Friday, March 30, 2012

Learning from a law firm's difficulty

The New York Times carried several short articles on the crisis facing the law firm Dewey &Amp; Leboeuf. As of March 28, 38 of its 300 partners had defected to other law firms, and the chairman of the firm, Steven H. Davis, had been stripped of his title.

The proximate cause of the crisis was the firm’s difficulty in paying its partners tens of millions of dollars in deferred compensation. The firm resulted from the 2007 merger of two old-line law firms. Indeed, the “Dewey” name comes from the estimable Thomas Dewey, the one time governor of New York State and the Republican Party nominee in the 1948 presidential election against Harry Truman. After the merger, the firm shifted strategies by hiring superstar lawyers, or rainmakers, from other firms and promised them multimillion-dollar payouts.  When the financial crisis hit, its revenues could not finance these promises, resulting in the deferred compensation.

It is important to see this story in its historical context. Old-line law firms thrived in part because they were protected from market forces. The firm as an institution represented a certain level of probity and trustworthiness. Clients who sought out the firm were buying and relying on its institutional standing. The rainmaker was less salient. Beginning in 1977, when the Supreme Court struck down laws barring law firms from advertising, they became increasingly market place creatures.

One can see this as a progressive development. The old-line law firms got business by relying on class and ethnic ties. WASP firms served WASP clients, Jewish firms served Jews, and lawyers from upper class families served clients from their communities. This arrangement precluded competition and was in this sense unfair.

The growth of advertising was the first signal that law firms would in the future compete largely on the basis of talent, ambition and drive, by attracting those partners who could generate high billings. As law firms were “marketized,” the client’s focus and commitment also shifted from the firm to the rainmaker.  The Dewey law firm in this sense was making up for decades of lost time. This may in fact be one explanation for its hasty accumulation of promises, which it could not keep.

Management theorists have described the “hollowed” out corporation where all but a select number of core functions such as sales or R&D are retained, and the remaining functions are outsourced. We can also think of this hollowing out as psychological. Perhaps the modern or post-modern law firm may be an extreme version of a new kind of institution, or a call it the “not-institution,” in which employee’s ties to one another are incidental and instrumental. This is one reason that law firms can collapse quickly. After a few rainmakers leave, other partners lose faith in the firm as an economic engine, and feeling no ties to one another, abandon ship. This is also why partners in law firms are so sensitive to differences in compensation, and why conflicts over compensation can precipitate a firm’s collapse. There is no other way, other than through money, to express regard, or to experience gratitude. It is the pure form of what Karl Marx once called the “cash nexus.” 

One question is whether or not the “not-institution” is indeed a model for the future of all organizations. (Indeed, my colleague Mal O’Connor is writing a book about this). Law firms are unique in some ways. Lawyers are often worn down by the interminable conflicts over money and property that they are called upon to adjudicate, contest or settle.  In this sense, the law firm becomes what we call in psychoanalysis, “a bad object,” a representation in the mind of a setting where people are at their worst -- hateful, greedy, and without grace. This is another reason why lawyers have limited emotional ties to the firms in which they work.

But three decades of market reform and deregulation in the West may be setting the stage for the psychologically hollow organization writ large. If so, one question is whether and how people will experience a sense of belonging. Perhaps, this is one way to understand why politics in the United States has been polarized. Perhaps, as organizations are hollowed out and working relationships are rendered instrumental and incidental, people feel psychologically worn out. They express their fatigue and resulting anger by joining with others and  making a different group the “bad object.”

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