Business Horizons (2007) 50, 17 — 28

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The strategic evolution of large US law firms Michael A. Hitt *, Leonard Bierman, Jamie D. Collins 1 Mays Business School, Texas A&M University, College Station, TX 77843-4221, USA

KEYWORDS Service diversification; International strategy; Corporate business model; Human capital; Relational capital

Abstract In recent years, large US law firms have been undergoing significant changes. Most have switched from a professional model (P2 form) to a corporate business model, employing competitive strategies and a profit orientation. As the market for corporate legal services became more competitive, many large US law firms began to diversify the services they offer and expand their operations into new geographic regions of the country and into international markets. They even engaged in acquisitions and learned to manage and leverage their critical resources, human capital and relational capital. As a result, most of these law firms have added more professional management. All in all, the services law firms offer and the rivals with which they must contend have changed substantially over the last 15 years. D 2006 Kelley School of Business, Indiana University. All rights reserved.

1. The bhuman professionQ Bob Dylan’s famous line, bthe times they are achangin’,Q has relevance to the practice of law in the United States, particularly that conducted by larger law firms. In recent decades, the practice of law in such firms has steadily evolved from a bprofessionalQ model, or what Greenwood and Hinings (1993) call the bP2Q form, to that of a traditional corporate business model (Cooper, Greenwood, Hinings, & Brown, 1996). The final death knell of the P2 model of large corporate legal practice arguably occurred in 2005, with the March 18th passing of legal icon Sol M. Linowitz. * Corresponding author. E-mail address: [email protected] (M.A. Hitt). 1 Present address: Hankamer School of Business, Baylor University, Waco, TX 76798-8006, USA.

Upon graduating from Cornell Law School in the late 1930s, star student Sol Linowitz turned down job offers from relatively large New York City firms, preferring instead to work for the three-lawyer firm of Sutherland and Sutherland in Rochester, New York. While Linowitz earned far less than he would have in New York City, he immensely enjoyed his work in the Sutherland firm and came to view the law as a bhuman professionQ (Legends in the Law, 1995). Through his participation in Rochester community affairs, he became friends with Joe Wilson, president of a small company called Haloid Corporation, who hired Linowitz to assist in obtaining patent rights to a new technology dubbed belectrophotography.Q In fairly short order, Haloid became the Xerox Corporation, and Linowitz its Chairman and CEO. After retiring from Xerox in the 1960s, Linowitz embarked on a career of diplomacy (he negotiated both the Panama Canal Treaty and

0007-6813/$ - see front matter D 2006 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2006.05.003

18 the Camp David Accords) and critiqued the evolution of legal practice, particularly as practiced in large firms. In 1994, at the age of 80, Sol Linowitz authored a book entitled, The Betrayed Profession: Lawyering at the End of the Twentieth Century (Linowitz, 1994). In this work, he stated that the legal profession has evolved from a noble calling to a huckster business that almost solely emphasizes profit maximization at the largest firms. In a speech given at the time of the book’s release, Linowitz noted that when he, a half-century earlier, had become a lawyer, it was considered ban honored profession.Q He then went on to argue that the practice of law had become a bhustling. . .profit maximizing businessQ (Small, 1995). Today, large law firms, in particular, are fiercely competitive businesses, serving highly demanding large corporate clients. Herein, we highlight the experiences of large law firms as they respond to two major trends in the profession: diversification of services and changes in the processes of managing law firms. Each of these trends is closely linked to the movement of the legal profession to the profitmaximizing model followed by nearly all for-profit firms. As knowledge has become a critical ingredient for gaining a competitive advantage (Grant, 1996), firms are increasingly aware that they must manage resources in ways that help them most effectively leverage their knowledge (Sirmon, Hitt, & Ireland, in press). Resources form the basis of firm strategies (Barney, 1991) and are critical in the implementation of those strategies. When considering law firms’ evolution, explicit attention to a company’s resources is warranted. Research has demonstrated that firms must have the appropriate resources to facilitate successful growth, and that those resources must be bundled and leveraged well to implement a strategy effectively (Barney & Arikan, 2001). Those valuable resources must be expertly managed (bundled and leveraged) to achieve profitable growth (Sirmon & Hitt, 2003; Sirmon et al., in press). In particular, idiosyncratic, intangible resources of the firm, specifically human capital and social capital, are crucial for law firms; in fact, their primary resources stem from the human capital and social capital of the individuals employed within. At the individual level, human capital attributes include education, experience, and skills (Hitt, Bierman, Shimizu, & Kochhar, 2001). For the firm, human capital can be conceptualized as the aggregate of employees’ knowledge and skills. In addition to formal education, professionals learn via work experiences, including working with others within

M.A. Hitt et al. their own firm, cooperating with other firms, and providing services to clients. Further, social capital (defined as networks of relationships that provide value to the participant/holder) constitutes a valuable resource for the conduct of business (Nahapiet & Ghoshal, 1998). The following chronicles the strategic evolution of large US law firms in recent decades, presented against the backdrop of evolving demands on such firms. Each of the major changes identified has correspondingly altered the approach taken by large law firms in managing their human and social capital resources.

