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Law Prof Predicts More Big Law Firms Will Collapse in ’09

Posted Dec 16, 2008 1:15 PM CST
By Debra Cassens Weiss

Large law firms are “immensely fragile institutions” and some of them aren’t likely to survive another year, according to a law professor who has studied firm management structures.

Indiana University law professor William Henderson makes his prediction in cross posts on the Legal Profession Blog and the Empirical Legal Studies Blog. “There is a good chance that several hallowed BigLaw firms, particularly those with weak balance sheets, will cease to exist sometime in early to mid-2009,” he writes.

He says a large proportion of big firms are in “one hell of a vise” because of the potential for weak collections and continuing costs after layoffs. Firms could be stuck with “vast expanses of Class A office space” after layoffs while making severance payments to its former lawyers, Henderson says.

If revenues drop by 20 percent, a possibility for some firms with large capital markets practices, profits could drop 50 percent or more, Henderson says. That could set off lawyer defections and a “rapid death spiral,” if figures from two collapsed law firms are a guide.

Henderson found that Heller Ehrman and Thelen “saw modest diminutions” in revenue per lawyer for 2003 through 2007 as other law firms in the top 200 posted steady increases. Yet the small drops “were precursors to total collapse.”

A November survey of the nation's 700 top law firms by Altman Weil found that most were collecting fees at the same rate as last year. But the legal consulting firm did note “some softening” in balance sheets, particularly in firms with more than 250 lawyers and in major legal markets.

Updated at 2:09 p.m. to extend the time period during which Henderson notes firms "saw modest diminutions."

Comments

1.

End of Big Law
Dec 16, 2008 2:31 PM CST

I agree.  I see it coming.  Big Law and the prices they charge per hour are not sustainable.  Plus there are two many attorneys and not enough work.

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2.

First to go?
Dec 19, 2008 6:32 AM CST

“Two many,” huh?  Hope you’re not on the chopping block, buddy.

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3.

Chopping block
Dec 19, 2008 7:38 AM CST

You really got him good, bro! Sick burn!

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4.

Dan
Dec 19, 2008 7:44 AM CST

Good riddance.

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5.

Change Model
Dec 19, 2008 7:46 AM CST

As in house counsel I would much rather pay for good attorneys housed in reasonable office space verses good attorneys housed on Park Avenue.  As long as I get back some of the price difference.  The notion that you cannot be in practice without Class A office space is outdated.  Offer me a billing rate of $450 an hour verses $600 an hour for the same quality of work and I can guarantee where my business will go, irrespective of how nice the offices are or how good the lunch is.  I would rather eat peanuts and visit a shack than see some of my fellow employees laid off.  It is time that big firm attorneys get over themselves.

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6.

Sam
Dec 19, 2008 7:48 AM CST

What a daring prediction!  “Some” firms won’t survive, you say? The ones with the weakest balance sheets and practices most vulnerable to the economic downturn are the most likely to dissolve? Who’d have ever guessed?

  How insightful! It’s a good thing we have experts who can discern the potential for such counter-intuitive outcomes. Most people would assume all firms will thrive and those with weak balance sheets would be the least likely to experience problems.

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7.

B. McLeod
Dec 19, 2008 8:03 AM CST

We can sit and eat buttered popcorn as we watch them fold and drop like Mukasey.

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8.

BC
Dec 19, 2008 8:23 AM CST

Nothing says “Happy New Years” like firms getting geared up to shut their doors in 2009 and inform their thousands of employees “Good Luck in 09…finding a new job!”

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9.

Steve
Dec 19, 2008 8:30 AM CST

This man’s predictive powers are akin to that of Nostradamus.  Next predictions, the housing market will sink and auto comanies will need a bailout.

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10.

B. McLeod
Dec 19, 2008 8:37 AM CST

And the refineries will manipulate gasoline prices, and the President will say something stupid.

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11.

