gets to the merits:
Mr. McCollam’s credentials as a domain expert in our industry aside, the article falls quite spectacularly on its own merits, as a truly impressive exercise in the abject failure of critical thinking:
Basically, he says law firms are no different from any other industry: profits are dropping across the board; firms expanded globally to follow their clients’ globalization; firms’ demises aren’t being hastened by underused capital expenses; and the body of the article doesn’t connect to the title (i.e., yes, things are bad right now, but how does that signal the end of BigLaw?).
Mendelson takes exception with two of MacEwen’s (all this McCollam-MacEwen bickering is making us want to watch Braveheart, by the way) points in particular [MacEwen in italics, Mendelson in regular text]:
1. “I have yet to meet a managing partner not exquisitely attuned to the sentiments of their partners and the perceptions of their clients.” You clearly don’t get out much then. This is absurd. If this statement was true, one would not see the massive amount of partner transfers between firms and pissed off clients. I am confident when I say that the majority of clients think exactly the opposite and disagree that law firms are “managing their firms as smartly as they are” (quoted from a previous Adam Smith blog); and
We completely agree with Mendelson on this one; partners are fleeing in droves. In fact, even Bloomberg has picked up on this, as we just wrote. Or read about our favorite “pocket boutique,” Zuber & Taillieu, or Virtual Law Partners (and not just because one of them is engaged to a Google gazillionaire who won’t let him sleep).
We’re amazed by MacEwen’s notion that there’s this unified front of manging partners and the rank and file. Partners with portable books are moving around in unprecedented numbers and to uncharted territories exactly because they feel they’re not being attended to by management.
Ask some White & Case partners how they felt when they saw Hugh Verrier profiled in the most-recent New York Times piece about Law Shucks. The kinder response comes from those who were blindsided. The really choice words will come from those who knew it was coming. And from what we hear, Verrier’s “exquisite attunement” to the perceptions of London rainmakers Mike Goetz and Maurice Allen played no small part in their leaving White & Case for Freshfields last year flat out quitting the firm with no announced plans this week,[Ed: woops, my bad - blended two thoughts together and got them both wrong] and Rachel Hatfield’s doing the same quitting the firm a few months ago. Hardly the hallmarks of attenuation, in our minds.
And if MPs aren’t attuned to what their own partners are thinking, the disconnect with what clients are looking for is even worse. Take a look at this Q&A from a Times Online interview just yesterday with the MP of Dundas & Wilson, a Scottish firm (emphasis added).
Are City lawyers overpaid?
I think inevitably some will be overpaid and some will be underpaid. Partnership structure has a tendency to blend profit shares and reward for individual senior partners or senior lawyers. If we could genuinely understand where the clients see the value in our services, then we would find a fairer way of rewarding our partners based upon their contribution to our businesses.
That’s the question being asked in corner offices around the world.
Mendelson’s other rebuttal:
2. “Last time I checked, we were not capital-intensive nor do we have but the most trivial base of fixed assets.” This is also laughable. First, I find it enlightening that the author uses the word “we” when referring to Big Law. Clearly this is another tip of the cap to bias. Secondly, law firms are notorious for getting in over their heads with fixed assets. See: Brobeck and / or my prior posting on this. And this doesn’t include the multiple of dozens of conversations I’ve had with AmLaw 50 partners agreeing with me that fixed costs are out of control.
This one is a little closer. Law firms do have relatively low fixed costs compared to revenues – it’s basically rent. Salary is variable, as the Layoff Tracker clearly demonstrates. Neither Mendelson nor MacEwen mentions the massive exposure many firms have to retired partners, which is equally substantial. Plus, a lot of firms borrowed against future revenues to fund outsized draws in good years, on the promise of more good times to come. If you think associates paying down law school debt are living paycheck-to-paycheck, take a look at a firm’s cash-flow statement.
But really, the issue here isn’t as much the expenses as it is the portability of the revenue. There is just nothing stopping partners from voting with their feet. And that portability has a snowball effect, no one wants to be left holding the bag, so as soon as whispers of troubles begin people start thinking of leaving. Perception quickly becomes reality, and the rats start jumping from the ship.
Conclusion:
At the end of the day, they’re both right, but they’re not talking about the same thing. Mendelson is right, the existing big law model is broken, but what he fails to recognize, and what MacEwen doesn’t express, at the expense of making a cogent argument, is that there will always be a need for top-of-the-market practicioners. That bleeds over into Mendelson’s argument, which should really be that the current model is broken for most firms. A few will survive because there will always be clients who will pay for a premium brand.
Firms like Anderson Kill and McDermott (not to pick on them – pick any firm paying first years 160k but not Wachtell, Cravath, Skadden, Cleary, STB, or a tiny handful of others) are eventually going to have to realize that they’re not competing on the right elements.
Just like it used to be that people “couldn’t get fired for buying IBM,” people will continue to believe they can’t get fired for hiring Cravath. A select few will abide (although MacEwen is overly inclusive and optimistic), and some will evolve (as Mendelson argues they must) or dissolve.
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Partners are not leaving firms because they are poorly managed, though they often are. They are leaving because they can get a better deal elsewhere. It's not true of everyone, but a majority and perhaps a large majority of people are going to jump ship if they have a book of business and can land somewhere that enables them to make another $500K a year. That's true even if they love the firm and think it's well-managed and suits their needs. Human nature.
Partners are not leaving firms because they are poorly managed, though they often are. They are leaving because they can get a better deal elsewhere. It's not true of everyone, but a majority and perhaps a large majority of people are going to jump ship if they have a book of business and can land somewhere that enables them to make another $500K a year. That's true even if they love the firm and think it's well-managed and suits their needs. Human nature.
I view that as being implied in management’s duty to ensure that their firm IS the better deal (including the friction costs of moving).
Also, I know Goetz and allen left freshfields this year and whitey last year I’ll fix it when I have better keyboard (on phone right now)
I view that as being implied in management’s duty to ensure that their firm IS the better deal (including the friction costs of moving).
Also, I know Goetz and allen left freshfields this year and whitey last year I’ll fix it when I have better keyboard (on phone right now)
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