Thinking Beyond Short-Term Metrics (Live Post – Ark Pricing Conference)
This is live blog post from the Ark Group’s Managing Partner’s Law Firm Pricing & Profitability Conference. First up is Steven J. Harper, author, contributingeditor to The American Lawyer, and adjunct professor at Northwestern University’s Law School and former Partner at Kirkland & Ellis LLP. His topic: Thinking Beyond Short-Term Metrics. [Please forgive any typos as I will post this as session ends].
Steven will describe how he became a commentator on the business of law after a long career in law practice. He started as full-time associate at K&E in 1979. One-half of 60th floor was the library, which has the ‘state of the art Lexis terminal”. At no point during orientation, did he hear anything about billable hours. It was not on the radar screen at K&E in 1979. Of course lawyers billed time but it was not a topic of conversation. Lawyers worked very hard but the focus was not on hitting targets, though he did learn his billable hours at the end of the year. So what happened? What’s changed?
In 1985, American Lawyer published its fir Am Law 50 issue. It published partners per profit. Steven calls this a ‘watershed event’. In real terms, PPP doubled from 1985 to today. In 1985: leverage was 1.76; 80% of firms had single-tier partnerships; path to partner was 8 to 10 years; and there were no guarantees of partnership but “decent odds of advancing.” Today, leverage is 3.54 (2x in 1985); 80% of firms have 2-tier partnerships; 11 to 12 years to partnership; and fewer than 10% of associates make partner. [Note: leverage ratios denominator is only equity partners.]
More metrics: In 1985, top to bottom equity spread was 3 to 1; few firms had mandatory billable hour requirements; hourly rates were low enough that firms could take small cases the enhanced associate morale and training. Steven said as 2nd and 3rd year associate, he was able to lead cases – it was unusual then but it never happens today because of high hourly rates. Today, the partner comp spread exceeds 1o to 1 in many firms (Dewey has “barbell” approach [RF: bimodal distribution]); most firms have mandatory minimum billable requirements, usually 2000 hours per year; hourly rates have “soared” from 1998 to 2007.
And still more metrics: In 1985, firm incentives rewarded mentoring and other partnership qualities; firms valued institutional clients and encouraged inter-generational continuity; lateral partner moves were rare. Tells story about Fred Bartlitt, his mentor, who was interested in ‘building a practice’. Today, short-term metrics – billings, billable hours, and leverage – determine partner comp at most firms; as a result of these pressure, partners build client silos ‘because they eat what they kill’; ‘lateral partner hiring frenzy continues’.
So today, there is three-legged stool. Says first leg is billable hour is one and that there is much evidence of a movement away from billable hours, talk of AFA notwithstanding. 80% of AFA are discounts from hourly rates. 16% of big frim revenues from AFAs. Second leg is billings: partners need to build silos so partners can hang onto their clients and their billings. This also gives them portability to move laterally. Third leg is still-increasing leverage. I ask if leverage has really continued to go up: answer is that it’s been about steady since 2010 BUT there is more hiring of counsel and the average of partners has increased. Conference Chair Paul Lippe points out that Big 4 and McKinsey have mandatory retirement but in BigLaw, often those over 60 are the biggest earners.
The downside of the shifts:
- Five year associate attrition exceeds 80%. This means less client continuity.
- Associate morale has plummeted.
- Money has not bought partner hapiness.
- Billable hour regime has encouaged inefficiency and cost clients money
- Several large law firms are gone. (Heller Ehrman, Thelen, Howrey, Dewey.)
- Continuity in client relationships becomes problematic.
“Not everything that can be counted counts and not everything that counts can be counted.” The challenge: what set of metrics should we use? Steven points out that life is more than about money. Being in the “flow state” is what most professionals want but system today does not focus on providing this. So, he offers ideas for clients:
- Fight the lawyer’s instinct for precedent
- Turn the billable hour metric against itself. For example, do a histogram (my words) of associate distribution billable hour years. This would show which firms work too hard. This may or may not matter to clients directly. But suppose clients showed that for each fee earner, they could see prior 12 month billable hour total. Analogizing to limits on truck driver and pilot time on job, clients might sense the diminishing marginal utility of lawyer time. Discussion though if clients really care – audience member says clients only care about results. Steven says clients would sometimes care, depending on nature of work and circumstances.
- Force and reward inter-generational transition. Clients should want lawyers of multiple ages on cases for long term continuity.
Ideas for law firms:
- Create reweard structure for long-term institutional stability and client service
- Change partner comp to discourage building client / partner silos
- Partners need to remember how they arrived where they are – they should mentor
- Encourage a culture that creates ‘flow’
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