Back in New York from a solid week of meetings in London (17 in five days) and a few observations, reflections, musings, and speculations come to the fore. And no, these will pointedly not include whether the US or the UK’s version of being seized by political dementia—The Donald vs. Brexit—is more awe-inspiring, nor what inferences might be drawn from the two countries’ distinctive preferences in nonstop televised indoor sports: Poker (US) or snooker (UK).
By way of background, our meetings covered a cross-section of Law Land: US- and UK-based firms, global players and boutiques; firms embracing new technology and “agile” working and firms dismissive of new-almost-anything; and perhaps most importantly firms with clearly articulated strategies and those seeking new compass readings.
A couple of issues, as you might imagine, came up with some regularity, including compensation and the so-far unanswerable but large question of whether new entrants (Axiom and Riverview but also potentially looming far larger, the Big 4 Accountancies) would find market acceptance and make serious inroads.
But another issue outweighed all of these put together. We’ll come to that.
Given the venue we’ve been in the past week, much revolved around lockstep, and modifications thereof, and around its Dark Star twin, “checkbook recruiting.”
Regular readers know to a fare-thee-well and irregular readers could safely venture an educated guess that I approach the world from both an economic and a frankly American perspective. Both of these clearly influence my instinctive views on compensation, and to me constitute backdrop realities—but I try to look far beyond my own intellectual reflexes and focus on the reality, the history, and the aspirations of the firm in front of me.
So, to compensation.
We all have been immersed in the lockstep/eat-what-you-kill debate for years and years and I will have mercy upon you and not rehearse it here. The only reason I feel compelled to bring it up is that for many (a majority?) of people in the market it seems to be the primary defining distinction between the UK and the US, or London and New York.
I’m not so sure I buy this anymore. To be more precise, as soon as the terms come up (lockstep/EWYK), all intellectual and analytical processes seem to shut down. You almost never see people actually thinking through the virtues and vices of what each of those caricatured extremes represents, and where on the spectrum from one to the other their firm ought to operate in the market right now.
Instead, what happens is that one phrase or the other is lobbed into the discussion and all involved are supposed to assume, if they’re on proper behavior, that a show-stopping riposte has just been delivered. Heads nod and the subject changes.
I can’t believe this is anything other than intellectual laziness. Indeed, I’m developing a hypothesis that the extreme variety among and multiplicity of law firm partner compensation models might reveal something interesting about just how much room for flexibility and change a firm’s compensation structure might actually be able to eperience without existentially rending the firm’s fabric. Let me explain.
As our colleague and friend Richard Rapp has written, the sheer variety of techniques firms employ to arrive at partner compensation is unheard of elsewhere across the economy (emphasis supplied):
As I have described elsewhere at length, the most remarkable thing about law firm partner pay programs is their extreme diversity and idiosyncratic nature. The range runs from lock-step by generation to “eat what you kill.” Some pay arrangements are totally transparent; others totally opaque. Some inculcate a strong sense of shared fate with firm-wide profit growth the main engine of individual pay growth; others are highly individualistic. And so on. To the best of my knowledge this diversity of pay criteria and administrative arrangements is very hard to find elsewhere in the U.S. economy:
Most people receive their pay in one of a very few ways –hourly wage, piece rate, salary + bonus and perhaps a few variations on each. In the upper strata of executive pay, we also find uniformity. Most corporate pay plans for senior executives closely resemble one another (salary + cash bonus + restricted stock + stock options tied to a relatively few business unit- and firm-level reward criteria). Hedge fund managers’ performance fees are usually the simple “two and twenty” formula, sometimes with a “hurdle” to reward excess returns over a market benchmark. Thus, for most occupations from the lowest to the highest earning ones, it isn’t hard to know how your pay is going to be decided.
The consequence of the diversity of partner pay programs is that there is no such thing as a market-wide wage for legal talent, even when the revenue and profit potential of a partner is perfectly well-known. … No single plan type dominates others in encouraging productivity and improving the odds of survival.
Now, it would be far-fetched in the extreme to suggest that a firm’s compensation structure could be altered at random to a different model without consequences, perhaps extremely destructive consequences.
But I think we should entertain the possibility—this is really what my hypothesis boils down to—that we do firms and their partnership ranks a disservice to assume without probing analysis that any material modification of the way the compensation system arrives at its outcomes is unthinkable and inadmissible. For one thing, I can assure you that if we looked hard enough we could find another firm, probably one not too dissimilar, that is doing just fine under the “new” and “other” compensation system.
