Slow growth, low inventory indicating slow collections and squeezed profit margins – just some of the issues facing law firms based on a Citibank midyear report of 176 US law firms. Not happy reading, as Patrick Lamb, of Valorem Law Group writes in ABA Journal.
The latest analyses of BigLaw financials is out, and things do not look good. In a recent article, Dan DiPietro and Gretta Rusanow of Citibank reported their midyear findings for a survey group of 176 firms (79 Am Law 100 firms, 47 Am Law 200 firms and 50 additional firms). The opening paragraph tells the story:
“Based on our read of the results for the first half of 2012, we’re now concerned that this year the legal industry may be unable to match 2011’s low single-digit profit growth. There are three reasons for our concern: demand growth slowed during the second quarter from an already tepid first-quarter level; inventory as of June 30 had grown little from the prior year, not a good omen for future collections; and signs that realization will decline again in 2012, squeezing profit margins even further.”
The thing to keep in mind is that when an article discusses averages, the plights of firms below the average—the ones that drag it down—tend to be minimized precisely because the focus is on the average instead of the lower level of performance of these firms.
Based on the figures being reported, Dewey’s demise and other recent events included one firm’s highly publicized capital call, predicting additional firm failures is no longer provocative. It is only when you try to predict how many firms are likely to fail that some pushback occurs. But as one friend commented, “it is a dynamic trend, and it is accelerating.”
The financial plights of so many firms, hidden from most of the firm’s partners, at some point will cause the partners to wake up and try to control their own destinies rather than running the risk that they end up like former Dewey partners. In the same private communication, my friend offered this observation:
Every firm is comprised of a unique combination of individuals, and those individuals make decisions (presumably) based on their evaluation of self-interest. (The displays of selfish promotion of self-interest over the good of the whole by leading partners—as revealed in recent law firm failures—ought to set any debate about that presumption firmly to rest.)
Which means that as the perception by partners grows that the cost of investing in the existing entity compared to its potential rewards is outweighed by going elsewhere or even starting over … the entities will be abandoned. This is not necessarily going to be a “survival of the fittest” contest as so many pundits have commented. Because a) many of the apparent fittest do not present a compelling case for being a place to go to (ask Henry Bunsow); and b) the opportunities to survive and thrive in alternative firm models will evolve quickly to capture talent. Rather, it shall become a movement of talent into different models. They may be boutiques, superregionals, virtual firms, alternative provider structures … but it won’t be ‘more of the same’. That business model as a model is in rapid decline in all but a few special circumstances … (Remember, many of the perceived “winners” in the lateral talent grab game have accumulated insupportable cost burdens, and their apparent advantage only defers the date of reckoning by a year, at most two, before they encounter the same dynamic problem and individual partners decide to leave, and leave in numbers that lead to the demise of the firm.)