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    October 14, 2008  
Dangers Ahead?

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While Bear Stearns and Lehman were collapsing, the legal industry just saw one of its own titans fall with the dissolution of Heller Ehrman, the 118-year-old firm with 550 lawyers at last count. The $63,000 dollar question (even clich?s are losing value): Is Heller's demise a harbinger of more failures? (Thelen? Others?) Or, if we may use a loaded phrase, are the fundamentals of the legal services economy strong? For answers, we hit up someone who studies such questions for a living—Jim Jones, Managing Director of Hildebrandt.


You might recognize Jim from Arnold & Porter (managing partner 'til his departure in '95), but now he plays consultant to law firm leaders at Hildebrandt, which among other things produces an annual law firm forecast jointly with Citi Private Bank. Their new prediction for '08 revenues (it was positive 3-5%) is flat to -10%. (NY is a bleak -5 to -15%.) And though Jim wishes he could say the "tragic" fall of Heller will be the last closing for a while, he expects it won't be. Two negative trends:

  • A softened litigation market in the three to four years preceding the economic downturn. Possible causes, Jim tells us: tort reform in California and Texas, and the costs of e-discovery, which may be keeping parties out of court.

  • Counter-cyclical work hasn't kicked in as you'd expect in a rough economy. It's only recently, with Lehman for instance, that we've witnessed large-scale bankruptcies.

But as Jim points out, financial issues are rarely the Achilles heel that brings down law firms. It probably played some role in the case of Heller, which reportedly saw eight major pieces of litigation wrap unexpectedly in early '07, leaving excess capacity and a fall in profits per partner to just over $1 million. But interestingly, Jim tells us that colleague Bill Johnston, now Director of Strategy at Cravath, did a study of law firm failures over the last ten years and found that most dissolved within 18 months of their best financial year ever.


The lesson? In most cases, Jim says the real culprit is lack of a clear strategy—which becomes magnified in tough times. And by strategy, he doesn't mean something you write up and file away in a drawer, but rather:

  • Constantly evaluating the landscape and thinking about how your firm can differentiate itself to win assignments.
  • Having a business focus and aligning all aspects of the firm around it.

  • Having the stomach to make negative decisions, like cutting loose clients with work that doesn't fit within the game plan. "If there's nothing you won't do, you don't have a strategy."

  • Having a leader at the top with the political skills to get buy-in from the partnership. It's much harder to be the guiding hand at a flat organization like a law firm, Jim points out, than to dictate from above in a corporate structure.

Those strategies are getting tested right now. Jim points out that the Wall Street cave-in will cause a "big shuffling" of work among firms, as the relationships between investment banks and their trusted firms are suddenly out the door. His tip? "If you did a lot of business with Merrill Lynch, you better get down to Charlotte and talk to Bank of America."

John Ford is Bisnow's Legal Editor. He's back from a weekend in Baltimore, where he paid a visit to the gravesite of Edgar Allan Poe. That visit and this column have made him eager for stories of law firm life and vitality. Send ideas to  

Andrews Kurth
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