Thursday, May 30, 2013

Why More Law Firms Will Go the Way of Dewey & LeBoeuf

from forbes




This article is by Mark Harris, the chief executive of Axiom, a 900-person new-model legal services firm that serves nearly half of America’s 100 biggest corporations across 10 offices and four delivery centers globally.
Dewey & LeBoeuf, a white-shoe law firm with famous bloodlines and nearly 1,000 lawyers, is a card-carrying member of the industry elite known as Big Law. Only a year ago, Dewey was on the make, wielding its stature and wallet to lure away and hire rainmakers from rival firms. What a difference a year makes. Dewey’s disappointing financial performance has led its leaders to slash or defer compensation for many of its partners and top earners.Now not only has it been hemorrhaging talent (110-plus partners and counting), but it’s instructing partners to seek employment elsewhere and considering dissolution.
The temptation is to view Dewey as an anomaly, suffering from its own aggression, a firm that got out over its skis. And the media has done just that, extensively covering the story of Dewey’s demise with a narrative arc that wonders in awe at how far and fast such a mighty firm has fallen. But Dewey isn’t the only law firm a few key defections away from the abyss. In fact, one could argue that sudden demise and dissolution may be what the large law firm is designed to do best. The structural fault lines inherent in the law firm model, coupled with extreme market shifts, could send several more large firms to the edge of oblivion, giving new shape to the changeless and storied legal industry.
The Dewey saga is just the latest development in a series of struggles facing firms. Most of the business world has been transformed repeatedly over the last 50 years, but the micro-economy of corporate lawyers has been preserved in the kind of pristine stillness usually associated with nuclear waste in an underground salt cavern.
It took an earthquake of a recession to expose the inefficiencies that have long plagued large firms, including the widely despised billable hour and the pyramid structure. These inefficiencies have contributed to a 75% increase in law firm prices (compare that with a 20% increase in non-legal business costs) over the past decade.
Not surprisingly, corporate clients, who pay the bills, are in open revolt. After a long run of meteoric industrywide growth, a 2010 study reported that the total amount spent on legal services had shrunk for the first time in recent memory. That contraction forced the nation’s top 250 firms lay off more than 10,000 lawyers. The picture has stabilized since, but large law firm performance is broadly flat. The firms on the AmLaw 100 list grew a mere 4% last year, and a report by Citi suggests a worsening trend in the latter half of 2011.
As Mike Roster, former general counsel of Stanford University and past chairman of the American Corporate Counsel Association, has said, “The legal profession . . . created its own economic bubble. Now that bubble has burst.”
Of course there are a handful of firms that operate above the fray, overseeing client matters so big that price is immaterial. For the rest of the industry, however, disruptive change looms, and a growing number of law firm managers know they must evolve. Yet despite their good intentions and a clear client mandate to get with the program, law firm leaders are unable to separate their firms from the old ways of doing things.
The problem: their colleagues.
Most law firm partners pay brutal dues for up to 20 years to land atop the pyramid, and any investment in redirection comes out of their own pockets, during the short window of high earnings they’ve suffered decades of hard work to achieve.
Their reluctance to reinvest profits is exacerbated by an even larger problem: Partners can take clients from one firm to another. The portability of the partner’s “book” has weakened the bonds that hold firms together and threatens the identity of the law firm as we know it. The hyperactive market for mergers and lateral partner moves, akin to unrestricted free agency in sports, presents law firm managers with a seemingly intractable dilemma.
Investment in the future, whether aimed at transcending industry pressures by acquiring game-changing talent or at innovating through increased use of technology and more streamlined delivery models, requires a deferment of near-term compensation, and thus it risks inciting an exodus by a firm’s top producers. As if we needed Dewey to remind us, what comes next might not be so pretty.

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