Illustration by Daniel Liévano WARNING SIGNS THREE DECADES OF DATA REVEAL HOW BIG LAW’S GREATEST FAILURES UNFOLDED, AND WHAT WE CAN LEARN FROM THEM. BY LIZZY MCLELLAN AND GINA PASSARELLA WHEN LECLAIRRYAN REACHED THE point of no return in August, finally to a collabo- acknowledging its plans to dissolve af- ration that was ter months spent bleeding partners, it billed as the firm’s sav- came into focus that the firm’s aggres- ior but ultimately became sive expansion had actually contributed yet another source of debt. And to its demise. those debts don’t include capital con- The firm had promised partners tributions as high as $100,000 per The de- more than they were worth and signed person, collected from as many as 50 tails of LeClair- expensive leases on understaffed offices. ex-partners who now seem unlikely to Ryan’s collapse are It missed budget in 2011 for the first ever be repaid. unique, but its trajectory is far time, but not the last. When new lead- Even as the firm’s debt grew, some from it. As recently as Sedgwick in ership took over in 2016, there was talk lawyers were given bonuses to stay, 2017 and as far back as Finley Kumble of “righting the ship,” a former share- sources have said. A select few part- more than three decades ago, over- holder recalls. Any attempts to do so ners with guaranteed contracts kept ambitious law firms have ended up in were too late. enjoying a high level of compensation trouble. Nearly all were growing head By the time it closed, LeClairRy- while others took pay cuts. Even in its count and revenue in the years leading an had borrowed $15 million from a final year, the firm boasted of its plans up to their demise. But an analysis of 10 lender, nearly half of which remained to change the industry with its new, up- years of data leading up to a dozen dif- as debt in bankruptcy. It owed more dated model, dubbed “Law Firm 2.0” ferent firm collapses shows that in most than $8 million to UnitedLex, related by leadership. cases, profits per lawyer failed to keep The American Lawyer | November 2019 23 pace with the costs of expansion, leaving Failed firms all had firms overburdened by the mounting debt that helped fuel their growth. something in common, As recently as 20 years ago, the Janis Meyer says: “They had major law firm dissolutions could be counted on one hand. But in the wake of expectations that couldn’t the dot-com bubble burst, and then the be fulfilled.” Great Recession, they began to pile up. Even economic recovery couldn’t stem the tide. Growing financial and client one or more of three issues: expanding pressures forced firms to rethink their too quickly, failing to manage costs and strategic vision, and many chose growth. generally poor leadership. Some followed the wrong path. “When the money got tight, those Each failure was another chapter people who had huge practices and por- in an unfolding story, whether it was a table business left. But had there been firm dissolution or a firm welcoming stronger leadership, that might not have absorption by a larger entity as finan- happened,” says Les Corwin, a partner at cial pressures grew. Some firms grew Eisner whose practice includes law firm head count by hundreds of lawyers in bankruptcies and dissolutions. Corwin just a few years before they met their places much of the blame of law firm end. Others invested in specific prac- failures on a lack of leadership. tices, looking to become the go-to firm External factors, including a reces- for an industry or legal service niche. Janis Meyer, the former general sion, can accelerate a firm’s demise, but And a few ended up under investiga- counsel of Dewey & LeBoeuf, which typically are not at the root of its prob- tion—or worse—for questionable busi- filed for bankruptcy in 2012, describes lems. Collapsed firms “had not grown ness practices. the common thread between failed in the right ways,” says Mary K Young, But they all had something in com- firms simply: “They had expectations a consultant at Zeughauser Group who mon: a strategy developed in the best that couldn’t be fulfilled.” previously worked in the marketing de- of times that didn’t consider what the A number of consultants say law partment of Howrey, which dissolved worst of times might hold. firm failures can often be traced back to in 2011. PRELUDE TO COLLAPSE In the decade before firms closed their doors, costs often rose at an unsustainable rate, making profits harder to maintain. $1,200,000 Revenue Per Lawyer $800,000 Cost Per Lawyer $700,000 $1,000,000 $600,000 $800,000 $500,000 $400,000 $600,000 $300,000 $400,000 $200,000 $200,000 $100,000 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 -10 -9 -8 -7 -6 Years Before Collapse Years Before Collapse Data from ALM Intelligence 24 November 2019 | americanlawyer.com Before 2008, Young says, “you could that gross revenue is not a clear indica- years out from collapse—an average bury a lot of issues.” But since the tor that a firm is approaching failure. 