Lessons From Dewey & LeBoeuf: Five Reasons Why Law Firms Fail
Dewey & LeBoeuf’s seemingly rapid free fall has caught the attention of business analysts and bankers as much as the legal community. As a result, the legal industry today is undergoing the same scrutiny as the financial services industry did in 2008.
While criminal allegations, lush multi-year contract guarantees and big debt dominate the Dewey news coverage, most of the analysis of why Dewey failed is wrong either in whole or in part. The underlying reasons for the firm’s troubles are far less complicated than analysts have speculated thus far. Here are five reasons why law firms are failing which might shed light on what happened at Dewey:
1. Refusal to Respond to Economic Changes. Most law firms have continued to raise their billing rates each year since 2008 without recognizing the downturn in their clients’ businesses. According to the 2012 Real Rate Report, the cost of an hour of a lawyer’s time continued to grow faster than key measures of inflation, despite a struggling economy. As a result, larger corporate clients, once the exclusive property of the National Top 250 firms, have discovered the benefits of using smaller regional law firms. Smaller firms can offer more competitive pricing structures and alternative fee arrangements to accommodate the new economic realities of their clients.
2. Arbitrary Multi-year Compensation Contracts. In law firms that have “open compensation,” allowing all partners to know how much money everyone makes, dissatisfaction often occurs when partners compare their own salaries to others. In law firms that have “closed compensation,” there is more of a danger to create disparity in partner compensation. In all likelihood, it was both the guaranteed multi-year compensation contracts and the lack of uniformity in partner compensation that became ground zero for Dewey’s failure. In many law firms, senior partners are unwilling to reduce their compensation during downturns, and they fail to recognize that partner compensation is never guaranteed. Big compensation is possible only for rainmakers who drive profits, and not for clientless superstar lawyers, superstar billers or senior members resting on past glory.
To read the full article and all five reasons why law firms fail please click here for a downloadable PDF.