Tuesday, February 26, 2013

Hastening ZombieLaw’s Collapse—and Why That’s a Good Thing

Ignoring the ballyhoo about “The New Normal” and the debate about whether this is BigLaw’s end of days, most seem to agree that the US legal market is overcrowded. It suffers from too many lawyers and law firms.

Like many aspects of our industry, market overcrowding is not new. For years, we have watched some BigLaw firms stagger around zombie-like and refuse to die. They decline in vigor and resort to bottom feeding and submitting low bids on every job in town. Some of these ZombieLaws are highly leveraged affairs with shrunken equity partner castes and even smaller star chambers that oversee closed compensation systems. Other ZombieLaws are over-leveraged and offer a warm bunk to lawyers with small books of business whom no one else will hire.

The disappearance of five such firms would blow fresh wind under the wings of fifty nearby firms and lift them higher. I blogged about this in 2008 when I predicted Bay Area firms would benefit from Thelen’s and Heller’s demises. (See "It's Hard to Accept Intelligence That Breaks Your Heart.") Since then, the Boston and Atlanta legal markets have also benefitted from regional right-sizing. The New York City market is right-sizing now, albeit slowly. In several other overcrowded markets, a handful of firms are feeling and causing each other’s pain.

If I had more resources right now, I would create two online prediction markets. (See Intrade for examples of such markets.) The first market would solicit bets on which US law firms will dissolve by December 31, 2013. The second one would solicit bets on which firms will merge with one or more firms by the end of the year. On January 1, 2014, I would close those markets, open two new ones, and start all over again.

If these markets worked well—and I believe they would, by crowd-sourcing intelligence anonymously from knowledgeable persons who will never go on the record—they would quickly and accurately identify the weakest firms. And, yes, these prediction markets might hasten their deaths.

What a mean thing to do, right? Wrong. It would be a kind thing to do. Depending on your viewpoint, of course.

So how about it—would you place anonymous bets on these two markets?  Which geographic, practice and industry legal markets do you see as the most crowded? Which firms would you bet will dissolve or merge by December 31, 2013?

Monday, February 18, 2013

Pulling Away from the Pack – or Powering with Arithmetic?

Last Friday, The Recorder published an article about FY 2012 Am Law early results:  “Revenue Growth Modest at Many Firms, But Profits Surge.”   Bylined by Julia Love, the article discussed several ways law firms can try to improve their top line performance when revenue stalls, including thinning their ownership ranks.  Three California firms whose FY2012 equity partnership ranks contracted and whose profits per equity partner (PPEP) showed double-digit increases were highlighted. 

Shrinking law firm ownership is an old tradition
The arithmetic potential to improve a firm’s PPEP by reducing the number of equity partners at that firm is obvious and significant.  But it’s far from a new trend.  Firms have been thinning their ownership ranks for over 20 years.  In FY1990, Am Law 100 equity partners constituted 32.8% of all Am Law 100 lawyers.  By FY2000, that metric declined to 27.5%.  And by FY2011, it was down to 22.3%. 

As legal industry metric wonks know, Am Law’s leverage metric also measures the extent of law firm ownership, but is calculated differently – as the ratio of all non-owner lawyers to each owner lawyer (equity partner).  In FY1990, the Am Law 100 collective leverage was 2.05 to 1.  In FY2000, it was 2.63 to 1.  And in FY2011, it was 3.49 to 1. 

How low will law firm equity partnership ranks go? 

I’ll confidently predict that if nothing happens to modify this trend, by FY2020 equity partners will constitute no more than 18% of Am Law 100 lawyers.  Stated another way, in FY2020 the Am Law 100 lawyer population will have at least 4.56 non-owner lawyers for every equity partner. 

If those predictions take away your breath, consider the accounting firms:  In FY2011, leverage at the Big Four was already 10.6 to 1, as reported by Accounting News Report.

Some uses of this competitive intelligence 

As ow iHow you absorb the above information and patterns, consider their import to your firm’s and your competitors’ choices about growth, management and business development models.  For instance: 

1.       How will this continuing trend of shrinking firm ownership affect your firm? 

2.       How will this trend impact your firm’s efforts to increase equity partner diversity? 

3.       What unintended consequences might this trend precipitate? 

4.       To what extent have specific firms’ PPEP been “enhanced” through rapidly shrinking ownership ranks? 

5.       When you factor out those PPEP “enhancements,” how do you interpret individual firms’ actual performances? 

6.       Put another way, which firms are truly pulling away from the pack, and which are simply leveraging the power of arithmetic? 

7.       Between now and 2020, what new business models might your firm or some of your competitor firms create to differentiate themselves and go to market more effectively? 

8.       How could you compete effectively against those new models? 

As Am Law releases more early FY2012 firm results, I’ll be discussing them here.