You Know Your Firm’s in Serious Trouble When …

The only reason for a law firm to invest in competitive intelligence is to help its decision makers prepare to benefit from (or avoid the dangers in) near- and long-term opportunities and threats. Therefore, among their other duties, CI professionals and their clients must track leading, lagging and coincident indicators that identify specific opportunities and threats and that forecast their timing.

Yes, the US economy is recovering from the Great Recession. But like all downturns, it stressed our industry. Some firms, more vulnerable than others, were tested hard. Happily, some of those firms’ leaders took major corrective actions, and their firms are emerging stronger than before. But some firms will not recover.

Below are 20 indicators that your firm—or a competitor firm—probably won’t make it, at least not in its current incarnation. I thank my esteemed colleagues (you know who you are) for suggesting some of these indicators. 

Twenty ways to know your firm’s in serious trouble …

1.    You dread coming to work.

2.    Partners’ doors are closed all the time.

3.    The coffee’s gotten worse.

4.    Firm revenue and headcount have shrunk, and net operating income has fallen even more.

5.    Profits per equity partner are shrinking or flat, kept aloft by partner de-equitizations.

6.    The only thing growing at your firm is the number of non-equity partners.

7.    Women at your firm are third-class citizens, not firm leaders or full equity partners.

8.    You don’t recruit government officials without business because you can’t afford to invest in them.

9.    There’s a big donut hole in your firm’s partnership, where future leaders used to be.

10. All the firm’s largest client relationships are controlled (“tattooed”) by the firm’s oldest partners.

11. Clients are viewed primarily as revenue sources, not objects of real affection and service.

12. Partners won't delegate work to other lawyers until they make their own production numbers.

13. Equity partner compensation is decided by a few partners, black-box style.

14. Your firm has downsized marketing and eliminated the CMO position.

15. You’re still using MS Office 2003.

16. You haven’t had a real firm retreat in years.

17. Your firm has recently been sued for malpractice, discrimination and/or sexual harassment.

18. Clients have started to ask you about the firm’s health.

19. You’re open to a combination, but “worthy” firms’ leaders won’t take a meet and greet.

20. You’ve finally started to say the M-word, assuring reporters your firm is not interested in a merger.

What other leading, lagging or coincident indicators do you think identify a law firm that’s in imminent danger of failing? 

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?

 

Law Firm Economic Cycles -- Part III

This is my third post in a four-part series that offers findings from analyses I performed last fall as my law firm clients were considering how best to respond to the economic downturn. Seven months later, some of my findings from last fall look like a big duh, although others still offer useful insights. (For more details and caveats about this series, read the past two days’ posts.)

5. In this recession, many law firms will be dissolved or acquired by stronger firms.

I maintain a list of “weakest link” law firms—those that are nearing or have passed a tipping point in terms of falling lawyer headcount and net operating income (these two metrics seem to be as good or better indicators of potential law firm dissolution or fire-sale acquisition compared to more arcane metrics). Right now, my weakest links list contains the names of nearly a dozen US law firms among the Am Law 200, the dissolution or acquisition of which would improve the health of competing firms, in some cases dramatically.

As with earlier recessions, this one will drive some law firms to failure and weaken other firms that will fail after the recession ends. US regional markets that are particularly stressed include Atlanta, Boston, Ohio, and the San Francisco Bay Area. During and following this recession, we can also expect to see failures or acquisitions of three or four New York Am Law 100 and 200 firms.

Firms that grew rapidly in recent years, spending or borrowing heavily to fund their growth, will suffer extra pressures during this recession. Those pressures will be hardest to withstand at firms where large blocs of partners have been together only a short while.

These forecasts should not shock anyone. Of the Am Law 100 firms listed in reports describing 1989’s financial performances, twenty no longer exist. Eight were acquired, and twelve have dissolved (see Table 2 below).

Twenty 1989 Am Law 100 Firms That No Longer Exist

A. Eight Firms Were Acquired
1. Brown & Wood
2. Hale and Dorr
3. Hopkins & Sutter
4. McCutchen, Doyle, Brown & Enersen
5. Rogers & Wells
6. Rosenman & Colin
7. Shaw Pittman
8. Winthrop, Stimson, Putnam & Roberts

B. Twelve Firms Have Dissolved
9. Arter & Hadden
10. Brobeck, Phleger & Harrison
11. Coudert Brothers
12. Gaston & Snow
13. Graham & James
14. Heller Ehrman White & McAuliffe
15. Johnson & Swanson
16. Keck, Mahin & Cate
17. Mudge Rose Guthrie Alexander & Ferdon
18. Pettit & Martin
19. Shea & Gould
20. Thelen, Marrin, Johnson & Bridges

6. Stronger firms absorb failing firms’ best assets, producing even stronger firms.

As in the past, many lawyers in firms that will fail or falter in the next few years will remain in private practice. An acquired firm’s strongest assets (lawyers) with the best strategic fit will be retained and assimilated, or they will find even stronger new homes.

Newly acquired and unhappy groups and practices at unsteady firms will be fair game for poaching firms with the resources to invest in new talent.

Odds are also strong that a Magic Circle firm and a top-tier New York City firm will soon find more reasons to merge than to stay single. If I had more courage, I would name here those two firms I fantasize will tie the knot.

Coming soon:

Tomorrow’s post concludes this series and addresses coming changes in:

7. Law firm partnership tiers

8. Marketing and business development functions

Heller to dissolve tomorrow

According to a brief article published by The Recorder at Cal Law sometime after 1:00 pm Pacific time this afternoon, partners of the Bay Area-based law firm of Heller Ehrman will vote to voluntarily dissolve the firm tomorrow, Friday, September 26.