Why BigLaw Is Not Yet Fixed

Doubtless over the weekend many of you read the NYT's longish story, "A Study in Why Major Law Firms Are Shrinking."  Truth in labeling would have changed the headline to "A Profile of White & Case So Far This Year," but perhaps that might not have drawn so many readers (according to the Times' website, the story was the second-most emailed of the day).  In journalism, I suppose you have to do what you have to do to corral readers--not that there's anything wrong with that.

Many of you probably read, as well, "The Economy Is Still at the Brink," on the op-ed page, by Sandy Lewis and William Cohan (fourth-most emailed of the day).  I'd like to suggest how these two stories intersect.

I.  White & Case

The White & Case story, it pains and annoys me to say, is fundamentally incoherent--at least if you're looking for a consistent through-line theory of how "major law firms [should address] shrinking"--or even whether White & Case itself has done the right or smart thing.  My irritation at the story is simple:  If the august Times is to devote this much prominent ink to the number one issue challenging our industry, you wish they could have at least come up with a plausible diagnosis and a debatable prognosis.  

There are even credibility-puncturing copy-editing errors.  I won't dwell on relative minutiae, but in this one phrase alone I detect two bloopers: "The firm, which is sixth on the Hildebrandt list, reported a 7.7 percent increase in profits last year, to $1.4 billion,..."  The "Hildebrandt list" referred to is the "Peer Monitor Economic Index," which is a composite of law firm market performance intended, roughly speaking, to be an analogue to the S&P 500 for law firms.  As best I know (and I'm quite familiar with the PMI), it's an aggregate index and not a ranking.  Suspiciously, however, White & Case was #6 in the AmLaw 100 in 2009 and in 2008, so that's probably what the Times is inartfully and inaccurately trying to refer to.  Second, of course, the firm's "profits" were not $1.4-billion, although its revenue was $1.467-billion, which was up 6.8% year on year.

Here, by the way, is the 1st Quarter 2009 PMI (I've added the arrow to make the "smoothed" results more conspicuous:

But to more substantive matters.

The most frustrating aspect of the article is its promiscuous mixture of the certainly-true with the scarcely-plausible.  For example?

At the root of the law-firm crisis, legal experts say, is the credit crisis, which has pulverized the need for traditional practice areas like structured finance, mergers and acquisitions and private-equity transactions -- the very things that have always kept a high gleam of polish on the city's whitest shoes. The downward trend has been unrelenting: fewer Wall Street deals mean fewer Wall Street lawyers.

While the legal industry is hardly battling the existential threat that is facing, say, the newspaper trade, Big Law -- especially in competitive New York -- is facing a potential paradigm shift as fundamental as the one that has hit investment banks and the auto industry. Big, as a business model (let alone as an expression of the national mood), seems bound for obsolescence.

The first of these paragraphs is inarguable, but the second leaves your eyes squinting and your brow furrowed.  Big, as a business model, is obsolete?  Have Wal-Mart and Exxon heard about this?  (For that matter, in its own world, has The New York Times?)   Far more accurate it would be to say what Hugh Verrier, W&C's chair, does:

Mr. Verrier ... suggested there was still "a vital role for the global law firm," even while acknowledging an increased tendency among clients to seek out regional firms for certain work. "Is there a paradigm shift?" he asked, seated in a 40th-floor conference room with a privileged view of Times Square. "I don't think anyone has a monopoly on what the future's going to bring."

Isn't this precisely the case?  Aren't we likely to see a relative profusion of law firm business models in the very near future?  And yes, very much including global firms as a "vital" part of that mix?

The mantra of BigLaw from about 2001 (or, arguably, 1991) through the third quarter September 15 of 2008 was:  Growth.  Growth was thought to be the universal solvent, the only strategy one needed, and we lived to some extent in a mono-culture.

