Why BigLaw firms fail

This post on ‘Why BigLaw firms fail’ aims to help prevent future failure of more firms.

In 2014 David Parnell published The Failing Law Firm. Chapter 10 recounts the publically available facts of US law firms which had failed up that time. To these, my colleague, David Goener, and I have added information from public sources on failed UK, Canadian and Australian firms.

Our analysis seeks to understand the circumstances and causes of failure of this group of BigLaw firms. And our purpose is address whether there are early warning signs of failure on which firms can act and prevent disaster?

We conclude the answer is Yes, failure can be prevented in the majority of cases.

Definition of failure

For our purposes, we define failure as one of the following events (1):

• Bankruptcy

• Administration and winding up

• Voluntary dissolution

• Being the subject of a rescue merger. (2)

Profile of the failed firms

A snapshot of the 47 failed firms we analysed is shown in the Notes below.

Reasons why BigLaw firms fail

There is a myriad of reported reasons for failure, many are inter-related. Some are an early cause, later appearing to be an effect. Our meta-analysis reveals 10 clusters of reasons. The reasons are presented below in no particular order or frequency of importance. We judge all to warrant itemisation.

1. Leadership that was ineffectual, asleep at the wheel, not transparently accountable and, in a few cases, blatantly dishonest.

• Leadership in this context refers to the person holding the position of chairman, CEO or managing partner (or equivalent titles) and those working closely with him (none of the 47 firms had a woman in this position). These persons variously included the finance director, practice group or office heads, and others with access to financial information and influence over decisions.

• In most cases, the leader had an autocratic style and managed with the ‘in’ group as a cabal. He made decisions about leases, using excessive debt for working capital, mergers and secret deals with laterals. There was little or no consultation with the wider partnership.

2. A lack of direction of the firm

• In some cases, manifesting as ‘steady as she goes’ in the face of rapidly and often adversely changing external conditions or expansion into areas of law or locations with no logical links to the firm’s strengths.

• In others, failing to read changing market conditions and being left stranded in unfavourable market positions, e.g. during the ‘mid-market merger mania’ of the 1990s that particularly affected the US and Australia.

3. Vulnerability because of exposure to a handful major clients and/or narrow service line offerings.

• In some instances, one of these clients represented more than 30% of the firm’s revenue.

• Narrow service lines exposed firms to deep down-turns in demand for example as the insurance industry consolidated and reduced the number firms required.

4. Poor financial management resulting in ‘nasty surprises’ for the owners and catastrophic cash flow challenges.

• The most frequent cause of financial stress was debt used to expand via new offices and lateral hires or provide working capital.

5. Prolonged tolerance of under-performance by a substantial group of equity partners.

• In some instances, senior partners were subsidised for ten or more years before any action was taken.

6. Perceived inequity in the compensation of equity partners over long periods.

• Pari passu with #5 above, younger and junior equity partners’ objections to gross imbalances between contribution and compensation were ignored.

7. Lack of leadership depth because of poor succession management from the top of the firm down to those holding key client relationships.

8. Merger-related of three kinds:

• Clashes of culture, e.g. one firm being profit-driven and the other motivated by professionalism.

• Merging for the sake of growth rather than service to clients.

• Repeated failures to find a merger partner resulting in loss of morale and desertion of partners.

9. Massive fraud and/or scandal consuming the firm and destroying market and staff confidence and reputation.

10. Partner defections – often in the dying days – as large numbers fled the sinking ship.

Conclusion

In many ways, the next decade will be more stressful for BigLaw business model firms that any prior period. (7) The causes of this stress are chronicled in Remaking Law firms: Why & How and are set out here. In summary:

• Hyper-competition. Hyper-competition will cause changes in industry structure, including clearer delineation of strategic groups and proliferation in the number and type of legal services providers, and intensifying competitive dynamics.

• De-regulation. De-regulation will progressively reduce, even remove, restrictions on almost all aspects of the ownership of providers and the ways in which legal services are delivered.

• Client transformation. The speed and intensity with which clients transform the ways in which they meet their legal needs will occur more rapidly than most anticipate.

• Exponential technology. The impact of technology as a substitute, not just a complement, for lawyers’ services will be more dramatic than most predict.

• BigLaw firm inertia. In the main BigLaw firms will be slow to develop the capabilities in change management and innovation that are needed to remain profitable in the conditions expected after 2025.

Every partner and law firm leader needs to be informed and constantly vigilant about the possibility of failure. Law firms are fragile businesses and readily prone to damage. Very few examples in this analysis can be regarded as black swan events or circumstances, e.g. the accidental fall to his death of Garry Hoy, managing partner of Holden Day, Toronto. Most failures arose from a pattern of behaviour and decisions that (at least with hindsight) should have rung alarm bells in time to stem the slide into failure.

Perhaps it’s surprising that more firms have not failed? (8) I welcome readers’ contributions to the list.

 

Post-script

As a follow-on to this post, David Goener will be writing a piece on the factors that contribute to a strong, enduring firm. 

Notes

(1) The ways a firm can fail are described using terms with which we are familiar. Language may vary by jurisdiction, but the basic mechanisms remain the same.

(2) A rescue merger is one where a distressed firm is effectively taken over by another, usually but not always, stronger firm. The process is referred to in public and with clients and staff as a ‘merger’ for face-saving reasons. The ‘rescued’ firm is wound up and disappears, although in some cases its name or a part of its name is used in the resulting ‘new firm’.

(3) All had 50 or more lawyers at the time of failure.

(4) The extent to which our conclusions apply to smaller firms is not known, although anecdotal experience suggests the pattern is similar.

(5) The representation of countries and the number of firms per country are a reflection of the data we found, and should not be interpreted as indicating the prevalence of failure.

(6) In the main, we studied firms with corporate clients and work types related to these clients.

(7) In viewing the future through a lens of stress I do not suggest it’s all gloom. For every threat and risk, there are at least as many opportunities – which is exactly why Imme Kaschner and I wrote Remaking Law firms: Why & How.

(8) Caveat. Identifying a failed law firm is often difficult; we may have omitted many. If for no other reason, David Parnell’s pioneering work deserves recognition for his documentation of the failed firms in the US.  

 

Firms analysed 

Countries US 37 | Australia 6 | Canada 3 | UK 1 |

Number of lawyers at peak size: 50–100: 10 | 100–200: 14 | 200–300, 8 | 300–700: 11 | 700+: 4 |

Number of domestic offices at peak size: 1: 24 | 2–10: 13 | 11+: 10 |

Number of international offices at peak size 0: 35 | 1–19: 12 |

Year founded 1843–1900: 15 | 1901–1950: 15 | 1950–2000: 14 | Post 2000: 3 |

Year failed 1986–2000: 19 | 2000+ 28 |

Life-span (Year founded – Year failed): 2–10 years: 3 | 20–50 years: 8 | 50–100 years: 25 | 100+ years: 11 |

Clients and work types Ranged widely across the full spectrum of corporate and commercial work, tax, real estate, private equity, technology, insurance, maritime, construction, financial services.

 

Researched and written by George Beaton and David Goener