Keeping a Butterfly and an Elephant in a House of Cards: The Elements of Exceptional Success

William H. Starbuck

New York University

(Published in the Journal of Management Studies, 1993, Vol. 30, No. 6: 885-921.)



Where Tandoori Can Lead

My wife and I were eating dinner with Donna and Joe.

Joe asked what I had been doing lately.

I explained that I had been studying knowledge-intensive firms ¾ ones that earn revenues from specialized expertise. I cited the Rand Corporation and Arthur D. Little as examples, and briefly described their work.

Joe, a partner in a prominent Park Avenue law firm, asked if I had studied any law firms.

With insufficient tact and excessive confidence, I told him I had not. I understood law firms to make most of their revenues by routinely generating standardized documents such as contracts, stock offerings, or wills. Because legal word-processing systems are widely available, because all lawyers have adequate basic knowledge, and because law firms employ lawyers with diverse skills, clients can readily substitute one law firm for another. My interest lay, I said, in firms that are renowned for their unusual expertise.

Joe replied quietly that he thought I was misjudging law firms in general, and more importantly, that some law firms do have reputations for unusual expertise.

I asked him to suggest such a firm for me to study.

He proceeded to tell me about Wachtell, Lipton, Rosen & Katz (Wachtell), another Park Avenue firm not far from his own. The very high quality of Wachtell's work and its distinctive culture had impressed him.

I did not really understand what Joe was telling me. I got the idea, which he later corrected, that he was saying Wachtell specializes in merger-and-acquisition cases and that clients seek out the firm because of this expertise. Doubting that any law firm stands out from the others, I listened to Joe's description with skepticism. As a result, it was roughly a year before I got around to writing to Martin Lipton and Herbert Wachtell, asking if I might interview them.

Had I known how exceptional their firm is, I would have waited not one day.

When I finally did interview people in Wachtell, I came away fascinated and impressed. When I later compared Wachtell statistically with other law firms, I was utterly astonished.

This article reports my observations.


A Few of My Many Biases

While living in Berlin in the early 1970s, Wolfgang Müller and I became statistical consultants to a research project that was searching for side-effects of contraceptive pills. Because it sought to find rare or unusual side-effects, the project observed 30,000 women for five years.

Statistical analyses showed the main determinants of side-effects to be doctors. Because some doctors noticed coronary disease, women who went to these doctors were more likely to have been diagnosed as having coronary disease and less likely to have been diagnosed as having other ailments. Other doctors noticed pulmonary disease, and women who went to these doctors were more likely to have been diagnosed as having pulmonary disease and less likely to have been diagnosed as having other ailments. And so on.

The same notion applies, of course, to social science. I tend to notice certain phenomena and to neglect others. Thus, readers need to beware of my biases.


Using Nonrigorous Methods And Focusing On Narrow Categories

During the 1960s and 1970s, many researchers attempted to find generalizations about all organizations. Widespread beliefs of that period, to which I subscribed, said that social science ought to use 'rigorous' methods to produce generalizations of very broad applicability. Unfortunately, practical experience demonstrated that these beliefs were ill-founded.

For example, the original Aston study examined eight autonomous organizations and 38 subunits of organizations, and analysed the data as if subunits were organizations.

We included manufacturing firms that made strip steel, toys, double decker buses, chocolate bars, injection systems, and beer, and service organizations such as chain stores, municipal departments, transport companies, insurance companies and a savings bank (Pugh, 1981, p. 141).

Some of these organizations focused on local areas and others sold nationally. Further, the researchers carefully chose measures that would be equally meaningful in all organizations.

It is the strength and the weakness of this project that no items were used unless they were applicable to all work organizations, whatever they did; several possible items of information had to be sacrificed to this end. Since the research strategy was to undertake a wide survey to set the guidelines, the result was superficiality and generality in the data (Pugh and colleagues, 1968, p. 69).

Of course, the drive to generalize has induced researchers to ignore or de-emphasize the properties that make organizations distinctive. Imagine comparing a hospital with a steel plant but ignoring the fact that one treats injuries and cares for sick people while the other operates blast furnaces and rolls hot steel.

Such studies showed that 'rigorous' methods contain many inherent traps. In application, methods that were labeled rigorous turned out to be formalistic, and the researchers who used rigorous methods lost sight of the commonsense content in their data. Their findings depended very strongly on assumptions embedded in their measures, assumptions of which they were unaware. The very process of following methodological prescriptions induced researchers to substitute ritual for understanding. As a result, rigorous studies had commonsense interpretations that were very different from the meanings implied by the names of variables (Starbuck, 1981).

Although some might blame this outcome on the researchers, the people who did this research were bright, well educated, sincere and among the intellectual leaders of their time. Their findings appeared in the most prestigious journals and were widely cited in other research and in textbooks. Thus, these studies showed deficiencies of rigorous methods rather than peculiarities of specific studies: So-called 'rigorous' methods are very prone to yield deceptive data that lack validity.

Thus, I generally eschew 'rigorous' methods in order to weaken the influence of my prior beliefs, to strengthen the validity of my data, and to heighten my understanding of what I observe. Most of my observations about Wachtell come from conversations with lawyers who work there. My informants are bright and articulate people who earn very high incomes because clients want the benefit of their perception and understanding: They well understand organizations and interpersonal relations. These people became my collaborators, as they not only answered my questions but told me what issues I ought to explore and with whom I should talk. Of course, my informants had agendas of their own, but their attempts to influence me afford useful data in themselves. Not only is it fun to spot inconsistencies and efforts to shape my perceptions, but the interviews I found least useful are those in which I said too much, especially at the outset. That is, I learned more by listening than by talking. One result is that I have grown even more skeptical of interviews that follow preplanned agendas.

This article assumes that readers also enjoy dealing with inconsistent and unprocessed information. I often let people speak for themselves. Their choices of words add to the basic information about organizational properties, but they do not portray Wachtell as a coherent, unambiguous system, and there are contradictions in what they say. I will leave these for readers to spot because I think the contradictions are rather clear and because identifying contradictions helps one to think through the issues.

Before each quotation is a letter that denotes its source, as shown in Table I. The interviewed clients are all General Counsels of major corporations. The opposing lawyers include several of New York's most successful ones. The statements by associate lawyers come from questionnaires they submitted to the American Lawyer in 1990 or 1992 rather than from interviews.

Table I. Codes Identifying the Sources of Quotations


An associate in Wachtell


A lawyer who has been a client of Wachtell


A document that Martin Lipton wrote in 1987 and then revised for the firm's 25th anniversary in 1990


A lawyer from a competing firm who has opposed or collaborated with Wachtell


A partner in Wachtell, including both junior and senior ones


A member of Wachtell's non-lawyer support staff


The generalization-seeking studies have built up evidence that the properties shared by all organizations are superficial, obvious, or unimportant (Starbuck, 1981). Again and again, these studies have rediscovered weak relationships that organizational researchers had observed 'nonrigorously' many years earlier ¾ possibly many centuries earlier. For instance, the strongest consistent 'finding' of the Aston studies was that larger organizations tend to be more bureaucratic. Two of the strongest consistent 'findings' from statistical studies of organizational populations have been that larger organizations have lower risks of failure than do smaller ones, and that well established organizations have lower risks of failure than do infant ones.

Even apart from the measurement methods used in studies, the properties shared by all organizations ought to be uninteresting and unimportant. One reason is that people create new organizations to pursue goals that existing organizations are not achieving. If left free, people will create organizations that complement the existing ones, and the new organizations will emphasize properties that the founders believe are both important for success and neglected by previous organizations. The overall population of organizations will grow more diverse, and diversity will increase primarily in the dimensions that are important to organizational survival or goal attainment. Many industries encompass firms that complement each other, and of course, industries complement each other (Carroll, 1985; Starbuck and Dutton, 1973). Thus, to see how certain properties foster success, one needs to look at the differences among organizations, and one of my goals in studying knowledge-intensive firms (KIFs) is to focus on a special category that differs from the general mass of organizations.

This article focuses much more narrowly yet. Far from claiming that Wachtell is a representative law firm, this article argues that Wachtell's extraordinary success derives from its individuality. Not only does Wachtell differ in important ways from all organizations, it differs in important ways from the mass of law firms and it even differs in important ways from other highly successful law firms. Wachtell is quite distinctive, and other law firms have not imitated its distinctive properties.

Nor does this article claim to make findings that generalize to other times. A firm may have to forego some short-run profits in order to build relationships that foster longevity, so an extremely profitable firm takes some risk of transience. Also, Wachtell illustrates both the effects of passing fads and fashions and the diverse forces that undermine exceptional success ¾ or other peculiarities. These forces promote regression to the mean and make exceptional success transitory.


Avoiding Averages

A second reason why shared properties tend to be uninteresting and unimportant is that organizations cannot gain exceptional success by imitating other organizations and exploiting shared properties (Starbuck, 1992). Although not all organizations seek exceptional success, its determinants and consequences interest me.

Focusing on exceptional success had not been my explicit initial goal. I had set out to study firms having distinctive expertise. Expertise is hard to separate from its effects because clients judge advice to be good if it produces good results. Thus, after studying a few firms, I realized I had been looking at especially successful ones. This realization forced me to reexamine my goals.

North American and English social science has been paying far too much attention to averages. The study of averages has become so prevalent that social scientists do not even have to explain why they think averages are the appropriate variables to study. Other social scientists often accuse the deviates who fail to study averages of doing valueless work, as if averages were the only information of value.