That is most assuredly no longer the case.  Among other things, this means the challenge to senior management is to take a hard look at their strategy in light of today's new reality.  I've written before that what worked yesterday has zero assurance of working tomorrow.  (Not zero probability--you might be splendidly positioned for the new landscape, and I could quickly name several firms that are.  But zero "assurance," meaning you cannot take yesterday's conventional wisdom as still settled today.)

One aspect of the new reality that the Times piece gets right is how emotionally tough this is--even for those fortunate enough to still be at their firms.  Senior management underestimates this at their peril.  As I say, the Times deserves credit for identifying this very real phenomenon, the profound, even identity-undermining, changes that have already taken place, with more to come.  An unnamed "longtime partner at a big New York litigation firm" describes it:

"For the first time in their lives, people feel sort of useless. All of a sudden, you can go to lunch for two and a half hours and really not be missed. It's a blow to the ego. You're talking about people who have never really failed."

A "top partner" at White & Case expresses similar thoughts, but with the additional fillip (and a common one) that the marketplace reality of having to make tough business decisions has sapped the blood of what it means to be a partnership:

"When you finally make the partnership, you can walk into a room and certain assumptions travel with you: This is someone who knows what they are doing, who has intelligence and authority," the partner said.

"While that's still basically the case, it was a much more collegial place when I first got to the firm. Now it's colder. "The loyalty of the institution to its people, and vice versa, isn't really there anymore -- it's a different animal from what a lot of us were used to. It's much more of a business now and less of a true partnership. The problem is we're supposed to all be in this together. But at some point, you stop and think: 'Well, maybe we're not.' "

Covington's Philip Howard, famous for his clarion calls for "common sense" in the law, is also brought into the mix to opine that "as the bottom line increases in importance, the traditional role of the lawyer as a trusted counselor slips away," although he would seem to disqualify himself as an expert on the issue by frankly and commendably admitting that "I'm not really interested in the business of the law."

I've written earlier about what I view as the preposterously false dichotomy between running firms as businesses and maintaining impeccable standards of professionalism, so I won't rehash that debate here.    But my take on the supposed inconsistency in a nutshell is that nothing provides a firmer foundation from which to exercise rigorously objective professional judgment than rock solid underlying firm financials, and that in turn clients pay top dollar only to "trusted counselors" whose judgment comes with a backbone of steel.

II.  The Economy is Still at the Brink

The theme of this column is aptly summarized in the title:  Despite every effort of the Obama Administration and the Fed to restore confidence in the economy, it takes a lot more than mere confidence to restore the foundation of a healthy economy (inserted subheads and emphasis mine). 

Forgive the extended excerpt, but not only is this one of the better analyses I've read lately, it also happens to coincide with my profound skepticism that there are "green shoots" of recovery in evidence.  I will grant, more precisely, that there may be such green shoots, but I also predict they could be covered over again with snow; I do not believe, in other words, that winter is over.

Confidence Alone Is Not Enough:  We Need Fundamentally Sound Foundations

If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we've learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy.

Wishing Won't Make It So

We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We're concerned that nothing has really been fixed. We're doubly concerned that people appear to feel the worst of the storm is over -- and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. But wishing for improvement and managing by the Dow's swings are a fool's game. [...]

Why Are We Propping Up the Institutions That Got Us Into This?

Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated -- so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department -- the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the "stress tests" of major banks -- appears to have been designed to either paper over or to prop up a system that has clearly failed.

Instead of hauling out the new drywall to cover up the existing studs, let's seriously consider ripping down the entire structure, dynamiting the foundation and building a new system that rewards taking prudent risks, allocates capital where it is needed, allows all investors to get accurate and timely financial information and increases value to shareholders and creditors.

We Need to Fundamentally Rethink How We've Been Living

Instead of promising the imminent return of good times, why isn't Mr. Obama talking more about the importance of living within our means and not spending money we don't have on things we don't need? We used to be a frugal nation. The president should be talking about kicking our addictions to easy credit, to quick fixes and to a culture of more is better [...]

Gas-guzzling S.U.V.'s, cigarette boats, no-income mortgages and private jets should be relegated to the junk heaps of history, or better yet, put in a museum dedicated to never forgetting the greed and avarice that led us so far astray.

