Daniel Neff Of Wachtell Lipton: On Leading The Market’s Most Prestigious Law Firm

The following post originally appeared on Forbes | February 24, 2016

A classic is a book that doesn’t have to be written again. ~ W. E. B. Du Bois

The classic law firm model – or, in the words of Dirk Harlacher, the “one collegial” firm – looks much different than today’s goliath law firms. Law was practiced from a single office. Values, methods of operation, work expectations, and the like – i.e., cultures – were highly homogenous. Partner compensation was lockstep. Performance was managed with mutual monitoring and adjustment. Matter engagement was highly selective. Career advancement was a strict “up-or-out” tournament. And the list goes on. If a firm could balance these aspects with mastery, they became very successful in their practice.

But, as market pressures built over the decades, the challenge of balancing all of the classic firm’s gears multiplied, causing most firms to shift in their composition. Footprints, practice portfolios, and lawyer volumes have expanded dramatically. Compensation models have become more complex. Cultural heterogeneity is the norm. Career advancement has morphed into the “elastic” tournament… This list goes on, too.

But what if a firm was able to orchestrate the classic model with perfect harmony, even in today’s pressure cooker? Well, you would have Wachtell Lipton. Ranked as the most prestigious and profitable law firm on the market, they have been wildly successful. And as the pressure in the market builds, their stock continues to go up. Because of the firm’s immense talent, hard work, and an ironclad commitment to their classic composition, they are more relevant today than, perhaps, any other law firm – in bet-the-company matters, in particular.

Below we hear from Daniel Neff, co-chairman of Wachtell Lipton, about various aspects of the firm’s inner-workings, including their compensation, the development of their reputational capital, matter selection, client relationships, and more. Please see a revised (and edited for readability) version of our exchange below:

On The Core Philosophy That Wachtell Lipton Views The World Through

Parnell: let’s start out with talking about how Wachtell Lipton has managed to arrive at such a coveted position in the market. With the credence nature of legal services making it more challenging to discern good from great, things like prestige, branding, and reputational capital are very important in the success algorithm of a firm. At a 20K or 30K ft. view, how do you think that Wachtell Lipton has achieved this position?

Neff: We have a core philosophy based on trying to play a valuable role as outside counsel on matters which are extremely significant to our clients. We’ve had the same philosophy for as long as we have been in business — we are in our 51st year — and the market has moved in our direction.

Back when I started, which was in 1977, Wachtell Lipton was a successful, small firm led by extraordinary founders. The firm had 35 lawyers at the time, with great ambition to make its mark in the world. The firm had a strong reputation, enormous ambition, and great lawyers, but it was not regarded in the same breath as the big names of the time. But the philosophy was always the same: We were striving to work on sophisticated, challenging, and crucially important matters where lawyers can make a difference.

Now, the U.S. legal market is extremely sophisticated; much more than in the past. There’s a segmentation of firms and of expertise; there’s an intense amount of media coverage of law firms, and information is ever-accessible. Within that highly sophisticated market, companies and other users of business lawyers are willing to pay for highly experienced, knowledgeable lawyers with judgment in the types of matters they’re handling. They seem less and less willing to pay for, I guess the expression is, “learning on the client’s nickel,” or for teams which are larger than what they consider to be necessary.

If your company has a serious problem, you want to go to the experts. And if the experts can make a difference, if they can help solve a major problem, that has a lot of value. These types of matters — high-stakes litigation or investigations, takeover or activism defense, important deals — have always been the focus of our practice. The in-house movement has gained a tremendous amount of traction — in some instances we have clients with legal departments that are larger than we are — and the benefit of offering our clients a combination of relatively specialized expertise and a vast amount of judgment gained through experience is attractive to them.

In handling these types of matters, we use different staffing than most other firms. We are partner heavy, and have extremely hard-working partners. That has always been an important part of the culture and of who we are. A well-known quote attributable to one of our former partners who is a professor at Harvard Law School is, “Becoming a partner at Wachtell Lipton is like winning a pie eating contest, and the prize is that you get to eat more pie.” It is true. When you become a partner here, you keep doing the same thing you’ve been doing, at the same level of intensity, but it gets more and more interesting as you gain more experience and have the opportunities to advise in, and be involved in, the types of matters in which we are involved.

On Replicating Their Model

Parnell: Success can be a double edged sword, as inertia and defensive positions might arise from it. Wachtell Lipton has been ranked – by Vault – as the most prestigious firm on the market for 13 years running. You are also the most profitable firm on the market. What are your thoughts on that? Did you think that the firm would become so successful? Is it difficult to avoid hedging on the complexity of the matters you are taking on?

