The Altman-Weil 5th annual survey of law firm leaders has been recently published to much commentary.
Some of the more striking results of the survey relate to leaders’ assessment of the market challenges (primarily reflecting the viewpoints of 250+lawyer law firms) and their firms’ ability to meet them. Over the next 24 months, most managers cited the need for “increasing revenue,” new business, growth, profitability, management transition, cost management, and attracting talent, with “client value” finishing eighth–a stunning lack of realization about what produces those revenues, new business, growth, etc.
In spite of their quest for growth, almost 30% questioned whether they had adequate mid-level partners to whom they could transition existing clients, let alone entrust with new clients. Fully 78% said their “senior partners don’t want to retire” and 73% admitted that “senior partners don’t want to forfeit current compensation by transitioning client work.”
Of course, one reason for the scarcity of mid-level partners is that 72% of firm leaders reported that reducing the ranks of equity partners is a permanent trend, with three-fourths saying they have either tightened their standards for admission to equity partner or taken them more seriously.
So what to do to man the forts? 100% of big firms plan to acquire laterals, but also acknowledge that they “sometimes, rarely or never” tell unproductive lateral hires to leave, the proof of which is in the unsuccessful lateral pie that becomes ever larger over time.
Perhaps the most troubling survey result is that almost 40% of leaders said that the morale of their partners, who by definition survived the purges of the recession, is lower than it was at the beginning of 2008.
Let’s look at this in the context of recent performance. In fiscal 2012, The Am Law 100 posted low single-digit gains on all major metrics–gross revenue, revenue per lawyer, and profits per partners–a modest improvement that belied individual unevenness. Only 76 firms reported gross revenue increases for 2012 and only 66 had PPP increases—down from 80 firms and 72 firms, respectively, on last year’s Am Law 100 list. Average PPP went up 4.2% in 2012, but the growth was uneven, with average compensation for all partners rising 3% in 2012, compared to 1.9% in 2011. But 19 firms reported increases in PPP of 10% or more for 2012, vs. 15 firms in 2011.
Changes in partner pay don’t always correspond with shifts in revenue. Of the NYLJ 20, based on the financial information reported for the 2013 AmLaw 100, eight New York law firms had larger jumps in PPP than they did in revenue. And some, significantly so. For example, gross revenue at White & Case went up only 3.9% but the firm’s PPP jumped 15.3%–almost 4 times that revenue increase–to $1.7 million. Sidley Austin’s gross revenue rose 5.2%, while its PPP rose 12.1%–or over 2 times more–to $1.8 million. The largest PPP drops were Fried Frank’s 16.8% fall to $1.3 million and Weil’s 8.6% decline to $2.2 million, after revenue declines of 6.3% and .1%, respectively.
Coupled with the Altman-Weil leader survey results, one is tempted to ask to whom those disproportionate partner profits are going. Perhaps it’s possible that those firms have simply determined that partners generally are underpaid. But a special interest seems more likely in play. Are those firms trying to raise mid-level partner comp as a way to keep and motivate that thinning breed? Are laterals with guarantees scooping up a disproportionate share? Or is it the senior partners who are greedily upping their comp before they are forced into retirement? The first offers some hope of preserving firm intellectual assets. The latter two possibilities risk losing them all.
Then there are the firms disproportionately lowering partner pay–is that some rare compassion for overworked associates being displayed or is there a new-age economic theory being tried out? More disturbing, are partners having to pony up to keep the mechanisms operating?
Steve Harper (author of The Lawyer Bubble: A Profession in Crisis) comments in “Proof of the Profession’s Crisis” that the Altman-Weil survey “shows…widespread management incompetence, stupidity, and worse.” Harper’s conclusions from the data are that:
- “Managing partners know that change is coming and clients are demanding it, but firms aren’t revisiting their basic strategies or business models.
- Growth and profits finish far ahead of enhancing client value as most law firm leaders’ top concerns.
- Leaders view aggressive lateral hiring as critical to law firm growth, but when laterals don’t produce, most firms don’t do much about it.
- Succession planning is problematic because senior partners don’t want to relinquish compensation that is tied to their client billings.
- As senior leaders continue to pull up the equity partner ladder on the next generation, morale plummets and managing partners worry about the absence of midlevel talent to serve clients in the future.”
The fear is that our leaders are marching in the same direction to the same tunes that have propelled law firms forward for the last century, but apparently blind to the withering results. And now they are reducing further any likelihood of catapulting ahead by offering to the upcoming crop of home-grown lawyers a croupier’s chance at partnership while tolerating lateral non-performers and aging half-theres. And perhaps over-compensating them to boot. Not only will those circumstances make it harder to provide expertise value to our clients, whom we are apparently trying to grow if not please, but the personal stress and damage to morale will erase any savings that management might have hoped to attain.
Profits for partners, anyone?