High Law Firm Leverage a ‘Combustible Combination,’ Expert Says
A law professor says changes in law firm structures are contributing to high labor costs and financial problems that are causing some firms to crumble.
Law professor William Henderson of Indiana University told the Chicago Tribune that one problem is higher leverage. The average large law firm has 4.3 associates and nonequity partners to every equity partner, an increase since 2000 when the ratio was 3.65 to one. The ratio means high fixed labor costs and declines in revenue per lawyer, a “combustible combination,” he told the newspaper.
Henderson also says the largest law firms often had only 500 lawyers 20 years ago, but now they may have up to 1,500 lawyers spread out across several offices. “You have pretty weak glue holding these bigger enterprises together,” Henderson told the newspaper.
Henderson says large law firms are “immensely fragile institutions” and predicts that more will dissolve in 2009. The Tribune article makes three other predictions for big firms. They are:
Law firms will continue to get smaller.
The “glory days” of lockstep pay hikes and bonuses will come to an end.
Firms will re-evaluate their capital structure. The move follows DLA Piper’s decision to invite non-equity partners to become equity owners.
