Dewey Need to Take a Pledge?

Dewey Need to Take a Pledge?.

Dewey Need to Take a Pledge?

The National Assembly taking the Tennis Court Oath (sketch by Jacques-Louis David). (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

April, 2012

 

Again, I am constrained to comment on a rather absurd story appearing in a Reuters dispatch concerning a venerable law firm listing along a perilous course. Leigh Jones, a capable journalist now reporting for Reuters and, I suspect in this instance taken in by the firm’s Hollywood Ninja flack, posits that this firm can hold steady and survive the storm if a “few key players” stay on board (all men) and steer the firm to safety.

The proposition is dubious as a general matter. Given where this law firm finds itself right now, the notion requires a complete suspension of disbelief. Sure, there are a few notable large law firms that achieved remarkable success because of the drive, skill and leadership of a few key players.  Boies, Schiller & Flexner, Kassowitz, Benson, Torres & Friedman and Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor come to mind. However, Dewey & LeBoeuf is not, in its current incarnation, the product of a few driven leaders of the bar.  Dewey is a century old global law firm with 1,000 professionals (maybe fewer by the time you read this) and 24 offices. The notion that a law firm in crisis can survive the loss of 50 partners and a complete crisis in confidence by and among all of its stakeholders by keeping a small cadre signed on to stay the course is simply not credible. Collaboration, the key to law firm survival, is painfully missing here.

Ms. Jones goes on to note that Dewey “… firm leaders say that the vast majority of the departures are due to the firm’s decision to downsize in order to increase profitability.”  Let’s look at the numbers: Six of thirty-five executive committee members have left, four of nine office managing partners are gone and some seven practice group leaders have checked out. And the folks at Dewey want you to believe that this loss of leadership – previously key parts of this firm’s management who have credible client following will enhance profitability.  What we do also know is that one fellow who certainly was tossed out the window (I guess to “increase profitability”); he was the firm’s duly elected chairman who took his defenestration with style and grace.

The firm provocateur then identified the seven amigos on whose shoulders the firm’s survival can be bound: “The seven key Dewey lawyers … are Martin Bienenstock, a bankruptcy attorney; Jeffrey Kessler, a litigator; Morton Pierce, a mergers and acquisitions attorney; Ralph Ferrara, a regulatory and corporate governance lawyer; Michael Fitzgerald, a corporate securities attorney; Bruce Bennett, a partner in the business solutions and governance group; and Berge Setrakian, an international commerce and corporate lawyer.” Well, gosh, that’s neat. Each of the Magnificent Seven were in place as part and parcel of the cadre that charted the disastrous course, and, presumably prime beneficiaries of the healthy succor doled out to the big producers. The message here is that the Magnificent Seven chose poorly when they allowed the now departed executive committee members, office heads and practice group leaders to assume positions of law firm leadership.

But, these seven keys to success do not quite seem to be reading from the same playbook.

Marty Bienenstock advised Reuters that “[t]wo weeks ago, more than 50 business-generators each individually pledged to stay with the firm.”  Mort Pierce, the firm’s vice chairman saw it differently: “There was no formal pledge, no secret handshake,” he said. Asked whether he was part of the “consensus,” Pierce said, “There was a meeting and I was there.” Ralph Ferrara acknowledged that he is busily fielding calls from the firm’s competitors seeking to lure him away. Jeffrey Kessler offered some faint praise: “I am committed to Dewey and believe the firm will prosper.” Bennett, Setrakian and Fitzgerald did not respond to requests for comment.

None of these fabulous lawyers offered up the solid pledge that Bienenstock averred was in place. And these are the believers.  One who didn’t drink the Kool Ade is John Altorelli, an outstanding corporate lawyer and former Dewey executive committee member who is now at DLA Piper. Altorelli, who ironically actually began his career at LeBoeuf, thought well of his former associates and publicly opined that while most of the folks at Dewey were quite good, management (of which he was a member) was “obtuse.” Altorelli also plainly stated that the king has no clothes: “I’m not sure how [Dewey] can weather the departures.”

It’s not just the previously announced departures.  Bienestock probably had it right when he spoke of the “pledges.”  He is an outstanding bankruptcy lawyer, after all, and knows how valuable pledges can be. The key here is for a public announcement, with no wiggle room, in which at least the  Magnificent Seven and hopefully the Key 50 make an unwavering vow to stay with the firm until either they retire or events force a shutdown. This pledge is certainly unenforceable in any judicial proceeding, but it is crucial in the court of public opinion, where the firm is now being badly battered. These outstanding lawyers have much to lose in the event the firm implodes and for that reason should be motivated to provide an oath of loyalty.

