Early Warning Signs of Law Firm Failure

law firm failure, out of businessAccording to Hildebrandt's The Anatomy of Law Firm Failures, failed law firms, like Thelen and Heller Erhman, have three things in common: 

  • Below average financial performance – often including excessive financial leverage, significant deferred obligations, low productivity, and poor realization;
  • Internal dynamics – primarily involving leadership issues, partners with incompatible goals, differences over compensation philosophy, and lack of succession planning; and
  • External dynamics – primarily involving competitive pressures related to the firm’s historical client base, access to new clients and desirable work, and inability to recruit key talent. 

I would add a fourth:

  • Lack of a business development strategy -- which leads to firms taking whatever comes in the door, as opposed to taking clients that fit a growth strategy; a lack of business development activities by the partners, who instead rely on a tiny minority of lawyers to bring in new files; and the promotion of lawyers without clients to partnership, which is preceded by hiring associates with no business development acumen.

The analysis comes from a new Hildebrandt white paper called The Anatomy of Law Firm Failures."  "Typically, the underlying problems created by the fundamental flaws in the firms we studied were brought to a head by a triggering event that set in motion a rapid downward slide," the report states.

Four types of triggering events were the most common:

  1. Overexpansion that weakened the firm over an extended period of time
  2. The unexpected rapid or gradual defection of significant partners to one or more other firms
  3. A breakdown in merger efforts for a firm that was already in serious financial distress and barely surviving, or
  4. The impending expiration/renewal of the firm’s primary office lease.

I would add more triggering events: the retirement of key rainmakers, loss of one or more "crown jewel" clients, clinging to unprofitable practices because they "generate cash flow" or are used to train associates, failure of partners to specialize, and hitching the firm to a dying industry and failing to adapt to the current downturn.

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Steve Matthews - November 27, 2008 11:50 AM

I would probably add an expensive judgement against the firm. Big law suits tend to show the cracks in firm relationships & bad politics come to a head.

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