2. Growth of large US law firms: Service and geographic diversification 2.1. Overview At the time Sol Linowitz accepted a job with the three-lawyer firm of Sutherland and Sutherland, the blargeQ New York City firms competing for his services typically employed no more than 50—60 attorneys. Today, many large New York City firms have over 500 lawyers, and the largest US law firms continue to grow; for example, the February 9, 2005 merger between San Francisco firm Pillsbury Winthrop and Washington, DC firm Shaw Pittman created a firm with approximately 900 lawyers and over $600 million in annual revenues. The combined firm has 16 international offices, an astounding number given that a couple decades ago, many large US law firms had one or two international offices at most (Grimes, 2005).

2.2. Service diversification A significant part of the recent growth of large US law firms has come through diversifying the services they offer. While a few of the largest firms continue to limit their practice to essentially one area (e.g., Wachtell Lipton specializes in corporate law and a related area, mergers and acquisitions; Littler, Mendelson specializes in labor and employment law), most now offer expertise in a fairly wide range of legal specialties. Consider the aforementioned merger of Pillsbury Winthrop and Shaw Pittman, which affords the combined firms’ clients well-recognized international expertise in the areas of labor and employment law, intellectual property law, corporate/corporate finance law, technology/technology outsourcing law, and privacy law, among others. The growth in federal regulation of business in the US, and indeed the increasing importance of Washington, DC as a global capital, has led virtually all major US law

The strategic evolution of large US law firms

19

firms to open Washington, DC offices. Firms frequently hire former members of Congress and other government officials to work in these offices, where they perform government-related legal work for major corporations and, increasingly, for foreign governments. Virtually all large US law firms also have capabilities in international law, and many have actually opened multiple overseas offices, in addition to practicing international law in their US locations.

2.3. Geographic diversification Historically, most large law firms maintained a single location in which the physical facilities (usually leased office space) grew along with the revenue flow and number of attorneys employed. Starting in the early 1980s, though, large US law firms began a major push to open new branch offices; i.e., geographically diversify (Hitt et al., 2001). Some of this geographic diversification was directly related to firms offering new important services. Thus, as previously noted, the increasing importance of federal regulation of business and the need to lobby on behalf of corporate clients led most large US law firms to open branch offices in Washington, DC. Similarly, large firms wanting to provide securities/investment banking/mergers and acquisitions-related services often would open an office in New York City with convenient access to Wall Street. Moreover, as corporate clients expanded and operated in increasingly diverse geographic

Table 1

locations, large law firms frequently opened offices in those regions to better service client needs. For instance, a number of major law firms have opened offices in metropolitan Sunbelt cities such as Phoenix, Houston, and Dallas to service the labor and employment law (and other) needs of clients that have established large manufacturing operations in Sunbelt locations. Geographic expansion by large law firms has been pronounced and noticeable internationally. Until fairly recently, large US law firms had a relatively small presence overseas (e.g., perhaps one overseas office in London with a small number of expatriate lawyers); however, a veritable explosion in the number of foreign offices opened by US law firms has occurred over the past 15 years. This change was engendered by both the increasing need to service large clients overseas and the deregulation of legal practice in major foreign countries. For example, Britain and Germany now permit multinational legal partnerships; that is, locally licensed and foreign licensed attorneys are able to practice law together in the same office (Silver, 2001). These factors have also led to mergers between large US and foreign law firms. For example, large British firm DLA (a Londonbased firm with 17 offices in Europe and Asia) recently merged with large US firm Piper Rudnick, creating a combined firm that boasts 49 offices across the globe, 2700 attorneys, and about $1.2 billion in annual revenues (bTwo Big Law Firms,Q 2004). Table 1 provides some perspectives on the

Internationalization of largest US-based law firms

Firm namea

Baker and McKenzie Skadden, Arps, Slate, Meagher and Flom Jones Day Morgan, Lewis and Bockius Latham and Watkins Gibson, Dunn and Crutcher Sidley Austina Mayer, Brown, Rowe and Mawa Fulbright and Jaworski L.L.P. White and Case Shearman and Sterling Weil, Gotshal and Manges Akin, Gump, Strauss, Hauer and Feld McDermott, Will and Emery O’Melveny and Myers Top 15 Totals

1995

1999

2003

Lawyers in foreign offices

% of total

Lawyers in foreign offices

% of total

Lawyers in foreign offices

% of total

1325 73

76 7

1,949 100

79 7

2698 190

83 10

65 25 14 20 18 26 11 202 98 19 26 8 9 1939

6 3 2 3 3 4 2 33 16 3 5 1 2 17

144 52 39 13 57 41 7 437 230 137 36 42 27 3311

11 5 4 2 7 5 1 47 28 19 4 5 4 22

336 39 280 51 161 351 11 899 399 215 31 303 37 6001

18 4 17 7 11 26 1 59 37 21 3 20 4 28

Source: National Law Journal. a Includes predecessor/successor firms.