A statistical principle, established over 50 years ago (Robinson, 1950; Thorndike, 1939), states that a correlation across a population may not recur in subsets of that population. Indeed, a true statement about averages across a population may be false for every subset of that population, including every individual in the population. For instance, in the study that introduced the concept of a strategic group, Schendel and colleagues observed a positive correlation between profits and firm size across the population of brewing companies (Schendel and Hatten, 1977; Schendel and Patton, 1978). But when they divided the brewing companies into size categories, they found negative correlations between profits and firm size within every size category.

Although statements about averages bother very few, they ought to bother many. For instance, scholars often state 'hypotheses' of the form 'Managers do such-and-so' and then support these hypotheses with statistically significant correlations computed across many managers. In such cases, one can nearly always point to at least one manager in the analysed data who did not do such-and-so. Typically, many of the analysed managers did not do such-and-so; and it is possible that none of the analysed managers did such-and-so. Is not something wrong when analysis supports a hypothesis that is violated by most or even all specific instances? Why do scholars not specify the fraction of managers who do such-and-so? What are scholars doing when they state 'Managers do such-and-so' even though some managers do not? I suggest that they are engaging in a stylized sense-making ritual rather than science.

Social scientists not only focus on averages, they often calculate averages that lack meaning because they arise from arbitrary categories with undefined boundaries. For instance, averages across a sample of KIFs would be meaningless because no clear definition of KIFs has wide acceptance. Scholars advocate multitude definitions of knowledge and hold disparate notions about the proper definitions for KIFs (Starbuck, 1992). Although one can point to specific organizations that almost everyone will agree are KIFs, the boundaries of the KIF category are obscure.

Fixation on averages makes social science blind to individuality, peculiarity, excellence, complexity, interaction, and subcultures. Similarity should not be the dominant property of people, groups, organizations, or societies because there are many criteria for what is good, many solutions for most problems, and many opportunities to exploit. All people, groups, organizations, and societies are peculiar and unique, and seeing how people, groups, organizations, and societies differ is as least as important as seeing how they look similar. In study after study, it turns out that few instances closely resemble the averages (Starbuck and Bass, 1967).

Averages usually tell nothing about outlying cases such as exceptionally successful firms. In most industries, the modal firms make low profits and have short lives (Starbuck and Nystrom, 1981). An exceptionally successful firm has to be unique in a way that exploits the peculiarities of its environments: It gains high profits and long survival through distinctive competencies that take advantage of its environments' unusual needs and capabilities.

Not only do its environments reflect and exploit the unique properties of an exceptionally successful firm, but the existence of a highly successful firm induces its environments to act as if the firm does exist. Thus, an observer nearly always sees marginal adjustments and rarely glimpses the complex dynamics that occur sometimes. An observer who averages across time will overlook the intricate and unusual, yet these may be the most important.

Produced by decomposition and simplification, simple relations among averages often misrepresent ecological interactions (Martin, 1992). Should one describe Beethoven's Ninth Symphony only in terms of pure sine waves, as Fourier proved one can? No musicologist would do so. Should one describe Van Gogh's 'Starry Night' only in terms of cyan, magenta, and yellow, as one can in principle? No art critic or historian would attempt it.


Studies of Averages

Gilson and Mnookin (1985) reported, mainly via footnotes, that lawyers in larger law firms receive higher compensation than those in smaller firms, that more Stanford graduates had been taking jobs in large law firms, and that the largest law firms are growing larger. They then argued that law firms have been growing larger in order to diversify and that diversification helps to explain law firms' commitment to 'lockstep compensation.' Lockstep compensation makes seniority the sole determinant of lawyers' wages and of partners' profits. Gilson and Mnookin (1985, pp. 328-9) explained: 'The lawyer cannot diversify his human capital investment. He cannot be both a securities law specialist and a bankruptcy law specialist.' Because domains of specialization become more or less lucrative as demands for their services fluctuate, lawyers find it useful to create 'full-service' firms and to agree 'that the returns to [human capital investments in different specialties] will be shared on a predetermined basis rather than in accordance with actual outcomes.'

Later, Gilson and Mnookin (1989, p. 585) reported:

First, firm leverage [the ratio of non-partner associate lawyers to partners] is directly related to firm profit: the higher the firm's leverage, the higher the firm's per partner profit. When one outlier is eliminated, our regression analysis of data from the American Lawyer's compilation of the one hundred most successful corporate law firms for 1987 discloses that differences in leverage explain 34.3% of the differences among firms in per partner profitability. Second, the degree of firm leverage appears to be determined, in part, geographically: the same data indicate that among these one hundred firms, those based in New York City had an average associate/partner ratio of 2.55, while those based outside New York had an average ratio of only 1.66; the leverage of New York firms was greater by some 54 percent. . . .

The outlier is Wachtel [sic], Lipton, Rosen, & Katz, a firm specializing in hostile [sic] takeover work. In 1987, Wachtel was reported to have an average profit per partner of $1,405,000 ¾ the top in the nation ¾ although its ratio of associates per partner was only 1.05. This firm bills for takeover work on a transaction, rather than a per-hour, basis, which significantly reduces the importance of leverage. If Wachtel, Lipton is included in the regression, differences in leverage explain 20.9% of the differences among firms in per-partner profits.

Note that Gilson and Mnookin based their generalizations on averages and that their wording illustrates the widespread usages cited in the preceding section.

Samuelson and Jaffe (1990, p. 190) remarked:

The major source of profitability for firms has traditionally been an army of associates who receive a salary equal to only a fraction of the revenues they generate, with the lion's share divided among the partners. Associates have been willing to cooperate with this system because they have had a good chance of being promoted to partnership. Thus, they anticipated that, in the relatively short period of six to twelve years, they would be sharing in the economic surplus generated by associates. Since partners have grown to expect an income based on a ratio of at least one (and ideally more) associates to each partner, firms suffer under an enormous growth imperative. Each time an associate is promoted to partnership, two or three new associates must be hired.

Price Waterhouse has been sending long questionnaires to the managing partners of 'well managed' law firms since 1961. Roughly 600 firms participate in the Statistical Survey and 300 in the Compensation Survey. Samuelson and Jaffe persuaded Price Waterhouse to allow them to analyse the responses submitted by 219 firms that responded to both questionnaires in both 1985 and 1986. These firms employed from eight to 645 lawyers, the average being 115.

Samuelson and Jaffe used step-wise regression to estimate the effects of various variables on profits per partner. Table II lists the statistically significant variables.

Table II. Determinants of Profit per Partner (Samuelson and Jaffe, 1990)





Number of associates


Number of partners (negative effect)


Hours billed per associate


Non-legal staff


Computer workstations


Hours billed per partner


Being in New York City


Lockstep compensation


Samuelson and Jaffe struggled with these findings because they had expected profitability to correlate with total lawyers and with leverage. They concluded (a) that total lawyers adds no 'explanatory value' beyond the number of associates and (b) that leverage adds no 'explanatory value' beyond the combination of associates and partners. One should, however, view their analysis and interpretations cautiously because of correlations among the alternative independent variables. A linear combination of associates and partners might afford a fair approximation of leverage, and associates plus partners equals total lawyers.

These studies say that law firms achieve higher profits by exploiting associates ¾ either by exploiting more associates or by exploiting associates more.


High-Revenue, High-Profit Law Firms

Now consider some statistics about 20 of America's largest 100 law firms. Figures 1 to 6 graph four-year averages, based on estimates made by the American Lawyer. Some of these estimates are more accurate than others because the American Lawyer is able to get more information or more reliable information about some firms than others. The firms shown are the ones that ranked at the top on either revenue per lawyer or profit per partner during 1989 or 1990.

Figure 1 shows that Wachtell not only had the highest revenue per lawyer, its revenue per lawyer was fully 55% above that of any other firm.

Figure 2 indicates that Wachtell is the smallest firm in this group. Indeed, Wachtell is the smallest firm among the largest 100.

Of course, with fewer lawyers than the others, Wachtell would likely have fewer partners, and it does. However, Figure 3 implies that Wachtell has disproportionately more partners for its size. For instance, Wachtell had 39% as many lawyers as Cahill Gordon and 33% as many as Cravath Swaine, but it had 94% as many partners as Cahill Gordon and 79% as many partners as Cravath Swaine.

Figure 4 traces the implications of Figures 2 and 3, that Wachtell has disproportionately few associates per partner ¾ very low 'leverage.' Indeed, Wachtell had only 0.8 associates per partner. In this group of firms, only Vinson & Elkins had fewer than two associates per partner. Excepting Wachtell, the group averaged 2.8 associates per partner. The two firms that most nearly resembled Wachtell in the previous Figures ¾ Cahill Gordon and Cravath Swaine ¾ had 3.3 associates per partner.

Of course, the preceding statistical analyses imply that Wachtell must have very low profit per partner. According to Gilson and Mnookin, leverage determines profit per partner, and Wachtell had the lowest leverage among the largest 100 firms. According to Samuelson and Jaffe, highly profitable firms have many associates and few partners, and Wachtell has the fewest associates and disproportionately many partners. Yet Figure 5 says Wachtell had the second highest profit per partner, falling between Cravath Swaine and Cahill Gordon. It is no wonder that Gilson and Mnookin excluded Wachtell from their calculations.

Despite the firm's high ranking on this measure, Wachtell's senior partners would say profit per partner is not a good measure of their firm's performance because profit per partner places too much emphasis on partners and too little on associates. (The American Lawyer says its estimates of profit per partner are less reliable than other statistics, partly because some firms have various partnership classes.)

