Big Law Firms And The Crack Dealer Business Model

Four and a half years ago, I wrote a brief post criticizing Thacher Proffitt’s hypocritical plan to fire their associates while giving under-performing partners the opportunity to “market” and “retool” themselves.

It didn’t work. A year later, the 160-year-old law firm was dead, a month after I had written about how large corporate firms were risky, transient businesses that will slough off the associates at the first sign of trouble. A year later, I came back to the subject of the broken social contract between young lawyers and their law firms, again noting that “firms show no loyalty to their young lawyers and so receive none in return.”

I thus wasn’t the least bit surprised by this recent explanation of how the mighty Dewey LeBoeuf came to its own demise:

A shared sacrifice ethos did not exist at Dewey. Mr. Davis subscribed to a “barbell” compensation system. On one end were the so-called rainmakers with big books of business who were lavished with multimillion-dollar, multiyear guarantees. Dewey’s stars were paid as much as $10 million a year. (Mr. Davis himself earned about $4 million a year, but cut his 2011 salary to $300,000.)

On the other end of the barbell were partners who worked on the court cases and deals brought in by the rainmakers. These partners were paid about $300,000, creating a dynamic where the highest-paid partners were making 30 times more than the most junior ones.

At Skadden, by comparison, the highest-paid partner makes no more than five times the lower-paid ones. One former partner called the arrangement “something closer to feudalism than a true partnership.”

They were all supposed to be partners, but the partner who can schmooze at cocktail parties and on the golf course took home $10 million while the partners who actually “worked on the court cases and deals” — you know, the ones who practiced law — took home $300,000? And they were surprised when the whole thing collapsed? 

Don’t get me wrong: $300,000 a year is a lot of money in the big scheme of things, right around the top 1% of household income in the United States, but put aside the absolute numbers and look at them in relative context. The issue here is the pay differential; we would be having the same discussion if the top partners took home $3.33 million while the working partners took home $100,000. When you’re all important to the team, and you’re all putting in 10+ hour days and weekends, what kind of “partner” pays another “partner” three cents on the dollar?

Young lawyers are often taught the value of the golden rule (I’ve recommend the same myself): to treat others how you would want to be treated when considering everything from how to deal with potential clients to how to write memos to the boss (i.e., you wouldn’t want to read a sloppy or poorly researched memo, so don’t write one). But it seems the older and well-established lawyers at Dewey didn’t follow that rule. If the leadership at Dewey had spent ten minutes thinking about the wisdom of paying the attorneys actually doing the work more than 3% of what they paid the supposed rainmakers, they would have realized how unsustainable their business plan really was. [Update: Steven Harper is going to profile the leaders of the firm in his next few posts.]

It’s not just a matter of fairness. It’s a matter of motivation. A law firm associate or junior partner is in it partly for the money and partly to develop their career for the future; if you make it clear to them that you don’t value their work, they’ll make sure their work isn’t worth much while they collect a check and plan their escape.

Now Dewey LeBoeuf, too, is consigned to the trash heap of historic law firms. There’s a lesson to be learned here, but it’s not a lesson about big law firm management. Indeed, if you’re in the upper echelon at a huge large firm and want to make a ton of money, set the firm up exactly like Dewey LeBoeuf, a “barbell” with overpaid rainmakers and executive committee members on one side and relatively underpaid rubes who actually practice law on the other. If you’re on the right side of that barbell, you’ll make a ton of money until the firm implodes, when you can take your book of business to the next shortsighted firm that thinks it’s worth paying rainmakers two inches of water from the well to get one inch of rain.

No, the lesson is for associates and junior partners. Forget what the firm told you during your time as a summer associate about the value of teamwork and the partnership track and all that nonsense: until proven otherwise, assume you are joining an entity with the same business model as a drug gang, an “extremely competitive field in which, if you reach the top, you are paid a fortune (to say nothing of the attendant glory and power),” but one where there’s far more competition — and attrition — than there are available spots. It’s a tournament, not a team.

Unlike the street level crack dealer, as an associate or junior partner you won’t have to live with your mother. You’ll often be paid quite handsomely, but you’ll also pay a different price  — your drudgery work for the firm will hamper your ability to develop business, magnifying the risk of working there and making the situation far more dire when the firm you’ve spent your entire career at suddenly implodes because the rainmakers feel it’s time to jump again.

Before you sign onto one of those places, ask where the money goes. You don’t need to know how much each partner makes, but if they tell you the money isn’t any of your business, it’s because they plan on never letting you have any of it.

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  • Gavin

    While I am in a solo practice, I’ve seen several firms (mostly large and middle size firms) in the Minneapolis area and elsewhere, dissolve. Watching the slow demise of a law firm is interesting. But sometimes they just crash and burn almost overnight. The conflict between the rain makers (who think they should get most of the money even though they do little of the work) and the people that do the work seems to be universal. Most law firms that go out of business (both large and small), have done so because of money disputes. You would think that the lawyers in charge of the larger firms especially, would be interested in self preservation, and more equitably distribute the funds available to all the stake holders assure longevity. While I don’t have insight into what many firms are doing now, I expect that when business declines, the firms take short term and short sighted actions to keep the major partners happy. I don’t think anyone has the perfect solution to law firm compensation, but there must be a better way.

  • MB

    I’ve heard the “barbell” and “tournament” descriptions of large firms before, but I’ve never heard anyone compare them to crack dealers. I think your description of the “law firm-crack dealer” business model is spot on. Great post.

  • Leo

    Eloquent use of a crack dealer analogy, Max. You article perfectly explains my thoughts on corporate law firms, and why I’m happy to not be at one.

  • Jay_henning

    Without the rainmakers, the junior partners would have no cases to work on and would not have their $300K salary. This arrangement should also be examined in the context of the parable of the workers in the vineyard – they did different amounts of work, but all got paid the same. As is human nature, the ones who worked more complained, but the point of the parable is that arrangement is what they had all agreed to, so they have no right to complain. Then again, if the vineyard owner is paying everyone too much, and the vineyard fails, that is a whole different matter.

    • http://www.litigationandtrial.com/ Max Kennerly

      A rainmaker is someone whose presence contributes to the overall success of the firm; someone who brings in minimal or negative net profit is not a rainmaker, regardless of the size of their business. Someone with, say, a $12M book of business that takes home $10M isn’t a rainmaker; once you add in their staff, their use of firm resources, etc., they’re probably a loss.

      The “rainmakers” at Dewey were plainly not bringing in enough business to justify their comparative salaries and bonuses, they were just voting themselves pay raises at the expense of everyone else doing the work. If a rainmaker isn’t bringing in enough money to raise salaries other than their own, they’re not contributing value back to the firm and should have their own pay cut or should be let go. Lawyers join together in firms for shared risk and shared reward; if you’re sharing only risk and not reward, you should be asked to leave.

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      • Jay_henning

        Max- I agree with you. That’s what the last sentence of my comment reflects. Dewey paid the rainmakers for two inches of rain but they only brought in one inch of rain. I was just trying to emphasize that if it is financially sustainable for a firm to have huge pay differentials, the lower paid-partners who signed on to that arrangement have little cause to gripe.