Atlantic article on the "death spiral" of biglaw Forum

[LawIdiot86]

The article misses a key distinction, which is that law firms aren't built on financial leverage the way most businesses are. They don't borrow tons of money to fund continued growth. They don't have stock prices that must be propped up by continuous growth. If a particular firm falls behind in growing profits, its partners might jump ship, but that's not going to cause the industry to decline, it'll just move profits from one firm to another.

A decline in big law will be precipitated by a decline in the demand for sophisticated legal services. e-discovery and off-shoring and the like will definitely cut demand, but only so much. And such a drop in demand might lead to structural changes within law firms (lower leverage, lower profits), but can't cause the same sort of death spiral you see in financially leveraged industries.

I disagree. Many firms are in fact heavily financially leveraged, it just doesn't look the same as when firms do. In fact, that's what's bringing down Howrey: they used leverage (bank loans and money borrowed from the partners) to make guaranteed disbursements, which they had to promise lateral rainmakers in order to lure them in. Business didn't materialize the way they though it would thought it would, the partners aren't getting paid, those with business are leaving, and now they are likely triggering debt covenants.

Firms cannot continue to "grow" by overpaying to lure in hostshot lateral partners. It's false growth, and with the exception of a very few "elite" firms, that's the model they all depend on.

I continue to think these guaranteed contracts were beyond insane. I could see something like "We'll give you the first 10MM in client billings you bring in from your clients," but saying "We'll give you 10MM based on your prior performance and hope you replicate it here" is the sort of thing an insane person does.

[sunynp]

The article misses a key distinction, which is that law firms aren't built on financial leverage the way most businesses are. They don't borrow tons of money to fund continued growth. They don't have stock prices that must be propped up by continuous growth. If a particular firm falls behind in growing profits, its partners might jump ship, but that's not going to cause the industry to decline, it'll just move profits from one firm to another.

A decline in big law will be precipitated by a decline in the demand for sophisticated legal services. e-discovery and off-shoring and the like will definitely cut demand, but only so much. And such a drop in demand might lead to structural changes within law firms (lower leverage, lower profits), but can't cause the same sort of death spiral you see in financially leveraged industries.

I disagree. Many firms are in fact heavily financially leveraged, it just doesn't look the same as when firms do. In fact, that's what's bringing down Howrey: they used leverage (bank loans and money borrowed from the partners) to make guaranteed disbursements, which they had to promise lateral rainmakers in order to lure them in. Business didn't materialize the way they though it would thought it would, the partners aren't getting paid, those with business are leaving, and now they are likely triggering debt covenants.

Firms cannot continue to "grow" by overpaying to lure in hostshot lateral partners. It's false growth, and with the exception of a very few "elite" firms, that's the model they all depend on.

I continue to think these guaranteed contracts were beyond insane. I could see something like "We'll give you the first 10MM in client billings you bring in from your clients," but saying "We'll give you 10MM based on your prior performance and hope you replicate it here" is the sort of thing an insane person does.

So what was the driving force behind hiring these elite superstars? They all bring a large book of business. But the guarantee, was that necessary to get them to join the firm? I

[09042014]

So what was the driving force behind hiring these elite superstars? They all bring a large book of business. But the guarantee, was that necessary to get them to join the firm? I

The idea is these elite superstars will bring their book of business over to the new firm. The problem is the book is almost never as good as they say it is. A lot of clients either don't want to switch, or are decide to look around during the switch. The guarantee was to entice the partners to move because without it, if they move, and their clients don't they get fucked really hard because their pay is based on their business they bring in. The problem for Dewey was, if enough of these partners move and don't bring their clients, they can't pay for it.

[sunynp]

So what was the driving force behind hiring these elite superstars? They all bring a large book of business. But the guarantee, was that necessary to get them to join the firm? I

The idea is these elite superstars will bring their book of business over to the new firm. The problem is the book is almost never as good as they say it is. A lot of clients either don't want to switch, or are decide to look around during the switch. The guarantee was to entice the partners to move because without it, if they move, and their clients don't they get fucked really hard because their pay is based on their business they bring in. The problem for Dewey was, if enough of these partners move and don't bring their clients, they can't pay for it.

So why did Dewey need to hire these superstars? They were hired after the merger, right? Was the idea that the superstars would bring in money that the firm needed to keep going? Or was it just to expand?

I think perhaps Dewey was in trouble after the merger, and before the guaranteed "elites" were hired.

