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Three Things We’ve Learned from the Dewey & LeBoeuf Collapse

 

Dewey LeBoeuf

The post-mortem for Dewey & LeBoeuf won’t conclude for quite some time. Once the dust has settled and the 1,000+ lawyers have landed elsewhere, we may get the full behind-the-scenes story.

For today, we’re learning that revenues went down, expenses went up, and the firm was obligated to pay huge sums to some key personnel. Certain lawyers were guaranteed huge, multimillion dollar salaries regardless of the overall performance of the firm.

The money ran out.

What can those of us in smaller firms learn from the Dewey & LeBoeuf collapse?

1. We’ve learned that business cycles are inevitable. The economy will go up, and it will go down. The economy affects everyone regardless of how big and how powerful you may think you are. The cycle will grow certain practice areas and shrink others. Things change, and they don’t always change in a positive manner.

2. We’ve learned that payroll is the expense that really matters. When payroll gets out of control, the whole business can collapse—very quickly. Most of us spend most of our money on payroll. It accounts for half or more of the expenses in most law firms. We have to keep tight control over payroll commitments. No employee is worth the collapse of the business. You’ve got to be careful to connect salary commitments with profitability. Whatever the system, it can’t require you to keep making huge expenditures when profits dry up.

3. We’ve learned that we need variability in our expenses. We can’t predict the cycles. When bad things happen, we need the flexibility to cut costs promptly. We can’t make big payroll commitments without providing a quick escape hatch. Payroll—all payroll—needs to be variable: it’s essential. More and more firms pay commissions to attorneys based on origination and productivity. Big firms that previously paid salaries and maintained lockstep compensation systems have migrated toward performance-based compensation. Ask a big firm associate how much revenue he needs to generate to cover his overhead. In many firms, associates will be able to spit out the number without thinking about it: they know what they need to do to make more money.

Variable payroll requires a big, emotional transition for many firms with a history of paying fixed salaries or salaries plus bonuses. You’ve got to make a change so that payroll can go down rather than just up. Conservative attorneys aren’t comfortable with risk and resist the variability. Those attorneys, and the firms that make commitments to those attorneys, sometimes end up unraveling like Dewey. In the end, the conservative attorneys and the firm all end up with nothing. It’s time for a change in those firms.

Variable payroll also requires big changes for the non-attorney staff. It’s challenging to develop variable pay structures for administrative support and paralegals. It’s important, however, to find a mechanism for introducing variability when non-attorney payroll represents a significant expenditure for the firm, as is the case in most small firms. Some firms are shifting toward virtual support and paying hourly for the help they need. That solution immediately introduces variability to the non-lawyer payroll.

Watching a firm like Dewey fall apart is frightening to smaller firms. We assume the big firms know what they’re doing and are well positioned to survive the ups and downs of the business cycle. Unfortunately, they’re subject to the same economic pressures as the rest of us.

There are lessons to learn from Dewey. We’re in a better position than most big firms to act quickly on those lessons and protect ourselves from the same fate. Look at your business practices and apply these lessons to your firm. That way, as things change economically, you’ll still be around long after some firms, like Dewey, are long gone.

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  • Almighty Dollar

    Knowing Steve Davis (from the beginning of his career) when I was on the other side of some cases and also later used him at LeBoeuf as our outside counsel when I was an in-house utility attorney, I’d not disagree with the points you made above, but I’d also argue that the relatively “flat”, lockstep compensation schemes of old-school partnerships that more equally rewarded “finders, minders and grinders” had a lot to do with their success, as opposed to the CEO-like, pyramidal ”winner take all” compensation schemes of today.

    I’d argue as well from my own long experience in smaller, regional firms of 20 – 50 attorneys that the “originator”/”eat what you kill”/supposed “book of business” firm models are a crock.  You end up valuing egotistical salesmen types who practice no law, don’t go to court, do no client work and  do nothing more than schmooze or golf with bankers and politicians way more  than the people who really create the value in the law firm, and this is a prescription for failure.

    My 0.02.  Yes, I know from your columns you value marketing and business generation a lot, and it’s certainly important, but the current CEO like, “winner take all” corporate banking/Wall Street compensation models shouldn’t apply to working professional partnerships.  There’s something wrong where those partners who claim the “origination” and “relationships”  get $10 Million but those who do the client work get $300,000 (modest in NYC).

    When only the “name” partners benefit and seek to claim all profits and “origination” because of their supposed reputations, schmoozing or golfing, things go downhill.  When golfing with bankers or politicians is more important than winning high profile cases or pleasing actual clients, something’s wrong.

  • Almighty Dollar

    Knowing Steve Davis (from the beginning of his career) when I was on the other side of some cases and also later used him at LeBoeuf as our outside counsel when I was an in-house utility attorney, I’d not disagree with the points you made above, but I’d also argue that the relatively “flat”, lockstep compensation schemes of old-school partnerships that more equally rewarded “finders, minders and grinders” had a lot to do with their success, as opposed to the CEO-like, pyramidal ”winner take all” compensation schemes of today.

    I’d argue as well from my own long experience in smaller, regional firms of 20 – 50 attorneys that the “originator”/”eat what you kill”/supposed “book of business” firm models are a crock.  You end up valuing egotistical salesmen types who practice no law, don’t go to court, do no client work and  do nothing more than schmooze or golf with bankers and politicians way more  than the people who really create the value in the law firm, and this is a prescription for failure.

    My 0.02.  Yes, I know from your columns you value marketing and business generation a lot, and it’s certainly important, but the current CEO like, “winner take all” corporate banking/Wall Street compensation models shouldn’t apply to working professional partnerships.  There’s something wrong where those partners who claim the “origination” and “relationships”  get $10 Million but those who do the client work get $300,000 (modest in NYC).

    When only the “name” partners benefit and seek to claim all profits and “origination” because of their supposed reputations, schmoozing or golfing, things go downhill.  When golfing with bankers or politicians is more important than winning high profile cases or pleasing actual clients, something’s wrong.

  • http://www.renschlawoffice.com/ Steve Rensch

    Yours is the only email document I commit to reading every day, primarily because you are the best at identifying and addressing the conversation that is already going on in my head.  That is particularly true of this article.  I know way too little about the collapse of big firms to comment on that.  But as the head of a small firm, I know that finding the right path in an environment that changes as fast as the weather is where my thoughts are most the time.  And though I have points of agreement and disagreement with “Almighty Dollar”, the most important point I believe he misses is that the preoccupation of owners with rainmaking is no longer a choice, it is a necessity.  All lawyers claim that their work is of the highest quality, and the potential client has no way of distinguishing in the absence of responsible marketing. 

     At the risk of being dismissed as “airy fairy”, the spiritual side of me fears that the increasingly frequent destruction of the seemingly indestructible institutions is indicative of a need to reconsider values on the part of both the new wave marketers and the old school professionals.  We are no longer immune to the forces that have affected the “common” populace so severely.

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