Figure 6 shows another astonishing differential between Wachtell and the other firms: Its profit amounts to 68.5% of its revenue. No other firm has profits that exceed 52.8% of revenue.

Wachtell stands out as a work environment as well. Each summer, large law firms employ 'summer associates' or 'interns' ¾ students who have finished at least one year of law school. Summer employment allows the interns to see potential employers, and allows the firms to appraise prospective employees. In 1989 and 1991, the American Lawyer surveyed these interns, asking their reactions to the experience and to the firms. Figure 7 shows that the interns gave Wachtell higher average ratings than any other firm in this high-revenue, high-profit group.

Similarly, in 1988, 1990, and 1992, the American Lawyer surveyed third-to-fifth-year associates, asking their reactions to their work experiences and to their employing firms. Figure 8 reveals that Wachtell's associates have given it the highest average ratings in this high-revenue, high-profit group. In 1992, Wachtell's associates rated it highly for client contact, level of responsibility, collegiality among associates, treatment of associates by partners, training of associates, associates' knowledge of their partnership chances, and compensation.

Overall, Figures 1, 2, 4, 6, and 8 suggest that Wachtell is in an entirely different business than the other top law firms. Although Cahill Gordon, Cravath Swaine, or Vinson & Elkins may contain subunits that generate very high revenues per lawyer, the earnings of these subunits are being averaged with much lower earnings from other subunits. Further, it is extremely unlikely that high-profit subunits in other firms have as few associates per partner as Wachtell, or associates who indicate as much pleasure with their working conditions as those at Wachtell.


How Wachtell Works


The Beginning

Ironically, one of the most profitable law firms in the world was founded by men seeking 'interesting work rather than lucrative' (P).

In 1965, four friends and alumni of New York University's Law School decided to form their own law firm. Their organizing plan and early decisions portray them as idealists in headlong pursuit of financial failure. P: 'We wanted an old-fashioned partnership rather than a business. . . . We didn't want a hierarchy, didn't want a managed business. Our goal was a congenial home for people who can't function in a hierarchy. One early decision was better legal products at the cost of administrative waste.' This 'congenial home' would have strong egalitarian norms: Every lawyer would write his own first drafts of briefs, and every lawyer would do his own library research.

These values partly derived from personal experience. P: 'We tried to avoid the bad things. We didn't like imperious senior partners using people instead of developing a firm. We wanted to have a different relationship with our [junior] colleagues than we'd had with the people we had worked for.' They had also seen friends and former classmates working long hours for low wages while highly paid partners spent their evenings at home. P: 'In a lot of ways we didn't know what we were doing. We didn't think these things through in a logical way. We just said we don't want the unpleasantness we had and we've observed in other places.'

They vowed to refuse routine assignments even if this meant earning less money. Wachtell would not offer a full range of legal services. It would try to excel in corporate law, creditors' rights, and litigation. (Katz also did real estate.) To ensure that legal expertise would count for more than social skills, every lawyer with the same seniority would receive the same pay. There would be no special incentives to encourage the courting of clients.

O: 'They thought they could form a terrific law firm and make a lot of money. Marty Lipton is a great securities lawyer and Herb Wachtell is a brilliant litigator, so they were taking no chances. It was the next generation that took the chances ¾ Nussbaum, Fogelson, Katcher. . . .'


A Transactional Practice

During Wachtell's first year and a half of operation, in 1965 and 1966, one corporate client accounted for two-thirds of its revenue. Then during the firm's second year, contending groups within this key client asked Wachtell to favor them in ways that made the partners very uncomfortable. The partners resigned the relationship . . . and thus lost two-thirds of their income. P: 'We had to call a future employee and say "We may not be in business next year."'

The partners' immediate reaction was to 'go out and scramble' for work. However, after they had dealt with the immediate crisis, the partners adopted policies that would keep a single client from becoming so important again: P: Initially, they agreed that Wachtell would 'emphasize transactional representation rather than across-the-board general representation.' They would base relations with clients on short-term agreements about specific matters. L: 'The Firm encourages its clients to maintain relationships with other law firms.' Around 1976, after some experience, the partners adopted a more sweeping limitation: L: 'Firm does not have retainer relationships with the retainer fee applicable to any services the client desires.'

Had Wachtell become an ordinary law firm, its transactional emphasis might have been very costly. However, the firm turned out to be anything but ordinary. It has become one of the rare ones to which corporations turn when they are most desperate, when their normal legal resources seem inadequate ¾ at least, when they do not want to find out whether their normal legal resources would be adequate, or when they do not want to risk Wachtell's aiding their opponents.

Wachtell's transactional relations with clients have become an asset. Transactional practice means that it has few conflicts of interest arising from ties to long-standing clients, so it is likely to be available to new clients. Partners in Wachtell say transactional practice also implies that other law firms can enlist Wachtell as co-counsel without fearing that it might try to steal their clients, and that clients need not fear that Wachtell will 'play politics' and disturb existing client-lawyer relations.

C: 'They are basically a litigation firm and a firm that specializes in deal making and transactions. . . . Where would we use them? Examples would be if we were going to make a major acquisition, or when we adopted a shareholder-rights plan (sometimes called a poison pill), or when we have shareholder suits against us.'

O: 'As an opponent and one who has been in the same area [of the legal practice], I'd rather have them against me ¾ no, not really against me, with me as co-counsel ¾ than any other firm because they're very bright and creative.'

O: 'I'd be afraid they'd steal the client.'


Case Selection and Innovation

Wachtell has adhered to its founders' ideal of refusing to perform routine legal chores. It does not regularly produce 'green goods' such as stock registration statements and loan agreements, and it focuses on 'a limited number of interesting and difficult specialities' (L). P: 'We are selective about cases. The partners would be bored with routine, repetitive work such as prospectuses, underwriting, due-diligence.' P: 'Wachtell is always "special counsel". It deals with unusual problems and boardroom situations, such as suits against directors. The client's CEO is involved. Such cases have high visibility.' P: 'We try to make the cases not-labour-intensive. We can't handle cases that require a lot of labour.'

Wachtell can be choosy because even in a slump, clients offer it twice as many cases as it can handle. In a boom, it turns down seven cases for each it takes. P: 'The firm could be 500 lawyers today if it took all of the work available.' P: 'We could be an 800-lawyer firm today. We chose not to do that, to keep ourselves small.' P: 'We are insulated against downturns by our small size. We've have always had more work offered to us than we wanted.'

P: 'We never went 100% M&A [mergers and acquisitions]. We didn't want to do only that. The work is too intense, and the work might go away, so we always maintained a lot of other work.' P: 'The takeover and buyout businesses have declined, but bankruptcies and litigation have ballooned.' O: 'I have to believe that in the 90s, the corporate lawyers there [at Wachtell] are doing green-goods work.'

P: 'Transactional business requires a special kind of excellence ¾ flexibility, creativity, and innovation.' L: 'The Firm encourages innovations and has been successful in developing many, such as cross-border equity mergers, mortgage-pass-through securities, the poison pill, the state business combination takeover laws, and innovative forms for merger and acquisition transactions.' P: 'Herb [Wachtell] has ideas that people think are crazy but they win cases.' P: 'Marty [Lipton] not only has good ideas every day, but every five years, he produces a radical innovation. He wrote the law review article about the business-judgment rule that became the basis for our M&A practice.' P: 'No one anywhere rivals him [Lipton], but a number of the younger partners have come up with innovations.'

One of Wachtell's most important innovations was the idea that, instead of being paid by the hour, lawyers' compensation should reflect their clients' benefits. P: Wachtell sometimes 'bases its fee in part on the amount involved in the transaction and Firm's contribution to the accomplishment of the client's objective.' Thus, in 1988, Wachtell received $20,000,000 for two weeks of work defending Kraft against a takeover attempt (Cohen, 1991, p. D6), P: 'and obtaining billions more for the shareholders than originally offered.' O: 'How they got compensated in the 80s is history. It's no longer true today. It was . . . almost an anomaly.'

O: 'Lawyers should not be partners with their clients. That type of compensation can raise questions about the lawyers' objectivity.' O: 'The two or three cases in which the courts criticized the defence all involved Lipton. In effect the courts said "You overstepped the bounds." Is it a case in which your fee arrangement makes you more aggressive?'



P: 'We would have been intellectually successful, but perhaps not as financially successful, without M&A.' P: 'M&A has evolved rapidly. Many firms have come in and dropped out. Wachtell has stayed with it every step of the way.' L: 'The Firm's success in takeover field is not attributable to other firms not being willing to handle takeovers ¾ those other firms were practicing in the takeover area before the Firm ¾ they were not successful and lost the practice because they were not structured to operate on a task force basis and were unwilling to test corporate innovations ¾ like the poison pill ¾ in litigation.' P: 'Takeovers are good examples of crisis-team situations. These provide good training grounds because you see a whole case from beginning to end in two months. You see two or three complete cases the first year.' O: 'It's perfectly clear to me that Marty and Joe [Flom of Skadden Arps] saw this whole area of hostile transactions developing long before other people recognized it. They saw it coming and got into it and just out-marketed the hell other law firms. Also, what they did do was bring together the various disciplines. . . . This task-force idea was very effective in selling to clients.' P: 'Wachtell focuses on takeover defence, Skadden on offense.' C: 'One thing I did notice. During the 80s, the firm prided itself in only representing the targets of takeovers. And then a couple of years ago, they began to represent the other side.'