12% jump after several years of growth Great Recession, firms have nowhere The data, available through ALM Intel- at a more modest 4% average clip. Head left to hide them. ligence, shows some unsurprising com- count growth fell to 3%, on average, in mon threads, including a drop-off in the year after that sudden increase, then GROWING REVENUE, GROWING DEBT head count and profitability in the year declined 3.5% and, ultimately, 8.2% in Bill Brandt has worked on a number of or two before a firm’s closure. Naturally, the year before firms closed their doors. law firm dissolutions, including How- mass departures are often the first pub- Revenue per lawyer at the average failed rey, Heller Ehrman (2008), Coudert lic sign that a firm is in grave danger. firm fell 2%, then 3%, in the last two Brothers (2005) and Dewey. He says What may be more surprising is that years of full operation. law firms run into trouble when they many of the dozen firms were growing Several of the 12 law firms saw no lose focus on the fundamentals—the in head count and revenue right up un- meaningful growth in profits per law- blocking and tackling, as a football til lawyers began heading for the exits. yer in the decade before their demise— coach might say. Several even saw revenue per lawyer as revenue per lawyer grew, costs per “You need to keep getting clients, climb in those years. On the surface, lawyer grew right along with it. This working for those clients, getting paid these firms appeared to be growing and was the case at Coudert Brothers, Wolf by those clients,” Brandt says. thriving, surpassing peers on the Am Block, Sedgwick and LeClairRyan, ac- Instead, firms that ultimately fail Law 200 rankings. cording to ALM Intelligence data. rush to grow rather than using an ap- But across these 12 firms, cost per In many cases, trouble was also propriate level of caution. They open lawyer kept going up, at an average brewing beyond the publicly reported accounts for clients that will never pay, rate higher than the annual growth in financial numbers. Brandt says. They fail to collect, and profits per lawyer. By the two years LeClairRyan, for instance, reported their realization rates plummet. Then, preceding collapse, the average failed gross revenue growth for 2013 and he says, they borrow from the bank to firm saw profits per lawyer decrease 2014. But according to court records, it make partner distributions, building up 5.9%, then 25.8%. All the while, costs missed budget each of those years. debt based on receivables that aren’t were still rising—1.3% and 7.1%, re- At nearly all of the failed firms, ma- likely to arrive. spectively, in the two years before col- jor debt was building. An examination of financial data for lapse, on average. Brobeck Phleger & Harrison had 12 now-shuttered law firms in the de- The biggest leap in head count for $90 million in debt when it closed in cade leading up to their collapse shows the failed firms tended to occur three 2003, The American Lawyer affiliate Bingham Brobeck Coudert Dewey Heller Ehrman Howrey Jenkens & Gilchrist LeClairRyan Sedgwick Thacher Thelen Wolf Block 1,500 Head Count 1,200 900 600 300 0 -6 -5 -4 -3 -2 -1 0 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 Years Before Collapse Years Before Collapse The American Lawyer | November 2019 25 “It doesn’t take a whole lot Sources describe LeClair- Ryan’s compensation system of debt to cause turbulence as opaque and overly compli- in a firm if the cultural cated, not to mention the cuts that came in the firm’s later cohesiveness isn’t there.” years. Many lawyers at the —Jay Benegal firm were aware of the guar- anteed contracts some col- leagues were granted, but their The Recorder reported at the time, in- exact terms were a closely held cluding $40 million it borrowed from secret, sources say. Citibank about a year before it dissolved. When problems become When Coudert Brothers closed in more obvious and partners 2005, it owed $23 million to its bank are caught by surprise, it only creditors, Citigroup and JPMorgan hastens a firm’s demise. Le- Chase & Co., and after paying that off gal industry consultant Brad the firm still listed $18 million in li- Hildebrandt, who has been abilities in bankruptcy, The American the trustee on at least eight Lawyer reported in 2006.