© Jerome Kowalski, April, 2012. All Rights Reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310

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Dewey Shoot the Lifeboats as Our Partners Seek Safety From Our Law Firm in Stormy Seas?

Dewey Shoot the Lifeboats as Our Partners Seek Safety From Our Law Firm in Stormy Seas?.

Dewey Shoot the Lifeboats as Our Partners Seek Safety From Our Law Firm in Stormy Seas?

Telegram from SS Amerika via SS Titanic on location of two large icebergs 14 April 1912 (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

April, 2012

I recently wrote about a major global law firm which now appears to be very publicly flaming out or perilously close to doing so.

The media trouncing this law firm is going through is, quite simply of its own making. But, we need to learn from all of our experiences and observations. Thus, some observations, as this high drama, cum tragedy, unfolds:

• Do not publicly grossly overstate your financial condition. You will get caught and  it will be embarrassing, let alone impair your credibility. As previously reported, this law firm reported to The American Lawyer that its 2011 gross revenues were a robust $935,000,000 and a nanosecond later advised its partners that gross revenues for 2011 were actually only $780,000,000.  Sure, everybody puffs their AmLaw numbers, but $155,000,000 is well beyond mere puffery.

• When you inevitably do get caught with your double entry bookkeeping system, don’t imagine that you will get away with it by assuming the naiveté and gullibility of the media and the reading public. They will quickly figure out some of the chicanery you may have deployed to keep your two sets of books. Suggesting that The American Lawyer uses a different metric to calculate cash collections from the rest of the universe won’t cut it.  Ten dollars in the cash register is can’t be massaged in any way in order to become $12.50 in coin of the realm. When you attempt to engage in this amateurish prestidigitation, The American Lawyer, will take the unprecedented step of calling you on it and in a completely unprecedented fashion restating the numbers you delivered to that magazine. You will look silly and The American Lawyer will emerge as a hero, after earlier being made to look foolish by swallowing a rosy picture you painted for it, which was not factually supportable.

• When you lose about 50 partners in a matter of weeks, including practice leaders and office heads, don’t heap excrement on your former partners or the law firms they are joining. Shooting at these partners as they board their life boats does nothing to enhance the firm or its financial vitality. To suggest that losing these lawyers will have no economic impact on the firm and was all for the best of the law firm, sends pretty abysmal messages: The firm has no loyalty of any kind to its partners of many years; management of the firm fell short in discharging its management duties in not realizing that all of these practice leaders and other escapees contributed nothing to the firm’s profitability; and the AmLaw 100 and magic circle law firms these folks are joining are pretty dumb in not conducting adequate due diligence on the lumpen masses leaving the Titanic seeking safety. This sniping at the lifeboats lacks credibility and shows your mean and vindictive side.

When Chico Marx was caught by his wife en fragrante delicto  in Duck Soup he violently protested his innocence and fidelity even as his wife peered down upon him in bed with his paramour. He famously said “Who are you going to believe, me or your eyes?” Phineas T. Barnum said that nobody ever went broke underestimating the intelligence of the average American.  But, nobody ever saved a floundering law firm by denying what is in plain sight and underestimating the intelligence of a firm’s partners, associates, clients, lenders and competitors.

© Jerome Kowalski, April, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310

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Dewey Think We Are Watching the Deconstruction of a Venerable Law Firm?

Dewey Think We Are Watching the Deconstruction of a Venerable Law Firm?.

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Dewey Think We Are Watching the Deconstruction of a Venerable Law Firm?

Dewey (Photo credit: Wikipedia)

Jerome Kowalski

Kowalski & Associates

March, 2012

 

Have you ever witnessed a sudden and unexpected calamitous and life threatening accident unfolding before your eyes?  Your brain is hard wired to provoke one or more of several different reactions:  (1) avert your eyes; (2) take flight for your own safety; (3) stare intently while frozen in place; or (4) leap to the aid of the victims.

As what may be the deconstruction or, hopefully, the salvation of a major, venerable law firm with either some real public perceptions issues or some systemic issues, let’s see what is unfolding before us, whether we are staring intently or averting our gaze. However this saga ends for this global 1,100 lawyer, 20 office law firm, the unfolding tale continues to provide important lessons for the profession and particularly for law firm leadership.