[09042014]

So what was the driving force behind hiring these elite superstars? They all bring a large book of business. But the guarantee, was that necessary to get them to join the firm? I

The idea is these elite superstars will bring their book of business over to the new firm. The problem is the book is almost never as good as they say it is. A lot of clients either don't want to switch, or are decide to look around during the switch. The guarantee was to entice the partners to move because without it, if they move, and their clients don't they get fucked really hard because their pay is based on their business they bring in. The problem for Dewey was, if enough of these partners move and don't bring their clients, they can't pay for it.

So why did Dewey need to hire these superstars? They were hired after the merger, right? Was the idea that the superstars would bring in money that the firm needed to keep going? Or was it just to expand?

I think perhaps Dewey was in trouble after the merger, and before the guaranteed "elites" were hired.

Like in all business the idea is to keep growing.

[sunynp]

So what was the driving force behind hiring these elite superstars? They all bring a large book of business. But the guarantee, was that necessary to get them to join the firm? I

The idea is these elite superstars will bring their book of business over to the new firm. The problem is the book is almost never as good as they say it is. A lot of clients either don't want to switch, or are decide to look around during the switch. The guarantee was to entice the partners to move because without it, if they move, and their clients don't they get fucked really hard because their pay is based on their business they bring in. The problem for Dewey was, if enough of these partners move and don't bring their clients, they can't pay for it.

So why did Dewey need to hire these superstars? They were hired after the merger, right? Was the idea that the superstars would bring in money that the firm needed to keep going? Or was it just to expand?

I think perhaps Dewey was in trouble after the merger, and before the guaranteed "elites" were hired.

Like in all business the idea is to keep growing.

If so, they expanded themselves into bankruptcy, which seems stupid if they weren't in trouble already.

[LawIdiot86]

So what was the driving force behind hiring these elite superstars? They all bring a large book of business. But the guarantee, was that necessary to get them to join the firm? I

The idea is these elite superstars will bring their book of business over to the new firm. The problem is the book is almost never as good as they say it is. A lot of clients either don't want to switch, or are decide to look around during the switch. The guarantee was to entice the partners to move because without it, if they move, and their clients don't they get fucked really hard because their pay is based on their business they bring in. The problem for Dewey was, if enough of these partners move and don't bring their clients, they can't pay for it.

So why did Dewey need to hire these superstars? They were hired after the merger, right? Was the idea that the superstars would bring in money that the firm needed to keep going? Or was it just to expand?

I think perhaps Dewey was in trouble after the merger, and before the guaranteed "elites" were hired.

Like in all business the idea is to keep growing.

Is this an odd version of the Peter Principle? That a successful business is destined to grow until it is so large and disparate that it can no longer succeed.

[09042014]

If so, they expanded themselves into bankruptcy, which seems stupid if they weren't in trouble already.

Well obviously they didn't really see this coming. They haven't really even been losing money. Law firms are really unstable business organizations because their equity holders are their profit makers. Dewey was making a lot of money, but it's partners figured they could make more at other firms.

[sunynp]

If so, they expanded themselves into bankruptcy, which seems stupid if they weren't in trouble already.

Well obviously they didn't really see this coming. They haven't really even been losing money. Law firms are really unstable business organizations because their equity holders are their profit makers. Dewey was making a lot of money, but it's partners figured they could make more at other firms.

I thought the longtime partners left because the newer guaranteed partners were getting paid and they weren't. So by adding these guaranteed partners, in a sense the existing Dewey partners destroyed their own firm.
I really don't understand what the thinking was at the time. Why did the Dewey partnership think they needed these elite people when they were doing well without them? I understand the idea is that businesses should grow, but this completely changed their compensation model. I have to believe that the partners understood the risks/ consequences of the downside of hiring elite superstars at guaranteed contracts. Maybe they all started looking for back-up options as soon as those guaranteed contracts were added onto the overhead they had to make each month.

[Renzo]

If so, they expanded themselves into bankruptcy, which seems stupid if they weren't in trouble already.

Well obviously they didn't really see this coming. They haven't really even been losing money. Law firms are really unstable business organizations because their equity holders are their profit makers. Dewey was making a lot of money, but it's partners figured they could make more at other firms.

I thought the longtime partners left because the newer guaranteed partners were getting paid and they weren't. So by adding these guaranteed partners, in a sense the existing Dewey partners destroyed their own firm.
I really don't understand what the thinking was at the time. Why did the Dewey partnership think they needed these elite people when they were doing well without them? I understand the idea is that businesses should grow, but this completely changed their compensation model. I have to believe that the partners understood the risks/ consequences of the downside of hiring elite superstars at guaranteed contracts. Maybe they all started looking for back-up options as soon as those guaranteed contracts were added onto the overhead they had to make each month.