20 increasing internationalization of US law firms. Specifically, the table shows the rate at which major US-based law firms have internationalized their operations over the past several years. In 1995, only 17% of the attorneys employed by the 15 largest US-based law firms were located in international offices. By 2003, this figure had increased dramatically to 28%. Additionally, international offices accounted for more than three times as many lawyers in 2003 as in 1995 (6001 versus 1939, respectively). At each step in the internationalization process, and with each new international office opened, these firms add human and social capital resources. Firms often follow major customers into international markets in order to provide more complete services to these clients. Therefore, large law firms that provide services to multinational corporations are likely to move into international markets. Because law is often bound by country borders, as legal and court systems vary across countries, movement into international markets by law firms may seem illogical. Yet, if they follow major clients, diverse legal and court systems may not be a primary deterrent. Furthermore, Hitt, Bierman, Uhlenbruck, and Shimizu (in press) found that many of these large law firms represented foreign governments within the United States. Building a relationship with foreign governments can facilitate entry into those countries; thus, large law firms may enter international markets in order to provide better service to their large corporate clients, while their foreign government clients facilitate entry into those markets. US-based law firms often began their international expansion by opening offices in the United Kingdom, France, Germany, and Brussels. While a few firms undertook this diversification as early as the 1960s, the phenomenon rapidly increased in the 1990s and continues today. A recent study revealed that, between the years 2000 and 2002, the top 100 US law firms opened 46 new offices in Europe, with Germany being the most frequent new location (Peres, 2004). Additionally, research has shown that movement into international markets is often built on valuable and specific resources (Goerzen & Beamish, 2003; Tallman, 2001). Therefore, we should expect large law firms with the strongest human capital to be the earliest movers into international markets and to continue international diversification more strongly than others. Hitt et al. (in press) argue that law firms moving into international markets often do so to leverage their human capital and relational capital. US-based law firms frequently establish foreign offices to follow existing clients desiring US-style legal advice and/or to take

M.A. Hitt et al. advantage of the firm’s significant foreign connections via partners who were born in other countries. For example, Coudert Brothers was founded by partners with family and business connections in France (Silver, 2001). Undoubtedly, these extensive connections in France historically benefited Coudert’s business in that country. Recent mergers illustrate the potential for large law firms to leverage their human and relational capital to compete in international markets. As mentioned previously, Pillsbury Winthrop and Shaw Pittman, two US-based firms, agreed to merge their practices and operations. The combined firm now provides a range of services, covering government and regulatory affairs, counsel pertaining to complex financial transactions, technology outsourcing, intellectual property, and litigation (Grimes, 2005). This type of merger provides the firms involved with a greatly enhanced international presence, which is strengthened by each firm’s existing client relationships in various international markets. International presence is being demanded by an ever-increasing number of clients. Finally, it should be noted that, in recent years, a number of foreign jurisdictions, particularly Great Britain and Germany, have eased restrictions regarding multinational legal partnerships. Thus, today, for example, US law firms in London are able to hire and have as partners attorneys licensed in Great Britain and practicing blocalQ British law (Silver, 2005).

2.4. Recent research regarding law firm diversification Clearly, the recent geographic and service diversification moves by large US law firms have dramatically increased their revenues. A number of major US firms, including the newly merged Piper Rudnick legal practice, have over $1 billion in annual revenues. As described later, these firms are operated as bbusinessesQ; they have professional business management. But, has all this growth and diversification increased law firm profitability? Not necessarily! Hitt et al. (2001) found that service and general geographic diversification alone had no relationship to law firm profitability, and that large law firms using a merger and acquisition strategy for geographic expansion actually performed less well than firms using other means to geographically diversify. It appears, however, that the synergies created when firms engage in both service and geographic diversification simultaneously can have positive effects on law firm profitability.

The strategic evolution of large US law firms Moreover, all of this depends to some extent on the law firm’s human capital and how well it can be leveraged. Preliminary evidence shows, for example, that large law firms with very good human capital are able to improve their performance by engaging in international geographic expansion/diversification (Hitt et al., in press). However, it is clear that the financial and managerial costs of aggressive expansion, especially into international markets, are very high, and may at times reach points of diminishing returns (Hitt, Ireland, & Hoskisson, 2007). Thus, caution seems to be the clear prescription.

3. Evolution in large law firm practices The evolutionary changes in large law firms during the past few decades extend far beyond geographic and service expansion/diversification. Following is an overview of some key changes in law firm practices, including: (1) (2) (3) (4)

The move to firm professional administration; Increased emphasis on the billable hour; Increased flexibility in the areas of work— family practices; and The significant growth in partner movement/ lateral partner hiring.

All of these must be understood in the context of the tremendous growth in both size and importance Table 2

21 of in-house corporate legal staffs, and the role these in-house staffs play in breprofessionalizingQ legal practice.