Professor SIzzlechest Q. Bunnington
Dec 19, 2008 8:48 AM CST

Im SO glad I’m entering the job market right now. Any advice? Become car mechanic? Writer? Fisherman? Towel folder at local gym?

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12.

WORD!
Dec 19, 2008 9:08 AM CST

Law Prof’s Article, Part II:

LAID OFF LAWYERS PREDICT LAW PROF LAYOFFS SHORTLY AFTER LAW FIRM LAYOFFS IN ‘09.

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13.

Hiding Out
Dec 19, 2008 9:14 AM CST

My 45K/yr government job is starting to look pretty awesome right now. we were told no raises this year, but we’re not looking at layoffs either!

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14.

Frank
Dec 19, 2008 9:24 AM CST

I agree with Sam.  This “prediction” is about as bold as saying “people who run out of money will be in bad financial shape next year.”  Brilliant.

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15.

Stone
Dec 19, 2008 9:27 AM CST

The perfect storm is brewing. Let’em fall hard. It’s evolution baby, and it’s time for MASSIVE change in the industry.

Don’t need luck to find a new job, it’s time to create a job. On your own, with a couple new partners. This industry has begun a massive change. You’re either going to be with it, or left behind.

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16.

Staff member
Dec 19, 2008 10:00 AM CST

Relatively healthy firms will use this climate to their advantage though, to push down compensation.  We’re at their mercy and they like it that way.

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17.

Brian
Dec 19, 2008 10:09 AM CST

I’m a 3L; I accepted a $85K/year gov’t job over a $160K/year firm job. Most people thought I was crazy… we’ll see about that.

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18.

Attorney in TN
Dec 19, 2008 10:10 AM CST

To the In-house counsel who does not want to pay for the big firm’s fancy office space…put your money where your mouth is.  I assure you that when the big case comes in you will still hire the most expensive firm so you can CYA if you lose…you can tell your board, “But I hired the best firm…you cant blame me if we lost.”

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19.

Andy the Lawyer
Dec 19, 2008 10:24 AM CST

One way to ameliorate the glut of lawyers in America = stop creating more lawyers than the marketplace can accomodate.  Closing one-third of the nation’s law schools would be a good start, even if it means Professor Henderson might have to actually practice (gasp!) instead of teach.

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20.

Hadley V. Baxendale
Dec 19, 2008 10:36 AM CST

Brian—if you ever regret taking the $85K gov’t job over the $160K Biglaw, just go get a second gov’t job and you’ll end up at the same place—twice the money, twice the hours of your life.  Remember there is no extra for overtime!

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21.

B. McLeod
Dec 19, 2008 10:41 AM CST

Probably a lot more firms really should be making staff cuts.  Where “performance” truly is not a factor, the firms should announce how many “associates” they need to cover workload, and let existing “associates” compete by low bid for those positions.  This would enable “associates” to carefully consider the true worth of their services, as well as how much they value continuing in their current posts rather than seeking jobs elsewhere or going out on their own.  It would also vastly improve the firms’ bottom lines and competitiveness, as charges to clients could also be reduced.

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22.

JME
Dec 19, 2008 10:46 AM CST

Given the opportunity, I’d have taken the gov’t job over biglaw myself.  with my military background, a 30 year retirement is only 11 years away, and then I would have the funds to go into business for myself.  However, since a gov’t job would require relocating, and I didn’t want to, I just went into business for myself to start.

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23.

Alan Schekotovits
Dec 19, 2008 11:11 AM CST

I think this guy is nuts. Law firms can’t close up they have cases to try!

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24.

Ben
Dec 19, 2008 11:52 AM CST

I think the author has missed an important point.  His collapse scenario is based on attorney flight from these firms when their numbers get weak.  But, unless the firms are on the brink of bankruptcy and distribution of debt burden to the partners, you won’t see a Heller Ehrman situation where people are simply leaving for a better opportunity elswhere.  People don’t jump ship to swim to shore themselves, they jump ship to another larger, better, prettier ship.  Realistically the “better opportunity elswhere” market is closing quickly, and large law firm attorneys recognize that there is no other ship to jump to—time to hunker down, grab an ore, and start rowing!  Thus, in all but the most dire firms, the flight temptation will be largely mitigated by the lack of opportunities to flee to.