A venerated AmLaw 50 firm is now under relentless attack by the media. The attack, describing “lean times” at a global law firm,  I would posit,  is in many respects at the invitation of the law firm itself as it boasted of astronomical revenues – which it days later acknowledged to its partners were overstated by some $155,000,000 dollars. While the firm was apparently aware that a number of significant partners would be leaving shortly, it did not disclose these imminent departures to the media during its chest thumping session with the media.  Nor did it address the fact that the firm was fairly well mired in substantial debt — $225,000,000 by some accounts. While it still strikes me as being plainly foolish to publicly tout how much money a law firm is making, particularly when it is fairly well understood that many firms game these financial reports, what is so striking here is what appears to be a pattern of dissembling.

The chairman of the firm, is an M&A lawyer, widely respected for decades. Had he been trained as a trial lawyer, or instructed by his outstanding litigating partners, he would have been schooled in the fact that when you make your case, you must take the initiative and address in your opening and in your direct case the inevitable weaknesses in your case, so that you (1) establish credibility with the jury; (2) do not appear to be hiding evidence that will inevitably surface and (3) make the strongest case for these shortcomings in your case.

As the firm took its first several rounds of pummeling from the media, it realized that it needed to have a crisis management public relations program in place, a program I have long advocated that any law firm should keep in reserve at all times. The firm hired a crisis PR firm, which counts among its clients Paris Hilton. Thus far, what may have worked for Hollywood is not making it here.

The law firm we speak of is, of course, of course, Dewey & LeBoeuf.

While it is still way too early to write a postmortem, it is timely to review how this noble firm finds itself in crisis. It is equally timely to consider the potential of failure and its consequences.

The firm is the product of the 2007 merger of Dewey Ballantine,  a hard hitting high end law firm with profound capacities in capital markets, M&A and big stakes litigation, and Leboeuf, Lamb, Leiby & MacRae, a well established law firm best known for its insurance industry and utility work. The Dewey side had profound share of “bet your company” work, where fee sensitivity was not an issue;   The insurance and utility sectors have always been rate sensitive. The business plan, as I understood it, was for the combined firm to focus on the high end side of the equation and to continue to grow by attracting partners with humongous practices with clients ready to send cash by the truckload. It appears that in order to facilitate this plan (and perhaps to meet some resistance about LeBoeuf’s more staid, perhaps lower paying client base), the combined Dewey & LeBoeuf offered incoming big hitting laterals multiyear fixed compensation whopping salary packages. Press reports suggest that some big hitting legacy partners signed on to the program but also sought these long term guarantees for themselves. Like the first time parachutist noting that it’s only the first step that’s daunting, it may have been these first steps that may have been foreboding, but unlike the parachutist, there was no protective canopy to gently guide the jumper through majestic heights. Much more frightening was the fact that these jumpers were diving into an unseen storm of epic proportion – The Great Recession. The consequence of the economic crisis was a universal fall off in business.  But, the new laterals and the legacy heavy hitters had the benefit of their reserve chutes; namely, the guaranteed comp packages. Apparently, even despite reductions of compensation for second and third tier partners and other expense reducing strategies, there wasn’t enough cash left to pay the big hitter class. Instead, the firm reportedly issued and these folks accepted scrip, in the form of IOU’s or deferred compensation agreements. Some press reports suggest that the total scrip thus far issued totals $100,000,000.

In early March, of this year, the firm’s chairman met with an American Lawyer reporter and announced revenues of $935,00,000 (remember this number, it will come up again) and advised that its headcount was then 1,040 (down from 1,400 at the time of the merger), an equity partner tier of 190, non-equity partner tier of 190 the net being unchanged from the preceding year, inexplicably despite the fact that in 2011 the firm brought on 30 lateral equity partners and lost 7 (I know this doesn’t make sense, but I only repeat what has been previously reported), profits per equity partner up by 1% to $1,782,000 and profits per non-equity partner down by 23% to $499,000 (yes, you read that right). The spread from highest earning partner to lowest is reported to be 10:1.  The firm apparently made these milestones  fortuitously because of the collection in December of a large receivable that was actually due in January. What Dewey didn’t tell The American Lawyer was that some real jolting news was about to surface.

