The following was published a month ago in LegalBusiness as part of their periodic “Dissent” series. The original appears here.
Adam Smith, Esq’s Bruce MacEwen argues that short-termism and a lack of stewardship 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.
Bruce:
How very old-fashioned: Stewardship? Next thing, you will be talking about honor… Outstanding piece.
An essential component of stewardship theory (in modern circumstances) is that it arises out of committed membership in a community. In most applications, stewardship is a positive responsibility of all members of the community, though in different measures under different circumstances within the community. Fruitful management of what we have been given in common heritage: it seems like it should be a natural concept in most enterprises, and with its relationship to fiduciary responsibilities, specifically to the Law.
Which is all very well in theory, but how would we structure our own organizations so that there is a voluntary, implicit commitment to operating in ways that will advance the general welfare within the traditions of our community?
Active stewardship is self-generating in circumstances that maintain the tradition: those associates (declining proportion though they may be) need to learn what stewardship means as part of their professional development. And it raises immediate questions when considering the issue of lateral transfers: How does a lateral transfer become part of our community? When we ask a senior person to join us, are we asking ourselves and her/him, is this a person who will be able to commit to our community, who will not only understand what makes this community unique and worthwhile, but be willing to commit a portion of his/her gifts to preservation, indeed growth, of what is uniquely ours as a community?
As you rightly point out, that is a sort of question – and a mutual commitment – that makes sense only in a long-term context. If we cannot imagine reaching past the next Quarter, the next year, or 2-3 years, then “stewardship” will not be an appealing or even a very coherent concept. On the other hand, if only that context is meaningful, our situation must be pretty dire.
Mark
Bruce,
The problems you describe seem like a classic negative feedback loop to me. Management of the firm is shortsighted in its approach in response to senior partners who feel entitled to reap the rewards of long service. Senior partners feel entitled because of a sense that the next generation is binging at the trough. The next generation is binging at the trough because management is shortsighted in its approach. Each fueling negative behavior in the others.
Breaking a negative feedback loop generally requires a change in the parties’ perspectives that enables each to accept short-term sacrifice for long-term gain. For those at the top, especially those contemplating retirement, the incentives to accept short-term sacrifice are especially difficult to identify. Additionally, everyone will have to be operating with confidence that those not similarly situated within the firm will act in good faith and not abandon ship when the sailing gets rougher.
Bringing in outside talent to manage a firm adds additional obstacles to overcome, beyond just breaking the negative feedback loop. First, outside talent can be very expensive and has had a rocky history to date (think DLA). Second, outside talent creates additional problems in that attorneys, particularly those at or near the top, tend to overvalue their individual contributions to the firm and the “personal capital” they have built up over their careers. Finally, what is likely needed is non-attorney management, and that is statutorily difficult due to the sharing of fees for any performance based compensation structure.
Bearing that in mind, it strikes me that the paradigm shift may be occurring naturally through the growth of in-house legal departments. These departments will force counsel into close proximity to the business methods and philosophies of “98% of the economy outside Law Land.” I would expect that the exposure to these business leaders to decrease the instinctive suspicion of their well honed business methods. I have always believed that this suspicion of businessmen in Law Land stems from the fact that they only consult attorneys when they are needed, and they are needed most when something goes wrong. As such, attorneys rarely get to see how many things successful businesses get right. Perhaps greater involvement in a functional, smart business culture will ease those suspicions.
My question to you is whether you have identified any practical measures that could help to break this log jam.