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Does training pay off? The Cleary Gottlieb case study

Posted by Jack Bostelman on Oct 15, 2012 | 0 Comments

Cleary Gottlieb's mini-MBA program

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AmLaw 20 firm Cleary Gottlieb invested $2.5 million to send 116 first-year associates to a “mini-MBA” training program for two weeks last month, according to a recent press report.* The firm plans to send additional new associates through the program as they arrive later this year. The goal, as reported, is to advance the new lawyers' understanding of the business and financial concepts inherent in work for the firm's clients.

What's the rationale?

Aside from favorable press coverage, what is the internal calculus that would lead a firm to make such a significant investment?

Certainly such a program has the potential to help these associates perform better. But how much? Will clients notice? Will the lawyers remember what they learned? One commenter suggested that the program at least emphasizes to the associates that they have a responsibility to know the business concepts being taught. Another has suggested the program benefits recruiting.

Let's consider the financial analysis first, then look at other issues.

Doing the math

How did that $2.5 million get calculated? Using round numbers, 116 associates at $250/hr (my  guess) for two 40-billable-hour weeks (corresponding to 2,000 hrs/yr) is $2.3 million in lost billings. The press account indicated the associates were based in New York and Washington, D.C. Housing the 20 (my guess) DC-based associates in New York for two weeks could easily run $100,000. While some of the training was conducted by internal partners and staff, outside trainers were also used. Let's assume another $100,000 for program development and outside trainers. Indeed, that's $2.5 million.

Efficiency gains

Let's apply the basic law firm economic model (discussed in a prior post) to the min-MBA program. In order to justify the program on a pure financial basis, the trained associates would need to operate about 4% more efficiently over the firm's prescribed payback period. If that period is two years, then the required breakeven efficiency gain is 2% per year. Stretching the payback period longer than two years seems unrealistic. By the third year, the associates would probably have absorbed the necessary business and financial understanding through on-the-job training.

This analysis also assumes the firm has soft write-downs or hard write-offs of first-year associate time at least equal to the efficiency gain ($1.25 million/yr) and enough new work to absorb the saved time. In other words, it assumes non-revenue associate hours that would have been written down or off are converted to collected hours through efficiency gains.

Is it plausible that a two-week mini-MBA training program would improve a first-year associate's annual efficiency by 2%? That's about 10 minutes per day, every day, all year. Even for a firm whose practice emphasizes financial-related work, that seems unrealistic.

Other reasons

There's probably more going on. Presumably there would also be some efficiency gains for supervising senior and mid-level associates, who can spend a little less time responding to junior associate questions and fixing their work.

Recruiting benefits, if significant, could be an important factor. It's difficult to imagine a two-week program making a decisive difference to a significant number of candidates, though.

If the program improved associate retention, the financial benefits could be significant. Because associates are more profitable to a firm as their seniority increases, a program that caused productive associates to remain with the firm an average of even a few months longer could well be worth $2.5 million. It's difficult to believe, though, that a two-week program at the start of an associate's career would have much effect several years later on the associate's willingness to stick around.

Client satisfaction

Client satisfaction is my guess as the main driver here. The press reports cite a statement from a supportive partner that the program will be considered worthwhile if even a handful of clients recognize the firm's associates understand the relevant business principles on their matters. Presumably the firm will take maximum advantage of publicizing the program in client pitches, and clients will experience for themselves the associates' greater business savvy. It is reasonable to expect that the talented lawyers Cleary hires will remember and benefit from much of their training.

Last year Skadden Arps instituted a mini-MBA program for first-years, as a component of an eight-week training course, according to a press report**. Their stated motive was to persuade clients that first-years are worth the hourly rates charged. That may be another way of saying that the goal is to reduce write-downs/write-offs of first-year billable time by creating more perceived value, whether or not efficiency improves. Cleary's goal may be similar.

Doing the math again

How much new business, retention of business or avoidance of write-downs/write-offs would be required to justify the program? Well, $2.5 million, of course. That's equal to a 0.2% revenue improvement (or avoidance of revenue loss), based on Cleary's American Lawyer-reported gross revenue of $1.125 billion. Let's say, though, that only half those revenues could be affected by New York or DC-based associates, since about half the firm's associates are based in those offices (based on a publicly available law firm statistical service). Is a 0.4% improvement in half the firm's revenues reasonable to expect from the mini-MBA training program? Or 0.2% each year for two years? Reasonable people could come out both ways on this one, I suspect.

Final thoughts about Cleary's program

So what's the bottom line? I have no inside knowledge, but I imagine the partner discussion on Cleary's program was lively. Press reports quote the supporting partner as saying the program was “not entirely uncontroversial” within the firm. In the end, it is possible to toss together one part associate efficiency improvement, one part new business/write-off avoidance and one part intangible client satisfaction improvement, with a pinch of recruiting benefit, and conclude the program makes financial sense.

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It is easier to decide, however, that maintaining clients' confidence in the firm's junior associates is a sound defensive move, from a strategic perspective. If clients become unwilling to work with juniors or, importantly, unwilling to pay the hourly rates charged for juniors, that becomes more than a financial problem. It affects the firm's business model of leveraging associates. Cleary's associate/partner ratio is reported by the American Lawyer to be 5.19. Spending money to preserve that model, at least for the medium term, appears very reasonable.

It will be interesting to see whether Cleary continues the program in future years and how the program evolves. It will also be interesting to see whether other firms follow the lead of Cleary, Skadden, Debevoise and the handful of other firms that have taken similar steps.

The moral of the story

What does this case study tell us about practice management? While financial analysis should be applied to major initiatives, strategic considerations come first. Addressing client feedback about junior lawyers needing a greater understanding of business and financial concepts appears to be the main reason for initiating the mini-MBA program. In the current environment for BigLaw, preserving client confidence in, and willingness to pay for, the junior lawyers essential to the firm's leverage model is strategically important.

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* This link may work only for subscribers to AmLaw Daily or certain other American Lawyer-affiliated publications.

** This link may work only for subscribers to lawjobs.com or certain other American Lawyer-affiliated publications.

[Photo credits: © Can Stock Photo Inc. / Andres & rukanoga]

About the Author

Jack Bostelman

Jack Bostelman is the president and principal consultant of KM/JD Consulting LLC. Before founding KM/JD Consulting, Jack practiced law in New York for 30 years as a partner of pre-eminent AmLaw 20 firm Sullivan & Cromwell.

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Before founding KM/JD Consulting LLC, Jack practiced law in New York for 30 years as a partner of pre-eminent AmLaw 20 firm Sullivan & Cromwell.

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