In the days before The American Lawyer interview, 18 of Dewey’s partners quit. Days after that interview a group of 12 partners left for Willkie Farr & Gallagher. Among that group was the head of the firm’s M&A practice, the co-chair of the New York insurance practice and the co-chair of the firm’s New York corporate finance practice.

A few days after this jolting news surfaced, the firm had a regular partners meeting at which senior management sought to assuage all those gathered that the firm was on firm financial footing and apparently asked the partners to demonstrate their confidence in senior management by staying put and allowing senior management to guide the firm through some mild turbulence. Two days later another 7 partners defected, including the head of the Houston office, the head of the Chicago office and the co-head of the firm’s New York regulatory practice.

In addition, at the March 21 partners’ meeting, management advised the firm’s partners that they should be have confidence in the fact that the firm posted respectable revenues for 2011 of $780,000,000 (now it’s time to recall the reported $935,000,000 in 2011 revenues that I asked you to keep in mind a couple of paragraphs ago). Yes, there is a reported $155,000,000 in missing revenue, as yet unexplained. This is not a mere rounding off error. I have previously addressed the issue of some law firms gaming their reported numbers, but the most compelling piece about Dewey’s lack of accounting reporting fidelity – and, indeed about the entire Dewey morass — can be found in the brilliant and incisive piece written by Bruce MacEwen, writing under the ­nom de plum (nom de guerre?) Adam Smith, Esq.

As Bruce noted, Dewey explained away the $155,000,000 discrepancy (a mere $816,000 per equity partner) as being attributable to “different metrics” used by The American Lawyer and the rest of the world. One wonders whether distribution checks will be issued by accounts maintained using “American Lawyer metrics” or real money.

The point is the lack of candor. The firm, which already presumably knew that at least twenty more lawyers would be leaving in days, neglected to make any public disclosure to The American Lawyer, The New York Times, The Wall Street Journal, The Daily Journal or any of the media dogging this story before these departures became faits accomplit. Most painful, by any measure, is the fact is that so much of the firm’s leadership have logged out, voting with their feet with regard to the confidence they had in the firm’s senior management. Like the generals in Libya and Syria, they declined to continue to attorn to their leader.

The lack of an early discussion coupled with the continued silence regarding the missing $155,000,000 is perhaps even more egregious. Even Dewey’s ninja spinmeister is silent.

As recruiters smell blood in the waters, they are now swooping in like piranhas. The phones at Dewey’s offices are ringing off the hooks. The media will not relent. Partners will necessarily seek alternatives, seeking, at the least, safety nets should implosion mark the end of this tale. With so many partners at the firm having lateraled in and so may having their compensation cut to pay for these laterals, institutional loyalty is likely a scarce commodity at Dewey.

Now with implosion being a real concern,  law firms considering taking on some of those outstanding lawyers from Dewey, must prudently temper their enthusiasm with the fact that with the real risk that they will need to be repay fees generated by these laterals will need to be repaid to a bankruptcy trustee under the unfinished business doctrine articulated in Jewel v Boxer as well as the fact that the resources of many of these new partners will be sucked up by the consequence of the possible bankruptcy of Dewey (yes, I finally said the unthinkable “B” word).

[Update:  On March 27, 2012, Dewey announced a management upheaval, under which four partners took over a newly created “Office of the Chairman,” with the prior chairman nominally serving as the fifth member of that office, although he is also being exiled to Europe.  This palace coup was orchestrated at a rump meeting of one-third of the firm’s partners on the preceding day, with apparently little regard to the fact that the putch was inconsistent with the firm’s partnership agreement and the fact that the chairman was just duly re-elected by the firm’s partnership for an additional five year term. In addition, the chairman’s adjutant, the firm’s executive director, was also ousted by the dissident group and apparently placed in isolation, as a member of the dissident group took over his duties. Will this move lead to cohesion or further acrimony?  Will the lawyers hire lawyers to sue the lawyers who are their nominal partners?  Only time will tell.]

We all hope and pray, for the sake of all of those directly affected and for the sake of the profession that Dewey survives this nosedive.  The alternative is almost unthinkable. But the specter looms large.

Now, I invite you to suggest management strategies that can prevent the train wreck. Let’s all say we pitched in or at least tried to do so. If you were leading this law firm, what steps would you now take?

© Jerome Kowalski, March, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310

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How to Succeed in BigLaw While Really Trying: A Four Act Unfinished Play, Now Playing at a Law Firm Near You

How to Succeed in BigLaw While Really Trying: A Four Act Unfinished Play, Now Playing at a Law Firm Near You.

