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.LegalBizGraphic

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.

Related Articles

Email Delivery

Get Our Latest Articles Delivered to your inbox +

Sign-up for email

Be the first to learn of Adam Smith, Esq. invitation-only events, surveys, and reports.

Get Our Latest Articles Delivered to Your Inbox

Like having coffee with Adam Smith, Esq. in the morning (coffee not included).

Oops, we need this information
Oops, we need this information
Oops, we need this information

Thanks and a hearty virtual handshake from the team at Adam Smith, Esq.; we’re glad you opted to hear from us.

What you can expect from us:

  • an email whenever we publish a new article;
  • respect and affection for our loyal readers. This means we’ll exercise the strictest discretion with your contact info; we will never release it outside our firm under any circumstances, not for love and not for money. And we ourselves will email you about a new article and only about a new article.

Welcome onboard! If you like what you read, tell your friends, and if you don’t, tell us.

PS: You know where to find us so we invite you to make this a two-way conversation; if you have an idea or suggestion for something you’d like us to discuss, drop it in our inbox. No promises that we’ll write about it, but we will faithfully promise to read your thoughts carefully.