3.1. Professional management As pointed out, many law firms are now large multinational businesses, several having annual revenues in excess of $500 million (see Table 2). Some of the largest, such as Piper Rudnick, have over $1 billion in annual revenues, close to 3000 attorneys, and thousands of support staff and other personnel. These firms typically engage in sophisticated marketing campaigns and have overseas operations. Thus, effective management of these firms has become critical, and the managing partners have learned that while they might be great lawyers, they may not have the skills to be professional bmanagers.Q Consequently, most large US law firms have hired MBAs, CPAs, and others to serve as high-level professional firm managers (Spruill, 2001). This trend is fully consonant with what Cooper et al. (1996) describe as the move toward the bmanagerial professional businessQ (MPB) archetype in large law firms. For example, they describe one firm that divided management between an attorney managing partner and a professional manager/ non-lawyer accountant designated as the firm’s bCEO.Q The attorney managing partner described

International scope of global law firms

2002—2003 Rank

Firm name

Home country

Gross revenue

Number of lawyers

Number of countries in which firm has offices

Percent of lawyers outside home country (%)

1 2

Clifford Chance Skadden, Arps, Slate, Meagher and Flom Freshfields Bruckhaus Deringer Linklaters Baker and McKenzie Allen and Overy Jones Day Latham and Watkins Sidley Austin Mayer, Brown, Rowe and Maw Shearman and Sterling Weil, Gotshal and Manges White and Case McDermott, Will and Emery Sullivan and Cromwell Kirkland and Ellis Akin Gump Strauss Hauer and Feld Davis Polk and Wardwell Gibson, Dunn and Crutcher O’Melveny and Myers

UK USA

$1,467,000,000 $1,310,000,000

2922 1727

19 12

59.4 10.4

UK UK USA UK USA USA USA USA USA USA USA USA USA USA USA

$1,200,000,000 $1,080,000,000 $1,060,000,000 $970,500,000 $908,000,000 $906,000,000 $831,000,000 $705,000,000 $700,000,000 $688,000,000 $675,000,000 $628,000,000 $624,000,000 $611,000,000 $575,000,000

2644 2250 3241 2025 1722 1548 1444 1354 1089 977 1522 1025 697 826 948

18 22 33 20 12 10 7 5 11 9 25 4 7 2 5

57.8 51.1 83.2 46.1 18.4 16.8 10.7 26.1 36.7 20.6 60.2 8.6 17.7 4.1 20.2

USA USA USA

$570,000,000 $569,000,000 $565,000,000

650 772 836

7 4 4

12.4 6.6 4.2

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Source: Global 100 (American Lawyer Media).

22 the relationship as follows: bAs I see it, the managing partner is the political head of the firm and the CEO is head of the civil service. . . the CEO is there to force partners to get their practice into shapeQ (Cooper et al., 1996, p. 638). Thus, in addition to managing the firm’s information technology, marketing, and various support services, law firm CEOs and managing directors also help supervise attorney productivity. They can, for example, inform associate attorneys or even partners when they’re not meeting their billable hour goals. Indeed, it may be easier for professional managers to play this type of role than for fellow attorney colleagues. In sum, today’s large law firms are big businesses that almost always employ toplevel professional management. In virtually all firms, the principal professional manager plays a key administrative role, while in some firms, professional managers provide major strategic input into firm operations (Spruill, 2001, p. 4).

3.2. Billable hours Coinciding with a move to professional management, the largest law firms have increased their emphasis on billable hours for attorneys. Until about 50 years ago, the legal profession generally billed clients by means of fee schedules or fixed fees for given services rendered. Attorneys also took some work on a contingency basis or, at times, gave clients a certain measure of discretion in payment based on perceived value provided. Many smaller law firms continue to charge clients in this manner. For example, a local legal practitioner may require an $800 fee to draw up a simple will. Similarly, an area law firm might have a fixed fee schedule for a no-fault divorce or take a minor injury car crash lawsuit on a contingency basis. Most large US law firms, however, do not charge in this manner. Prodded in part by antitrust concerns regarding the application of fee schedules covering large geographic regions (Pack, 2005), virtually every large law firm charges clients based on the bbillable hourQ; that is, attorneys bill clients a given dollar amount for each hour, or portion thereof (frequently divided into 15 minute segments), of their services. In many ways, the billable hour is the ultimate symbol of large law firms’ movement away from the P2 professional archetype to the MPB business archetype, described by Cooper et al. (1996). Associate attorneys at some firms are privately referred to as bPBUsQ (or bportable billing unitsQ) by senior partners, and virtually all large firms have stated or implied annual billing minimums (usually at least 2000 billable hours per year) for associate

M.A. Hitt et al. attorneys (Pack, 2005). Under the billable hour model, there is often a negative incentive for being creative and finding a quick solution to a dispute/ court case or complex legal issue, as these generate a tremendous number of billable hours. The pressure to bill hours is high, especially because associate and bnon-rainmakerQ partner bonuses are based on the number of annual hours billed. The practice can also lead to over-billing and other questionable ethical practices. For example, Business Week recently reported a story about a lawyer at the prominent Kirkland and Ellis law firm in Chicago who had been working on the United Airlines bankruptcy case. During 2004, the Kirkland and Ellis partner registered 3500 billable hours of work at $540 per hour on United Airlines-related services. Titling the article, bUAL Lawyers: Eight Days A Week,Q the magazine noted that this attorney would have had to work 9.6 hours per day, 7 days a week, every week of the year only on United Airlines matters and nothing else (lunch breaks, firm meetings, etc., are not billable time) to reach his reported total (Sager, Bernstein, & Arndt, 2005). This said, there are no signs of demise for the billable hour model for large law firm revenue generation. First, in many respects, the billable hour system is good for lawyers. While all leading firms have quality human capital and do effective work, the system places less emphasis on outstanding quality output per se and more on continual hard work. Or, as one leading observer has stated, bif you can get somebody to pay you by the hour no matter what the quality of those hours is, subject to client review of the bill and all that, that’s a good thing. It’s certain, you can budget, you can create expectationsQ (Pack, 2005, p. 26). In addition, big firm lawyers and large law firms are typically highly risk averse (Kahneman & Tversky, 1979), and generally desire to avoid contingency fee arrangements or other situations in which they might not receive pay for all the effort they invest in a case or other legal matters. Associate attorneys, though, are typically not happy about the billable hour system at large law firms, and the pressure and lack of free time the system engenders. While 2000 billable hours a year (40 hours per week for 50 weeks, the minimum at most large firms) may not seem especially high, they quickly learn, as Notre Dame Law Professor Patrick Schiltz has pointed out (Schiltz, 1999, p. 894), that there is a difference between the hours you bspend at workQ and the hours you can legitimately bbill.Q An attorney is expected to bill only that time which is spent in full concentration on client work, not time spent on the computer

