A leading U.K. firm appears to be dabbling in a little voodoo economics.
Herbert Smith is a firm that has long enjoyed a reputation for stability and professional excellence. Recently, however, leaders of Herbert Smith apparently have decided, as reported by The Lawyer, to engage in a little voodoo economics by de-equitizing approximately 15 partners.
A principal reason appears to be a desire to boost average profits per equity partner to a level consistent with Magic Circle firms.
We don’t know all of the facts, but on the surface this appears to be a short-sighted decision with potentially crippling long-term ramifications. Part of it might be a reaction to having its merger proposal rejected by long-term strategic allies Stibbe and Gleiss Lutz. (My colleagues at Walker Clark and I were not surprised by that result.)
Part of it might be an effort to pretty up its numbers to be more attractive to the Australian firm Freehills, a very well-regarded banking and finance powerhouse with whom Herbert Smith is currently in very early merger discussions. This could be quite a triumph if Herbert Smith could pull it off.
Whatever the motivation, this is not how sophisticated law firms improve profitability — or their credibility as sophisticated law firms. Average profits per equity partner is one of the least accurate and least reliable benchmarks for the overall business health of a law firm. It is also a metric that can easily be manipulated and abused.
The first steps to boost profitability, even in difficult times, is to pursue a flexible, well-informed business strategy, improve productivity, and to align the firm’s systems and processes to meet or exceed client expectations every time.
Firing or de-equitizing partners is a short-sighted response, frequently motivated more by greed rather than reason. It permanently throws over the side fee-earning capability — even if flawed — when the firm needs it most and makes it more difficult for the firm to recover when business conditions improve. It is appropriate only as a last desperate effort to save a sinking law firm.
I tend to agree with one anonymous comment to The Lawyer’s story:
Not so sure about a slash and burn redundancy programme though, this is a firm which needs to boost revenues and address strategic weaknesses, not engage in that type of divisive and distracting process.
We don’t have all of the facts yet; and it is possible (but I think unlikely) that Herbert Smith’s strategies (the product of something unfortunately called Project Blue Sky) might turn out to be brilliant. Let’s watch this firm closely in 2012. They could be a very instructive case study, one way or the other.