The Leading Edge
Columbia Law School graduates serving as managing partners and chairmen at some of the world’s most successful and respected law firms take a close look at the state of the elite bar. How has the economic crisis impacted large firm practice, what has changed over the years, and what’s on the horizon?
It has been a rough few years for the legal industry. The financial crisis of 2008 hit Wall Street clients hard, and many law firms were affected by that downturn. Revenue growth during 2012 was slow, and it is unclear when, or if, law firm business will return to pre-2008 levels. Meanwhile, the risks that some firms were taking became apparent when Dewey & LeBoeuf collapsed in 2012, shocking an industry unaccustomed to spectacular failures.
Although the financial pressures are front-and-center, important developments within the legal industry extend beyond just economics: Globalization has meant even New York City’s top law firms can find themselves competing with foreign shops, while technological advances have helped turn large swathes of legal work into a commodity business.
From inside the glass-clad office buildings of Manhattan’s elite law firms, managing partners and chairmen—many of them part of a new generation of management at their firms—are searching for the right strategy for the new legal environment. Some are expanding overseas in an effort to ride the global economy, while others are focused on strengthening core practices and building-out related businesses that suit the times, such as financial regulation and antitrust work. All hope that their culture, their training, and their expertise with respect to the highest-of-high-end work—complex transactions, thorny litigation matters, and the like—will give them an edge.
Columbia Law School Magazine spoke with seven graduates who serve as managing partners or chairmen at some of the world’s most prominent law firms—Boies, Schiller & Flexner; Cravath, Swaine & Moore; Davis Polk; Dechert; Milbank, Tweed, Hadley & McCloy; Sullivan & Cromwell; and Wachtell, Lipton, Rosen & Katz—as well as two top in-house general counsels. We wanted to get a sense of how the elite bar is reacting to changes in the marketplace, and what clients that use large law firms expect when it comes to representation. Change, it seems, is everywhere.
“There used to be an oligopoly of New York firms,” notes Joseph C. Shenker ’80, the chairman of Sullivan & Cromwell. “Now there is not.” Shenker ticks off components of the current legal landscape: increased globalization and competition from foreign firms, an oversupply of lawyers, increasing consolidation, and the possibility of additional firm failures.
“The world has changed,” echoes Dechert chairman Andrew J. Levander ’77. “There is fee pressure, and there is a proliferation in the number of lawyers. So where firms like ours operate, and want to operate, is doing the cutting-edge, value-added work. If it is humdrum work, clients can hire a small firm or a regional firm to do it.”
That bifurcation of the legal market has resulted in top firms vying ever harder for the plum assignments, and for the brightest law school graduates, at a time when nationally both law school enrollment and demand for top-shelf legal services are down.
Against that backdrop, how does an elite firm maintain, or even improve on, its standing? In discussions about the future of the elite bar, key topics—such as globalization, fee pressures, recruitment and training, and how much (or how little) to expand—came up again and again. So, too, did the Dewey collapse, and what it might signify for the legal profession.
While each of the seven firm leaders has made different choices based on their own firm’s history, culture, and expertise, they largely agreed on one thing: Many of the old ways of doing business are gone. And they are not coming back.
The Rise of Alternative Billing
Four years ago, Evan Chesler, of Cravath, Swaine & Moore, caused a stir with an opinion piece in Forbes, titled “Kill the Billable Hour,” which argued that the way law firms charged clients made no sense—even for lawyers. “If you are successful and win a case early on, you put yourself out of work,” Chesler wrote. “If you get bogged down in a land war in Asia, you make more money. That is frankly nuts.”
He may be right in theory, but, in practice, it has proven extremely difficult for law firms and their clients to agree on how to replace the billable hour. Alternatives abound, including fixed rates for projects, monthly retainers, and variations on contingency fees that call for firms to provide discounts for broken deals and lost cases, but allow for a premium payment when achieving success.
Moving away from the billable hour is “not an entirely comfortable notion for lawyers,” says C. Allen Parker ’83, who became Cravath’s presiding partner at the beginning of 2013. “So you have to step back and ask, why do we bill by the hour? It’s like democracy. It’s the worst system, except for everything else. We don’t always know how to value a law firm’s contribution, so we’ve fallen to rate-times-hours.”
