Walker Clark Worldview

For an interesting, but somewhat superficial, analysis of the crisis in big law firms in the United States, read  “A Study in Why Major Law Firms Are Shrinking” by Alan Feuer in today’s New York Times.

I use the word superficial with respect for the space limitations under which the author wrote.  Moreover, because each law firm truly is a unique business entity, it can be difficult to apply the “lessons” from the experiences of White & Case to all law firms, or even to another law firm.   Not all law firms — not certainly not all large law firms in the world — have had to deal with the same challenges as White & Case; nor are the White & Case responses necessarily the best course of action for another firm.

The article also fails to probe the real reasons why some of the most powerful law firms in the world — not just in the United States — have struggled, and in some cases failed, to respond to the economic crisis.  These reasons lie deep within the firm, not with obvious scapegoats such as credit unavailability or the bad economy.  Instead, the real reasons usually indict sensitive issues that many law firms — large and small — are sometimes afraid to recognize, much less to examine.

There are at least four phenomena that can be found in most of the law firms — big and small — that are “shrinking” (which in most cases is a polite substitute for struggling for their lives).

• Partners who have been more focused on their end-of-the-year profit distributions than on the long-term economic health of their firms

This has been an unfortunate characteristic of business generally in the United States.  However, in U.S. law firms, partner self-interest has been fed by the slavish pursuit of “profits per equity partner” as the primary measure of the business health of a law firm.  This obsession was also supported, to a large extent, by the legal press and consultants who have been mired in predominantly U.S-U.K. paradigms of what constitutes long-term success in a law firm.

Sometimes accompanying this factor is the abdication, by many partners in the firm, of any outward expression of interest in or responsibility for the management of the firm.  An “employee mentality” sets in; and partners focus intently on “their” clients and their individual practices, to the exclusion of almost everything else.

• “Dumb as we wanna be” business strategy

Thomas Friedman uses the phrase dumb as we wanna be in his book Hot, Flat, and Crowded (Farrar, Straus and Giroux, 2008) to describe an attitude that assumes that the successes of the past will transition smoothly to the future and that we do not have to do anything differently to prepare for it.

In many law firms, including some of the biggest ones, “strategic planning” has consisted of placing a ruler along side the past performance curve and extending the line upward on the same trajectory. Size and past achievements has been seen as  certain predictors of future success; and if a business downturn should happen, the firm will deal with it when the time comes.  To suggest otherwise was viewed a not being a team player or as disloyalty to the firm.

I get very annoyed when I hear law firm partners whine, “nobody could have foreseen this.”  Nonsense!  Our firm saw the first warning signs as early as 2002 and started to advise our clients back then to begin to plan for a serious financial crisis.

• Viewing associates as fungible commodities

There are some exceptions, but one of the characteristics of most of the law firms that are now in deep trouble is that they badly under-invested in the development of business, marketing, and practice management skills in associates.  “We pay them enough already,” was a statement that I frequently heard.

“This stuff is ‘nice to have,’ but they can pick it up once they make partner.  For now, all we need for them to do is to bill fees,” was another all-too-common comment.

Not surprisingly, many of these same firms have made a pig’s breakfast of the layoffs — not only giving up long-term fee earning potential in order to make the ends meet short-term, but also making enemies for life in the legal profession.

• Woefully inadequate cash reserves

The short-term obsession with putting money into the partners’ pockets created intense pressure to reduce cash reserves in large and midsize firms alike.  These same firms also usually have relatively low capital contribution requirements for their partners.  Many of these firms are now learning the hard way the truth in the old proverb “Even the best law firm is only six months from bankruptcy.”

Norman Clark

Tags: economic crisis, large firms, redundancies

This entry was posted on Sunday, June 7th, 2009 at 17:43 and is filed under economic crisis. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.