"Feelgood" Medicine is the Last Thing We Need Right Now

Why is the morphine drip still in the veins of the financial system? These trillions in profligate federal spending are intended to make us feel better again even though feeling pain, and dealing with it responsibly, would be healthier in the long run. It is time to stop rescuing the banks that got us into this mess. If that means more bank failures on a grander scale or the dismemberment of Citigroup, so be it. Depositors will be protected -- up to $250,000 per account -- but shareholders, creditors and, sadly, many employees will, for the long-term health of the system, need to feel the market's wrath.

Beware Government Second-Guessing the Markets And (Inevitably) Playing Political Favorites

Is there to be any limit on bailouts? We have now thrown money at the big banks, any number of regional ones, insurance companies, General Motors, Chrysler and state and local governments. Will we soon be bailing out Dartmouth, which just lost its AAA bond rating? Is there no room left for what the Austrian economist Joseph Schumpeter termed "creative destruction"? And what is the plan to get the American people out of all these equity stakes we now own and don't want?

Furthermore, for government leaders to decide who shall live and who shall die in an economic sense opens them up to legitimate charges of crony capitalism and favoritism. We will benefit in the long run from a return to market discipline. [...]

Time for Some Creative Destruction

We are in one of those "generational revolutions" that Jefferson said were as important as anything else to the proper functioning of our democracy. We can no longer pretend that our collective behavior as a nation for the past 25 years has been worthy of us as a people. Many of us hoped that Barack Obama's election would redress the dire decline in our collective ethic. We are 139 days into his presidency, and while there is still plenty of hope that Mr. Obama will fulfill his mandate, his record on searching out the causes of the financial crisis has not been reassuring. He must do what is necessary to restore the American people's -- and the world's -- faith in American capitalism and in our nation. But time is wasting.

By now you must be wondering what on earth I think this has to do with Law Firm Land, much less White & Case.

The relevance is this: I'm asking you to think that BigLaw is like the financial system, and it's not fixed yet.

We had 20+ years of living off the fat of the land, with 5-10%/year rate increases, 5-15%/year revenue growth, and 5-15%/year growth in profit, until we began to think of them as God-given rights. A generation of us has experienced nothing else.

I'm here to suggest that those days were abnormal. It's time to meet the new normal.

But, as Melville's Bartleby the Scrivener famously said, "we'd prefer not to."

We're at risk of wasting the opportunity this crisis presents, of being 139 or 180 or 270 days into "The Great Reset," as I have come to call it, and deciding that the green shoots represent true spring, spring just like any other spring of the past 20 years, and not a January thaw with hard freezes yet to come. No need to fundamentally worry; it will be back to business as usual if we just can sit tight long enough.

The real intersection of the White & Case article and the still-on-the-brink article is this: We must have the intellectual and emotional courage to first imagine, and then to begin to build, business models that will carry forward our professional traditions and the highest standards of impeccable client service into the 21st Century, knowing that the strategic business mantra of growth for growth's sake is no longer the answer.

This will take from us no less courage and imagination than it will take to re-imagine and reconceive our financial system, and it will require that many of the same components of what was settled wisdom be re-examined root and branch:

• Compensation and incentives;
• Training and professional development;
• Billing methodologies;
• And not least, the purposes and structure of our firms.

Hugh Verrier is right to insist that there will remain a vital role for global law firms. But there will also, I intuit, be a vital role for boutiques, for regional firms, for industry-specific firms, for commodity-work highly efficient firms, and for prestigious high-end bespoke firms, and for new varieties undreamed of by us today. Some firms (White & Case?--perhaps, but don't look to The New York Times for guidance) will occupy a spot in that future firmament, and some will not.

The only prediction I can make with utter confidence about that future is that if you think all is now right with the world and it's time to relax again, it bodes ill for your firm's future stature. Even though, like Obama on the economy, I really am the optimist at heart.