Jeff Hammes
Subject: The Fall of Weil Gotshal
Bio: Former Managing Partner of Kirkland and Ellis
Transcript:
Larry Bernstein:
Welcome to What Happens Next. My name is Larry Bernstein. What Happens Next is a podcast that covers economics, politics, and culture. This episode is The Fall of Weil Gotshal.
Our speaker is Jeff Hammes the former Managing Partner of Kirkland and Ellis. I want to learn about why Weil Gotshal failed. And I want to find out what Jeff’s strategy was to make Kirkland and Ellis the most profitable law firm.
Jeff, can you please begin with six minutes of opening remarks.
Jeff Hammes:
In 2009, I took over as chairman of Kirkland. At that time, Kirkland was #11 in profits per equity partner. The 10 firms ahead of it were all New York firms, other than Latham, which was originally based out of LA but had a strong New York office. We could not crack into the top 10. I sat there and thought, how am I going to get this firm from #11 to #1?
I knew I could not get people out of law school because all the best people would go to the Cravaths and the Wachtells. By the time they were valuable, I would be retired. You could look at the top 10, 15 law firms, like the top 10 to 15 colleges. Back in the 80s and 90s, they did not change much.
I want to focus on profitability instead of revenues. Bigger you are, the worse it is in terms of profitability, because the bigger you get, the less quality people are available. It is a talent game.
Kirkland had a weak New York office at that time, same with London. Prior to 2009, we hired cast-offs, people from the top 10 firms who did not make equity partner. That is like building a firm with B players. B players don’t want to work with A players, A players don’t want B players. If you start with a B player, you have defined your office. It does not get better from there.
Our strategy was to be strong, especially in New York, because New York is by far the number one market in the world. London’s a sister city, less profitable, but has cachet. My mission was to be #1 during my tenure.
The strategy was to try to break the lockstep. If you and I make equity partner at a lockstep system in a given year, we will make the same amount of money for the rest of our careers, regardless of how productive we are. It is socialism versus meritocracy.
Larry Bernstein:
When you became chairman of Kirkland in 2009, what did compensation look like across the top firms?
Jeff Hammes:
At Kirkland, the top five to ten people made $6 million. At Simpson Thacher and Paul Weiss and Davis Polk, maybe it was $5 million, and Cravath, the ultimate lockstep firm, maybe it was $4 million. The key is how do you distribute your profits? Lockstep’s like socialism. At the other end of the spectrum, it’s “eat what you kill.” Kirkland was somewhere in between, more flexible, nimble, and based on merit.
Larry Bernstein:
Why did you go after private equity partners in particular?
Jeff Hammes:
Kirkland had a great private equity practice. If you are going to hire people, you got to have a platform under which their practice can thrive. If you have Blackstone or KKR as your clients, you think you are moving, that firm has got to have a strong platform. Kirkland had that.
It was principally middle market, but had deep bench on fund formation, private equity lawyers, credit lawyers, tax lawyers, ERISA lawyers, people who dealt with the issues that private equity funds deal with day in and day out. You have literally hundreds of people, great depth.
Private equity was my specialty until 2009. It is a young guy’s game. There are a lot of 33-year-olds doing deals at private equity shops who work with young guys at law firms. Those are the guys that were vulnerable, as compared to say litigation or $30 billion Fortune 100 mergers. General counsels at these bigger companies, gray hair is desirable. They are more risk averse and want to say to their boards, I hired the best.
Larry Bernstein:
How much did you have to pay to get those junior equity partners who worked in private equity to move to Kirkland from another top 10 law firm?
Jeff Hammes:
Let’s say a guy made $1.5 million at another law firm. I’d pay him $5 million dollars.
People would say, “What are you nuts?” All my partners thought so too. Once people saw this working, everyone jumped on board. Lawyers are not risk takers.
People were reluctant to do this. Unlike Wall Street guys, lawyers are not looking for the last dollar. If a guy is making $5 to $10 million, you’re not going to move him for an extra million dollars. But if you double or triple his pay, they’re going to think about it. There also has to be generally a push factor, something that they don’t like at their existing firm — they’re being suppressed, they’re not getting opportunities they think they should deserve.
