The New Normal
Questions an Inquiry Commission Might Have About the Dewey & LeBoeuf Crash
Posted Jun 25, 2012 8:30 AM CDT
By Paul Lippe
When a plane crashes, the National Transportation Safety Board dispatches an investigative team to understand the causes and prevent future crashes.
When the Space Shuttle Columbia disintegrated, the Columbia Accident Investigation Board assessed the causes of the disaster.
When the financial markets crashed in 2007, Congress (following in the footsteps of the famed Pecora Commission, which investigated the 1929 market crash) set up the Financial Crisis Inquiry Commission.
In the latter examples, the special investigation panels all had a significant number of lawyers among their members.
When a law firm crashes, we’re more like drivers on highway—we drive by and gawk, and thank the heavens that it’s not us.
So in all likelihood, with the demise of Dewey & LeBoeuf, we won’t spend too much time soul-searching the causes of the crash and taking measures to prevent the next one.
But since, as I’ve suggested, Dewey is likely to be the first in a series of similar firm failures between now and the end of 2013, let me suggest some questions for the group (American Bar Association, New York State Bar, risk management committee for banks that are lending to law firms?) that will ultimately be constituted to investigate these crashes and prevent future ones:
1. Are laterals a risk factor? Every analysis of Dewey has pointed to the prevalence of laterals as a key contributing factor to the firm's collapse. There has always been some mobility in law, and it will often be wise to add good lawyers on a geographic, specialty or client basis, but lateral hiring as a core, financially driven “growth” strategy is a relatively new phenomenon, and doesn’t have a lot of real execution behind it. See Ed Reeser’s excellent analysis (sub. req.) of the true economics of lateral hiring to start to understand some of the “magical thinking” around laterals.
2. Are firms’ governance structures adequate at a large scale? Almost everything in law is designed at the level of individual lawyers and their relationships to individual client matters. Yet we now have very large institutions that have to manage those relationships at some scale. Are we up to the task?
3. Should banks be lending to law firms without adequate capital safeguards? We have long presumed that law firms institutionally were a safe credit, even though everyone has described them organizationally as places where the assets go down the elevator every night. According to the bankruptcy filing, Dewey had more than $300 million in debt and far less than that in assets. Why lend to Dewey, then?
4. What happens if clients start applying “vendor qualification” standards to clients? I just got off the phone with someone from a large bank who mentioned in passing that the bank was starting to apply its normal “vendor qualification” standards to their law firms (as they do to my company, BTW). The core of these standards is around data security and financial solvency. The irony of Dewey’s collapse is that it seems to have been largely a matter of indifference to clients (which clients did you see express their regrets or intervene to save Dewey?), but I don’t think it will be without inconvenience, especially as the bankruptcy litigation wends its way along. So if clients feel more insecure with firms, will they either move more work in-house or apply higher standards to firms?
5. Are firms adequately capitalized? If I understand the history correctly, Dewey’s original sin was to have an underfunded pension plan. This appears to be a major cause of the failed merger with Orrick and be at the root of their increasingly over-aggressive measures to improve their financial position. This is not a new issue. Maybe Dewey’s unique on this score, but since every state government is in the same position, I sort of doubt it. So if the typical otherwise successful firm has a liability to its former or most senior partners that equals 5 percent to10 percent of its annual income, how can they right the ship?
6. Are firms’ management spending their time in the right place? In my experience, and based on dozens of conversations I’ve had with people who’ve been there, nearly 100 percent of large firm management time is spent chasing and divvying up money. Almost none is spent figuring out how to do a better job for clients. Is that sustainable?
7. Are our ethics rules adequate for large-scale law firms? Much of the ease of the exodus of Dewey partners—and therefore the instability of the firm—is based on the ethical presumption that individual lawyers' duties are to their individual clients, not to their partners or the firm as a whole? Do these presumptions make sense in today’s world?
8. If lawyers mismanage their own affairs, will they impact clients’ confidence in their abilities to advise on clients’ affairs? As each and every development in the Dewey saga illustrates, there was a remarkable lack of judgment, foresight, integrity and common sense in the management of Dewey. Yet every story also emphasizes what a terrific law firm Dewey was. Is that possible? Can a cobbler truly have barefoot children?
We New Normalists have been suggesting for a while that law is in for a period of accelerating change. I guess it’s theoretically possible than Dewey is a one-off, but it's more likely to be the first in a series that catalyzes some other overdue changes. Nobody’s perfect, but smart people learn from others’ mistakes.
Paul Lippe is the CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering.