Coudert, Thelan, Dewey Lebeouf. Heller Erhman, Howrey, Olswang…. Former great firms which no longer exist. And yet the partners at these firms are still working and the clients are still writing cheques. What went wrong?
Most law firms aren’t run like modern businesses. It used to be that being a law firm was a way to print money. Clients were everywhere, brand was key and partners did not have to work too hard to win business. The demand in Asia, London and New York for skilled-lawyers was sky high and firms had no issue in raising their rates without clients questioning this. Some firms began turning over $1 billion in revenues and partners were making millions.
Those were the good old days. Fast forward to 2017. Corporations are so focused on cutting costs that firms cannot just rely on brand anymore. It used to be that Firm A was one of a couple go-to firms for a particular type of work (private equity mandates for example). Now these firms are competing with more competition and clients are always focused on who can do the work for the best rate.
So what’s the problem?
Simply put, law firms are too big. In the golden period of law firms, partnerships were smaller and run in a way which benefited all of their partners. The concept of a salaried partner was rare and many firms shared the same vision, ambition and culture. Now it seems law firms are in a race to see who is the biggest – for law firms, size does matter. The issue arises when trying to maintain a core strategy and culture when you have 500 partners to please.
A knock-on effect is that firms need to keep their partners happy and their brand strong and this means they are now almost entirely focused on annual profits. Firms always talk about long term strategy and investment but when it comes to it they only care about one thing – annual profits per partner (PEP). When PEP is high, times are good. When PEP falls, it is a disaster. And everyone looks to management. Why then would a firm look to invest profits for a long term strategy when they need to get PEP high at the end of the financial year?
At least once a month I meet with a firm who pitches me their long-term strategy. When I talk about potential partner hires, the first question asked is what their portable book of business is? Personally I would prefer they ask what their predicted book will be in three years but this would take some investment. This wouldn’t be a huge issue if making one or two partners hires a year but as mentioned before, size matters to law firms and they tend to want to recruit a couple dozen.
Another issue with short-term focus on profits is that partners can simply move whenever they want to earn more money. In my experience, a firm is more likely to hold on to under-performing partners rather than fight tooth and nail to keep their superstars happy (again, size does matter a little bit too much here). Once profits drop in a year, earnings fall. If you are a rainmaker in a firm, then you can cross the road to a competitor and earn more money. Compare this to a listed company – when the stock drops shareholders will moan but in most cases customers and employees don’t run away.
Until firms start to take a long term approach to growth, invest in the best and get rid of the rest then this problem will continue. Ironically, I believe that not only is the next Dewey Lebeouf around the core but more are necessary. As more firms fall at the way side we will then see the next generation of successful firms which allows to promote their own, retaining rainmakers and making bigger profits.