More cautionary news from the world Big Law. Dewey LeBoeuf–the mega-merger of venerable Dewey Ballentine and LeBoeuf Lamb–is in trouble:
Tens of millions of dollars in deferred compensation are owed to Dewey’s partners. Some have been told they are being paid a fraction of what they were promised. The firm is cutting 5 percent of its lawyers and 6 percent of its staff. Nineteen of its 300 partners have left Dewey since January, including heads of major practice areas. About a dozen more departures are expected.
Some of the blame goes to “financial missteps”–which is like saying heart stoppage was the cause of death. When was the last time a business failed because of wise financial decisions? The true problem is the profound change in the legal market, which
has yet to bounce back from a deep recession. Many of the lucrative practice areas that fueled growth during the market boom — securitizations, mergers and acquisitions and real estate — have failed to return to prefinancial crisis levels.
At the same time, expenses, which include the rising pay for young associates just out of law school, continue to accelerate. Further adding strain to firms’ finances are corporate clients who, operating in an uncertain environment, have become increasingly resistant to fee increases and are demanding discounts.
One recently published influential report on the state of the industry painted a grim picture.
“Since it is unlikely, based on overall economic conditions, that the demand for legal services will grow robustly for the foreseeable future, the legal industry will be forced to live with uncertainty for some time to come,” said the report, from Citi Private Bank and the Hildebrandt Institute.
Parse that second paragraph. “Rising pay for young associates just out of law school” and “corporate clients who . . . have become increasingly resistant to fee increases and are demanding discounts.” In other words, big law firms continue to pay big bucks to lure the highest-achieving law school graduates, while clients–those who pay the bills–demand discounts. One discount that the linked article does not mention is for hours billed by those high-paid young associates, who don’t actually know how to practice law. Some corporate clients refuse to pay anything for training young associates–they won’t allow them near their deals. That’s an unsustainable business model, and partially explains the extraordinary attrition rate for those sought-after young associates:
Attrition of law firm associates has always been a blight on the profession. This attrition is financially painful as associates leave BigLaw in droves during their third or fourth years, at precisely the point when these associates become significant profit centers at the law firm. Attrition at these levels often reach the 60 – 80% level. The financial pain to law firms is compounded by the fact that law firms have by that point spent upwards of $500,000 to recruit and train each associate. In the current market, with clients by and large refusing to pay for the training of young associates, the financial burden to law firms caused by this attrition is further exacerbated.
Another explanation for associate attrition is inhospitable law-firm culture. Take a couple hundred Type-A young associates who are accustomed to thinking of themselves as the brightest bulbs in the chandelier, compensate them more than their objective worth (if they were worth what firms billed for their time clients wouldn’t refuse to pay for them), add mundane legal work–because in this climate that’s all that mid- and upper-level associates are willing to give them–and not even enough of that to keep everyone busy, require them to bill 2,000 hours a year, and shake vigorously. “Inhospitable” doesn’t begin to describe it.
And it’s not like young associates can honestly say if I can make it through this in a few years I’ll be skipping through fields of clover. A big firm lawyer without his or her own book of business will forever be feeding at someone else’s table.
At many large law firms, including Dewey, the compensation system has become a two-tiered structure where the highest-paid partners can make more than 12 times as much as the lowest-paid ones. On the high end are Dewey’s so-called rainmakers, the star partners who make millions of dollars a year executing corporate mergers and handling high-stakes business litigations. [The article mentions one partner with guaranteed annual income of $6 million.] On the low end are the majority of Dewey partners who are known as service partners. These lawyers are not responsible for client relationships. Instead, they handle more tedious legal tasks like drafting briefs and executing merger documents. They are paid at the bottom tier, about $450,000 a year . . .
$450k/year is top 1% money, but many lawyers realize the game isn’t worth the cost of the ticket. If they are smart or lucky they so realize before chaining themselves to a lifestyle that requires $450k/year. If not–misery loves company.