Staying on top requires staying out in front. The specific actions of law firms are easy to imitate. For example, in 1982, Martin Lipton invented the 'poison pill' defence against hostile corporate takeovers. According to Powell (1986, pp. 21-2):

Prior to the Chancery Court's decision upholding the poison pill [in 1985] ten companies had accepted the advice of Lipton and adopted his innovation, and in the eleven months between that ruling and the affirmation of the Delaware Supreme Court only an additional seventeen companies followed suit (Corporate Control Alert April 1986). This was a period of very cautious adoption by a few Wachtell Lipton clients who viewed themselves as highly vulnerable to a hostile takeover attempt. Law firms other than Wachtell Lipton did not recommend the pill to their clients because its future was still uncertain; it was a radical innovation, not just some minor tinkering with corporate charters. The slow diffusion of the poison pill was not due to inadequate information about the new device, however. News of Lipton's innovation spread rapidly through the legal and business presses and Lipton himself promoted the poison pill in client memoranda, interviews and addresses to lawyers. . . .

Once, however, the Delaware Supreme Court had put its seal of approval on the poison pill, its diffusion occurred very rapidly. Indeed, within nine months of the court's decision a total of 263 companies had poison pills in place, including many of America's largest corporations.

O: 'Gotta hand it to Marty though. That poison pill was a great thing. [Long pause.] His pill though didn't work! The court ruled against him in the Crown Zellerbach case. We added a feature to the pill that made it work.'

One informant opined that the poison pill changed the nature of acquisitions, by devaluing the nonmonetary components of deals and escalating the monetary values. O: 'Marty's creation, the poison pill, the courts held that it was legal because he clothed it in a garb in which the courts looked only at the formality of it and not at the substance of it. . . . The way the poison pill turned out was that only cash counted. Any other kind of offer could be turned down. Negotiation disappeared. Junk bonds made it possible to raise the [large amounts of] money.'


Selective Hiring

To attain and retain its status, Wachtell has had to recruit exceptional lawyers. P: 'Wachtell's strategy is rooted in personnel: Don't compromise standards. Each generation should be a good as the founders.' P: 'There is an external perception of a quality difference at Wachtell. Maintaining that perception depends on recruiting. There is only a small pool of qualified applicants.' O: 'We recently did a [very big] deal with Wachtell. They had a young tax lawyer who ran rings around my whole crew. Just beat them into the ground. He wasn't even a partner. They've got some wonderful people there.'

During Wachtell's early years, its hiring benefited from its founders' disadvantages: It looked attractive to Jews, and it had an inside track at the New York University (NYU) law school. Although discrimination had been declining since the 1940s, the large American corporations and the banks and law firms that served them had long traditions of anti-Semitism. NYU had a tradition of serving the children of recent immigrants to America; and during the decades when elite law schools were applying quotas to Jewish applicants, NYU's doors had been open equally to all. During the 1960s and 1970s, NYU's law school had very high standards and was graduating some excellent lawyers; but because the school was much less well known than the elite ones, its graduates had restricted job opportunities. The founders of Wachtell taught at NYU's law school and participated in alumni activities, and the deans of NYU's law school advised outstanding graduates to consider Wachtell. P: 'For years, two-thirds to three-fourths of the [Wachtell] lawyers were NYU' graduates. C: 'They were able to people this firm with some lawyers who might not have been acceptable at other firms ¾ some Jews, some Irish, some Greek, some Italians, Polish ¾ who might have been welcome as associates at other firms but would never have made partner.'

These demographic advantages gained strength from Wachtell's small size and its policies of egalitarian pay, egalitarian work, and every-associate-can-become-a-partner. P: 'I wanted a small collegially structured firm that works on the most sophisticated matters.' P: 'I joined Wachtell because I wanted a small firm with intelligent people, highly regarded people.' P: 'I was attracted by Wachtell's small size. I was also, attracted by the promise that associates can make partner if they're good enough. Other firms don't do this; they reject some deserving people.' P: 'The odds of becoming partner are far higher here. This helps to attract top-notch people. We never hire people just to ease the burden of work. We've wanted the firm to grow slowly; wanted to retain collegiality.' L: 'Partnership decision is made early, with associates becoming partners at the end of six years. The basic premise is that every associate will become a partner.'

Of course, the conditions that existed when Wachtell began have all but disappeared. Discrimination against Jews has become largely insignificant in the New York law firms; NYU's law school has become highly respected; and Wachtell itself has become an icon. P: 'Wachtell is the hardest firm in the US to get a job in.' P: 'We have insanely tight criteria on whom we let in.' P: 'Most firms have many associates and few partners. The partners make money on the associates' excess value. These firms need 50-100 new associates each year. They can't hire 50-75 superstars in one year, so they hire a lot of not-so-terrific lawyers and weed out. We only take in superstars at Wachtell. No fixed number. We take as many or as few as look promising.'

Nearly all of Wachtell's hiring is out of summer jobs. Each year, around 1200 law students apply to Wachtell for jobs as interns, and the firm chooses 20 to 25. At summer's end, it offers long-term employment to 12 to 15 of the interns who are beginning the last year of law school. Six or seven accept the offers.

Associate lawyers receive appraisals after three, four, and five years. The senior partners make these appraisals quite frank so that the final partnership decision surprises no one. The partnership decision occurs earlier than at other leading firms.

Of those who start at Wachtell, over 40 per cent become partners. Figure 9 shows the percentages. Wachtell's percentage is three times the average and 60 per cent higher than the next highest one. The data for the other firms come from the New York Law Journal (May 29, 1990; June 11-12, 1992). The data describe 27 of the 30 largest New York firms and lawyers who graduated from law school from 1979 through 1983.

P: 'In Wachtell's history, only one person has been brought in as a partner.' P: 'When I joined the firm as an associate in February it was with the expectation that by year end I would be made a partner, if everything worked out. That is a euphemism for "if everyone likes you and respects you"' (Lederman, 1992, p. 59).


High Quality

C: 'I've had nothing but the best experiences with them and I've always had the impression that there's something they do that is unique.' P: 'The advantages of working at Wachtell are always dealing with very smart people, also highly motivated people who look further for evidence. Imaginative ideas. Good theories. It's a spectacular environment. Our clients are always amazed and happy with the people who work on their cases. Also, clients get partners, not associates, working on their matters.' P: 'People are wildly self-motivated. Their drive to do a spectacular job is so great that they'll drive themselves nuts. The success of the firm came from lousy marriages.' P: 'Wachtell is also somewhat arrogant. We believe we are as good as any firm in the US.' P: 'It is a true academic environment in the best sense of that term. There are never any political issues. The only thing to think about is what is the best way to do it. Never, never compromise anything.' O: 'I think that what has distinguished the Wachtell firm is that they have consistently gone out and hired first-class minds.' O: 'If they say "We are the best there is" and they try to behave that way, that is what makes it real.'

L: 'The Firm has not deviated from the basic premise on which it was founded twenty-five years ago ¾ if you do a superior job there will be more demand for your services than you can meet.' P: 'People come to us because they perceive us as very good lawyers.' P: 'Wachtell's attraction to clients is basic things. People really care. They'll work 20 hours more to improve a document 2%.' P: 'Wachtell has quality consistency far higher than any other law firm.' O: 'They can be a little slovenly.' P: 'I always knew that I could work as many hours as I wanted to do the best job I could and nobody would ever second guess me.' P: 'I'm successful because I'm scared. All you have to do is screw up once or twice.'

O: 'When I was sued, they were my first choice' to represent me.

O: 'I've been involved in many situations where we've bested them. Like the . . . case. It was just marvelous.' So how does one go about beating Wachtell? 'There's no consistent theme to it. They don't have any glaring weakness. Marty, of course, became more doctrinaire as he matured in the practice.'

C: 'Are they better than other lawyers? I find it easier to talk about individuals. We use other firms as well. I'm enormously impressed by the associates at Cravath; I think they're the best associates I've ever met. At Wachtell, there's an enormous consistency at an exceptionally high level ¾ mainly among the partners.' O: 'There are differences in degree in what they do, and there are differences in how hard their partners work. There is not a significant difference in the kind of work or quality of work. They have been able to do it on a more profitable basis and to have less chicken shit in what they do.'


Commitment, Stress, and Self-confidence

Why do only half of those to whom Wachtell offers jobs accept? Who would not welcome an opportunity to work in such an organization? After all, it is a very prestigious firm that offers high pay and high probabilities of partnership, that provides an egalitarian, collegial work environment, and that practices on the leading edge of the law.

Obviously, some lawyers see a downside to working at Wachtell, but without interviews with those who turned down offers, one can only speculate about their reasons. One factor may be the lawyer's commitment to career achievement and hard work. A second factor may be the lawyer's attitude toward stress. A third factor may be the lawyer's self-confidence.

Wachtell resembles an emergency medical team. Their clients are desperate and demanding. Although willing to pay very high prices, the clients want immediate results, and they expect Wachtell to deliver products that their normal law firms cannot ¾ legal innovations, remarkable arguments, extreme quality.