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25.

Bob in Juno
Dec 19, 2008 1:20 PM CST

Read the Scientific American article on the real causes of the collapse of Wall Street investment banks, with an SEC rule change that erased capital reserve and debt limit regulations.  The overleveraged firms underestimated the effect of quantitative models for responding to market flucuations, at the cost of their demise.  None of the five major investment firms that lobbied for the SEC rule change in 2004 exist as independent firms anymore.  So the collapse of law firms, that depended for business on these investment banks, is not surprising in the least.  I would say the party is over, unless one has access to the current administration to try to wangle some of that $700 billion!

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26.

Salazar
Dec 19, 2008 1:21 PM CST

For decades now the nations tier 1 law schools have been pumping out many more grads that BIGLAW has been able to absorb, resulting in excellent talent at regional and small sized firms.  Now, for a lot of specialized work or even general litigation, a mid-sized shop is as good and often better than the behemoths.  Saavy GC’s have known this for some time.  Over the next few years a GC will be putting his neck out in an attempt to justifying billings from BIGLAW, which will put a lot of pressure to find alternatives.  The pressure has been there now, which has resulted in a big jump in per partner profit for midsized firms at the expense of BIGLAW, especially since midsized firms do not have the overhead and attendant babysitting (i.e., highly priced, under performing Associate) expenses.

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27.

Bob in Juno
Dec 19, 2008 1:23 PM CST

Here’s the link: http://www.sciam.com/article.cfm?id=after-the-crash
The NY Times article was published in August, I believe, and there are growing blogs on this point.

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28.

Bob in Juno
Dec 19, 2008 1:34 PM CST

Here is a link to the Oct 3, 2008 NY Tims article:  http://www.nytimes.com/2008/10/03/business/03sec.html?_r=1&ref=business&pagewanted=print
Jonathan Schwartz’ blog adds excerpts from current Treasury Secy Paulson’s testimony, when he was head of now-defunct Goldman Sachs, lobbying for the rule change.  See:
http://thismodernworld.com/4496
In this context, the $700 billion bailout administered by Paulson and company is a criminal cover-up of malfeasance and greed, and it is my hope the incoming administration will work not only to repeal the bailout act, but to recoup the taxpayer monies which should have gone to the retirees and mutual funds who so unwittingly became victims of what was really an elaborate Ponzi scheme.

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29.

Bill Dugan
Dec 19, 2008 3:16 PM CST

This guy can’t be right.  I just spent good money on a new suit.

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30.

Anthony G. Argeros
Dec 19, 2008 6:08 PM CST

I will happlily watch as BIGLAW takes a dive.  First, in 18 years of practice, I have NEVER seen where the size of the firm had anything to do with legal talent.  If anything, there has probably been an inverse relationship as the majority of the work (pleadings, depositions, motions) is done by young, usually talented, but inexperienced associates.  Second, the insane billing rates and pervasive churning of files is going to be the undoing of BIGLAW just as lack of oversight brought down the brokerage houses and utter stupidity will almost certainly bring down the BIG THREE automakers.  If I ever decided to stop practicing law, I would love to work at a company auditing litigation files being handled by BIGLAW firms.  I would not even need a salary, I would simply ask for a commission on the fees these BIGLAW firms would be refunding to the company after the audits were complete.  I say all of the above as a plaintiff’s personal injjury trial lawyer who has been proud to earn his living “eating what I have killed” - with a success rate easily above 95% on cases where my “quarry” is often represented by BIGLAW.

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31.

J.D.
Dec 19, 2008 6:18 PM CST

BREAKING NEWS:

Kenya Gov’t tells Obama family it needs permission before speaking with media; ensures “better flow of information.”

http://allafrica.com/stories/200812110079.html

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32.