Larry Bernstein:
How did the culture of these top law firms change as they grew from small partnerships into massive institutions?
Jeff Hammes:
When firms were small in the 1980s, and let’s say there’s 15 partners, it’s easy for everyone to think the same way. You know all the partners well; you know what their strengths and weaknesses are. It’s a team. But as you grow from 50 to 100 partners, it’s hard to maintain that dynamic. You begin not to even know who these people are. This idea that you’re going to subsidize someone else who you don’t know dissipates. The firms that are lockstep try to maintain that culture to this day, but it gets harder and harder.
Larry Bernstein:
When you started picking off young equity partners at three times their pay, matching you would have blown up their lockstep systems. How did those firms react?
Jeff Hammes:
I thought we’d have a 3-year window before they would say, “We can’t let these guys take all our people.”
Their initial reaction was, let’s say Larry, it was you who was leaving. They would say, Larry, he’s leaving. We cannot change our comp structure just to keep Larry Bernstein. Larry, he is kind of a malcontent. He is not loyal. It is easy for firms to get negative on Larry once he’s going to leave, even if they liked him the day before.
Larry Bernstein:
You expected three years for law firm to respond but it took nine?
Jeff Hammes:
People got mad. They have no culture, it’s a Ponzi scheme. They just made-up stuff. I retired just before COVID started, but in the post COVID period firms unleashed themselves and began to enter the lateral talent game.
Larry Bernstein:
Does Kirkland’s size and profitability change how much risk you can take when you buy top talent?
Jeff Hammes:
I think it does. These are ballpark numbers. Kirkland, largest, most profitable, $10+ billion in revenue. Latham, $8 billion. Then you have Gibson Dunn, Davis Polk, Paul Weiss, Simpson Thacher at $2-4 billion.
The numbers are crazy. If you have $2 billion in revenues, you can’t make a lot of mistakes. A firm like Kirkland, they could make a mistake. It’s not going to move the needle. The scale and at the same time being profitable acts as a moat.
Larry Bernstein:
The striking lesson of Weil Gotshal’s collapse is how fragile these firms are. One moment Weil looked like a successful law firm, and in the blink of an eye it’s winding down. How does that happen, and why is such a large firm so fragile?
Jeff Hammes:
I only know about Weil from what I read. Let’s contrast Wall Street, which is where you come from. Take Goldman Sachs it’s a machine, it raises money. With lawyers, your assets really are walking out the door every day. Bankers you can replace them. It’s more the brand that matters.
Weil had a chairman and a powerful rainmaker, who ultimately went to Cravath in September. This rainmaker was of the mindset of no lateral hiring. They were not doing any lateral hiring and he wanted to maintain this small collegial firm. Anybody who wanted to leave was deemed to be not loyal. Call it your grandfather’s law firm.
From 2010, Weil slowly got weaker each year — they were losing quality people. They would say, we don’t need that guy, that woman, they’re not loyal. They just rationalize it away.
Weil’s mistake was that they ran into the situation where they are trying to make one big rainmaker happy.
Reading between the lines, the firm decided this year they wanted to change those stripes and do more lateral hiring. Seems like the rainmaker did not like that. He got mad. Maybe he is 5% of the business, maybe he’s 10%.
Then some people go, whoa, he left. Ramona Nee goes, whoa, I don’t want to be chairman, and more people start leaving. That is where it’s like a run on the bank.
It seems like that is what happened at Weil. Four months ago, they were not in trouble. It was a great firm.
Twenty years ago, Harvey Miller was the head of the restructuring group. He worked till he was 80. Same sort of dynamic.
They let him run the firm. Kirkland picked up a bunch of restructuring lawyers in the early 2000s from them. You have this one guy where the whole firm becomes about him. That really doesn’t work. It’s definitely the wrong way to run the firm.
Larry Bernstein:
Do you give the young rock stars that you hire room to grow?
Jeff Hammes:
If you get rock stars, you got to let them go and run. They will make some mistakes. Things will fall through cracks. But people like to be empowered. That energy will be super productive.
