There has been no shortage of coverage on and opinions of the disintegration of former Big Law juggernaut Dewey & LeBoeuf. The larger issue, however, is the simple fact that the model for advisory in the deal economy services (not just legal services) is changing, and that change is catching many firms flat-footed.
The most vulnerable firms will be the ones whose empires are built on that anachronistic vestige of another time: the billable hour. There is no better friend to a boutique advisory firm such as mine than the lazy, unimaginative revenue model of so many advisory shops; built on a foundation of perverse incentives that rewards over-staffing and inefficiency over tangible results.
As the global economy has become increasingly complex, and expertise has been more widely disseminated, there is no more stark illustration of the manner in which advisory firms have sought to divorce themselves from the fate of their clients than the persistence of a compensation model that rewards over-staffing and inefficiency and punishes the swift achievement of tangible results.
The billable hour pushes professional services firms of all sizes to adopt a “leveraged model” in which the key to revenue maximization is more bodies. When work is plentiful the army of analysts and associates on the financial advisory side and associates and junior partners on the legal side is a force multiplier; allowing rainmaking managing directors and partners to sell more work than they could ever manage themselves, and bill out their junior resources at far higher rates than those professionals could command on their own.
However, the race for mass has a dark side: when those bodies aren’t being billed they produce a river of red ink. Just as worrisome, the deal economy is becoming stuffed with highly efficient cogs, who, by virtue of their experience working inside the leveraged model, are able to manage engagements only with the bloated teams inherent in that model. Essentially, the deal economy is creating a generation of deal professionals less versatile than the last.
Professionals in the deal economy may decry the frustratingly slow pace of M&A, but they fail to acknowledge that a key issue facing the U.S. economy is that there are simply too many deal professionals. According to the Bureau of Economic Analysis, the deal economy (which I classify as both 1) Finance, insurance, real estate, rental, and leasing and 2) Professional Services is slightly larger as a % of GDP than it was in 2007 (33.2% vs. 32.7%).
The consumers of advisory services (the companies that actually make and sell things, as well as capital providers such as banks and private equity firms) are catching on, and asking why they should acquiesce to a compensation structure in which incentives are perpetually misaligned. Viewed from that standpoint, Dewey & LeBoeuf was not an outlier so much as a harbinger of the change that will continue to roil advisory firms as they struggle to adopt a structure better aligned with the needs of their clients.
As founding partner of a boutique advisory firm in the turnaround and restructuring space I am particularly thankful for the strategic failings of my competitors. The words of Napoleon are apt here: “never interrupt your enemy when he is making a mistake”
Junior deal-makers of the world take note: rationalization is coming to your field, and if you aspire to be nothing more than a well-paid cog in a machine your days are numbered.
About the author:
David Johnson is a founding partner of ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].
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