Re: Atlantic article on the "death spiral" of biglaw
Posted: Sat Apr 21, 2012 10:27 pm
Renzo wrote:rayiner wrote:The article misses a key distinction, which is that law firms aren't built on financial leverage the way most businesses are. They don't borrow tons of money to fund continued growth. They don't have stock prices that must be propped up by continuous growth. If a particular firm falls behind in growing profits, its partners might jump ship, but that's not going to cause the industry to decline, it'll just move profits from one firm to another.
A decline in big law will be precipitated by a decline in the demand for sophisticated legal services. e-discovery and off-shoring and the like will definitely cut demand, but only so much. And such a drop in demand might lead to structural changes within law firms (lower leverage, lower profits), but can't cause the same sort of death spiral you see in financially leveraged industries.
I disagree. Many firms are in fact heavily financially leveraged, it just doesn't look the same as when firms do. In fact, that's what's bringing down Howrey: they used leverage (bank loans and money borrowed from the partners) to make guaranteed disbursements, which they had to promise lateral rainmakers in order to lure them in. Business didn't materialize the way they though it would thought it would, the partners aren't getting paid, those with business are leaving, and now they are likely triggering debt covenants.
Firms cannot continue to "grow" by overpaying to lure in hostshot lateral partners. It's false growth, and with the exception of a very few "elite" firms, that's the model they all depend on.
I continue to think these guaranteed contracts were beyond insane. I could see something like "We'll give you the first 10MM in client billings you bring in from your clients," but saying "We'll give you 10MM based on your prior performance and hope you replicate it here" is the sort of thing an insane person does.