Law Firm Economic Cycles Part IV

Here’s my fourth and final post in a series offering 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 three posts at this blog.)

1. Many firms will return to a single equity partnership tier.

In the nineties, law firms created non-equity partnership tiers as a tactic to elevate their profits-per-partner performances. The number of non-equity partners in law firms grew in the 2000s, those ranks filled by reliable technicians who did good work and supplemented labor gaps unmet by the associate talent wars.

As a result, many firms now have expensive, middle-aged legal work forces with reduced appetite and aptitude to become equity partners. These non-equity partners supervise associates, a useful function, but one that has an unintended consequence of blocking mentoring of associates by partners who are business owners, a distinction I think is important. It’s interesting that law firm associates’ widespread and vocal dissatisfaction with their professional lot coincides with their greater insulation from equity partner mentoring.

Although few firms have yet announced taken they will action to eliminate completely their multiple partnership tiers, I have long heard firm leaders talk about their desires to return to a smaller, single equity partnership structure for a variety of reasons. Therefore, I view some of the late 2008 and early 2009 partner downsizings as not only housecleaning and paring of practices, by efforts to reduce these non-equity partnership tiers.

2. Legal marketing and business development functions will continue to evolve.

During the recession of 1990-91 and through the nineties, law firms began to engage marketers and marketing methods from other industries. This first wave of professional legal marketers focused on basic marketing services—promotional events, marketing communications, public relations, and branding. Marketing services have expanded over the years to include sales and sales support, decentralized marketing support for practice and industry groups, market research, in-house client feedback programs, and key client programs.

I predict that in the current downturn law firm marketing will undergo a second renaissance. Marketing contributions that were valued 15-20 years ago probably will not make a big difference this time around.

Going forward, competitive firms will double down with even more professional sales support and coaching, key account management, and much more sophisticated competitive intelligence functions. These skill sets will help firms to acquire, expand, and defend their best client relationships. These functions will also help firms add badly needed rigor to their business planning function. Strategy, long pooh-poohed by most firm leaders, is finally seen to be important at both practice group and firm-wide levels. During this global recession and the new-world recovery to follow, law firms now need the early-mover and better execution advantages these functions offer.

And with print journalism on its last legs, law firms’ traditional PR programs will have no choice but to embrace Web 2.0 tools and activities to support the firm’s and individual lawyers’ institutional and personal brands through digital promotion and virtual word of mouth.

Conclusion: Recessions Offer a Chance to Step Forward

Recessions offer opportunities for a law firm to emerge stronger than its competitors. Certainly, a law firm is obliged to do whatever it must to survive in the short term. But the greater challenge for law firm leaders and their advisors is to find and take those positions (invest in resources) that will take advantage of changes wrought by the recession and the eventual recovery. Firms that will be stronger after this recession are those that find and tap new opportunities at the intersection of otherwise disconnected areas of expertise, where change is happening that they can exploit. (USC business school professor Dick Rumelt describes this approach to successful strategy in an excellent McKinsey Quarterly interview.)

The changes this recession introduces to law firms are nearly limitless—energy and environmental changes, client industry changes, political changes, legislative and regulatory changes, dramatic changes in communications and news channels, as well as changes in the legal talent pool, law firm structures, fee arrangements, business processes, and legal technology.

Lessons from the 1990-91 recession tell us that fifteen to twenty years from now, at least a fifth of today’s “leading law firms” will no longer be around, having dissolved or been acquired by stronger firms. Many others will have fallen one or more quartiles in the rankings that matter most—firm revenue, revenue per lawyer, and profits per equity partner. But still others will have ascended dramatically, having done what firms like Latham, Orrick, Dechert, Goodwin Procter, and Quinn Emanuel did in the last fifteen years—finding and tapping new opportunities at the intersection of otherwise disconnected areas of expertise, where change is happening that they can exploit.

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

Law Firm Economic Cycles -- Part II

This post continues the serialization begun yesterday of findings from analyses I performed last fall as my law firm clients were considering how best to respond to the economic downturn. To help them, I parsed US law firm performance data, particularly those from 1989-1996 to identify precursors to and impacts of the 1990-91 recession on law firms’ financial performances.

As noted yesterday, I have long since shared the insights gleaned from my analyses and their early warning benefits with my own clients. Therefore, it’s now appropriate to share them with a larger audience. Which brings us to today's post.

3. Higher-end firms suffer longest from recessions.

Partners at firms with the highest-end practices should manage particularly downward their expectations of an early recovery. A severe recession’s impacts are generally felt longer by the most profitable law firms, which rely on a stream of complex, high-value deals and, therefore, must wait longer for that level of economic activity to reappear and stabilize.

Evidence of the long-lasting effects of severe global recessions on highest-end law firms is offered by their performances during the early 1990s. After 1989, seventeen of that year’s twenty most profitable US law firms failed to produce profits per partner (PPP) higher than their 1989 PPP during at least four of the seven following years.

Overall, the most profitable law firms suffer the longest recession impacts. For example, twelve Am Law 100 firms failed to produce higher PPP for all seven of the years following 1989; these firms included Cahill, Cravath, Davis Polk, Gibson Dunn, Kaye Scholer, O’Melveny, Paul Weiss, and Skadden. Eight more Am Law firms failed to exceed 1989 PPP for six of the following seven years; these firms included Kirkland, Latham, Milbank, Wachtell, and Willkie Farr.

4. Lower-end firms tolerate recessions better and recover from them faster.

The data also show that those firms that generally feel a deep recession’s impacts for the shortest time are less profitable firms with low billing rates and the lowest profits per partner. Even in depressed times, day-to-day legal work does not subside.

Note: The two findings described above are brightly demonstrated by the data in a chart (click here) that I simply was unable to figure out how to include here (I welcome any advice and help from readers about how to do this).