Sometimes it's because they need to balance out practice areas; for example, if a firm is crazy dependent on M&A work, and M&A slows down, the firm may pay a premium to bring in a bankruptcy partner to even out the revenue stream. Other times, unfortunately, it's because if they don't continue to grow PPP they are concerned that the rainmakers already inside the firm will take a lucrative offer someplace else.

Very few firms have the old-school "partnership" mentality, so it's often grow or die: The juniors aren't being groomed for partnership, they are being weeded out. So when one finally rises to the top, despite the abuse and obstruction of the older partners, he or she has no loyalty to the firm, and is more than willing to cut out if the money's right.

[dailygrind]

Very few firms have the old-school "partnership" mentality, so it's often grow or die: The juniors aren't being groomed for partnership, they are being weeded out. So when one finally rises to the top, despite the abuse and obstruction of the older partners, he or she has no loyalty to the firm, and is more than willing to cut out if the money's right.

I'll admit that I'm not particularly knowledgeable about this type of thing, but I have a slightly hard time buying your theory that today's partners are much more "abusive" than the partners of yesteryear. Granted, the compensation paid for associates has ballooned in the last few decades and I could see why they'd want to get more out of us than before, but it's not like greed is a terribly new concept.

[Anonymous User]

Very few firms have the old-school "partnership" mentality, so it's often grow or die: The juniors aren't being groomed for partnership, they are being weeded out. So when one finally rises to the top, despite the abuse and obstruction of the older partners, he or she has no loyalty to the firm, and is more than willing to cut out if the money's right.

I'll admit that I'm not particularly knowledgeable about this type of thing, but I have a slightly hard time buying your theory that today's partners are much more "abusive" than the partners of yesteryear. Granted, the compensation paid for associates has ballooned in the last few decades and I could see why they'd want to get more out of us than before, but it's not like greed is a terribly new concept.

Greed is a relative thing. I was a summer SA at a pretty old-school NYC lock-step firm, and definitely heard older partners lament the change in culture. It's something you actually see across the economy. My dad complains constantly that his generation in his industry did a shitty job of grooming the next generation, and will as a result suffer for it when the old guys die and nobody knows how to do the work.

[dailygrind]

Very few firms have the old-school "partnership" mentality, so it's often grow or die: The juniors aren't being groomed for partnership, they are being weeded out. So when one finally rises to the top, despite the abuse and obstruction of the older partners, he or she has no loyalty to the firm, and is more than willing to cut out if the money's right.

I'll admit that I'm not particularly knowledgeable about this type of thing, but I have a slightly hard time buying your theory that today's partners are much more "abusive" than the partners of yesteryear. Granted, the compensation paid for associates has ballooned in the last few decades and I could see why they'd want to get more out of us than before, but it's not like greed is a terribly new concept.

Greed is a relative thing. I was a summer SA at a pretty old-school NYC lock-step firm, and definitely heard older partners lament the change in culture. It's something you actually see across the economy. My dad complains constantly that his generation in his industry did a shitty job of grooming the next generation, and will as a result suffer for it when the old guys die and nobody knows how to do the work.

I guess it could be something that comes with the increasing trend towards job mobility for the young'ns. Why invest in someone that has a high probability of leaving you? I am loathe to attribute things to cultural changes though. It's like the unassailable argument.

[Renzo]

Very few firms have the old-school "partnership" mentality, so it's often grow or die: The juniors aren't being groomed for partnership, they are being weeded out. So when one finally rises to the top, despite the abuse and obstruction of the older partners, he or she has no loyalty to the firm, and is more than willing to cut out if the money's right.

I'll admit that I'm not particularly knowledgeable about this type of thing, but I have a slightly hard time buying your theory that today's partners are much more "abusive" than the partners of yesteryear. Granted, the compensation paid for associates has ballooned in the last few decades and I could see why they'd want to get more out of us than before, but it's not like greed is a terribly new concept.

I don't mean abusive as in difficult to work under. I mean abusive as in economically exploitive. Partnership tracks are longer and less certain. There are more non-equity partners and Of Counsel. Pay disparity between partners in the same firm is greater.

The yesteryear model was to hire junior attorneys, let them handle small matters for low billing rates, and skim some off the top. Those that showed promise with their small cases, or managed to grow them into repeat business, were eventually let into the partnership after paying their dues. Yes, there was still a desire to skim as much as possible off these juniors, but there was also a desire to see them develop and succeed, because if they did, everyone was made better off when they were made partner.

Now, the business model has shifted from hire talent, groom talent, grow firm; to hire talent, extract as many hours as possible from talent, disgard talent (or offer then a non-equity spot).