The collapse of Dewey & LeBoeuf is a massive tragedy for those involved. This will be a setback for many of the Dewey partners, but most of them will land on their feet. The real tragedy will be felt by people like a secretary who has worked for his or her entire career at Dewey or its predecessor firms and is a few years from retirement, or the employee who started in the mailroom a couple of decades ago and has worked his or her way up to a position of responsibility.
The implosion of the law firm partnership offers fascinating insight into what led to the collapse. The members of the office of the chairman have given remarkably candid interviews. c
I am no expert on the subject of law firm management or Dewey, but I was a partner at a major firm for almost 25 years. These are my personal observations on what we know so far about Dewey’s rapid demise, shaped by how I viewed being a law firm partner.
High levels of compensation are an important element in the glue that holds law firms together, but compensation is not sufficient. Successful law firms have partners enthusiastic about not only their own practice and compensation, but also about building the institution. Otherwise it all becomes about partners competing with each other for a bigger share of the pie. Some such competition is inevitable, but, with nothing else, a law firm won’t prosper.
At Dewey, there are reports that nearly one third of partners were promised guaranteed levels of compensation—including as the firm’s results declined. Some firms do offer guaranteed compensation to lateral partners to induce them to switch firms. But apparently the guarantees went well beyond that at Dewey, and proved to be at least partly responsible for its fate.
Law firm partnerships have to be worth more than the sum of their parts. Big law firms have enormous overhead—expensive real estate, technology, recruiting bureaucracies and management. So to pay for all of that, and to make it worthwhile to own a share of the equity of a law firm partnership, each partner has to have a symbiotic relationship with the partnership.
Another way of putting it is that each partner must ultimately feel—regardless of how much he gripes at compensation review time—that he is being overpaid compared to his alternative career paths. It looks like at Dewey those guarantees used up funds available to pay other deserving partners. That is not a situation which can continue for long in a partnership.
And here is a corollary to the compensation issues: In my experience, the biggest-producing partners in successful partnerships are restrained in their compensation demands. Much of the business of a law firm can be claimed by its super-stars, which can be used to justify astronomical compensation. Yet in a firm with a strong culture, these will be the very partners who want to build the institution and ensure that money is available for partners in their formative stage to motivate them to develop into more productive partners.
Borrowing to pay compensation to partners is not only unsustainable, it makes it significantly harder—and ultimately impossible—to hold a partnership together.
Dewey is reported to have had enormous levels of debt when it ran into trouble. It is not clear what that money was borrowed for, but if a significant portion was to maintain partner compensation, that could have been deadly in itself. In one sense, it is no different than mortgaging the house and maxing out the credit cards to maintain a standard of living. The mere hope that things will be better in the near future rarely justifies incurring debt that will be impossible to repay if that hope turns out to be dashed.
In a law-firm partnership, that debt can quickly prove to be especially toxic. Why? Because the assets walk out the door every night (or sometimes in the wee hours of the morning). If the partners are deciding whether to stay at a debt-ridden partnership—where the debt will need to be paid off before (or at least as) the partner obtains future compensation– or starting some place new possibly without that debt burden, it can become an easy choice to start fresh.
In some sense it is the classic prisoners’ dilemma: those who jump first may be able to leave the debt behind to be paid by those remaining.
Large firms need strong management willing to act quickly and decisively when problems arise.
This story tells it all: M&A star (and former Dewey vice-chairman) Morton Pierce was one of the last of the Dewey heavy hitters to leave earlier this month. It has been reported that he claimed to be owed $61 million by the partnership. That probably means he had been deferring a portion of his compensation. And although leading partners in big firms are highly compensated, the magnitude of that amount suggests that problem of deferred compensation had been building for a significant period—probably years. And of course that is essentially just more debt that needs to be paid off before other partners can expect significant distributions.
That magnitude of a problem would have needed to be addressed immediately after it appeared. As difficult a problem as that would have been to deal with earlier, it obviously became much worse—perhaps insurmountable– as results declined and partners defected.
The bottom line is that it sounds like the seeds to Dewey’s failure were planted long ago.
Isabella Steger
Gillian Tan
Utterly wrong.
First, a defense law partnership exists to minimize losses, not to maximize income. Everyone has good years..but it’s the bad ones that are the killers.
Second, law firms shouldn’t have debt…at all. That’s what partnership capital is for, to cover capital expenses.
The problem is that, thirty years ago, a whole load of kid partners in defense firms thought law was a business, rather than a profession, and they all wanted to be paid as CEOs. The only way that could happen in bad years was to borrow on their reputations. They should’ve gone into plaintiff’s work instead.
I too was a partner at a major law firm fornearly 25 year. During that period, I observed the culture of the firm completely change. When I started, the lore and culture of the firm was that the firm never hired laterals. By the time I left, the majority of partners were laterals. What happened is that the laterals completely changed the culture. At one time, there were no partner clients, only firm clients. By the time I left. Partners were literally stealing clients from one another. It is a little unnerving when a client apologizes calling a partner because that client was directed to only call another partner, after years of contact with other partners. Firms need to realize that rainmakers are not the only value. Highly skilled technicians are also valuable. Firms that reward rainmakers (or rain stealers as the case may be) drive off the highly skilled technicians. For all of the highly skilled technicians out there, I have this word of advice: There aremany in-house positions that value your technical skills much more than the modern law firm that only seems to value rainmakers.
The Dewey experience confirms my opinion of many years: That lawyers are generally not good businessmen.
Law firms tend to be relatively horizontal organizations which seems to be o.k. when they are relatively small (though even small law firms can generate a lot of tension between partners).
But when law firms get large there is no one aboard who has the financial and other skills that are required to run a large organization. Because law firms are not where you tend to naturally learn such skills.
At its highest level, the practice of law is about having judgment so sound that people will pay you to share it. What kind of judgment have the lawyers who managed Dewey displayed? Who is paying them for it now, and where?
There has been little demonstration that the aggregate price of the guaranteed contracts bore a positive, let alone profitable, relationship to the firm’s top and bottom lines.