L: 'The Firm's operations are geared to the needs of its practice ¾ 24-hour-7-day full service; always prepared to do a deal, fight an injunction or give an opinion on an overnight basis.' P: 'Wachtell treats everything as a crisis. Clients get upset if lawyers slow things down.' P: 'My wife says this firm is built on failed marriages.' P: 'Our creed is being there when the client wants you, getting it done expeditiously, turning out the best possible piece of work, and being scared. You're worrying so that [the client] doesn't have to worry.' C: 'You give them something, they're interested in it. I call up at 3:30 in the afternoon, they'll be in my office at 5:30, maybe 8:30 the next morning. If I ask for Marty, he'll call me back in half an hour. He might be in Europe or on the West Coast, but he calls me back. Since most of our work is litigation, we don't use him that much, but still, I like that relationship.'

P: 'Wachtell people take a lot of pride in what they do.' P: 'Wachtell people work harder than others. They agonize over important calls and major matters.' S: 'We just know that it's last minute.' O: 'I suspect that they work harder' than other lawyers.' O: 'Another thing I've always been impressed by over there is their dedication to hard work.'

To call these extremely self-confident people would be gross understatement. To attract Wachtell's attention initially, they had to have outstanding records in law school. They know they are brighter than almost everyone. They know they can accomplish more than almost everyone. Those who joined Wachtell before it became well known were putting their own judgments ahead of general opinion. P: 'Most law students saw Wachtell as a gamble [when I graduated]. Wachtell wasn't well known among most students at [my law school].' Even those who join Wachtell today are choosing an unconventional path.

Then Wachtell offers them positions as junior associates who have unusual responsibility. To take these positions, they have to regard themselves as ready to practice law on an equal basis with the best. They will be working among people who are at least as able as themselves.

Recall that the founders wanted a firm in which associates do not do grunt work for partners and partners work as hard as associates. As the firm developed, the founders augmented their initial ideas with three more notions: (a) that new graduates from law school would have major responsibilities, (b) that no lawyer would be hired or retained unless they expected him to become a partner, and (c) that major cases would be shared by teams of lawyers representing different specialties.

P: 'You're about as good a lawyer as you are ever going to be after your first year in law school.' L: 'Associates get full responsibility as soon as they are ready.' A: 'I feel I have been granted a surprising degree of responsibility.' A: 'By third year, an associate often will be the primary contact on a number of matters and negotiating major portions of transactions. I find I am given more responsibility than associates I come across at other firms ¾ no matter what class year they are in.' A: 'It is hard for me to imagine any firm where I would get more responsibility and consistently excellent work.' A: '"Partner" functions and roles are often not clearly distinguishable from "associate" functions and roles.' O: 'They can delegate responsibility to people who aren't ready for it.'

P: 'There is prompt feedback when you screw up.' P: 'Employees have to expect to be treated as autonomous professionals or they wouldn't join Wachtell.' P: 'You never feel afraid of telling Wachtell or Lipton "I just don't understand this. Explain it to me."' C: 'The [Wachtell] partners have a presence. They have a certain style. It's a commanding style. They're not background people. They tend to be forceful advocates of what they think is the right legal judgment.'

P: 'The main disadvantage of working at Wachtell is not enough associates to handle matters. The partners feel overworked and complain. The partners would like more help.' P: 'Everyone drafts briefs; everyone does research; everyone deals with clients. In other firms, the senior partner goes home at 5 p.m. and leaves the work for inexperienced associates. At Wachtell, no one does that.' P: 'No one works harder than Marty Lipton.'


Egalitarian Compensation

Wachtell's compensation system reinforces its egalitarian norms.

One of the firm's most unusual policies is that it takes no markup on associates' time; clients pay proportionately less for the work done by associates. P: 'Wachtell has no leverage. Instead, we get top-dollar for what we do.'

Thus, the firm has no incentive to employ associates instead of partners. Indeed, the financial incentives promote the opposite. P: 'Partners do a lot of low-level work' but charge clients proportionately more for it. P: Wachtell is a 'bottom-loaded partnership because there are so many younger ones.' P: This strategy is 'protected by the excess demand for our services.'

C: 'We use them because they are very good. They work very hard. We can call them on a Friday afternoon and they'll work through the weekend. They're expensive, but they're not that expensive because they don't use so many people. They never overstaff there. Where another firm might use six or eight people, Wachtell might use two or three. The aggregate bill may be not that much higher. Why do you pay a little more? Well, the quality of the work, the timeliness.'

Partners too have egalitarian compensation in comparison with many firms. P: According to Wachtell's lockstep formula: 'The three founders get 125% of the average. Other seniors get 100%. Younger partners progress toward 100%. A new partner would get around 33%.' P: These percentages are 'determined entirely by seniority. No one is compensated for client clout.' L: 'Hours worked, client contact, firm administration all do not affect partnership shares.'

P: This compensation system 'can only work where everyone is sharing the workload. No one is seriously considering changing the system. It requires trust among partners, sharing, beneficence by the seniors.' P: 'No one came to this firm for dollars; no one stays for dollars.' P: 'We can move associates around because no partner is responsible for a specific client. Also, there is no reticence to bring someone else into a client relationship. Lockstep is very important.'

P: 'Lockstep fosters co-operation. But the question is: can we afford it in terms of decreased entrepreneurship? Lipton gave up income to buy loyalty, but he also gained more control, more decision power.' Partners conjectured that Lipton would be making 3-6 times as much if he were in another firm. O: 'Lawyers tend to be risk-averse ¾ even a great lawyer like Marty Lipton. If he went to another firm, would he have a senior litigator as good as Bernie Nussbaum?'


Collegiality and Culture

KIFs face serious obstacles to creating and maintaining distinctive cultures (Starbuck, 1992). Although skilled experts share values, standards, habits, mental frameworks, and language, the culture they share is supra-organizational (Smigel, 1964). As a result, few KIFs closely resemble what Maister (1985) called the 'one-firm firm.'

According to Maister, a one-firm firm devotes much effort to selecting and training personnel; grows slowly while choosing clients and tasks carefully; takes service to clients very seriously; stresses co-operative teamwork, group identity, and institutional commitment; de-emphasizes autonomous profit centres, entrepreneurship, and internal competition; encourages free communication among personnel; and gives information freely to its personnel, including financial information. Maister also warned that one-firm firms tend to grow complacent and habit-bound and to lack entrepreneurship and diversity.

All of the KIFs I have studied select expert personnel carefully, use teams extensively, take their missions seriously, manage growth cautiously, and encourage open communication; and all of them depart from the one-firm model in decentralizing activities and not involving everyone in decision-making. However, only Wachtell approximates the one-firm model in discouraging internal competition, emphasizing group work, disclosing information, and eliciting institutional loyalty. Wachtell's personnel disagree about whether it lacks entrepreneurship.

P: 'Wachtell is a special place. It has a culture. It is structured differently. No one is hired who is expected to leave. People treat each other well. There is no pyramid of partners and associates. There is no competition among the associates.' P: 'Excellence as a lawyer is cherished. A lot of people teach [in law schools]. Education is valued. Comradeship is also valued. The one-to-one ratio lets partners spend time on associates, help them develop. There is much loyalty to the firm. The associates rated Wachtell first in New York City.' A: 'I am . . . impressed with how informal and nonhierarchical relationships between partners and associates are.' P: 'One of my surprises on becoming a partner was the very collegial atmosphere among the partners.' P: 'I came to Wachtell because it looked different ¾ smaller, less widely known at [my law school]. The Wachtell people seemed very smart, bound together some way but not socially ¾ young aggressive people. I didn't understand the structural difference between Wachtell and other firms.' P: 'Wachtell doesn't abuse human capital.' S: 'We all feel part of a very big family. . . . Every person feels that the firm cares about them. If you need money, if you need medical advice, even if you're abroad, there's always someone here. . . . People have been here 15 to 20 years. They don't leave. They feel it's just family. . . . People come here to be spoiled. . . . If someone decides they want a different soda, or a different flavor cookie, it's here. It's a firm that does everything for everybody. It's because we care.'

P: 'People like each other, and in large part, it's because the things that cause dislikes are eliminated.' P: 'Doors are open. Everyone has a first name, and people use them.' A former partner, Lederman (1992, p. 57), recalled: 'All office doors were always open, fostering a communal workplace. Everyone treated the office like home, and no one felt any need to knock on doors or to hesitate to cross a threshold. Lawyers would walk into your office, demand attention (almost always bringing cookies or coffee or soda from the small kitchen), and begin talking about what was bothering them, while offering you food, even though you were with someone else or on the phone. . . . Without any privacy, everybody knew what everyone else was doing, which meant that knowledge was shared, making the informality more effective than seminars or luncheons arranged for the dissemination of information. George Katz, one of the founding partners, embodied this family style. He visited all the offices almost every day, bringing encouragement or news or gossip, a practice which he continued until his premature death in 1989. Always optimistic, George would report on current matters and ask for advice from everyone on thorny legal questions, giving even the new junior associates the sense that their participation was valuable.'

O: 'They're pretty nice even though they're tough. There are some law firms that pride themselves on being mean. Wachtell doesn't play those games. They're not a bunch of mean pricks.' O: 'It's an interesting place and the people are fun. They're interesting people to be with.' C: 'It's a very informal firm. You walk into Cravath, it's a little bit stuffy. At Wachtell, they're in their shirt sleeves. Nothing oppressive, nothing standoffish. Some people might want more of a white-shoe atmosphere. We don't. These people are extremely smart and extremely capable. That's what we want.' C: 'You get a different feeling at Wachtell. Maybe collegial isn't the best word but it's the only one I can think of.'

O: 'Wachtell has limited itself to two or three disciplines, so when they talk about communication across disciplines they don't know what real communication problems are.'

