Struggling Law Firms May Face Dissolution Risk in Recession

LeClairRyan recently joined the ranks of major law firms that have shut their doors over the last decade, a group that could grow in number if a predicted economic downturn arrives and catches firms unprepared.

While law firms can and have gone bust for a multitude of reasons, the looming economic downturn will have law firms of all sizes reflecting on their future.

“The lesson to take away is no matter how old you are, no matter how revered you are or how long you’ve been around, you can’t count on being around five years from now, 10 years from now, or certainly 20 years from now if you don’t adapt,” said Jeffrey Lowe, head of Major, Lindsey & Africa’s law firm practice.

Legal industry observers noted that while a recession itself might not be the sole cause of the next big law firm collapse, it could be the final nail in the coffin for firms struggling with other problems or failing to change with the times, as it was for some a decade ago.

Decade of Dissolutions

Brad Hildebrandt has been retained a number of times by struggling firms over his four-decade career as a legal consultant.

“The problem is I couldn’t help them because they called me too late,” Hildebrandt said. “By the time I got to them a large percentage of the partners had their resumes on the street.”

He noted that there have been many dissolutions in the last 10 to 15 years and several prominent firms have ceased to exist.

The recession served as as an aggravating factor in the dissolution of several firms that went bust around the time the Great Recession began. The once 700-lawyer, San Francisco-based Heller Ehrman announced it was dissolving in October 2008. A month later its Bay Area neighbor, Thelen announced it would dissolve after 85 years in business. In December, New York’s Thacher Proffitt & Wood, whose largest client was Bear Stearns, said it would be closing its doors.

In 2011 Howrey closed its doors and Dewey & LeBoeuf, Bingham McCutchen, and Dickstein Shapiro followed. Last year Chicago-based Sedgwick filed for bankruptcy.

After years of declining revenues and a seemingly never-ending trail of partner departures LeClairRyan announced in August it would dissolve, despite its bet on the future of outside investment in law firms.

Runs on partnership are the death knell to a struggling law firm, but they aren’t the only reason firms dissolve.

There are uncounted reasons law firms go under, said Janet Stanton and Bruce MacEwan of law firm focused management consultancy Adam Smith Esq.

An absence of true leadership, making ill-advised bets on geography or practice areas, a partnership model, and “promiscuous and undisciplined” lateral hiring are all reasons a law firm can fail, they said.

More firms will go “belly up,” which will be exacerbated by a recession, said Stanton and MacEwan. Those in greatest peril are “full-service, destination for nothing special,” law firms, they added.

Recession Woes

For a long time in the 1990s and 2000s, according to Lowe, every firm was trying to emulate powerhouses like Latham & Watkins for their huge headcount and expansive geographic footprint, until the Great Recession taught them they couldn’t.

Lowe said some law firms have learned their lessons from the last recession and spent time regrouping, figuring out where they want offices, which clients they want and what work they want to chase. Others, he said, are still very unsure of who they want to be, chugging along taking whatever work comes in, which could spell disaster and dissolution once the recession hits and work dries up.

“When the next downturn comes it’s going to be absolutely brutal for many Am Law 200 firms,” Lowe said.

Lowe said firms in the second hundred category of the AmLaw rankings have been “riding the coattails” of a very strong economy, which has hidden their deficiencies.

“But once this party ends, its going to end very quickly and it’s going to end very severely,” he said.

Law firms should be “battening down the hatches” now and looking at the profitability of different practices to get a head start on dealing with those issues ahead of an economic slide, Lowe said.

“It’s incumbent on firms to not only remain nimble, but to become much more farsighted into how this world is going to evolve to make sure that they stay relevant,” Lowe said.

Hildebrandt said though no one is totally immune from a downturn, if law firms are well balanced and have a stable of solid and loyal clients, they should be able to weather it intact.

He cautioned against the idea that the recession alone will force a law firm to dissolve, and noted that other factors are most often in play. These can include weak firm economics, associate salaries that grow too fast, or the loss of key laterals.

“Sometimes a recession can create underlying problems that may cause a firm that’s already struggling to have to fall into a dissolution,” Hildebrandt said. “But I would say with a few exceptions recession itself has not really been the primary cause.”