The American Lawyer asks "Is Shedding Partners the Right Way to Improve Profitability?," which is the wrong question—albeit a nice headline for a relatively substantive article.
First, what phenomenon are they addressing?
The phenomenon is nicely encapsulated by the changed perspective Dan DiPietro of Citigroup Private Bank brings to the metric of partner "defections:" Whereas it used to be "an absolute red flag," indicating a troubled firm, they’ve now re-labeled it as the less judgmental partner "departures," and “It [is] still something to track, but it [isn’t] immediately seen as a bad thing.”
To the numbers: The American Lawyer‘s methodology was to identify 15 firms, using their lateral partner database, that lost more than 15% of their partners over the three-year period from October 2003 to October 2006. (During this period, the average firm lost 11% of its partners.) This yielded 15 firms.
Next, they looked at AmLaw revenue and profitability figures and found what I view as a draw, although they differ. On profitability, 8 were above average and 7 were below: A draw. On revenue, this is what they have to say:
"Only six improved their all-important revenue per lawyer more than the Am Law 100 average of 15.3 percent. What our sample shows, in other words, is that partner losses can boost profits, but they don’t often correlate with an improvement in a firm’s overall financial health.
[…]"If firm managers cull partners strategically, and with humanity, they can make their firms more efficient and more unified. If, however, they handle partner departures ineptly, says lawyer and legal consultant Bruce MacEwen, they can ‘destroy morale and be caustic to the firm’s ethos.’"
Let’s back up.
The article proceeds to discuss large-scale partner departures at firms such as Dechert, Cadwalader, and Akin Gump. Each story is of course different, although the Dechert and Akin Gump strategies are emblematic of an industry-wide shift, and within reason resemble each other. Both firms decided they needed to focus on key practice areas, and this meant remaking the partnership ranks: “We were kind of all over the place,” said Akin Gump chairman R. Bruce McLean. Dechert likewise focused on a general "quality upgrade" across the board, from practice areas to senior C-level executives.
Meanwhile, Cadwalader has pursued the most radical path of all, as I’ve described. Cadwalader’s wholesale revamp of the partnership wasn’t really a renovation of the firm; it was a tear-down.
Orrick is cited as an example of a firm that hasn’t eliminated practice areas, but has strived to push its practice areas to the famous "higher value" work ("higher value" being defined as of high importance to the client). So, for example, an employment partner moved her practice from one-off representations to high-level executive defense and class actions: "I transformed my practice,” says [Lynne] Hermle. “One day I was doing Joe versus gas station, and the next day I was doing $40 million class actions.”
Two other archetypes are presented: The first is Duane Morris, which has aggressively (overly so?) gone after laterals, with a $7+-million/year recruitment budget, only to find that many do not work out—some, if you believe the article, flat-lining within six months of arrival. Although they treat such flame-outs humanely, the Duane Morris model clearly risks erring on the side of promiscuous hiring.
The second and final example is Shearman & Sterling, which, rather than recruiting laterals that are not productive, has been shedding home-grown talent that is not productive—intentionally, in many cases. In the short space from 2004 to 2006, S&S’ total partnership ranks have shrunk by 18%, from 239 to 196. Meanwhile, the entire firm shrank during that period by 130 lawyers. Still, they have increased revenue per lawyer by 26%.
Finally, this is how the article sums up its findings:
"That’s the new reality-partners leave or get pushed out of firms, and firms find laterals to replace them. The partners join new firms, perhaps pushing out a different group of lawyers in the process. Old-fashioned notions of collegial lifetime partnerships are only a memory at many firms. "
Is that all there is to be said?
I think not.
In fact, I have a completely different explanation for what we’re indisputably witnessing: We as an industry have not suddenly in the past three
years lost our souls, become wealth-maximizing philistines, or abandoned all sense of humanity and proportion in dealing with our colleagues.
What has happened, at first glacially in the 1990’s and with accelerating force in the 21st Century, is that our industry is fundamentally restructuring itself—in a way that will endure for the rest of our careers—to match the globalization of our client base and the rapidly evolving structure of those clients’ portfolios of legal needs.
For example?
Structured finance didn’t exist 25 years ago; today "CDO’s" [collateralized debt obligations] are commonplace, and the income from David Bowie’s royalty stream was famously securitized.
Inbound project finance to the Chinese mainland? Sarbanes-Oxley? Derivatives accounting for hedge funds? Private equity fund formation? Shareholder oversight of executive compensation?
My point is simple: The rate of change in the world economy is accelerating, and in league with that our firms must responsively adapt to clients’ needs.
When a law firm needs to change the composition of its output, it needs to change the composition of its "factors of production"—which means changing the composition of its partnership.
What all of the churn and sturm und drang recounted in "The Departed" reflects is a once-in-a-generation change in the structure of our industry.
So, going forward, we’ll all be perfectly conformed with and aligned to our clients’ legal portfolios? Scarcely. Evolution is constant, change ineluctable, and metamorphosis desirable. But I still believe we’re going through an exceptional period, a "local maximum" passage of change.
And law firms don’t change in the abstract; they change by changing the composition of their partnerships. "Shedding partners to improve profitability?" Wrong question. "Shedding—and aggressively gaining—partners to remain at the forefront of relevance to our clients’ needs," is more like it.