In short: What if the compensation structure matters less than we’ve been thinking?
Note that—studiously—I did not say compensation itself matters little. I’m talking about the process, or the inputs, and specifically about the antipodal lockstep and EWYK models. One way to think about the key input under lockstep is that it resembles what tax economists call “horizontal equity”–that people in the same position (in terms of seniority and presumed ability to contribute to the firm) should pay, or in this case of course receive, the same amount. The desired results are to encourage collaboration and sharing within the firm internally, to deliver “the best lawyer for the client” on the instant matter, and to promote unvarnished candor in rendering client advice.
Analogously, the key input under EWYK can be thought of as “vertical equity”–that people who contribute more to the firm should receive more of the rewards. The desired results are to encourage business generation, raising the profile of the firm, and keeping others (presumably without rainmaking skills) busy and productive.
If we think about the two systems this way, don’t they both have impeccable intentions to encourage productive and valuable behavior? And isn’t each well-designed to incentivize the values it ranks more highly? All I’m asking is that conversations on this topic actually focus on intended results on the ground in light of a firm’s strategic goals in its markets at this particular juncture. Let us get past the bumper stickers and T-shirt slogans.
A final note on compensation itself. It:
- Must be determined with some reference to going market-rate standards;
- Ought to be aligned with the firm’s strategic objectives (or put more simply, it needs to encourage behavior designed to advance the firm’s considered goals and discourage behavior inhibiting progress towards those goals); and most importantly of all
- Has to be perceived within the firm as fair overall and as being administered impartially and with faithful and conscientious adherence to the announced principles and rules of the road.
But study upon study upon study of motivation within organizations finds that compensation ranks somewhere below the top five or six drivers of behavior: Contributing to the firm, to one’s team, building something, serving clients, being able to take pride in what one does—these and similar values all consistently rank more highly than compensation.
Compensation must be fair and it must be perceived as being fair, but beyond that I’m coming to the view that we are making a categorical mistake to hang as much of firms’ identity on it as we do.
More of a pressing issue in the UK than in the US, given the Legal Services Act opening the door to outside investment and non-lawyer ownership. Much or most of the ink has been spilled on the upstart or “new model” entrants (Axiom, Riverview, Radiant, and to some extent Lawyers on Demand and PeerPoint), but for purposes of today I want to take a contrary stand and focus on the announced and the perhaps unannounced but plausible plans of the Big 4 accountancies (Deloitte, EY, KPMG, and PwC) to provide legal services.
A few data points:
- The combined revenue of the Big 4 is greater than that of the AmLaw 200 firms by fully one third ($135 billion for 2015 for the Big 4 vs. $100 billion for the AmLaw 200); they have a war chest if they care to use it.
- Their employee ranks utterly dwarf those of law firms: About 735,000 professionals and staff in the Big 4 (2015) vs. about 175,000 lawyers and staff in the AmLaw 200 (over four times as many).
- They have name-brand entrée into the boardroom of every Fortune 1000 and FTSE 250 corporation in the world—and then some.
- And perhaps most tellingly of all, when they set their sights on a goal (invading a professional services vertical or an industry) and tell their professionals to march, those professionals…march.
The counterarguments to the Big 4 mounting a meaningful threat to BigLaw are essentially three, none of which I would count on as a bulwark safeguarding my core business model:
- First, they tried this before in the 1990’s and were repulsed.
Well, actually Andersen Legal was hit by a stray bullet from the firefight Enron kicked off and which culminated in Sarbanes Oxley. What happened was hardly a critique of either their business model or their effectiveness in the market.
- Second, law isn’t part of their core competence and it would always be peripheral to their real business.
Again, actually their “real,” core business has morphed repeatedly over just the past couple of decades. None would boast their core anymore is “audit,” and the consulting that’s their core now is perilously close to what many lawyers do.
- Third, the legal market is different: Always has been, always will be. For example, what about conflicts?
The legal market is far less different than you’re privileging yourself to imagine; it’s one more species of professional service, which is the business the Big 4 have been in for a long time. Global? They’ve done that. High end and commodity, depending? They’re actually frighteningly good at that. Requires brand-name credibility? Thery’ve got it in spades. Not to mention the global legal services market is huge enough to be quite an interesting target for the Big 4—approaching US$1-trillion in annual revenue.
Maybe they don’t seem to be coming yet, but our hunch is that if you could see just over the horizon you might be less sanguine.
