Four Steps Every Firm Should Consider in the Wake of Dewey & LeBoeuf

June 8, 2012

Lawyers in firms around the world are asking themselves, “Is there anything that we need to do differently to avoid making Dewey’s mistakes?” 

In the wake of Dewey’s failure, and accelerating changes in the legal industry, all firms that aspire to grow stronger and to avoid Dewey’s mistakes should consider taking the following four basic steps.

Four Steps

1. Develop and build consensus around a strategic plan.  Your firm’s strategy should evidence consensus about what the firm’s partners aspire for their practice and financial performance over the next three to five years.   Your firm should distill its strategy in to a short, written plan.  Outline form is fine.  But to be effective, your plan should also be granular enough to indicate with precision who in the firm is going to do what and when to drive the firm to where its partners want it to be. 
   1. An often-overlooked failure of Dewey was a lack of consensus in the firm about its growth strategy.  As with many firms, that did not pose a problem as long as the firm was performing well, but when the firm’s performance dipped and the firm could not keep up with its compensation obligations, the lack of consensus about the firm’s growth strategy came to a head.  Not long after that, a trickle of attorney departures turned in to a stream, and the firm was soon in its death spiral. 
2. Align Compensation with Performance.   There is an accelerating trend among strong firms to align compensation with performance.  In Dewey’s case, that did not happen.  In the late 1990s, a small band of leaders in the firm, reportedly without the knowledge of many of the firm’s partners, developed and quietly carried out a strategy to grow the firm by hiring a large number of laterals from other firms.  Decisions were made to provide many of those laterals with unconditional compensation guarantees not tied to performance.  When some legacy Dewey partners heard about that strategy, they were very unhappy, demanded compensation guarantees of their own, and the firm caved to their demands.
3. Don’t Surprise Your Partners.  By early 2012, approximately 100 of Dewey’s 300 partners had compensation guarantees about which many other partners were not aware.  Those guarantees were on top of existing obligations the firm had to retired partners and other significant debt that the firm had accumulated with banks and bondholders.  On January 27, 2012, Dewey partners were summoned to a 22^nd floor conference room at the firm’s New York headquarters and, as Reuters reported, “Using a PowerPoint slide show, [former Dewey Chairman Stephen] Davis presented a grim picture: Of Dewey's approximately $250 million in net income for 2011, about half was committed to pension obligations to retired partners and compensation that was owed to certain partners for the two prior years. Just half the pie remained to distribute to disappointed partners.  The firm was living on the edge, Davis revealed. ‘You have to own this problem,’ he told stunned partners, according to a lawyer who attended.”  The takeaway here: if you risk surprising your partners about the reasons for your firm’s underperformance, you risk a crisis of confidence in leadership that could unravel the firm.  That is a common thread that runs through many failed firms.
4. Adapt to survive the Darwinian shakeout that is underway in the legal industry.  For 17 straight years leading up to 2008, firms in the Am Law 200 on average benefitted from increased profits per equity partner and revenue per lawyer.  However, that streak came to a screeching halt on September 15, 2008, the day that Lehman Brothers collapsed.  After that day, firms were limited in their ability to raise their rates every year as a key driver of their growth.  That new reality is now evident in both the revenue and expense strategies of many firms. 

                                                    i.     Raising revenue.  Firms are finding that their clients increasingly respond to specialization and hire firms that have “known-for status” to handle highly sought-after and other important matters.  As a result, many strong firms are prioritizing the use of their resources to double down on their strengths to differentiate themselves and make the most important short-lists of their clients and prospects.  Strong firms generally work hard to try to serve key clients across the firm, not in limited silos.  Many strong firms credit their growth in the challenging years since 2008 to a laser-like focus on identifying and then growing key client relationships across the firm.

                                                   ii.     Lowering expenses. Just like manufacturers in the industrial revolution, the market, led in the legal industry by clients, is pushing law firms that strive for better financial performance to become more efficient in the way that they deliver legal services.  This is resulting in a sea-change: the market is pushing firms that want to increase profits to rethink the traditional model of using high-priced young associates to do routine low- value legal work.  Many clients tell outside firms that they no longer want to see first and second year associates on their invoices.  This is changing how firms allocate work.  Some forward-thinking firms are using lower cost, non-partnership track lawyers, within and outside of the firm, to get routine work done, such as document review in litigation and due diligence in transactions. 

1. A recent survey by Tymetrix and the Corporate Executive Board found that over the past five years across 4000 firms, matters staffed with entry-level associates accounted for just 2.9% of bills last year versus 7% in 2009.  The same survey found that rates increased five times faster for the highest billing associates (charging $500+ per hour) than for associates with the lowest billable rates (less than $200 per hour).   This suggests that clients value the work of low-rate associates less than the work of high-rate associates.
2. It is particularly telling that in late 2010, Thomson Reuters, the parent of West, first announced it wanted to sell BarBri, the bar-review company, and then it announced its acquisition of Pangea3, a business that often replaces the need for non-partnership-track associates.  

The Future

When weak firms fail, the industry gets stronger.  In the case of Dewey, many strong firms grew even stronger because of the strong talent they picked up from Dewey.   

Looking ahead, the future is bright for the legal industry, particularly in the U.S.  More money is spent on litigation in the U.S. than is spent on legal services of all kinds, in all other countries, combined.  The U.S. is the only nation in the world that has jury trials, putative damages, and even treble damages in some cases.  Rarely do we have loser pay rules.  Even as the balance of the world’s wealth increasingly tilts toward Asia, whenever aggrieved plaintiffs are able to drag a defendant in to a U.S. court, they will have incentive to do that.   Similarly, investment from emerging economies will continue to flow in to the United States.  That will continue to create transactional work, much of it in the middle market.  Although weak firms will continue to struggle, strong firms will have ample opportunity to get stronger.  What will separate many weak firms from many strong firms will be a willingness to adapt to change in the market. 

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Kent Zimmermann is a Chicago-based partner with Zeughauser Group.  He advises law firm leaders on management strategy, often focusing on strategic growth planning and law firm combinations.   He can be reached at zimmermann@consultzg.com. 

[A version of this article was published in the Chicago Daily Law Bulletin on June 8, 2012]

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