The yearly numbers would come out. We would go from eleven to nine to seven to five, then three, then to one. It was like kaboom. We are giving each other high fives. We are winning.
That in and of itself can be a culture. Law firms talk of excellence and whatever that means. You will see it on everybody’s websites. We are at the top of the game, so it was a blast.
Larry Bernstein:
Are firms ranked 11-15 today hamstrung?
Jeff Hammes:
They are all strong firms. There is nothing magical about ten.
But let’s say you’re twenty-five or thirty, you’re not as profitable. You are going to encounter retention problems. All firms have great lawyers. But if you only have a few of them and they start leaving, the firm becomes vulnerable. You got to have depth in talent.
It gets lonely at the top. If you are the only rock star and someone comes in and offers you a big pay package, you might leave, and it gets harder for the less profitable firms to match that. You are declining slowly. Then if you end up with too few rock stars and one of them leaves, that can create a run on the bank. Something like what happened to Weil could repeat itself very quickly.
Larry Bernstein:
Paul Weiss and Brad Karp got into a fight with Trump that caused a lot of internal strife. How fragile are these institutions when a major event hits?
Jeff Hammes:
The Paul Weiss situation. You have litigators who say, Let’s fight this guy. Then you got transactional lawyers going like, “Wow, I got clients that need to get deals done through the FTC. If we get shut out of the government, what are we going to do?” Their clients call up the transactional lawyer and say, “Are you guys fighting with Trump? Am I going to be able to get my deal done?” If they get nervous, they are going to use someone else, no problem.
The chairman of Paul Weiss is in a no-win situation. If you’re a chairman, no one’s going to be happy with you. Do I cave and get criticized for that? Or do I not cave and risk that the firm’s profitability goes way down? Or in the worst case, that the firm unwinds itself and fails. I wouldn’t want to be him or any of those guys in that spot.
Larry Bernstein:
What would you tell a top gun graduating from Harvard Law School about how to choose a law firm?
Jeff Hammes:
Fifteen years ago, if you were going to go to New York City and wanted to be a transactional lawyer, you’d be going to Wachtell, Cravath, Simpson Thacher, or Sullivan and Cromwell or Davis Polk. You were not gonna go to Kirkland. I would suspect that Kirkland’s getting a lot more of those people these days.
Don’t look at who has more prestige, look at what they’ve been doing and how dynamic they are.
Let’s say you go to your country club in New York City, doctors and non-lawyers there, they may never have heard of Kirkland & Ellis. They’ve all heard of Cravath.
In 2009, Cravath was maybe the second most profitable firm in the country by profits per partner. Looking at it right now, they are 13th. They keep falling. They have maintained their culture, but I’m not sure how long that goes on for, and whether you’re able to retain the young talent. It is a dynamic world.
Larry Bernstein:
Weil Gotshal is unwinding, with a large number of young associates and a newly hired graduating class. What happens to all those lawyers?
Jeff Hammes:
They’ll go to other firms. Ninety five percent of them will get absorbed, no problem.
If you’re a first, second, third year associate, you’re not going to take a compensation hit. All firms pay their associates the same thing for the most part. The more senior you get, the more variation there might be. If you are two, three years away from making partner and you’re a B plus or A player, you should do fine. You might take a ding on comp. If you’re really good, you’ll ultimately end up where you ought to be.
Larry Bernstein:
Talk about the big law firm business model. As I understand it, you bill associates out at $1,000 an hour, pay them $125 an hour, and keep the $875 difference. The partner’s job is to find work for the associates so the firm can make that spread.
Jeff Hammes:
You hear people talking about the top partners’ billing rates. They say, $3000/hour! If you get a top person, they can give you a lot of valuable information in one hour. I would argue that’s worth it. But a thousand dollars for someone right out of law school, that’s crazy.
A starting associate makes about $250,000. They bill 2200 hours at a $1000/hour. That’s $2.2 million. That means you make about $2 million on that person times what, 300 people you hired that year? Do the math. You’re making quite a spread.