The strategic evolution of large US law firms thinking about client work, having a morning cup of coffee, attending a firm meeting, etc. In recent years, however, many top young lawyers have made a bdeal with the devilQ in voluntarily taking employment with the largest US firms. The bdevil dealmakingQ increased in the Spring of 2000 when, at the height of the Internet boom, the large (but not top-tier) Silicon Valley law firm of Gunderson Dettmer unilaterally and dramatically raised the salaries of its first year associates by approximately 50% to $145,000 per year. Similar raises were also provided for all other associates; for example, pay for fourth year associates increased to $195,000 (Snider, 2000). Gunderson Dettmer’s raise in pay for first year associates began a bsalary warQ for entry-level legal talent throughout the country, with virtually every major US law firm essentially matching its salary levels (Bilodeau, 2002). Currently, top-credentialed attorneys 3 or 4 years out of law school generally earn over $200,000 per year (base salary plus a year-end bonus) at the largest US law firms. New associate attorneys with the highest quality credentials, particularly former law clerks to US Supreme Court justices, often also receive six figure signing bonuses. This money, though, must be generated. Dramatically higher salaries for associate attorneys could be offset by higher billing rates (higher charges per billable hour), but corporate clients are increasingly sensitive to such increased charges. Higher associate salaries can also be covered by equity partners taking lower profits from the firm, but such partners are likely to be resistant to a pay cut. Another way to deal with the increased salary costs is to make associate attorneys work harder; i.e., bill more hours. As Peter Pantaleo, previously managing partner of the Washington, DC-based Verner Lipfert law firm (now merged into Piper Rudnick), stated in 2002: bClients’ relentless pressure to hold down legal costs has made it impossible for most firms to offset higher salaries with fatter fees, so firm management has looked to delasticity in productivityT — meaning more work from the rank and file — in order to prop up profits. But with associates’ annual billable-hours requirements already hovering around 2000 at most major firms, there is no more elasticity there—people are at the end of their enduranceQ (Bilodeau, 2002). In some cases, large firms have increased their associate billing requirements to as much as 2400 billable hours per year, or almost 50 billable hours per week (Pack, 2005). Thus, while associates at the largest law firms are earning higher salaries, they are also working incredibly long hours.

23

3.3. Work—family practices Working 2400 (or even 2000) billable hours per year does not leave much time for having a social life or for family issues. The fact that this surprises some of the under-30-year-old associates who earn more than $200,000 per year at large law firms astounds some senior individuals in the profession. In addition to being very highly paid, these associates are also knowingly participating in a btournamentQ to become a partner in the firm (Galanter & Palay, 1991). Achieving partner status holds the promise of even greater riches (average per partner draws at a number of the largest US law firms are now over $1 million per year). Thus, as one senior member of the profession recently put it, quality of life issues are the lawyer’s responsibility, not those of the firm, and attorneys who feel their employer’s time demands are too burdensome always have the option bto walk out the door and find a place that gives you quality of life. . .Q (Pack, 2005, p. 24). Nonetheless, recent laws, such as the Family and Medical Leave Act of 1993 (FMLA), require large law firms to be at least somewhat flexible on bquality of lifeQ and work—family issues. Preliminary research shows that it may, indeed, be in the firm’s interest to have some flexibility in this regard (Zardkoohi, Hitt, Bierman, & Chew, 2006). In many respects, the need for such flexibility relates in good measure to the significant increase in recent years of females going to law school and entering the legal profession. Whereas large US-based law firms have traditionally been populated largely by male attorneys, today, nearly one-half of the first year associates at large US law firms are female; additionally, an increasing number of partners are female (Nusbaum, 2003). Because of these changes, virtually all large firms go beyond the mandates of the FMLA and provide attorneys paid maternity leave (the FMLA merely requires up to three months of unpaid leave). Moreover, some firms, such as the prominent Arnold and Porter law firm in Washington, DC, have established full service child care centers in their offices (Groom, 2003). Firms have also increasingly been offering attorneys the possibility of alternative work arrangements. The growing number of female attorneys has increased the pressure on law firms to develop more family-friendly benefits and work options, such as part-time employment and flexible schedule alternatives. Many firms have abandoned wholesale adherence to the so-called Cravath bup or outQ model (named after the prominent New York City law firm of Cravath, Swaine and Moore),