While Cravath has become more proactive about proposing alternative-billing arrangements, Parker argues that clients need to understand that alternative billing is not a code word for discount. “What the most thoughtful clients mean is having law firms put some skin in the game in the early part of the assignment,” he says. “So maybe we’ll work for 80 percent of our billable rates on a summary judgment motion, but on victory, you will pay us an amount that brings us up to 120 percent of our billable rates. A bad arrangement is: We’ll work for 80 percent, and if we win we’ll get 100 percent.”
While the pressure for alternative-billing methods has been building for years, the recent economic climate brought the issue to the forefront. “In this environment, every client, whether they are under duress or not, is looking to control and limit fees, and to make their outside legal work as productive and efficient as possible,” says Jonathan D. Schiller ’73, the co-founder and managing partner of Boies, Schiller & Flexner. “In that effort, they are turning to flat fees and alternative-billing arrangements, and trying to get away from unbudgeted hourly billing.”
At the same time, the balance of power between firms and some large corporate clients has changed, as in-house corporate legal departments have grown in both talent and size—with legal teams at some companies now comprising hundreds of lawyers.
“Everything is about navigating around the billable hour,” says Eve Burton ’89, the senior vice president and general counsel at media giant Hearst Corporation, which now does the majority of its legal work in-house. “It’s not just about cost. It’s about the way we want to have relationships with lawyers who help us.”
In other words, at Hearst, as with most corporations, business units must come up with estimates of costs and revenues, and show how big decisions make sense for the company as a whole. A law firm that does not fully understand this reality, Burton argues, fails to grasp how business operates today.
She shares a story about a very large firm Hearst had hired for a fixed monthly fee. The firm recently came to Burton and asked for more money to account for extra hours it had worked. “I said, ‘That’s not how we look at it,’” she recalls. “‘We can’t afford to pay any more than this. You’ve got to change what you do to fit the budget. You want to create a Cadillac, and I need a Volkswagen. To the extent that you want to take my VW Bug and turn it into a sedan, you do it at your own cost.’”
In some instances, technological advancements have allowed firms to change the way they offer advice, thus impacting fee arrangements. Thomas J. Reid ’87 LL.M., the managing partner of Davis Polk, provides an example of a practice that is becoming more common within the profession: The firm chose to upload elements of its advisory work on the Dodd-Frank regulations to an online database. The subscription price per client for database access is much lower than any one client would pay for advice, but the firm has not seen its profits on the work decrease, since multiple clients use the service. “In places where the delivery of advice can be effective, but does not necessarily need to be individualized, we have responded to the changing dynamic,” he says.
In such instances, as with some other alternative-billing scenarios, the potential for a win-win situation exists.
“If I was a client, I wouldn’t be happy if I gave a law firm something I thought was straightforward to accomplish, and it took them twice as long to accomplish it, and therefore I had to pay them twice as much,” says Daniel A. Neff ’77, the co-chairman of Wachtell, Lipton, Rosen & Katz’s executive committee. “It’s not wrong for lawyers to ask to be paid for the expertise they have gained over their careers, and it’s not wrong for clients to say they want to pay for competence, not for things that take too long.”
From the clients’ perspective, the issue is not only about fees, but about the types of projects for which companies seek assistance from outside counsel, says Ellen Oran Kaden ’77, the senior vice president and chief legal officer at Campbell Soup. With larger in-house legal departments, often staffed by lawyers who worked at large law firms earlier in their careers, companies are more likely to handle in-house work they might previously have sent out, while retaining outside counsel to do more routine work, like reviewing documents. “In many respects,” Kaden says, “the tables have really turned. For many years, the structure of the fee system at outside law firms was predicated on rewarding inefficiency. The more people, the more time, the more large rocks you could hammer down into small rocks and glue back into large rocks, the more lucrative the assignment. Those days, for most companies, are long gone.”