Neff: I actually joked about prestige when I was coming out of law school. People asked, “Why aren’t you going to a prestigious firm?” At a party 10 years ago, someone I knew in law school reminded me that when I started my career I had predicted that Wachtell Lipton would become an extremely prestigious firm. I made that prediction because I thought that the pieces were in place to build a top firm, but did I know it was going to work out the way that it has? You could only hope. I thought that it was going to be an extremely good and successful law firm, but I didn’t foresee these changes in the market from which we have benefited. I didn’t foresee the in-house movement becoming as powerful and important as it has. I didn’t foresee the great recession of 2008, which ultimately enhanced our market position, as typically occurs for us in tough markets.

However, you can’t take the view that whatever exists today will be forever, and you have to stay humble and alert.

If your assessment of prestige accurately reflects where we stand in the market, one of the great benefits is the quality of young lawyers that we attract through our recruiting process. We have remarkable young people. I look at their resumes and feel a bit guilty: Many of us would not have been hired. (Laughs)

But, there is a downside. The business law market has become extremely competitive. And if you believe your press clippings and stop doing what makes you successful, you’re going to be in trouble. One of the things that I constantly harp on is, don’t read your press clippings, including surveys about prestige. Your reputation is what it is because of what the firm did yesterday and the week before, and you have to keep moving forward.

On Their Definition Of Expertise

Parnell: This question is perhaps a bit obtuse, but necessarily so: How would you define “expertise?”  There are a lot of firms — perhaps all of them — that say that they have deep levels of expertise. They are “experts” in what they do. What are the attributes or criteria that Wachtell Lipton, as a firm, looks for in order for their lawyers to be considered “experts?”

Neff: All lawyers who specialize in some manner will have expertise. Our practice areas involve matters which are highly significant for our clients, such as deals, activism matters, white collar criminal matters, high-stakes litigation, and bankruptcy situations. Often the matters can be career makers or breakers for the executives involved. So it is a combination of extensive knowledge and judgment combined with experience applied to situations that are highly consequential to the individuals and companies involved – that’s where our expertise comes into play.

I think that’s what sets us apart: The complexity and the consequence of the matters that we’ve been involved in.

On Institutional Relationships

Parnell: Now, your relationships with your clients — how would you describe these in a generalized way? Does Wachtell Lipton look to find and foster institutional clients? It sounds like the way that you choose your work is more matter, rather than client, based. Certainly no individual client has dominion over all of the most challenging matters in the market at any given time. What are your thoughts on that?

Neff: We have an interesting mix of individual matters and institutional clients. Some clients rely on us for a considerable array of actions and decisions. Others will take the view that “If I’m ever involved in some kind of contested situation, you are the people I want to call.” Then others are in the middle, and take the view that if it’s an important matter — it may or may not be bet-the-company, often not — that we are the firm that they want involved. And, so, each situation and each client is different. It’s an interesting blend. It’s all self-selecting and we can address all of these matters effectively.

On Matter Selection

Parnell: Regarding matter selection, your website says, “We focus on matters that require the attention, extensive expertise, and sophistication of our partners.” Can you expand on that a bit?

Neff: The key to that statement is “of our partners.” If you look at our firm structure, it’s much more partner heavy than other major firms in New York or other major business centers. In a takeover matter, an activism defense, big-ticket M&A, certain types of litigation, we believe that the market is rewarding us because we have a great deal of experience and success.

Also, when we hire younger lawyers, we hire a much smaller incoming class than other firms do. Our summer program is much smaller. We want to get the best younger lawyers, and we want to get them up the learning curve quickly because we’re not operating under the assumption that there will be significant turnover every year, and we will just have to restock the associate pool. We want the younger lawyers that we bring in to understand, and become comfortable with, and to participate effectively in, our system, which offers them a lot of responsibility. It only works with young lawyers who are extremely able, and extremely committed. That’s how we most effectively address the client’s desires. They don’t want lots of lawyers on their matter if we can effectively handle it with leaner staffing. And they don’t want to be paying for the training experience of younger lawyers who have less experience. After three years here, our people have seen a lot. And frankly, I think that they are regarded as attractive to other employers. That seems to be our history. Other employers know our lawyers have worked very hard, have seen a lot, and have had a very rich experience in terms of becoming business lawyers at a very high level.

Parnell: So leverage is not a focus of your firm’s business model, your firm’s finances.

Neff: Absolutely correct. We’re selling expertise and experience and judgment. We are not selling lawyer hours.

On Their Compensation Model

Parnell: Regarding compensation: It is fairly unique at this point to have full blown lockstep compensation. The market has placed a lot of pressure on firms to modify this. Can you talk about that a bit? Do you see this changing at all in your future?