L: 'The Firm is not a business; it is an old fashioned professional partnership; there is no partnership agreement ¾ only a handshake among friends.' Lederman (as quoted by Cohen, 1991, p. D6): 'The ethic there [at Wachtell] is, if you're in, it's your life. If you're partly in, you're out.' S: 'People here often don't understand how different other firms are. A lot of strange things happen in other firms.'


Task Forces

L: 'The Firm approaches all matters on a task force basis. An ad hoc group of tax, antitrust, litigation, creditor rights, real estate, corporate or other lawyers, as needed, is formed for each matter. . . . The task forces overlap with a particular lawyer leading one or more and assisting on one or more. There is considerable overlapping of the composition of the task forces so that each matter has the benefit of the best thinking the Firm can bring to bear on that matter.' P: 'Our success in takeover cases arose from marrying different kinds of expertise. In the beginning, Wachtell was a small firm working for big corporations, so we had to work together. Everyone shared every project. We had a collegial atmosphere. We learned how to create task forces. Other firms had departments, and it took them ten years to learn to make task forces.' O: 'They were a ragtag bunch of people who pulled together, bonded by the fact that they weren't tied to anything else.'

P: 'Task forces are the essence of expertise. Critical. Life and death. Other firms don't copy task forces well. People at Wachtell work together well. People know each other very well. There are few partners and they have had long relationships. Lipton is exceedingly generous.'


Management and Control

Wachtell has also applied its founders' ideas about organizing. P: 'This place would go bananas if we tried to put in systems and turn it into an efficient organization.' P: 'Our overhead costs are twice that of most firms.' Figure 10 graphs ratios of support staff to lawyers and indicates that Wachtell had a higher staffing ratio than any of the largest New York firms during 1990 and 1991; Wachtell's ratio was 61 per cent above the average. The data for the other firms come from the New York Law Journal (December 2, 1991).

Nelson (1988, pp. 205-28) remarked on lawyers' ambivalence about power and organizational control. On the one hand, they spoke of collegiality and every partner having a say in firm governance; on the other hand, a very few lawyers dominated each firm, 'not unlike the father does in many families' (p. 212).

P: 'Management devolves on those who will do it.' P: 'Occasionally, we lean on people.' In late 1991, four people made case assignments at Wachtell: Herbert Wachtell and Bernard Nussbaum [now Legal Counsel to President Clinton] did so for litigation, Leonard Rosen for bankruptcy and creditors' rights, and James Fogelson for major assignments and antitrust.

P: 'Three committees manage the firm. The Administration and Coordinating Committees overlap. The Recruiting Committee is the most important one.' Who is on the Recruiting Committee? P: 'Whoever wants to be on the Committee shows up.' P: 'The Administration Committee handles paper clips. At one partners' meeting, no one knew who was on it.' P: 'Wachtell is a frustrating institution sometimes. It doesn't plan very well.' P: 'We need more structuring within the firm.'

Martin Lipton says, 'I have never gone to a committee meeting.' P: 'Marty doesn't participate in management but no one can do anything without consulting him so decisions get changed. There is some grumbling about this.'

P: 'Suppose there is an issue as to whether we should take up a new matter from a nontraditional client. This produces a group discussion in the creditors' rights department. In corporate or litigation, the decision is centralized.'

P: 'Up to now, policy decisions have been made by consensus. But 60 partners makes getting everyone to agree very, very tough. Ten per cent dissent can be overcome, but a 60-40 split leads to slow decisions. Ultimately some kind of smaller decision-making system will have to get put into place. Now, a lot of major decisions get made by the three main partners over lunch. If this system hadn't been benevolent, it would have been deposed.' P: 'Most decisions are made ad hoc, not at partnership meetings.' O: 'The desire to stay small is an important feature of the way they do business. It allows them to maintain control in a way that you can't do in a larger organization.'

P: 'Twice someone at Wachtell has been involved in insider trading. In both cases, a small group made the decision and someone was dismissed. There was no partnership meeting.' (Lederman (1992, pp. 226-61) describes both cases.) O: 'In [a small collegial firm], how did they end up with two partners within a few years who became involved in insider trading? No other firm that I know of has had two partners who did that. How did this happen?'



Service KIFs generally give client relations higher priority than technical expertise (Starbuck, 1992). The experts with greater social skills become client-relations specialists, and these receive higher compensation and wield greater power than other experts. Their power arises from the possibility that client-relations specialists might depart and take long-term clients with them.

Informally, American lawyers put the label 'rainmakers' on the lawyers whom clients seek out. This term symbolizes the mystery, magic, and power of client relations.

Most law firms reward rainmaking, of course, and Wachtell does not. P: 'Getting new business is irrelevant to people's performance [ratings]. The criterion is always excellent legal work.' P: 'The only thing that matters in terms of becoming a partner is whether you're any good.' C: 'Of course, by doing such good work, you don't have to market yourself. Your work speaks for itself.'

Some Wachtell personnel see the firm's disregard of rainmaking as a corollary to its transactional practice. P: 'Wachtell isn't dependent on long-term relationships with clients. Wachtell has a transactional practice.' P: 'No clients account for more than 3, 4, 5, 10% of revenues, so we don't have to worry about pissing any clients off.' P: 'We have a huge client base. Many, many more client contacts than most firms, and they are contacts at high levels. Not the assistant counsel. Usually the chief counsel, the CFO, or the CEO.' P: 'Our clients are mainly lawyers who represent corporations' and who know how to evaluate legal services. P: 'The firm tries to make all clients the firm's clients rather than individuals' clients.' P: 'Marty spreads it around. Over the years, he's succeeded in introducing the world to the rest of the firm. I think there is very little question that the firm will survive the retirements of Wachtell, Lipton, and Rosen.'

O: 'The thing that distinguishes a Cravath, Wachtell, or Davis Polk is that the clients come to them because they have big problems. They're not looking for a lawyer they can schmooze with. With the high-pressure investment banker, with the Type-A personality we usually see, there's not much room for social skills.'

Other Wachtell personnel worry that the firm may be undercutting its future. P: 'We need more people generating new business.' P: 'We haven't spread rainmaking as much as we should have. We've been too busy, so junior people haven't been encouraged to rainmake. It's happening now [during the recession] more than it was however.'

Still other Wachtell personnel are trying to make rain. P: 'Rainmaking in our kind of practice is [a matter of] doing a good job and getting to know other people. There is not a need for rainmaking [in another sense]. We get business because we do a good job. We also have to stay in touch with clients.' The latter speaker then explained how he keeps in touch with clients. He has Wachtell's library watch for ticker-tape items and articles in the business press that relate to firms he regards as his clients. When the library turns up an item on which he has insight, he telephones a senior manager or the corporate counsel, explains that he has noticed the item, and suggests that the client consider doing such-and-so. Thus, he lets clients know that he is watching out for their interests and that he has expertise relevant to their current problems; by giving advice away he implies that he could bring even greater expertise to bear.



P: 'Marty was leading. He recognized that M&A was a good way to go. We just followed him.' P: 'Marty Lipton is a business genius. He has strategic planning insight.' P: 'Marty is charismatic, confident, usually right, and he dominates. Herb is similar, yet they get along.'

O: 'Marty was one of the best securities lawyers in the country; there were maybe half a dozen others. Unlike the others, Marty was not at a firm that would necessarily frown on aggressive hostile actions. Unlike the others, Marty was willing to deploy task forces. Finally, of the great security lawyers, Marty had the best business sense.' O: 'Marty is the most honorable guy. He doesn't communicate any sleaze to anybody.' O: 'Marty has a big ego and sometimes he comes across too strong.' O: 'I have very high regard for Marty Lipton. He is a fine lawyer. He is innovative. He is superb with clients. He is the force at that firm. They have other fine lawyers, but without Marty Lipton. . . .'

O: 'Lipton's genius was he chose to be on one side [defence against takeover]. He realized that they were prepared to pay because . . . they were never around afterward. You couldn't win so it was a matter of how much money you could raise for the losers. Everybody hired Marty to keep them independent, but this just wasn't possible. I believe the financial results justified the earnings, and I believe [Wachtell's] actual earnings were much higher than' the estimates made by the American Lawyer.

P: 'Wachtell has one phenomenal rainmaker. We've practiced in the puddle created by his rain. But he's not politically well connected or socially well connected. He's an extremely good lawyer who makes contacts because people want him to work on their cases.' P: 'Lipton would be sorely missed. His business life is interwoven with his social life. He's a genius and we all benefit from it.' P: 'Lipton is one of the most brilliant lawyers in the US, maybe the most brilliant. He's also entrepreneurial, and he networks.' P: 'No one this side of the Mississippi could replace Marty Lipton. However, many lawyers in Wachtell have close relations with various clients.' P: 'Marty is unbelievably smart. Comes up with these ideas.' P: 'Marty is unique.' P: 'Even if Lipton's not here, he's here. "What would Marty say?'''


What Lies Ahead?


Will Growth Drive Wachtell Back to the Mean?

P: 'We need more associates, especially in litigation. Young people are willing to do the routine work. They have more energy, more enthusiasm. Without young people you feel isolated, put upon. The young work cheaper, so there is less client complaint.'

Galanter and Palay (1991) argued that the up-or-out rule ¾ which dictates that associates must either become partners or depart ¾ locks law firms into exponential growth. Maintaining constant sizes requires firms to appoint new partners no faster than current partners retire or die. Maintaining leverage requires having more associates and fewer partners. But associates remain so for only a few years whereas partners remain so for many years, so to keep the same sizes, law firms must promote very few associates to partnership. When firms grow, the ratios become more severe because there are fewer partners near retirement and because firms tend to grow by adding associates rather than partners.