Now to that one big issue.
The issue that trumped everything else put together was the US/UK, or New York/London, axis. Where is it going, what does it mean, how will it play out, what on earth should we do?
Every time we’ve gone to London for the last few years this has come up, but on each visit the drumbeat around the topic seems to increase in volume and intensity. This time it’s safe to characterize it as an obsession—which US-based firms with offices in London share; it’s not limited to the UK firms on their home turf. This expressed itself in many ways. Here’s a sampling of what we heard, sources unidentified for obvious reasons
- Should we seek a merger?
- We’re seeking a merger!
- Or should we just expand our US capability?
- Does “the US” mean we have to have bricks and mortar there or can we do it through a sales team? Why can’t we reach in from outside?
- Are the Americans going to take over London?
- Partners born and raised under the umbrella of the Magic Circle are too comfortable there to ever leave; and they wouldn’t have a clue where to start if they did.
- Magic Circle partners with their eye on the main chance are jumping ship to US firms.
- Middle market US and UK firms will be just fine if they tend to their own back yard.
- Middle market US and UK firms are going to have to respond to the world going global—there’s no place to hide.
- They are taking work that rightly belongs to us! (This righteous observation was offered in both directions.)
- Why on earth do we need US capability? The world is moving to global deals done under English law. Nobody asks for US law any more.
- I’m sitting here in London doing exactly what I did for 20 years in New York: Deals under New York law across the table from New York lawyers. Nothing else has changed except my clients are in Europe, the Middle East, and Asia and not in New York, Chicago, Texas, or California.
- The US is the end-game; without meaningful US capability, we can’t lay claim to being a truly global firm.
- US firms are grossly mismanaged; sometimes I wonder whether they’re managed at all! In looking at potentially transformative transactions, who cares what one lousy partner in [Austin/Boston/Charlotte] thinks it means to him?! US firms just aren’t run as serious businesses.
- There will never be a [successful] US/UK merger! Never! The cultures are fundamentally too different. (Perhaps this fellow hasn’t heard of HoganLovells, but it didn’t seem the opportune moment to interrupt his flow.)
There may be other possible views on this topic that we’ve omitted, but if we’d stayed another week we surely would have heard them as well.
How to make sense out of all these inconsistent and contradictory opinions? What can one sensibly conclude from this cacophony?
Actually, my own conclusion is perfectly straightforward: This is a market in severe disequilibrium. The status quo seems untenable to many, yet whether the way ahead calls for advance, retreat, or some sort of flanking maneuver if for no other purpose than to buy time, is impossible to tell. Grow and expand offerings? Shrink and specialize? Pay royally for marquee talent? Focus on process optimization and near-shoring? (Both?) Merge/invest in best friends/go it alone?
In other words, confusion and inconsistent readings of the landscape seem to reign. From this, in turn, I conclude that market dynamics will not indefinitely tolerate this state of affairs. Something has to give. In other words, if we were to have the same set of meetings five or ten years hence, I find it impossible to believe that this state of “great blooming, buzzing confusion” will still prevail.
So what, then, do I hypothesize will “give?”
I will offer you two opposed ideas at the same time and trust you will all retain the ability to function: First, those positing the US/UK divide is unbridgeable will be vindicated: The cultures are indeed too foreign to each other, clients want either New York or English law but never need both under one roof, the lockstep end of the compensation spectrum and the EWYK end are incapable of being squared, and so on.
In other words, the current law firm rankings and standings on both sides of the Atlantic will continue to look much as they do today—with the salient difference that people will be largely at peace with it. Firms will retain their essential identity as US/New York rooted or UK/London rooted. No problem.
Second, this is indeed a moment of severe disequilibrium whose only resolution lies through a substantial recombination and re-ordering of existing firms. Globalization is inexorable and for the law firm market to fail to offer a wide range of choice of providers offering strong US and UK capability will prove to be a vacuum that nature abhors.
Once one or two high-profile US/UK marriages or engagements are announced, there will be a rush to follow before the proverbial window closes. The landscape of firm rankings and standings will be altered greatly. And I’ll offer a bonus footnote under this hypothetical future: Because there are far fewer UK firms of the caliber to hold up their end of the bargain than there are equivalent US firms, the great majority of US firms will be left without a partner and, like it or not, will indeed have to focus on tending their home garden.
But for all this to be the same in 2021 or 2026? Hard to see this level of obsession and anxiety persisting that long.