The new normal is still likely to include standard hourly billing, but with alternative-billing arrangements becoming more prevalent as a viable alternative. At Boies Schiller, for example, alternative billing expanded to more than half of the firm’s total billings for the first time in 2010. At Dechert, meanwhile, the firm has begun talking with associates at an earlier stage about both alternative billing and business development. And none of the firm leaders interviewed, even those who expect that their own firms will continue to predominantly bill by the hour, would dismiss the shift out of hand.
Expansion: Why? Where? How?
During the boom years, many large law firms rushed to add overseas offices, but even in tougher times some remain committed to building their business abroad. Among the elite firms, there are primarily two distinct ways to confront globalization: Some are continuing to expand abroad, particularly in major financial centers such as Hong Kong and Frankfurt, while others are sticking to core practices at home, or partnering with foreign firms on an as-needed basis. The first strategy addresses globalization head-on, but can be riskier—global markets could shift, and there are inherent costs that go along with opening far-flung offices and finding the right lawyers to staff them.
At one end of the spectrum is Dechert, with more than 900 lawyers and 26 offices, as far afield as Dubai, Almaty (Kazakhstan), Tbilisi (Georgia), Luxembourg, and Dublin. “We have tried to position ourselves as doing really high-quality, cutting-edge work in the global arena—cross-border transactions, cross-border litigation, arbitrations—so some of the offices we have opened are part and parcel of that strategy, and some are more fortuitous,” Andrew Levander says.
Similarly, Sullivan & Cromwell has 12 offices—including those in Frankfurt, Hong Kong, and Tokyo—and has added practices in the laws of the U.K., France, Germany, and Hong Kong. The firm, which earns nearly half its revenues from non-U.S. clients, has long had a program that allows foreign lawyers to spend time at the New York City office.
“The challenge we all have as the world becomes more global, and New York becomes less of the dominant financial center, is how do you remain globally relevant?” Joseph Shenker says. “That’s the big picture. We need to make sure that we are not insular. For a firm like ours, which specializes in global transactions, we need to compete with the European law firms and, in time, the Chinese law firms.”
At the other end of the spectrum, consciously going against the trend toward opening foreign offices, is Cravath, which operates out of locales in just two cities: New York City, where the bulk of the partners practice, and London. When the firm’s work requires more foreign expertise, Cravath teams up with a foreign firm, such as Slaughter and May in the U.K. “We obviously understand that there’s a lot of globalization going on, but we have made a decision that our clients are best served by having us focus on the things at which we are best,” Allen Parker says.
Wachtell’s Daniel Neff, similarly, argues against opening overseas offices, raising the question of whether an office of a U.S. firm abroad can adequately maintain the culture and caliber of its headquarters.
“The model where you have under one roof one of the best Dutch tax lawyers and one of the best Chinese competition lawyers is an expensive proposition,” he says. “I don’t know how the other firms are doing, but I hear enough grumbling that certainly, for now, we’re very comfortable not having gotten involved in geographic expansion.”
Milbank is in the middle of the pack when it comes to overseas expansion. It has 11 offices and one-quarter of its lawyers work outside the U.S., but the firm is moving cautiously. It has experienced both successes abroad, such as its office in São Paolo, and failures, such as its Moscow office, which was shuttered in the wake of the 1998 ruble crisis. “We are very careful in making the decision to open an office, and we spend an inordinate amount of time deciding which new location fits within our global strategy,” says Milbank Chairman Mel M. Immergut ’71. “Since we have a relatively small number of offices compared with many firms, it’s about being in the right places.”
Beyond geography, the shifting legal environment has also led some firms to consider adding new practice areas, or to shift focus in the direction of legal fields that are especially relevant at the moment. But those decisions involve numerous variables, as well as an array of considerations that are unique to each firm. “We are not looking to pick up some unrelated area,” says Wachtell’s Neff. “We just don’t see it. We’re not interested in growth for the sake of growth. It’s got to support our core practices.”
Other firm chairmen also noted the importance of pursuing practice areas that either were integral to their core businesses or that made sense for long-term growth. Sullivan & Cromwell, for example, has expanded in the areas of intellectual property and international tax enforcement. Dechert, meanwhile, is expanding its white-collar crime practice (adding a group in London focused on the U.K. Bribery Act), and in the fields of international arbitration and global M&A.
