April 20, 2012
"The Death Spiral of America's Big Law Firms"
That is the title of an essay posted on blog of the The Atlantic magazine. Jordan Weissman, a journalist who formerly worked in the business operations side of a major law firm, reviews the profitability of the most elite law firms pre-crash (2001-2007) and post-crash (2007-2010). [See charts below] The slide into lower profitability is what is causing the run-on-the-bank at Dewey LeBoeuf, a storied firm on the brink of collapse.
Dewey LeBoeuf, like the Howrey firm which failed slightly over a year ago, are almost certainly on the lefthand side of the 2007 to 2010 profitability chart. Weissman's conclusion is pretty simple: the industry is running out of gas. More failures are likely. Unfortunately, I agreed.
For the record, legal education's problems are no less severe. There are not enough qualified students to fill the number of 1L seats, so as an industry, our revenues (akin to law firm profits) are going to go down. The entire legal services and legal education industry is undergoing a major disruption. All of this talk of structural change is going to move from the abstract, where we contest it the premise, to the concrete, which induces panic among the unprepared. It is going to be very tough. Our character is going to be tested.
Paradoxically, making decisions based on our professional values rather than self-interest will be the key to survivial. More on that later. I have to prepare for the Lawyer of the Future Conference at Pepperdine University School of Law.
[posted by Bill Henderson]
So... I'm inclined to agree that important changes are on the way for the legal profession. But these graphs do a pretty lousy job of showing why it's necessary, and they certainly don't show anything resembling a "death spiral." Two issues:
First, the dates are clearly cherry-picked. The first graph starts with the low baseline of the 2001 recession and follows law firms' growth through the end of the unsustainable, bubble-fueled financial boom. The second graph starts from the baseline of law firms' last boom year and follows it through the end of 2010. During the period covered by the first graph, U.S. real GDP per capita rose by roughly $2500. During the period covered by the second graph, it fell by nearly the same amount.
Second, even with the cherry-picking, the decline the graphs show isn't all that severe. The worst-performing firm on the graph saw a drop in PPEP of about 8.5% per year from its record 2007 high. Just 8.5%. During the worst recession since the 1930s, the partners at the worst-performing law firm saw their annual profit distribution drop from $1.39m to $1.1m over three years, while those at the best-performing law firm saw theirs rise from $0.77m to $1.4m. Death spiral?
These graphs might be enlightening with a proper control group to compare them to, or comparison to similar periods of boom and bust in the legal profession's past. And in fairness I haven't read the full piece you linked to, so the author may deal with these problems there. But the graphs as they're presented here don't say much beyond, "law firms are affected by the business cycle."
Posted by: Alan Hurst | Apr 20, 2012 8:20:19 AM
I'm interested in the statement that there are not enough "qualified" students to fill the seats in America's law schools. If this is your opinion, fine, but you seem to state it as a fact. What measure are you relying on? It's quite possible you and I disagree on who's "qualified" to be a lawyer. How would be decide that? Thanks.
Posted by: Frank Snyder | Apr 22, 2012 1:26:43 PM
Alan, You make some really good points. I now I realize that omitted some key context. Declining profitability, despite being quite profitable, is dangerous because 1) allocating the lower profits evenly creates instability, 2) allocating the lower profits to the big rainmakers also creates instability, 3) rainmakers may blame it on management and seek out a better firm. Firms are too big and too dispersed and built too much for laterals. Money is what holds them together. Lots of firms to the left side of the 0% line spells trouble.
Frank, qualified students are those with a good chance of passing the bar. Students with very low LSAT and undergraduate records are, statistically speaking, much more likely to struggle and never pass the bar. Though I am not a big fan of the LSAT -- more specifically, its overuse -- one of the good things it has done is reduce the number of students who might otherwise flunk out of law school. Open enrollments are not a good idea. Let's not provide false hope just to fill a class.
Posted by: William Henderson | Apr 22, 2012 7:17:02 PM