If a partner’s $3000/hour and bill two thousand hours that’s $6 million. If they’re making $15 million. It’s all about leverage in the system.
Larry Bernstein:
I graduated college in 1987 and went straight into investment banking at Salomon Brothers. Cleary Gottlieb was our law firm, and I got to know its partners, an incredibly bright, hardworking group. What amazed me was how much more the Salomon bankers made than the better-educated lawyers. Today many lawyers make much more than investment bankers. How did that happen?
Jeff Hammes:
In 1995 an acquaintance of mine had worked at Goldman, he was an MD. I’m talking to him on the phone, he goes, “I got a $5 million, 5-year guaranteed contract. I go, “Wow, the top people at Kirkland are making $1.8 million. I thought, “Wow, I got into the wrong business.”
Roll the clock forward. Lawyers at the top of their firms now are making $30 to $40 million. That MD, it’s probably $2 million a year, which is shocking to me. The investment banking industry changed a lot after the great financial recession. A lot of talent left. The best people realized they could make more money in the hedge fund or private equity industry. It caused a brain drain.
Larry Bernstein:
It goes back to your thesis that it’s all about talent and contribution to the bottom line. Bankers’ ideas have become commoditized, while the ideas at the top of the legal profession maybe have not, though AI may level all that. It is still shocking to me that lawyers make so much money negotiating reps and warranties. I do not think this compensation can last, because I don’t think they add that much value. Do you?
Jeff Hammes:
It’s gone way beyond what I thought it would go. Since I come from the law firm world, I like lawyers making a lot of money. It is their time. Except when I pay their bills, which I do frequently these days.
Has the pendulum swung too far? I would say it probably has. Will it swing another way? I am sure it will. Who would have thought a MD at Goldman would be making less money today than they made in 1995?
You mentioned AI. Is that going to be the great equalizer? Is that going to commoditize top talent ten to fifteen years from now? It may. AI is definitely going to be a disruptive factor.
Larry Bernstein:
Let’s go back to the basic billing model, where a litigation matter has one partner and dozens of associates. If a firm can use AI agents to replace some of the associates’ work, it loses the spread between what it pays associates and what it charges a client, and billing may shift toward fixed-price deals. Who keeps that money, the firm, or the client?
Jeff Hammes:
Let’s say you’re a $10 billion firm. 35% of that $10 billion, that’s associate comp. You have $3.5 billion of profit margin potentially for my AI model. Who gets that 3.5 billion? Is it the client or is it the law firm? That remains to be seen.
Larry Bernstein:
I end each podcast with a note of optimism. What are you optimistic about for the legal business, given the lessons of Weil Gotshal’s recent demise?
Jeff Hammes:
Larry, it depends what kind of law firm you are and where you sit. I am not suggesting that if you’re number thirty, you’re going to fail. You have pressures that are going to be real. If you are operating a firm like your grandfather’s firm, you’ll continue to struggle. On the other hand, those who are playing the lateral talent game and on the cutting edge in AI will thrive.
In terms of the talent game, it might be too late. These transactions are happening at $25 million dollars. It’s hard to do accretive acquisitions of talent at that price. But you cannot sit back and sit on your hands. Firms like Kirkland, Simpson, Paul Weiss, Latham, these firms that are focused on talent and playing the talent game will thrive. If you are not playing that game, you’re going to slide.
The more stars the better. The challenge is to get them all to work together. You cannot have it where you got one or two stars because you become vulnerable. You view the world from where you sit.
Larry Bernstein:
Thanks to Jeff for joining us.
If you missed our previous podcast, it was How Politics Undermines Scholarship.
Our speaker was Ashley Rubin, a professor at the University of Hawaii at Manoa and the author of the Vanderbilt and WashU Report -- The Status of Scholarly Standards in Sociology.
We discussed how the politicization of sociology has impacted what topics can be researched and what content can be taught.
Previous episodes and transcripts are available on our website as well as on Apple Podcasts and Spotify.
I am Larry Bernstein with the podcast What Happens Next.
Check out our previous episode, How Politics Undermines Scholarship, here.
