The real cause of Dewey’s downfall: Optimism

I’ve been reading a lot lately about why Dewey LeBoeuf went out of business, how quickly they went from over $900 million in revenue to a Chapter 11 bankruptcy filing on May 28.

The most detailed account I’ve seen is the cover story in the current issue of the American Lawyer. Based on interviews with nearly three dozen former partners and staff, and detailed reviews of documents ranging from audited financial reports to the firm’s bond offering circular, they concluded that “Dewey’s death was the product of years of bad decisions, and of greed on the part of senior partners” (p. 49). 

The implication for lawyers at other large firms is “Don’t worry.”  It was just a few bad eggs.  This couldn’t happen to you.

I disagree.  This can and will happen to other large firms.

I have no reason to doubt the facts quoted in the American Lawyer, but I interpret them more simply.  Dewey failed because its leaders were too optimistic.  Their business decisions would not have led to bankruptcy a decade ago.  Bad decisions simply did not lead $900 million dollar firms to fail at a time when larger economic forces were pushing all large law firms up.

Ten years ago, there was a lot of room for error.  Now there isn’t. 

As Warren Buffet famously put it, “It's only when the tide goes out that you learn who's been swimming naked.”

Like Howrey, Thelen and Heller Ehrman before them, Dewey failed to adapt to a changing legal marketplace.  The specific causes were different for each of these large law firm failures, but the underlying reason was the same:  leaders were optimistic that the kinds of strategies that had worked in the past would continue to work in the future. 

When I went to my first legal conference seven years ago, I was stunned at the state of the legal profession.  In the 20 years before that, when my company developed training programs for Fortune 1000 companies, we had seen one industry after another squeezed and transformed by technology and competition.  In 2005, when I started this blog, it seemed that the forces of global change had hardly been felt at law firms.

In 2007, I wrote a post arguing that lawyers had become complacent because they were seduced by their own success.  As Bill Gates put it: "Success is a lousy teacher. It seduces smart people into thinking they can't lose."

You might think that the economic events of the last few years would have convinced most lawyers of the need to change.  Change has indeed begun, but I continue to be amazed by how slow it is.

If optimism was the cause of Dewey’s downfall, many lawyers would like to believe pessimism is the cure.  Lawyers are good at pessimism, and some are hoarding their clients and their revenue as a result.

But no one can succeed in business without optimism.  The cure is not pessimism, but a different type of optimism, adapted to the new normal.  Large corporations will always need lawyers to protect their interests.  But now many long term clients are looking for a different approach, in which firms provide more value.

As Indiana Law School Professor Bill Henderson put it in his thoughtful analysis of the Dewey bankruptcy:

To hold onto market share over the long term, Big Law is going to have to reallocate some of its profits and massive brain power toward the development of… products and services that focus on some combination of better, faster, cheaper, or more predictable.

In this new race, there will be winners and losers.  If you’d like to lose, refuse to spend time or money on changing lawyers’ behavior to meet client needs.  Better yet, form a committee to study how to change, and wait for them to agree on a final report.

But if you plan to win, you’re going to need to act fast, to take risks, to embrace innovation, and most of all to figure out how to meet client needs.  The clock is ticking.

Part 2 of our series on Gray Plant Mooty’s approach to legal project management will appear next week on Wednesday, July 25.

Comments

[Dan]

I agree. I cannot believe how many lawyers and law firms still trot out the same ol' same ol' when discussing what they are going to do "to turn things around." If you add up those lawyers and law firms with those who have pretty much stuck their heads in the proverbial sand you are getting shockingly close to 100%.