How to Succeed in BigLaw While Really Trying: A Four Act Unfinished Play, Now Playing at a Law Firm Near You

Is that Herman above the tree? (Photo credit: mali mish)

Jerome Kowalski

Kowalski & Associates

March, 2012

 

Dramatis personae:

Herman Laforge; 64 year-old chairman of Biglaw, Global and Powers, an international law firm with roots in the Midwest.

Marvin Shades; managing partner of BG&P;

Sheila Shuster; CFO of BG&P;

Setting:

Tower floor of Manhattan skyscraper overlooking the canyons of Manhattan.  Act I takes place in late January 2009.

Act I

Laforge:

I am still breathless.  What a year 2008 has been! Those banks going out of business weren’t as harmful to our business as I feared.

Shuster:

I don’t know Herman. We had some deals and some litigation work from these banks for which we collected fees through the third quarter, but then new deal flow stopped and the lawsuits were then stayed by the bankruptcy filings. New matter openings in the firm slowed by about 40% in the fourth quarter and hourly billings were down about the same in Q4.  I don’t see those picking up during the first few weeks of this year. We could be in for a disaster this year. We just don’t have enough work to keep everybody busy.  If this continues, we may be in for a disaster this year.

Laforge:

Have we got the preliminary numbers for 2008 yet?

Shuster:

Yes, Herman, they are in your packet. Be careful about these – these are the real numbers – not what we release to the media.  As you can see, our gross was down 11% and our net was down by 14%.  The net might have been worse, but, fortunately, we laid off about 60 lawyers and about 100 support staff.

Laforge:

How does our profits per equity partner look?

Shuster:

We took a pretty big hit here. PPEP was down about 16%.  We may take a beating from the media on this one, but from what I hear, there are lots of firms that are in the same shape.

Laforge:

That doesn’t make me any happier.  Look, I built this firm by growing, merging and opening offices in the major US markets. I was only able to do that by boasting about our growing PPEP and showing potential acquisitions that our PPEP was up there with the top New York, California and Washington firms.  I had to get it out of everybody’s head that we were just another sleepy Midwestern law firm. That’s why I move to New York. If our PPEP takes a dip, I am afraid that we’re going to have trouble growing.  We’ve got to get our PPEP back up there.  Shirley – you got any bright ideas?

Shuster:

Well, Herman, PPEP is just a function of dividing up profits among our equity partners. We could increase PPEP by either raining profits, which are is going to pretty impossible in this economy or having fewer equity partners.

Laforge:

You may be on to something there, Shiela. Look, our partners are actually paid pretty much what I tell them they are going to be paid. Our budgeting is pretty good in stable years. Why don’t we take a bunch of our equity partners and take them out of the equity class – we’ll de-equitize them. We’ll just call them income partners. We’ll just explain to them that at the end of the year, they’ll make as much money as before and that we just have to make this adjustment temporarily to please the media. We’ll give them contracts so that their incomes will be protected.

Shuster:

But, Herman, we already have a problem with our non-equity partners. They weren’t as busy as they had been in the past. In fact, their hours billed were down about 20% last year.

Laforge:

Tough times require tough decisions. Let’s lay off about 10% of our income partners. That should seal the deal. And as long as we’re at it, let’s take another look at our associates and support staff and see if more cuts should be made there. If we’re going to take on some hard nasty news, let’s do it all at once. Get O’Brien in the media department to have a press release ready if word about this gets out to Above the Law. Say something about aligning our partnership and support structures to an ever changing and challenging economy.  And throw something about how we are very strong and confident. Oh – and say something about how we’re looking forward to a great year.

Shades:

Can we do all of this?  I mean, legally. These guys are partners, after all.

Laforge:

These are tough decisions, but we get paid big bucks to make these tough decisions. We made these folks partners and I guess we can unmake them as partners.  Everybody will understand that we are doing this for the good of the firm. Let’s also be strict about our mandatory retirement policy. No waivers. Period.

Act II

January 2010.

Laforge:

It’s been another doozie this year.

Shades:

At least cutting some of our equity partners last year kept our PPEP respectable.

Laforge:

But our gross still keeps slipping. We have to pump that up.

Shades:

Any ideas, Herman?