24 in which associate attorneys must leave the firm after a requisite period of time if they are not selected as a partner (Sherer & Lee, 2002). Currently, many large US firms have created bpermanent associateQ-type positions, with such titles as bsenior attorneyQ and bcounsel.Q These positions allow firms to retain quality talent that would otherwise leave the firm, and give associate attorneys the opportunity to potentially move off of the partnership track while maintaining a wellpaying position with the firm. Moreover, many large US law firms offer associate attorneys (and, in a number of cases, partners, as well) the opportunity to work part-time, without any penalty. Thus, associate attorneys can work 80% time (e.g., take Fridays off) for 80% pay and still stay on the partnership track. For example, after serving as an 80% part-time associate in her firm for a number of years, Joanne Soslow was recently promoted to partner in the large Philadelphia law firm of Morgan, Lewis and Bockius. Indeed, she was considered for partnership in exactly the same number of years as comparable associates working full-time (Nusbaum, 2003). Although instructive, the previous example is admittedly an exception. While cell phones, email, and other technologies make flexible working arrangements easier to implement today than in the past, attorneys at large law firms (especially male attorneys) remain extremely reluctant to accept part-time employment; in fact, it appears that only 3—4% of lawyers in large firms take advantage of this option (Nusbaum, 2003). Their reluctance stems from the potential bstigmaQ it could leave on one’s reputation. Lawyers in large law firms fear that working only part-time might signal a lack of commitment to the firm, thereby harming their careers (e.g., opportunities for partnership, bonuses, highly desirable assignments). This fear is often present even when the firm has explicitly and formally stated that a parttime schedule will have no deleterious effects on career opportunities. Firms that offer family-friendly alternatives may be able to attract and hold talented lawyers who desire these options. Therefore, such policies make the firms more competitive in the market for top legal talent. They also help law firms to retain top legal talent previously forced to choose between work and family per more traditional employment policies.

3.4. Partner lateral hiring/mobility/demotion Under the traditional Cravath model, associate attorneys assiduously toiled to attain the bbrass

M.A. Hitt et al. ringQ of partnership and, if successful, generally stayed with the firm for life (Sherer & Lee, 2002). Becoming partner in a large law firm essentially conferred lifetime btenureQ on the individual, with firms usually basing partnership salaries primarily on seniority. This is still practiced by the Cravath firm in New York City, and by most major law firms in Great Britain. As partners became senior under the traditional system, they were valued and paid top dollar for their bsagacity and experience,Q even if their work productivity slowed a bit (Schmitt, 2000). This blearned profession/P2Q model of large law firm partnership, however, has largely ceased to exist, as Leonard Garment recently discovered. Leonard Garment has had a storied career as an attorney: he served as counsel to President Richard M. Nixon during Watergate and later, in private practice, represented numerous celebrities, such as Broadway producer David Merrick. In 1996, the Philadelphia-based, 440-attorney law firm of Dechert, Price and Rhoads hired Garment, then age 71, to be a partner in its Washington, DC office at a salary of $300,000 per year. The firm’s intent was to enhance its connections and presence in Washington, DC, and its managing partners apparently told Garment he would serve as an belder statesman,Q doing some legal work, setting up meetings, working on his memoirs, etc. Upon joining Dechert, Garment issued a press release stating that he was pleased to be joining ba firm whose culture still considers the law an honorable profession, not just a businessQ (Schmitt, 2000, p. B4). But younger partners and others at Dechert resented Garment, and his failure to keep good records of billable hours for the legal work he did only created more problems. Approximately two years after joining the firm, the firm’s top partners unilaterally cut his annual salary in half to $150,000, while allowing some possibility for performancebased bonuses. Shortly thereafter, Garment left the firm and sued Dechert Rhoads for age discrimination. The suit was recently settled out of court, and Garment has taken a non-partner retainer position at another Washington, DC law firm. Garment maintains he is able to make a contribution to legal practice, bif not always one that directly generates billable hoursQ (Schmitt, 2000, p. B4). Leonard Garment’s story is not an isolated one. Some major US law firms have recently gone beyond the actions taken by Dechert Rhoads in cutting partner pay, and actually demoted numerous partners to the rank of bcounselQ because they were not productive enough (Bierman & Gely, 2003). Moreover, legal trade publications regularly feature advice to top firm management on how to bweed

