Law Firms

Consultant Has 'Somewhat Robust' Watch List of Law Firms in Possible Danger

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Dan DiPietro, chairman of the Law Firm Group at Citi Private Bank, is keeping an eye on law firms that could be in trouble and putting them on a watch list.

The list is “somewhat robust,” DiPietro tells Bloomberg Law in a video interview, though he says not every firm that earned a spot is in big danger. “We have varying degrees of concern,” he said, “from very slight concern ranging to, ‘Oh my God.’ ”

DiPietro tells Bloomberg that law firm profit numbers often are lagging indicators of a law firm’s financial health. He’s more attuned to leading indicators, including partner departures.

He’s not troubled when a law firm is simply “cleaning house,” indicated by partners leaving for smaller or boutique firms. Of greater concern, he says, is when partners are going to similar-tier or up-tier firms.

Other leading indicators that could indicate trouble: A law firm has significant excess capacity that is greater than the industry average, or has excess debt that is not due to a good reason, such as a recent move. Some firms, he said, are quoting low prices to get work that won’t even cover their costs.

Transactional work is down, except for a few law firms, and part of the reason is that in-house counsel are compartmentalizing the work, he adds. “Rocket science work” is given to the go-to law firm, but easier parts of the deal are given to a less-expensive firm or even kept in-house. The problem, he says, is that “law firms have built their leverage model based upon doing all the work.”

DePietro notes new entrants in the ranks of global law firms and wonders if there is room for everybody. “You could argue that the space has gotten very crowded,” he tells Bloomberg.

Asked whether there could be more spectacular law firm failures ahead, DiPietro answered this way: “In this kind of economic environment,” he said, “it’s hard to imagine we wouldn’t have some level of additional failures. I don’t think it will be an off-the-charts number; I don’t think it will be a huge spike.”

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