Large Law Firms

Three Letters—LLP—Helped Spur Howrey’s Downfall, Columnist Says

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Updated: The conventional wisdom is that Howrey failed because of a quick expansion and partner dissatisfaction spurred by fluctuating profits and a lack of transparency.

Washington Post columnist Steven Pearlstein suggests an additional reason for the demise of Howrey, as well as several other large law firms: the letters LLC or LLP.

When law firms became limited liability companies or partnerships, the partners are shielded from liability and decision-making changes, Pearlstein explains. “That means that they are apt to be less careful in making decisions about what risks and expenses to take on, knowing they do not face the prospect of losing all of their net worth,” he says. “They also have less incentive to commit themselves to a long and difficult turnaround when the firm gets into trouble.”

Pearlstein also looks at Howrey’s other problems, including a rapid expansion that led its overhead expenses to outpace its revenue. Some offices were never profitable, he said, including ones in London, Paris, Madrid and Southern California. Fixed costs are particularly troublesome for litigation firms without a steady stream of revenue, Pearlstein says. The problem was worse at Howrey, since it was increasingly relying on contingency fees that created big fluctuations in revenue.

The growth contributed to two other problems: increased conflicts of interest and declining partner loyalties. In Europe, newly acquired partners were losing out on business because of the stricter conflict of interest rules that applied in the United States, the article says. And newly acquired partners that jumped to the firm because of a focus on the bottom line were less likely to remain loyal when profits dropped.

Pearlstein faults the legal press and legal blogs for “uncritical acceptance” of law-firm growth, free-agency partners and “a world in which firms are held together by nothing more than a collective determination to increase profit per partner.” The industry, he says, has not learned its lessons. He suggests that lawyers need to turn their firms “back into genuine partnerships and their business back into a profession.”

A business professor offers the opposite view in another Washington Post column, arguing that law firms need to act more like businesses.

Prior coverage: “Consultant: Howrey Didn’t Have to Fail, Despite Low-Paid Partners; New Jobs for 18 More Lawyers” ” ‘Revolution of Rising Expectations’ Has Hurt Howrey, Where $600K PPP Was Once the Norm” “Partnership Vote Seals Howrey’s Fate, But Future Is Unclear for Some of Its Lawyers” “Howrey VC Recounts Problems: Quick Growth, Lower Profits and Partners Who ‘Bailed on Us’ “

Updated to correct term to “limited liability companies.”

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