The strategic evolution of large US law firms outQ partners who are not being productive enough, with bproductivityQ mainly turning on the ability to bring in considerable billable business to the firm. Thus, bservice partners,Q or partners that work on business/projects brought in by other brainmakingQ partners, are frequently characterized as bgrindersQ who are expendable (Sterling, 2004). This strong emphasis on brainmakerQ partners has been exacerbated because of the recent associate salary wars and the need for firms to generate ever greater numbers of billable hours. Moreover, it has occurred in the context of decreasing loyalty of partners to their law firms, and of decreasing corporate client loyalty to given law firms. Putnam (1995) suggested that, during the last half of the 20th century, an increase in the transactional nature of personal interactions in the US led to reduced trust and a general reduction in the importance of social capital in governing relationships. Attorneys, law firms, and clients tend to not be socially bound to long-term relationships, and instead prefer explicit agreements to govern their interactions. Thus, trust has little value as a tool for enforcing agreements. These changes are evident in the increasing frequency of non-exclusive relationships between corporate clients and law firms, as well as in the high rate of lateral movement among attorneys at large law firms. Thus, while major corporations traditionally had exclusive or semi-exclusive relations with given large law firms (e.g., IBM Corporation and the Cravath law firm), solid corporate client loyalties to firms have become very rare. As a result, competing law firms regularly steal from each other clients and individual partners with rainmaker client connections (Hello, I Must Be Going, 2005). Indeed, 40% or more of the current partners in large US law firms came to the firm as lateral hires; i.e., from other law firms (Haserot, 1997). Firms also continue to add celebrity partners to their rosters, but, unlike the situation involving Leonard Garment, want celebrities who can bring in a lot of billable business, as opposed to only bsagacity and experience.Q For example, in March of 2005, the large Houston, Texas law firm of Bracewell and Patterson added former New York City Mayor Rudolph Giuliani to its partnership ranks. Giuliani, who has not practiced law for approximately 20 years, opened a New York City office for the law firm while continuing to work at the New York-based consulting firm bearing his name. It also appears that Bracewell, with 400 attorneys and 10 offices nationwide, has renamed the entire law firm bBracewell and GiulianiQ (Roth, 2005).

25

3.5. The role of in-house counsel Traditionally, in-house corporate legal departments were perceived as negative places for top law graduates to work (i.e., dead-ends for careers). One of the surprising, and somewhat ironic, developments in the legal profession during the past 15 years has been the increasing prominence of inhouse corporate counsel. Indeed, the changing role of in-house legal practice is likely to affect the manner in which the legal profession is perceived in the future. The reasons for these changes are fairly clear. Inhouse attorneys have one client and are primarily concerned with practicing law in a way most beneficial to this client. Thus, in-house attorneys have clear incentives to seek creative and expeditious ways of resolving disputes, as opposed to billable hour-oriented attorneys who work for outside law firms. In addition, most large corporations have comprehensive family-friendly programs/policies, and corporate attorneys are probably more likely to take advantage of these programs than attorneys in large law firms; having only one client, the given corporation, may make it easier to do so. Moreover, by definition, legal departments in large corporations are ultimately overseen by professional managers. Finally, with ongoing shifts in outside law firms being retained by given corporations, in-house legal departments, typically charged with selecting law firms to retain, have come to wield considerable power in the profession. The bfirst moverQ in changing to a stronger role for in-house law departments was General Electric Corporation CEO Jack Welch, who in 1987 decided to build a top-tier legal group within GE. As Welch explained: bWe had a legal organization that was on the wrong side of the Rolodex. If a problem came up, our lawyers basically knew whom to dial up. The outside counsel would then run the case, and our legal staff would serve as backupQ (Welch, 2001, pp. 136—137). To solve this problem and take the lead in building a top flight law department within GE, Welch recruited Benjamin Heineman, who, at the time, was the managing partner of the Washington, DC office of the Sidley and Austin law firm. Heineman, a former Rhodes Scholar and law clerk at the US Supreme Court, was not a specialist in corporate law, but Welch told him that was not a concern. Welch explained he was confident that Heineman would be able to hire the very best lawyers for GE, which Heineman actually did in a relatively short time period. As Jack Welch later described, this bwas

26 the classic case of A’s hiring A’sQ (Welch, 2001, p. 137). Heineman’s ability to do such hiring was, of course, facilitated by the carte blanche Welch gave him to match the compensation paid by the top law firms, and also add stock options bas the upside kickerQ (ibid.). Today, General Electric Corporation employs approximately 1000 top flight in-house attorneys (Clancy, 2003). Heineman’s 2003 compensation was approximately $5 million, and he holds about $100 million worth of GE stock and stock options (General Electric Corporation, 2004). A number of other leading corporations have emulated GE’s action of building high quality inhouse and/or large legal practices; for example, Verizon Communications, Inc. recruited former US Attorney General William Barr to be its top in-house counsel and Citigroup, Inc. has developed an inhouse staff of approximately 1300 attorneys. Nevertheless, there is variance across large corporations in how they approach this bbuy or makeQ issue (Coase, 1988), even in companies of roughly the same size and in the same industries. For instance, Exxon-Mobil Corporation and Citigroup have three or four times the number of in-house lawyers than do ChevronTexaco Corporation and BankAmerica (Clancy, 2003). The development of large, prestigious, highly paid in-house legal departments in various major USbased multinational corporations has had a tremendous impact on the largest US law firms. In addition to competing for legal work from these companies, these law firms are now competing with these companies for top legal talent. Moreover, to the extent top in-house legal talent like Benjamin Heineman can do high quality work in-house, there will be increasing pressure on major law firms to demonstrate true value-added for their work. There is little doubt that the increasing top-tier professionalism of many major corporate law departments will have a considerable impact on the future practice of law in the US, and perhaps eventually abroad.