Galanter and Palay said that around 1960 the prominent New York City law firms were more or less in equilibrium: They had 1.36 associates per partner, and they were promoting between one-seventh and one-fifteenth of these associates to partnerships. They also allowed a few associates to hold that status indefinitely. Firms outside New York had just 1.03 associates per partner, but they were promoting about half of their associates to partnership. According to Galanter and Palay (1991, p. 36), 'For big firms, circa 1960 was a time of prosperity, stable relations with clients, steady but manageable growth, and a comfortable assumption that this kind of law practice was a permanent fixture of American life and would go on forever.'

Of course, what Galanter and Palay saw as comfortable stability, Katz, Lipton, Rosen, and Wachtell saw as exploitation and bureaucratization. The story of Wachtell suggests that the structure of 1960 was promoting the creation of new specialist law firms that did what they did better than their old, large competitors. In 1976, Brill (1976, p. 55) speculated, 'Flom's and Lipton's success seems to be part of a trend in New York that has seen younger firms spring up in the last two decades to challenge the supremacy of the old Wall Street firms. The younger firms, many of which were started by Jewish lawyers who were not as welcome then at the old-line firms, enjoy reputations among job-seeking students at major law schools as "sweatshops" or as "places where the action is," depending on the student's outlook.' Because similar developments were occurring in investment banking and financial brokerage, the new law firms could find clients who did not have established ties.

From 1960 to 1985, according to Galanter and Palay, law firms adhered to the up-or-out rule while their operations changed dramatically. Government regulations and an increasingly litigious society led corporations to search for more specialized and higher legal skills. Many corporations terminated their long-standing relationships with full-service law firms, created in-house legal departments to handle routine matters, and divided their outside legal work among specialists in governmental regulation, labour relations, mergers, pensions, taxes, and so on. The large law firms responded by bringing in former government officials as partners, by raiding each other to obtain the specialists in greatest demand, by merging with firms having complimentary specialties, and by expanding geographically. Most large law firms have opened offices in Europe and in several US cities.

Nelson argued that Galanter and Palay overstated the importance of the up-or-out rule in these developments and understated the importance of lawyers' ideologies and their desire for profits. He (1992, pp. 745-6) opined that 'corporate law firms began to mimic the aggressive entrepreneurialism of the corporate and financial actors they represented. In a corporate environment that did not value institutional loyalty, traditionally oriented law firms risked looking flabby or out-of-touch.' Furthermore, 'corporate law firms simultaneously define professional achievement in terms of status and economic returns' (1992, p. 747). 'Law partnerships maintain the promotion-to-partnership tournament, not because it is the only way to arrange these exchanges, but because it is an effective surplus-producing mechanism' (1992, pp. 746-7). (Sander and Williams (1992) also disagreed with Galanter and Palay's interpretation.)

Of course, Wachtell promotes associates to partnerships even though the firm does not extract surpluses from its associates.

Whatever the reasons, the large law firms grew 8% annually from 1975 to 1985. Since much of this growth came through recruitment at the bottom, leverage went up. Leverage probably also rose because competition among law firms for new graduates drove up starting salaries. In New York, leverage had risen to 1.82 associates per partner by 1985; and Figure 4 says it had gone much higher in the top firms by 1990.

Although Wachtell has resisted an increase in leverage, it has not escaped growth. Some of its partners wonder if Wachtell has already grown too big. P: 'One hundred lawyers pose managerial problems ¾ personnel, recruiting, space, mail, word processing.' P: 'Participatory democracy doesn't work as well with 100 lawyers as with 50.' P: 'Maintaining the culture was easier with 30 partners than with 60 partners.' O: 'I don't happen to believe that when you've got a hundred lawyers, there's that great communication!'

Others wonder how much longer the firm can continue to expand without radically altering its culture and standards. P: 'Will growth dilute the partnership interest? Will Wachtell be a victim of its success?' P: 'Can Wachtell find enough new hires who are good enough to sustain the one-to-one ratio?' O: 'The biggest problem you run into with a large law firm is: the bigger you get, the more conflicts [of interest] you get into. . . . It's a huge limiting factor.'

Wachtell has also resisted expansion to other sites. Responding to pressure from clients, Wachtell did experiment with an office in London, but then closed it. P: 'Our staff are "homegrown". We need to monitor quality. It's difficult to do that with just one office; multiple offices make it an impossibility. We don't want to work with people we haven't worked with before. We've been able to serve all the business by getting on airplanes. Ours is a transaction business.' P: 'We believe that to survive, you don't need 2000 lawyers all over the world. Of course, the world may pass us by; we may be an anachronism. We're not trying to do everything.'


Does Wachtell Need Long-Term Strategies?

People in Wachtell debate the need for long-term strategic planning. P: 'Wachtell needs an overall strategy as the firm gets bigger. There may be trouble in, say, 1995 when the firm has grown to 140-150 lawyers and the founders are gone.' P: 'We have no long-term strategy. Held a weekend meeting of partners. It was a bust.' P: 'We held a Retreat two years ago to talk about how to identify what is most fundamental. Everyone is struggling co-operatively with the issues. Three guys discuss the issues at lunch and agree, but they don't push their solution on others.' P: 'Do we need to plan? Yes. Lipton encourages us to plan. But he's the planner, together with Fogelson and Wachtell.'

Others see little need for long-term strategies. P: 'Our long-term strategy is "more of the same."' P: 'Fine tuning will suffice. We have enough work for 150 partners.' We think restructuring is going to be the next five years. Litigation and creditors' rights boom in a bad economy. Corporate goes the other way.' P: 'People here believe that if you're good at what you do and you do the best job you can, there will always be people who come to you. The work will always be there. There's not a whole lot of concern about the future.'


What Will Happen When the Founders Depart?

Succession is an ancient problem. For instance, Marshall (1920, p. 316) remarked that 'after a while, the guidance of the business falls into the hands of people with less energy and less creative genius, if not with less active interest in its prosperity.'

Wachtell's founders see this issue and aspire to create an exceptional institution that will long survive them. The L quotations above have a formal tone that reflects Lipton's vision of Wachtell as an institution. The example of Cravath Swaine proves that extreme excellence and unusual ways of organizing can memorialize those who created them (Nelson, 1988, pp. 71-3; Swaine, 1946-1948). Still, no one is confident that Wachtell's excellence will survive its founders' departures.

O: 'These were four extraordinary lawyers. Emotionally, if I were part of that firm, I'd feel enormous gratitude to them.' O: 'Len Rosen ¾ I'm told he's the best bankruptcy practitioner in the country.' P: 'It is a law-firm tradition: The original partners get diluted. The next generation is not a good as the founders. Wachtell hopes to break out of this.' P: 'There's a generation gap between the 30-year-olds and the 60-year-olds.' P: 'The organization has to get over the parental problem. Wachtell, Lipton, and Rosen stand in the parental role. The younger partners resist responsibility' for management. P: 'We have to pass relationships down to the younger generations.' C: 'I have a relationship with the two top people. I can call Marty. I can call Herb.'

James Fogelson, whom some regarded as Wachtell's likely leader for the 1990s, died in September 1991 at the age of 48. P: 'Fogelson was a great administrator. He kept track of everything.'


The Elements of Exceptional Success

What explains Wachtell's exceptional success? This question has many answers, all of which may be correct, and there is no way to find out whether some of these answers are truly essential. Here is a concise analysis by one of Wachtell's competitors who knows the firm well.

What factors have led Wachtell to be so profitable? The first is that Wachtell was and is a major factor in takeover work. Virtually all of the most successful firms have been major presences in takeover work.

A second factor is that Wachtell has limited lines of business. That is to me a function of its age. . . . Old law firms are like snowballs rolling down the hill. Not only can't you get rid of the bad business, it keeps growing. The theory that diversification is risk-averse is wrong. It's wrong because an unprofitable line is never going to become profitable again.

The third factor ¾ Wachtell has the best work ethic of any firm in the country. A higher percentage of Wachtell's personnel have a diligent work ethic than any other law firm in the country. This too is a function of the age of the firm. Wachtell has relatively few people who are over 48-50, and the people at Wachtell who are over that age are a very diligent group. They deserve credit, a lot of credit, for maintaining that work ethic. I'd guess that 90% of Wachtell's lawyers share their work ethic. At a firm like this one, there might be [one seventh of the] lawyers who have that work ethic.

It takes all three factors. If they just had the other factors but not the takeover work, they'd have been very successful but not as successful as they have been. If they just had takeover but not the other factors, they'd have been very successful but not as successful as they have been.

Wachtell is an intricate house of cards. The preceding analysis seems too simple. It also overstates the importance of M&A work. As the analyst observed, 'Virtually all of the most successful firms have been major presences in takeover work.' Indeed, Wachtell was far from the dominant presence in M&A cases. Powell (1986, p. 40) noted, 'Skadden Arps . . . was involved in 60% of all major mergers and acquisitions during 1985 and Wachtell Lipton in 45% (Corporate Control Alert February 1986).'

Every concise analysis seems too simple. Wachtell contains many elements that fit together and reinforce each other. Each element is individually a flimsy component with which to build an institution, and some elements are individually farfetched. Yet, they fit together so well that removing one element might undermine the whole structure.

