Law Firms

How Some Big Law Firms Erred in the Boom Years

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Large law firms made some errors during the boom times that are coming back to haunt them in the economic downturn.

One error: Law firms that once profited by jettisoning countercyclical practices are now underperforming the industry. A January 2009 client advisory (PDF) by Hildebrandt and Citi Private Bank reports on that problem and other missteps.

Some of the law firms that had the highest profits per equity partner from 2000 to 2007 got good results by axing otherwise successful practices that did not meet their strategic plans, according to the advisory. Now some of these firms are hurting because they winnowed out practices that could have provided a cushion during the economic downturn.

Another error that has backfired: Law firms that were reluctant to fire underperforming partners ended up “dequitizing” them. “Unfortunately, these actions often resulted in the creation of large groups of unhappy nonequity partners who remained as underproductive as before but who, in the process, became serious morale problems for their firms,” the report says. Successful law firms will set clear expectations for partners and fire those who consistently fail to meet them, it concludes.

Another problem, according to the report, is that law firms have failed to change lockstep compensation structures for associates. That needs to change, the report says. “In the current economic climate, it is irrational to have half or more of a firm’s highly compensated lawyers on largely seniority-based salaries.”

James Jones, managing director of Hildebrandt International, also talked about the need to change associate compensation in a talk he gave last week. He predicted that the law firm business model will change to include a shift to more contract and temp lawyers and fewer full-time partners and associates.

The report predicts that, for most large law firms, profits per equity partner for 2008 will range from flat growth to a decline of 10 percent. The decline in partner profits for firms with large capital markets practices will range from 5 percent to 15 percent, with even sharper drops for a few firms.

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