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Law Firm Turnarounds

By William F. Brennan
May 30, 2012

Dewey & LeBoeuf LLP, the 20th largest law firm in the country according to the 2012 NLJ 250, is in the process of dissolving with a future bankruptcy declaration almost certain. According to the firm's management, in 2011 it had more than $900 million in revenues with average profits per equity partner of about $1.8 million. The Am Law Daily reported that those statistics were substantially overstated and had to be restated to $782 million in revenue and $1.04 million in average profits per equity partner, still impressive statistics for a law firm. (Dewey says that the former numbers were and are accurate and are due to methodological differences.) How could such a prominent law firm end up in such a mess?

If Dewey's situation is consistent with other law firm financial crises, it fell victim to a series of different issues that individually might have been manageable, but together may prove to be insurmountable. Typically law firms in crisis face more than one of the following critical challenges:

  • Loss of key clients;
  • Loss of key partners;
  • Regulatory or legislative change affecting key practices;
  • Excessive reliance upon debt;
  • Overhead expenses out of control;
  • Overly rich benefits provided to former partners via an unfunded partner withdrawal entitlement;
  • Compensation systems not perceived as equitable or pay levels significantly below market;
  • Loss of confidence in firm Leadership/Management;
  • Inattention to client/practice concentrations;
  • Failure to react to market shifts;
  • Reliance on billing rate increases at twice the rate of inflation as primary means to increased profits.

The occurrence of one of these problems, if corrected quickly, is unlikely to cause a law firm to fail, but the simultaneous convergence of two or three, or an inability to adjust quickly, can spell doom for a law firm ' a business structure that relies primarily on the shared trust of its co-owners and thin capitalization.

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