Sunday, April 22, 2012
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.
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.
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.