Davis Polk recently expanded its Washington, D.C., office to grow its antitrust and financial regulatory practices—enforcement work has been a hot area since the economic crisis. “Expansion is always going to be constrained by our core practice areas, or adjacent essential practices to the core,” says Davis Polk’s Thomas Reid. So, for example, its expansion in Washington, D.C., has included a partner to do work related to the Committee on Foreign Investment, which reviews transactions that have the potential to result in control of U.S. businesses by foreign countries. “We had not had that practice before, but because we saw foreign investment in the U.S. become larger and larger, we added it,” says Reid.
While macro-level developments in the U.S. and internationally can be useful in assessing opportunities for increased profits, leaders at elite New York City firms tend to be skeptical when it comes to taking on trendy or unproven niche areas of practice.
With respect to development and growth through the recruitment of young attorneys, many firm leaders reported that the current economic climate has resulted in a seemingly counterintuitive reality. In a difficult market that includes more lawyers than jobs, it would be easy to assume that law firms have the upper hand with respect to hiring. But these partners say that the competition for the best law school graduates, from Columbia Law School and elsewhere, has never been tougher.
Milbank is spending “more time, money, and effort” recruiting associates, Mel Immergut says, even though the size of the firm’s summer classes and first-year classes has shrunk since the financial crisis.
Other firms, meanwhile, view their individualized training programs, or lower partner/associate ratios, or abundance of international offices, as pluses when it comes to recruiting new associates. Sullivan & Cromwell, for example, has expanded its hiring to include Asian and European law students, in addition to graduates rom schools in the U.S., as it becomes an increasingly global firm. “It’s a brains business, and you want to make sure that your talent is drawn from as big a pool as possible,” says Joseph Shenker.
With the competition between law firms more intense, effective and efficient training has become even more important. One recurring issue is how best to train junior attorneys to specialize—at a time when clients expect increasingly deep knowledge about specific legal areas—but also make sure those attorneys are flexible enough to shift as the economy does. At Cravath, for example, which has its own rigorous training system that seeks to produce generalist lawyers, when bank lending evaporated in January 2009, the partners who had specialized in that area moved into M&A and securities work, Allen Parker says. Adds Wachtell’s Neff: “If you’re a junk bond lawyer, and the market shuts down for three or four months, you need to be able to know how to do other things, even if they are in the securities field.”
So what do these trends add up to, and what will the future bring for the nation’s top firms at a time of market consolidation? While each managing partner and chairman interviewed for this story believes that his firm is well positioned for success going forward, these leaders of the elite bar understand that challenges lie ahead. Many did not hesitate to point out risk factors and potential pitfalls that could invite trouble down the line.
For instance, despite Dewey’s collapse, some partnerships continue to offer big bonuses and guarantees to lure top lawyers—and their business—in an increasingly competitive market. “The firms that give bonuses and guarantees to people are at risk if the work they are doing dries up,” says Jonathan Schiller, the managing partner of Boies Schiller.
More broadly, the bifurcation of the legal market—between the elite firms and more commodity-driven ones—seems to be here to stay. For the latter, “There will be really intensive fee pressure,” says Cravath’s Allen Parker. “It’s possible you will see more failures of law firms that just don’t have an understanding of what they are and how to act on it.”
The Dewey blowup is “absolutely” a sign of things to come, Davis Polk’s Thomas Reid adds. “There are more mergers now, and there may be more failed law firms,” he says. “That just goes back to the supply/demand imbalance. I think that will test a lot of firms to the max, particularly firms that don’t have a strong culture and don’t operate as teams.”
On the other hand, even as the weak get weaker, the strong and the focused can indeed get stronger, with the best-run firms gaining from that coming shakeout. With increasing choices regarding whom to call, clients will look to the smartest lawyers, and the most trustworthy firms, to do the job.
“Clients are more vocal today about making sure that they are getting good value for the dollar,” Parker says. But ultimately, he adds, their needs are the same. “Clients want first-rate legal advice for good value.”