Neff: We certainly hope not. Without our culture, lockstep wouldn’t work. Also, I doubt it could work in a 1000 lawyer firm, but we’re not. I’m sure it would be much harder in a firm spread over many geographies, in comparison to our one office model.

Something very important to us is that two of our founders are still extremely active and extremely valuable in the practice, working every day on major matters. They laid out the firm’s guiding principles, and the principles seem to be more modern, and more valuable, as time goes by. They established the culture and created the lockstep compensation system which has been an essential part of our culture.

We have a seniority-based partner compensation model that escalates in increments every year. Although this may seem counterintuitive, it results in a very enjoyable way to practice. You’re not worrying about “What’s in it for me.” You’re worried about “How can we do the absolute best deal, or solve the most challenging problem, or achieve the best outcome for the client?” If we do that, if we achieve great outcomes, everything else takes care of itself. And we can achieve the best outcomes by people getting together as a team, and as thoughtfully as we can, decide what’s the best way to address the situation.

You watch a situation like Dewey & LeBoeuf with the spread of, say, twenty to one between the top compensated partners and the least compensated partners. To us, an approach like that is not designed to produce the best outcome. It certainly risks generating all kinds of internal resentment. Sometimes we joke with each other, saying, “Well, I originated that matter.” And that’s our way of acknowledging that we are different, and we are pleased to operate that way. If we get a good outcome, everything else will take care of itself.

On Their Task-Force Approach To Legal Services

Parnell: On your website you talk about your firm working on a task-force basis. Can you expand on that a bit? What does that mean, exactly?

Neff: I’ll give you an example. We are working on a deal right now that has a white collar issue and also a fairly typical class action securities litigation. We sit in a room — the white-collar expert, the securities and fiduciary duty defense expert, a number of our other colleagues, and me, and we ask, “If you do this in the white-collar matter, how does it affect the securities/fiduciary duty matter, and vice versa.” We are all physically together. We are all sharing ideas. We’re talking out problems. The fact is, what we do is a team sport. You just can’t get there, in terms of delivering a great outcome, if you have real strength in just one area, but it’s not across the board.

We are bringing our best talent, as needed, to the situations that we face, all the time. If we have a takeover defense that involves a trial, I could go to someone whom I regard as a great trial lawyer and say “Can you take this on?” And they will normally say, “of course.” If there’s an appeal in that case, I can say to that same person, “You’re a great trial lawyer, but the guy in the office next to you is the best appellate lawyer I’ve ever seen,” and he’ll agree. Here, you leave your ego at the door and figure out what’s best for your clients. And if it’s best for your clients, then it will turn out to be best for the firm. We rise and fall by what we achieve for our clients. Our victories are “Wachtell Lipton” victories, rather than “this person’s” and “that person’s” victories.

What makes me happy — and this happens regularly — is when one of our clients says, “All of your people were great.” That’s a source of tremendous pride for us. But we are designed to generate these types of compliments. That’s how we can produce the types of outcomes that benefit our clients and enhance the firm. It is also a reflection on the extraordinary quality of the young lawyers who come here.

On Technology And Innovation

Parnell: There is a huge push to innovate from a technological standpoint in the market today. Are you paying attention to any types of new technology as the market shifts?

Neff: Of course, up to a point. Importantly, we think we’re selling expertise, experience, and judgment. There is no technology – at least not yet — that disintermediates the conversation where you tell a company’s chairman, “Here are my thoughts on how to explain this problem, this situation, this litigation, or this deal, to your board of directors. Here’s when I would call them; here’s what I would say.” If that gets outsourced, we’re all in big trouble! That’s the benefit of the practice that we’re in, so long as we continue to succeed in doing this part of the practice.

On the litigation side, we have been an early mover on predictive coding and have been outspoken about it. We certainly understand why clients don’t want to spend millions of dollars, sometimes per month, on having heavy discovery reviews conducted. But the idea of outsourcing or relying upon technology for critical research or critical judgment, we have not done that.

On Their Strategy

Parnell: Can you talk to me about Wachtell Lipton’s strategy over the next 2 to 5 years? How do you plan on approaching the market as it continues to evolve?

Neff: I’ll say this: We constantly look at where we think opportunities exist, and we move in the direction of what we perceive to be opportunity. But I don’t want to be more specific than that. I think we have a pretty good nose for anticipating developments and catching trends early, but to the extent that we see new opportunities, we’re not going to broadcast that.

If you look at REITs and REIT M&A, and separating real estate assets from operating assets, we were early movers on those. We were early in spotting the trend, and working on, corporate inversions. Part of this is that we try to take a holistic view of what’s going on in the market. Part of it is that we have great clients and they are constantly thinking and evaluating. We get the benefit of knowing what’s on their minds.