I found it impossible to array the quotations in a cleanly linear fashion: For example, Wachtell's success with M&A cases arose partly from its ability to innovate, partly from its use of teamwork, partly from its willingness to practice law 168 hours a week, partly from its self-confidence, and partly from the personalities and abilities of its founders. These elements in turn interrelate with its high recruiting standards, culture, compensation systems, transactional practice, history, and social environment.

The cards forming a house stay up because they oppose each other. Likewise, Wachtell is internally inconsistent, in conflict with itself. For instance, in a profession that emphasizes individualism, it hires supremely self-confident lawyers and asks them to subordinate their individuality to teamwork. Although it specializes in difficult areas of practice and emphasizes the high quality of its work, it gives early responsibilities to associate lawyers, makes partnership decisions early, and promotes a high percentage of associates to partner. Although its policies call for transactional practice and some lawyers emphasize their independence of clients, rainmaking is on many minds. Whereas the mythology says 'management devolves on those who will do it,' it is senior partners who make case assignments, who 'lean on people,' and who make 'a lot of major decisions . . . over lunch.' The firm's founders say they have given low priority to income, and they seem to be foregoing personal income to build a firm. Thus, the founders are hoping to attract lawyers like themselves, yet no potential or current employee can ignore the very high incomes that Wachtell offers. Lawyers who were social underdogs have become the professional elite.

A house of cards can grow stronger as the builder adds cards, but growth also makes the structure less stable. Policies of early promotion and high rates of promotion, and possibly clients' resistance to high fees, compel Wachtell to grow; yet growth is posing serious challenges of socialization, recruiting, and demand for services. The current 100-plus-lawyer firm is probably much less integrated and less stable than the 24-lawyer firm of 1974.

Wachtell is an elephant. Like the blind men who tried to describe the elephant, various participants in and observers of Wachtell see different organizations. Wachtell's complexity is one cause of ambiguity, and its internal inconsistencies are another.

To explain Wachtell's success, one must point to many factors ¾ converting disadvantages into advantages, successful recruiting, case selection, lawyers' efforts to live up to their own aspirations, a culture that promotes supreme effort, emphasis on high quality, disdain for administrative costs, the M&A fad, collegiality, teamwork, an extreme ethic of client service, founders who are willing to trade financial rewards for organizational ones, the differing personalities and values of the four founders, success that feeds on success, and luck.

It is no wonder that the partners disagree about what Wachtell should do next. The firm is not a coherent unity, and it justifies different interpretations of 'reality.' Is control more democratic in creditors' rights than in corporate law or litigation? Is there enough entrepreneurship? Does Wachtell offer a warm, collegial work environment or does it consume its personnel? Is Wachtell egalitarian or paternalistic, or is paternalism a prerequisite for egalitarianism? Does the firm's success arise from its method of organizing or from the exceptional abilities of a very few? Does Wachtell need a strategy or does it already have one? 'Task forces are the essence of expertise,' and 'if you do a superior job there will be more demand for your services than you can meet.'

Law firms, and other KIFs, tend to attribute their successes and failures to individuals. For example, Gilson and Mnookin (1989, p. 572) wrote: 'At the time of the initial hiring decision, the law firm is unable to tell which among its pool of new associates will come to possess the knowledge and personal attributes that the firm requires in a partner. The firm is uncertain not only about an associate's legal skills, but also about more subjective personal characteristics ¾ for example, co-operativeness, maturity, the ability to gain respect of existing clients and to recruit new ones ¾ that traditionally have been important to the partnership decision.'

Such interpretations assume that 'personal characteristics' are indeed personal. The Wachtell case suggests that personal characteristics reflect organizational culture and policies. Wachtell has no better information about prospective employees than any other law firm, yet more of Wachtell's associates achieve partnerships and do so earlier, and Wachtell's partners have external reputations for unusually high quality and especially hard work.

Wachtell is a butterfly. Butterflies are elegant creatures, airy and colourful. They seem barely to touch down on flowers, branches, or leaves. Although butterflies are easily injured and short-lived, nothing lives forever. Some butterflies might choose to live longer at the cost of less beauty; others might risk their lives to attain more beauty. Wachtell too is an elegant, colourful creation that flits from one success to another, and almost no one will be surprised if Wachtell metamorphoses into something more ordinary.

Wachtell flits because it opportunistically goes where the flowers look brightest. Some observers allege smugly that Wachtell's success is a result of a fad ¾ the M&A one. To me, this appears to be a correct statement, but not in the sense that its speakers intend.

Fads always happen. Social changes are inevitable and frequent. The important point is not that Wachtell benefited from a fad, but that Wachtell turned a fad into an opportunity. Indeed, several of Wachtell's opponents suggested that the firm both helped to stimulate the M&A fad and took actions that shaped its character. When the M&A fad faded and recession developed, Wachtell shifted to creditors' rights and bankruptcies. And when the recession ends, Wachtell will turn to something else. It doesn't require a specific social current because its personnel are very proactive and very, very able; they might be able to turn almost any social current into an opportunity. In 1993, Wachtell is emphasizing, more than before, its capabilities in taxation, antitrust, and real estate; and it is promoting its expertise in bank mergers and in recapitalizations of and regulatory compliance by financial institutions.

Some people protest that one should not hold Wachtell up as an example for imitation. They say the firm makes an appalling prototype because it turns an occupation into an all-consuming passion. One response to this protest is that people have the right to dedicate their lives to their occupations if they so choose and it is not only those who work at Wachtell who do this. A second response is that Wachtell cannot serve as a prototype for many firms because it is so difficult to imitate.

Wachtell is more unique. All organizations are unique, but Wachtell is more so. Although it shares many properties with other law firms, it pushes a few properties to extremes that no other law firm attains, it combines properties in a way that no other firm duplicates, and it may possess a few unique resources.

Wachtell is very much a product of a time and a place. Its founders' values fit into the 1960s, and its founding reflects the New York City legal system of the 1960s and New York City's ethnic diversity. Wachtell is also very much a product of specific people ¾ Lipton and Wachtell with charisma and off-beat ideas, Katz and Rosen with commitments to democracy and teamwork. What if Wachtell's first major client had not posed difficulties that stimulated the founders to opt for a transactional practice? Indeed, what if Martin Lipton is truly the best corporate lawyer in America and what if the firm is basically an amplifier for his talents? How would an imitator obtain a Martin Lipton?

One strong evidence that Wachtell is difficult to imitate is the lack of a twin. Although other law firms crave Wachtell's high status and stratospheric fees, either they cannot reproduce the conditions necessary to elicit these or they have refused to make the required tradeoffs. Observers often contrast Wachtell with Skadden, Arps, Slate, Meagher & Flom. Skadden Arps opposed Wachtell in many M&A battles, and Joseph Flom's reputation for creativity and good sense equals Martin Lipton's. Skadden Arps very likely received fees for M&A work resembling those paid to Wachtell. But Skadden Arps used this injection of wealth to try to become 'a complete financial services company.' It has allied with affiliate law firms in a dozen countries, and in 1990, it employed 1113 lawyers.

Deviance plays a powerful role in Wachtell's success. The law industry needs and can support very few firms of last resort, very few emergency medical teams. One can imagine a second Wachtell or even a third, but not five or ten. If there were five law firms with similar abilities, they would not have several times as much work as they could do, they would not be able to choose their cases, and they would not be able to charge significantly higher fees than other firms.

Nevertheless, someone could probably create a second or third law firm like Wachtell. O: 'I don't think it's a formula anybody could follow but it could happen again.' O: 'Why hasn't it been repeated? There's no question in my mind that it can be repeated. It hasn't been because lawyers are so risk-averse and we pay them so much.'

Someone could also create KIFs like Wachtell in other industries. Maister (1985) pointed to one-firm firms in accounting, consulting, investment banking, law, and the military, and one can visualize them in education, marketing research, product development, scientific research, and software. But complexity and peculiarity do make Wachtell difficult to imitate. This firm's story seems to show that it is not sufficient to assemble two or three crucial elements or to assemble many conventional elements. Those who aspire to exceptional success must integrate many elements, some of which are abnormal, and must put them together in unique combinations that may not work or that may meet environmental hostility. Indeed, the fusion of complexity and peculiarity are probably what makes exceptional success rare. Furthermore, both complexity and peculiarity offer bases for the destruction of exceptional success. Complexity means that there is a high probability of losing a few crucial elements out of many, or of opposing elements getting out of balance. Peculiarity means that there is a high probability of the peculiar elements being lost.

Wachtell's story says a great deal about what it takes to attain exceptional success, but it also says exceptional success is very difficult to attain and something most people would be unwilling or unable to attain. Like the Grand Canyon or the British Royal Family, Wachtell challenges the premise that something is only worth observing in order to imitate it.


Note: I owe thanks to many who contributed data, time, ideas, insights, and contacts. This article reflects help from Murray Bring, Andrew Brownstein, Joan Dunbar, William Evan, Arthur Fleischer, Joseph Flom, Blaine Fogg, James Fogelson, Stephen Fraidin, Eliot Freidson, Melvin Heineman, Dennis Hersch, Ruth Ivey, Morris Kramer, Robert Landes, Joanne Laurence, Karen Legge, Martin Lipton, Joanne Martin, Joanna Martinuzzi, Alan Meyer, Theodore Mirvis, Connie Monte, Robert Nelson, Harold Novikoff, Lawrence Pedowitz, Fioravante Perrotta, Joseph Post, James Ringer, Lawrence Rosenberg, Stephen Volk, Herbert Wachtell, Alan Whitaker, and some who asked for anonymity.




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