There is a good article in the 7 May
2011 issue of The Economist, "A Less Gilded Future."
Although I do not agree with a few minor points, it describes how easily a
well-established law firm (in this case, the U.S. firm of Howrey, LLP) can go
over the edge.
The two issues that Howrey's former
managing partner cited in the article were obvious to many observers at least
five years ago. (To be fair to the former Howrey partners, I assume that a more
thorough analysis by him was cut during editing.)
Even so, many law firms negotiated -
and continue to negotiate - these two challenging economic situations very
successfully, in some cases improving profits even when revenue remained static
or declined. Some of them accomplished this without draconian cuts in staff or
closing offices.
Water on the Promenade Deck
The danger arises - almost always
silently and suddenly - when law firm partners:
- Ignore the warning signs;
- Reassure themselves that the dangers don't apply to
them;
- Focus only on short-term results and overlook long-term
implications; or
- Assume that they can stay the course and survive
through force of will.
In short, they don't see the danger
until the water is already sloshing around on the Promenade Deck.
Who could have foreseen?
One of the most frequent rhetorical
questions that I have heard in the legal profession in the past two years has
been, Who could have foreseen such a crisis? The answer is that
many law firms did see it coming and were ready to deal with it. My colleagues
and I in Walker Clark, LLC, were advising our law firm clients as early as
2002-2003 to anticipate and plan for a significant economic crisis by the end
of the decade, which could fundamentally shift the paradigms that governed the
mutual expectations of law firms and sophisticated purchasers of legal
services.
The article in The Economist
offers some good observations about the characteristics of U.S. law firms that
have survived. I have minor disagreements about some of the conclusions that
the authors draw; but the authors' discussion nonetheless points out
important issues for law firms that want to "go global" or pursue a more
limited international expansion.
Read the last paragraph first.
I believe that it is the most
important part of the article.
Many bosses of law firms realize
that the profession is changing in ways that will be uncomfortable for some.
They are adjusting to this, but Howrey's fall shows just how fragile even a
55-year-old firm can be. Since a firm's only real assets are its partners, when
a few departures turn into an exodus, the end can be shockingly quick.
This is what l call the "death
spiral" of a law firm. Usually the first signs of impending crisis are partner
departures. These are the people who decide to abandon ship while they can,
before the firm passes the point of no return. When partners leave, clients
soon follow.
All of this reminds me of what I
believe to be the most horrifying end to any short story in the English
language: the final paragraph of Edgar Allan Poe's "MS. Found in a Bottle,"
first published in 1833 in the Baltimore Saturday Visitor.
Edgar Allan Poe (American writer,
1809-1949)
In the meantime the wind is still in
our poop, and as we carry a crowd of canvass, the ship is at times lifted
bodily from out the sea - Oh, horror upon horror! the ice opens suddenly to the
right, and to the left, and we are whirling dizzily, in immense concentric
circles, round and round the borders of a gigantic amphitheater, the summit of
whose walls is lost in the darkness and the distance. But little time will be
left me to ponder upon my destiny - the circles rapidly grow small - we are
plunging madly within the grasp of the whirlpool - and amid a roaring, and
bellowing, and shrieking of ocean and of tempest, the ship is quivering, oh God!
and - going down.
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