B. McLeod
Dec 19, 2008 7:56 PM CST

@30, Amen.

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33.

amayes
Dec 20, 2008 6:59 AM CST

So there are soon going to be a lot of lawyers seeking jobs, eh?  Experienced lawyers?  That’s great news for a soon-to-graduate law student.

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34.

B. McLeod
Dec 20, 2008 7:20 AM CST

But the good news is, most of them will be transactional lawyers from big firms, who: 1) have no idea how to function on their own; and 2) have no knowledge about litigation or field work (or for that matter, anything apart from whatever narrow practice area they used to churn documents for in the big firm’s office).  So, they will have the advantage if you are applying at big firms (which will not be hiring anyway), but you will be on at least equal footing in most other cases.  For small and medium firm jobs, you may even have an advantage, because most of these firms will prefer to train “associates” their own way, without having to listen to a bunch of crap from some idiot who has only been in practice a few years, but insists on telling the partners how x, y, or z was done back at the big firm that canned them.

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35.

Rocco
Dec 20, 2008 9:39 AM CST

Partners will parachute out with fat severance packages and associates will be out the door with their J.D. in one hand and their dick in the other.

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36.

Billy
Dec 20, 2008 10:12 AM CST

What will be next….BAILOUT for BIG LAW

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37.

B. McLeod
Dec 20, 2008 1:48 PM CST

I think the bailout will be more as Rocco describes.  Except, by then, there won’t be much even for the partner severance distributions, and most of the “associates” may only be able to find their J.D.s.  But, they will need the other hand to hold the begging bowl anyway.

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38.

JMc
Dec 21, 2008 8:02 AM CST

Rocco’s belief that partners will parachute out with severance, leaving associates with nothing, just shows Rocco has no clue.  Most law firms maintain sufficient liquid working capital to cover 1-2 months of operating expenses—which is why partners need to sign personally for any long-term commitments the firm makes, like office leases.  Severance?  Get real.  Partners are lucky if the landlords don’t chase them if a firm fails, and all they lose is their invested capital.  Rocco needs to get a little smarter, if he hopes to make partner somewhere.

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39.

r.gov
Dec 22, 2008 8:07 AM CST

I’m a hardworking gov’t atty. Some people thought I was crazy not to take a big firm job or go in house eventually. But I prefer serving the public. The job stability and quality of life ain’t too bad either… I welcome big firm lawyers to cross over the other side….

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40.

Comfortable in Philly
Dec 22, 2008 8:20 AM CST

“Posted by Hiding Out - 2 days, 22 hours, 48 minutes ago

My 45K/yr government job is starting to look pretty awesome right now. we were told no raises this year, but we’re not looking at layoffs either!”

You and me both, Hideout.  I may not command a Big Law salary but my government benefits, paid vacation time, and pension are reassuring during this financial storm.  It has also allowed me to maintain a small part-time practice after hours.  No, you won’t hear me complain one iota this holiday season.

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41.

Small Firm Corporate Lawyer
Dec 22, 2008 5:12 PM CST

Change Model - Good for you!  I recently went to a seminar at the mid-sized (@100 attorneys)NY branch office of a mega-firm.  The office easily rivaled that of a huge invesmtent banking house like Goldman Sachs - a huge reception area with inlaid marble floors, an entire hallway with nothing but conference rooms, the largest of which was almost the size of a small auditorium - for 75-100 lawyers!  If I were a client, I’d think to myself, “Oh - so this is what I’m paying such exorbitant amounts of money for!”  At my small firm, we do the same transactions as the mid-size to large firms, but for about one-half to one-third the price. And the biggest difference is not even the lower billing rates - it’s the fact that we don’t put everything through five layers of review (with each of those people having to come up with some comments to justify thier existence), or have our clients pay for training associates with no experience.  The big firms will collapse on their own weight, and their “cast-offs” are not the ones I feel most sorry for; rather, it is the new graduates, as small firms often don’t hire people straight out of school.

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