A crucial aspect of our culture is our openness to innovation, to doing things that are different or unique. The development of the poison pill over 30 years ago is just one example of this.

On The Way That They Bill Clients

Parnell: I’m sure that you saw a while back that The American Lawyer had released an invoice to the public, and in a nutshell, it looks like you tied the fee to the size of the transaction. Can you expand on that a bit — how you bill your clients?

Neff: Our billing is based on a combination of factors. Critical factors include how effective we were — how instrumental we were in achieving a good outcome; the difficulty of the matter; the level of commitment of resources is also important.

A recent example will help to explain: We worked a deal last year that we thought was going to go smoothly, and that would be done in four months. But it turned into a real battle and required 15 months to complete because of antitrust issues and a competing bidder’s challenge. In terms of our relationship with the client, though, a 15 month exposure is the best thing that could’ve happened. The client kindly said, “Wow, we could not have gotten this done had we hired somebody else.” That reaction was extremely satisfying. If you do top-quality work, and the client and the law firm produce very good outcomes, billing is not difficult to resolve.

If our clients feel like they are not getting good value, our business model won’t work, nor will our approach to billing. We’ve done it this way for over 50 years, and virtually every year we’re busier than the prior year — outside of cyclical downturns. In reality, we know, and the client will know, if our services were as they were touted. If they are, the client is quite willing to pay. And if they’re not, they’ll let us know.

On The Legal Market Over The Next 5 – 10 Years

Parnell: Now, the market. What do you see over the next 5 to 10 years? From your perch, what do things look like?

Neff: I think there seems to be a natural progression; almost like a law of physics whereby the strong will continue to get stronger. This is not to say it is inevitable, but success does breed further success.

There are lots of other ways for law firms to be successful other than our approach. Some of our more traditional New York-based competitors have good strategies to be successful. Skadden, for instance, has a totally different approach and a totally different mindset than we do. But it’s a good strategy and it’s well implemented. There are lots of ways to succeed, but you need to have a match between a strategy that makes sense, people who oversee implementation of the strategy, and lawyers who are good at what they do. I don’t predict a lot of Wachtell Lipton imitators. It takes a lot of different pieces working together – including culture, talent, practice areas – which all need to make sense in developing and implementing a strategy.

More generally, I think the abundance of information about what law firms do is part of what accelerates the strong getting stronger. If potential clients are looking to engage in a certain type of transaction, they can read the multiple outlets for coverage of the law firm industry, and they can see that, in our case, we have worked on something like 12 of the 20 biggest spin-offs. That information used to be difficult to obtain. Now it’s fairly readily accessible, and that enhances the possibility that we’re going to get a call from somebody that we don’t know. Because of the abundance of information, firms with experience in one area, or that have a track record of success, will be more effective at getting the next matter, and the matter after that. All of this builds on itself.

On Skill Development

Parnell: Let’s talk about skills that you would focus on developing. If you are a mid-level partner, with everything that you know today, where would you focus on developing your own skill set?

Neff: I would try to understand my clients’ businesses and their concerns, at least at a macro level. You learn a lot just by talking to your clients – “How’s the business? How did that deal work out and why?” When I finish a deal, I’ll call the client back six months later and ask, “How do you think it’s going?” You learn things if you ask.

A part of it is attitude. You have to understand that it’s a privilege, and not a birthright, to work on the types of matters that we are interested in handling. These are literally the most consequential matters in people’s careers, and you have to walk in their shoes. Clients know if you care intensely about their matters, and they gravitate to counsel who take that approach.

Also, if I was a mid-level partner, I would try to find a mentor who does all of these things well. I’ve been blessed: The quality of mentorship from which I’ve benefited is outstandingly high. I have tried to pass on to others my own great experiences as a mentor. It’s critical to learn from people who have achieved a level of mastery of what we do.

Also, this is a cliché, but I think it works: You have to think about your matters in the shower. That’s part of caring intensely about your clients and their matters. Similarly, when you’re traveling, make the extra visit. Don’t be reluctant to call clients and say, “I’m in your neighborhood. Can I come by?”

The mentorship piece, though, is really key. If you are trained during your apprenticeship — and the apprenticeship of a business lawyer last for many years— by someone who would cause you to say, “What would he or she be doing now to solve this problem?” then you know that you have very good training and immeasurable assistance in your own career.

Email: [email protected] Twitter: @davidjparnell

Books: The Failing Law Firm: Symptoms And Remedies; In-House: A Lawyer’s Guide To Getting A Corporate Legal Position