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October 31, 2012

Law firm winners and losers

The demand for lawyers is going down, and the supply keeps going up. With clients spending less, the result is a worldwide game of legal musical chairs, with a growing number of lawyers being left with nowhere to sit down.

In 2005, in the first post in this blog, I wrote about an RFP that Tyco had issued to increase the value their law firms provided. Before then, Tyco had used 167 different law firms for product liability cases. The RFP was designed to combine all that work within a single firm to maximize efficiency. To me, the most interesting fact was that when Tyco made their choice, they selected a firm that was not one of the 167: Shook Hardy & Bacon, a firm that they had no previous relationship with.

According to an ABA Journal article seven years later, the relationship grew, and “today Shook Hardy is Tyco’s sole legal services provider for product liability, automobile, and general liability matters.”

The article quoted Dennis Lynch, chief litigation counsel at Tyco, “I think it has worked well because we’ve truly partnered with them…They’ve gotten to know well the players here, the business, products and obviously the law department.”

But that is not to say that building a partnership was easy. The article also quoted Shook Hardy partner Paul Williams who “admits the learning curve for Shook Hardy was steep.”

Firms need to reduce that learning curve, since a recent survey found that 46% of law departments report that they are working with fewer law firms than five years ago, and another 16% report that the number of firms is the same, but they have switched to different ones. When the music stops, you may need some new skills to make sure you still have a place in the game.

Improved skills could even help you save your firm.  You think your firm is perfectly safe now? That’s what they thought at Dewey LeBoeuf, Howrey, Heller Ehrman, Thelen, and Thacher Profitt. Each of these firms had hundreds of lawyers a few years ago, but now the firms are gone. A large number of smaller firms have died as well.

Every law firm that has gone out of business had its own unique problems. But people often use this as an excuse to say: This could never happen to us. Actually, it could.

When the American Lawyer ran a cover story on Dewey’s demise  they interviewed nearly three dozen former partners and staff and conducted 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.” The implication for lawyers at other large firms was: Don’t worry. It was just a few bad eggs. You are safe.

I have no reason to doubt the facts quoted in the American Lawyer, but I interpret them differently. Dewey failed because its leaders were overly optimistic that the kinds of strategies that had worked in the past would continue to work in the future.

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.

As pricing pressures increase, so do the bad decisions.  For example, in “Growth is Dead,” the Adam Smith Esq definitive series on the current state of the profession, Bruce MacEwen has written about “‘suicide pricing’ in response to RFPs… bids—from name-brand firms, mind you—that are so breathtakingly low one wonders how they could possibly make any money. The short answer is they can’t. These bids come in 5, 10, 20, 40% under what my clients think would be reasonable for the matter.. in a desperate and/or deluded attempt to keep the factory whirring away.”

Ten years ago, there was a lot of room for error. Now there isn’t. As Warren Buffet famously said, "It’s only when the tide goes out that you learn who’s been swimming naked."

Large law firms had a great run of success through the first few years of this century, with constant expansion and ever-rising salaries. But that’s over now. As Dan DiPietro, Chairman of Citi Private Bank, put it, “The industry will not return to the golden era of double-digit profit growth any time soon.”

And, as Microsoft founder Bill Gates stated, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

In other industries, many people have experienced great success and thought they couldn’t lose. Here are some of the companies they used to work for: TWA, Pan Am, Eastern Airlines, MCI WorldCom, American Motors, Montgomery Ward, Woolworth’s, Standard Oil, RCA, Compaq, Digital Equipment Corporation, Wang, Drexel Burnham, E.F. Hutton, PaineWebber, and Lehman Brothers.

But the world changed, they didn’t, and now all those companies are gone. So are lots of others.

In the last few decades, the forces of global economic change and technology have radically transformed many industries including telecommunications, airlines, retail, mass media, and medicine. As jazz great Miles Davis said in his autobiography: “The world has always been about change.” These same forces are now transforming the business of law.

In his apocalyptic book The End of Lawyers? Richard Susskind argued that, “For many lawyers, it looks as if the party may soon be over.” (p. 270) As a result of advances in information technology and pressures toward commoditization: “The market is increasingly unlikely to tolerate expensive lawyers for tasks (guiding, advising, drafting, researching, problem-solving, and more) that can equally or better be discharged by less expert people, supported by sophisticated systems and processes.” (p. 2)  As a result, Susskind wrote, “Lawyers who are unwilling to change their working practices and extend their range of services will…struggle to survive.” (p. 269)

Change is never easy, and it will require both inside and outside counsel to make a substantial investment in learning new skills and experimenting with new ways to do business. As Harry Trueheart, the chairman emeritus of Nixon Peabody, put it:

Law firms will pay dearly as we as a profession learn to do this. There will be winners and losers.

There’s still time to decide whether you will win or lose.  If you want to lose, ignore the need to change your behavior and better meet client needs. 

But if you want to win, it is a time to stop acting like a risk-averse lawyer, and start acting like an entrepreneur, and turn your clients into raving fans.  As Camden Webb, a partner at Williams Mullen, put it after completing one of our project management programs:

Don’t hold a series of committee meetings for a year and then do a top-down analysis. Just do something

 

Lpm-paperback-cover-final-Sept 18-1

 

This post was adapted from my new book “Legal Project Management, Pricing, and Alternative Fee Arrangements” which will be published in February.  A draft of the book is currently being reviewed by experts from over 50 law firms.

 

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