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Sunday, April 22, 2012

The Death Spiral of Law Firms (and Law Schools)

The Atlantic: The Death Spiral of America's Big Law Firms, by Jordan Weissmann:

This month, the legal industry has been fixated on the gathering storm clouds around Dewey & LeBoeuf, a high-end international law firm based out of New York. The issue is not so much whether Dewey is in trouble -- that much is obvious -- but whether the firm is in the midst of an accelerating death spiral. About 20% of its partners have defected to other firms this year. More may be jumping ship. Former partners are speculating about whether the firm will merely shrink, or be "busted up into a bunch of little pieces." 

But no matter what Dewey's final fate may be, its travails are a sign of something larger, which Bloomberg Businessweek calls out in a new article this week: Slowly but surely, the rarefied world of corporate law appears to be coming apart at the seams. 

Last year saw the collapse of Howrey, a venerable Washington, D.C. firm that had once been among the most powerful forces in corporate litigation. In the last decade, Businessweek notes, a dozen major firms have crumbled, and more may be in trouble. ...

There are any number of ways to interpret the crisis in Big Law, as the top tier of the industry is known, but the story, at its core, is a simple cautionary tale. (Disclaimer: I worked on the business side a firm for about a year and a half.) During the early and mid aughts, firms built unsustainable business models that survived off the froth flying from Wall Street. Now, many have become too bloated to change course and adapt to a new era in business.

It starts with the two graphs below, from a report this year by Citi, which is a major law firm lender, and the Hildebrandt Institute. Do yourself a favor and ignore the acronyms. In essence, it shows the growth in profits at top law firms pre- and post-recession. The left axis on each is a measure of profitability. The bottom axis is the percentage growth of profits over time. And here is the upshot for our purposes: Before the economy crashed, business was plentiful growth was easy. After the economy crashed, business was lean and growth became very, very hard.

Law_Firms_Profit.PNG

You might notice that a few firms still appear to be producing stellar results. In fact, they seem to be doing better than ever. And it's true -- a few are. These are the metaphorical 1% of the legal industry, the elite firms based mostly in New York that have been able to maintain their performance by focusing on the most expensive, sophisticated work. For everyone else, the wrenching changes that followed the recession have disrupted their business. ...

[R]ather than finding ways to innovate and improve profits, much of the legal world has turned to cannibalizing itself. Dewey may be the victim today, but there'll probably be others tomorrow. This is what happens when an industry can't see past the good times, then gets sacked by the bad.

The Legal Whiteboard: The Death Spiral of America's Big Law Firms, by Bill Henderson (Indiana):

Dewey LeBoeuf, like the Howrey firm which failed slightly over a year ago, are almost certainly on the lefthand side of the 2007 to 2010 profitability chart. Weissman's conclusion is pretty simple: the industry is running out of gas. More failures are likely. Unfortunately, I agree.

For the record, legal education's problems are no less severe. There are not enough qualified students to fill the number of 1L seats, so as an industry, our revenues (akin to law firm profits) are going to go down. The entire legal services and legal education industry is undergoing a major disruption. All of this talk of structural change is going to move from the abstract, where we contest its existence, to the concrete, which induces panic in the unprepared. It is going to be very tough. Our character is going to be tested.

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Comments

The Fortune 1000 sized companies and large financials are no longer going to pay high fees for useless work done to train/test associates and to fatten profits.

Posted by: save_the_rustbelt | Apr 22, 2012 10:45:39 AM

I'm sure Dewey, Cheatham & Howe will continue to excel... ;)

Posted by: Dr. Kenneth Noisewater | Apr 23, 2012 6:49:57 AM

If the United States has more lawyers than all the other countries in the world combined does that suggest we may have too many lawyers chasing a shrinking economic base.

Lawyers add zero wealth to our economy. Yes, we need a new legal paradigm.

Posted by: jgreene | Apr 23, 2012 7:42:41 AM

"There are not enough qualified students to fill the number of 1L seats..."

No problem. Just redefine "qualified" to include those who previously wouldn't be permitted to walk past the entrance of a law school, including those you would never even trust to handle sharp objects. The law schools will protect their profits at the expense of the legal profession and the legal system, all to the greater detriment of society. Standards will be lowered if the cash cow is threatened.

Posted by: Esteban | Apr 23, 2012 8:53:58 AM

It would seem to me that legal services are very elastic. It is easy for clients to choose less litigation, more settlements, fewer court appearances, and quicker speedier divorces, re transactions, whatever. Also, legal education can be easily moved to the cloud on the internet as the final result is simply to pass a bar exam in some state somewhere, and there do exist internet based legal educations. Moreover, it is easier than ever to get your legal degree part-time. I predict some nasty bubbles for law firms, legal education, most higher ed in general, legal services, and ....wait for it...newspapers.

Posted by: Keating Willcox | Apr 23, 2012 10:45:57 AM

When "law" degenerates to a mere bureaucratic/regulatory exercise, that is, when a Congress composed almost wholly of rent-seeking parasites passes shoals of unread 2,700-page "legislation" exploiting productive private sectors, the surprise is that of Samuel Johnson's dog walking on its hind legs: "The wonder is not that it is done badly, but that it is done at all."

At the point where "Rule of Law" exemplified by a hyper-politicized yet utterly craven Court system constitutionally incapable of acting in the country's interest [pun intended], defaults to zero, refusing to address such fundamental matters as Executive Branch legitimacy or peculating Legislators' malfeasance on the merits, first institutions then individuals, ultimately the entire civil polity, will seek elsewhere to redress the balance.

Historically, this is a recurrent theme. Alas, de facto American governance since WW II has devolved to an utterly corrupt pay-to-play lobbyist machine, an Iron Triangle of perpetual political incumbents, entrenched administrative fixers, round-table crony capitalists intent not on productive innovation but on outbidding competitors in impenetrable Committee contexts immune to any form of oversight.

When halfway decent private citizens become aware that their so-called legislative Representatives are no such thing; that Courts are irremediably stacked in favor of back-scratching insiders; that their Executive Branch is no better than a thieving mafia pushing an ill-willed collectivist Statist agenda-- then politicians (sic), Fourth Branch bureaucratic/regulatory commissars and gauleiters, monied special-interests of all stripes, will find their services discounted to zero in advance.

Somewhere out there, a twelve-year old potential Cromwell, perhaps a Lenin or other murderous Luddite sociopath, absorbs all this with predatory instincts poised to ride the wave of One World eco-tyranny (or indeed whatever else may come to mind). If and when circumstances offer opportunity as in 1645, 1789, 1914, this scarifying Sulla-in-waiting will emerge unbidden to carry all before him. Rule-of-Law will be the first to fall, carrying its feckless and malfeasant acolytes down with it.

Posted by: John blake | Apr 23, 2012 6:57:46 PM