Laforge:

Let’s get back to our game plan for growth. We got to 1,200 lawyers by lateral hiring. Lots of it.  A lot of other law firms have done what we have done – de-equitize partners.  Partners at law firms are just free agents. Let’s now hire some real big producers and shell out some real money for these guys. Real money invested begets real returns if you hire carefully. If necessary, we’ll lean on some of our partners to defer some of their comp to cover these costs. After all, it’s for the good of the firm. Make sure O’Brien sends out a great release saying how we are continuing to grow.

Shades:

Sounds like a plan.

Act III

January 2011

Shades:

It looks like we are beginning to bounce back. We got some really good talent and bought some nice business. Even after paying for our ramp up expenses, we are showing some real improvement in gross, net and PPEP.

Shuster:

Yes, but the expense side keeps going up at a higher rate than the profit margin.

Laforge:

Sheila – you’re going to have to cut some support staff again.

Shuster:

I’m on it, Herman.

Laforge:

What are we going to grow the revenue side this year, Marvin?

Shades:

We are going to continue to buy talent and business. I’ve also been speaking to a bunch of other managing partners whose firms have pretty good numbers. A lot of these guys have pretty good networks of international offices. They say that these networks of international branches are great for servicing clients with global needs. They also say that having these networks gets them on the short lists for big ticket items where clients have the needs for international resources on matters where the stakes are high and they can charge big bucks. They also say that these international offices are pretty good feeders of business to the US offices.

Laforge:

You’re saying –

Shades (Interrupting):

Yes, let’s go global big time.

Laforge:

Sounds like a plan.

Act IV

January, 2012

Shades:

Hermann, on paper, we’re looking pretty good. Our gross is up 4%; Sheila got our net up by 11% but we are still getting killed with expenses rising quicker than revenues. On top of that, in order to get the cash in the bank, we have squeezed our clients to pay every bill possible before year end. We did a pretty good job on that with the help of Sheila’s staff. Sheila also did a great job on juggling our accounts payable, deferring payments until 2012 to keep our net as high as possible.

Shuster:

Thanks you, Marvin. But, we now have some new problems. Getting those clients to pay quickly ate in to our inventory. Our accounts receivable are at an almost unacceptable level.  The banks have noticed that and have raised some questions. On the expense side, we are cutting and pruning and we are way down on what we can cut. Our accounts payable numbers are much higher as a percentage of revenue than they ever have been. And while a 4% increase in revenue seems commendable, it is only slighter better than flat. We still need to increase the revenue side.

Laforge:

Look, guys – this isn’t a complicated business- we put in hours, charge by the hour and get paid by the hour. Just tell everybody to bill more hours. I’ve read that a couple of firms are doing that.

Shuster:

We have another problem, Herman. We lost a couple of our old time producers last year. They took a chunk of business with them and the press is starting to ask questions. The truth is that I tool this pretty hard – after all I’ve known these lawyers for thirty years and I found it hard to believe that they didn’t appreciate what we were doing for them in building the firm.

Laforge:

I don’t get it. What ever happened to loyalty?

Shuster:

It’s just not like the good old days, is it, Herman, is it?

But we have another problem brewing, you know when we went on that lateral hiring spree a couple of years ago, we asked some of our second and third tier partners to defer their comp to help pay for the new business. Well the total of deferred comp is getting a little out of hand and some of our partners and the banks are beginning to worry about that.  Some of the guys leaving are telling me that the whole deferred comp idea is one of the reasons they decided to bail out. And the press is starting to ask some hard questions.

Lafarge:

Look, Marvin, you get O’Brien to prepare another press release saying how we’re really doing well and that these partners leaving is part of our ongoing efforts to align ourselves with market realities. And you may as well let everybody know that we’re going to be laying off some more lawyers and support staff. You know, the alignment thing.  We’re not the only ones going through this.

Shades:

Herman – with all due respect, I think we need a more comprehensive approach on the media side.  Look, we saw Howrey go down last year.  The leadership there just didn’t appreciate how what they were telling the media helped sink them.

Lafarge (rising, very agitated):

Are you saying that we’re in danger of sinking? Is that what you’re saying?

Shades:

No Herman. Calm down. Every law firm is at its essence a fragile business. The point is that we need to recognize the realities. We must level with all of our partners. We need to make sure we are all working together as a team for a common purpose.

We also need to make sure that our partners understand that if we continue to get bad press and they continue to bail, we could, heaven forbid, be this year’s Howrey. We need to make sure that every partner understands that the personal consequences to the partners if we tank are extremely dire.