4. Broader organizational lessons from the strategic evolution of large US law firms 4.1. Overview What broader lessons can be learned from the major shift by large US law firms from the P2 professional model to that of the traditional corporate business model? What are the implications of hyper-competitive/profit-maximizing large legal practice for other business organizations? In many ways, the lessons are similar to those that can

M.A. Hitt et al. be drawn from Pulitzer Prize winning columnist Thomas L. Friedman’s 2005 best-selling book, The World Is Flat. In an era of global competition driven in good measure by the Internet and other cuttingedge technologies, law firms simply cannot remain static (Friedman, 2005). Or, as an African proverb quoted by Friedman states: bEvery morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. It doesn’t matter whether you are a lion or gazelle. When the sun comes up, you better start running.Q (Friedman, 2005, p. 114) Today, large US law firms and virtually all business organizations must think and act strategically, continuously.

4.2. Global competition As previously established, large US law firms have increasingly opened offices overseas. In part, however, this has been done to offset competition in the home markets from foreign-based law firms. As noted in Table 2, the largest law firm in the world, Clifford Chance, is based in Great Britain, and has developed (and is continuing to develop) significant operations in the United States. As Table 2 also illustrates, three of the five largest law firms in the world are currently headquartered in the United Kingdom, and have an average of 56.1% of their lawyers based outside of their home country. All US businesses are facing increasing competition from foreign firms. Moreover, competition is likely to increasingly come not only from the United Kingdom and Western Europe, but also from Asian countries such as India and China. As Thomas Friedman explained: bYou are not going to go to Bangalore to find an internist or a divorce lawyer, but your divorce lawyer may one day use a legal aide in Bangalore (India) for basic research or to write up vanilla legal documents, and your internist may use a nighthawk radiologist in Bangalore to read your CAT scanQ (Friedman, 2005, p. 239). Indeed, there is preliminary evidence that such outsourcing of basic legal work to India has already begun (Kellogg, 2005).

4.3. Work—family blurring Similar to large law firms, many business organizations have become increasingly bflexibleQ with respect to work—family issues (e.g., allowing

The strategic evolution of large US law firms employees to spend a day or two a week working at home). Some of the greater flexibility has been prompted by new government regulations such as the FMLA, but perhaps even more by quantum leaps in bworld is flatQ technologies. Because of email, bosses and employees can communicate comprehensively at virtually any hour. Moreover, cell phones, BlackBerries, and other devices allow employees to be reached instantly whenever desired (Friedman, 2005, p. 213). Thus, while new technologies make it much easier for employees to work away from corporate headquarters, they also dictate that employees are, essentially, never truly boffQ from work. Even while on vacation, employees often check emails, check voice mails, and call into the office on their cell phones. Work and family lives have become increasingly blurred both in large law firms and in the general business community, as increased flexibility exists alongside 24hour a day bon callQ status.

4.4. Supply-chain monitoring/accountability Technology is also making it increasingly easy for employers, customers, and other interested parties to closely monitor virtually every element in the supply chain. Technological advances now allow law firms to know, on practically a real-time basis, precisely on what lawyers are spending their time at work. Similarly, technology allows firms such as Wal-Mart to instantaneously know which specific items are being sold in its thousands of stores, information that can also be communicated quickly to firm vendors (Friedman, 2005, p. 129). In law firms and other contexts, supply-chain technology allows clients to carefully scrutinize what they are receiving for dollars spent, and thus what legal functions might be better or more economically performed in-house. Clients such as the DuPont Corporation are increasingly playing bhardballQ with the large law firms they employ, ensuring that they receive appropriate value for every dollar spent on outside legal services (Kellogg, 2005, p. 24).

5. Final thoughts Today’s ultra-competitive environment has made clear the need for law and other service firms to have highly professional management. Businesses must constantly have their beye on the ballQ and keep brunning,Q and need highly trained, effective managers. Jeffrey Immelt, the CEO of the General Electric Corporation (GE), may have an easy-going demeanor, but he works 100 hours a week (his daily work schedule runs from roughly 7 A.M. to 9 P.M., 7 days/week), virtually every week of the year.

27 Indeed, Fortune recently labeled Immelt bThe Bionic ManagerQ (Colvin & Lashinsky, 2005). Immelt couples hard work with a coolly rational Harvard MBA-trained intellect; however, even he is struggling to keep GE at the top of its competitive game and to boost its lagging stock price. In sum, large US law firms, along with most businesses, have changed dramatically from the time Sol Linowitz embarked on his career. Today, these law firms, some with billings of over $1 billion per year, are indeed large businesses. Most of the largest firms now offer a wide array of services and have international offices. Salaries for starting associate attorneys have escalated well into the six figures. This growth and increasing business-like orientation, though, has arguably led to a bde-professionalizationQ in the largest US law firms. Currently, the practice of law in large law firms has become a highly competitive business. Global competition has grown steadily in recent years, and technology has enabled not only work on a 24/7 schedule, but also the effective monitoring of such work. Technology has allowed enterprises the opportunity to take greater advantage of the potential benefits of vertical integration, such as better protecting proprietary information. Finally, the current high level of competitiveness has increased the need for extremely competent and hard-working professional management. Even in law, the P2 professional model has given way to a highly competitive global business model.

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