This 9 point summary is from Ed Reeser’s article “A Big Law Firm Demise – It Happens Like This” on July 2009 in Of Counsel.
9 Steps to Law Firm Doom
1. Rapid lateral partner hiring in 2-3 years with new offices and little net growth.
2. Capitalized out-of-pocket costs of lateral partner acquisition.
This includes recruiter fees and the initial 90 days of salary draws. They are masked and capitalized over 5 years rather than expensed in the same year. Generally these costs are also funded by debt or capital contributions. New partners should look for this kind of “financial engineering” Ed says.
3. Significant new de-equitized partners.
These lawyers have different titles such as counsel, senior counsel, special counsel, etc.
4. Lacking transparency in decision-making and strategic objectives.
Equity partner discussions are reduced to a few elite. The shareholder becomes more an employee.
5. Firm culture is lore than current truth.
The majority of the partners who are culture models are mostly retired, dead and gone.
6. More than half of core management are partners who have been with the firm for 10 years or less.
7. The firm equity compensation scale becomes skewed and endorses class war.
If the PPEP given to the AmLaw is $900,000 and half the partners are making $600,000 or less, reveals that the many partners are paying for the few on the top.
8. Uses short-term, non-sustainable cost-saving measures to maintain profit (ie. layoffs, etc.)
9. A material reduction in the draw schedule for equity partners is imposed for the next years.
This is likely evidence of a banking relationship issue with the working line of credit.
In conclusion for law partners,
What leads up to this place is a not a lack of leadership for leaders are behind a law firm’s destruction. I believe what creates such a strong opposite scenario is well defined and agreed upon values that create expectation around stability, accountability and fairness. I have seen law firms that do not get caught up in growth for growth sake, do not play the Profits per Partner game and do not over leverage themselves for sake of short-term gain. The do exist. They understand the numbers of the lateral partner process. They are driven by a set of values that trump selfish individual gain.
It important for law partners to consider how the acquiring firm is funding your lateral move, what does their balance sheet look like, their culture of compensation, their method and motive for funding expansion, etc. Do they have a strong set of cultural values? What governs their decision making when it comes to long-term and short-term strategy?
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