Let’s take our own statements seriously. Let’s really make sure that all of our partners are actually properly aligned and that all are compensated fairly.

Lafarge:

Sounds like a plan.

Curtains Draw to a Close

Author’s Curtain Call invitation to his audience:  Please help me with writing the fifth act. How do you think this production should end?

 

 

© Jerome Kowalski, March, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310.

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What is the Fair Market Value of a Full Service Commercial Law Firm?

What is the Fair Market Value of a Full Service Commercial Law Firm?.

What is the Fair Market Value of a Full Service Commercial Law Firm?

Image via Wikipedia

Jerome Kowalski

Kowalski & Associates

February, 2012

 

 

A short piece in today’s the Wall Street Journal caught my eye: The Journal reported that a report was just issued that “estimates that top U.K. law firms are worth between $711 million to $4.1 billion, with Magic Circle firm Allen & Overy leading the pack.”    The report the Journal made reference to was brief and from Europa Partners which stated that it had just completed its second annual valuation of UK based law firms and found that “Law firms are valuable businesses; six of the top ten by value are large enough to be included in the FTSE100 if they were listed.”

I wonder.

When I went to school, I learned that the definition of value was “the price a willing buyer would pay a willing seller, each negotiating n good faith and neither under duress.”  Well then, is there a willing buyer out there for any of these firms?  We don’t see any. The Alternative Business Structure, sometimes called the Tesco law, does allow for non-lawyer ownership of law firms in the United Kingdom and Wales. But, as I predicted some time ago, there aren’t any non-lawyer buyers lining up or kicking the tires for large commercial law firms. With the top ten magic circle firms valued in the eye-popping range of $711,000,000 to $4,200,000,000, I suspect that more than a few equity partners at these well heeled law firms would be seriously thinking about cashing in their chips if there were a willing buyer out there. I know you would. I certainly would.

We have all learned the hard way that lawyers, trusted business advisers to the global markets, have concocted the silliest business model for their own business.  In any other endeavor, a business owner invests capital, sweat equity and builds a viable enterprise and looks forward to an exit strategy, where he or she could sell the business or perhaps leave it to his or her children. Lawyers can do neither. If they are lucky, they get to retire voluntarily when they are ready (not when they are forced to) and then simply get their own money, namely, their capital contributions, back over a period of years. Maybe a nice dinner with a couple of partners is thrown in as well. But no premium and no premium for having built a successful business. Anti-nepotism rules typically preclude a bequest of a partner’s ownership rights to his or her offspring.

More painfully, a large commercial law firm has less than zero value on liquidation or winding down.  In fact, such scenarios have been enormously costly for partners in such law firms.

Well, then, what is a commercial law firm worth? Nothing, really. I have no idea what Europa Partners’ valuation methodology was, but whatever methodology was deployed, it certainly couldn’t result in a fair market value with the standard textbook definition of value.

The Achilles’ heel in valuing a law firm is that its most valuable assets, its working partners, ride that old elevator down every night and in this age of partner free agency, there is only a hope and a prayer that these assets will return the next day to contribute to the production line. Our colleagues across the pond do have an advantage in maintaining some value for these assets in some respects in that the rules in the UK do allow for “garden leaves,” under which a withdrawing partner can be compelled to spend many months after he or she withdraws from a law sitting at home enjoying the garden or just sucking wind. But, in most of the United States, Rule 5.6 of the Model Code of Professional Conduct bars a lawyer from entering into any agreement which restricts him or her from practicing law. No restrictive covenants here.

But, I digress.

The point is as we go through the wrenching changes wrought by The Great Recession, clever lawyers, with a bit of self interest should be thinking about re-designing the entire business model of law firms and the delivery of legal services. While the American Bar Association dithers with little bits of the non-lawyer ownership of law firms issue for no good or productive reason, the market – and clever lawyers – will develop a new structure which create a new structure for the delivery of legal services, which will have real value, be saleable and scalable. Our LPO competitors have already figured out how to do so and may be soon eating our lunch. And their enterprises have real value.

© Jerome Kowalski, February, 2012. All Rights reserved.

Jerry Kowalski is the founder of Kowalski & Associates, a consulting firm serving the legal profession exclusively. Jerry is a regular contributor to a variety of publications and is a frequent (always engaging and often humorous) speaker to a variety of forums. Jerry can be reached at jkowalski@kowalskiassociates.com or at 212 832 9070, Extension 310.

 

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