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Lessons for law firms from Dewey & LeBoeuf bankruptcy Add to ...

The news that the venerable U.S. law firm Dewey & LeBoeuf LLP has filed for bankruptcy isn’t exactly surprising, considering that its partners have been fleeing for months, but the final hammer has clarified some key lessons that other law firms should learn from the debacle.

First and foremost, too much debt will sink you, no matter what kind of company you are. I haven’t seen hard numbers across industries, but if you were to look at some of the biggest failures over the past, say, twenty years, too much debt is almost always a root cause. (Think CanWest.)

In Dewey’s bankruptcy documents, the firm reported debt worth $245-million (U.S.), largely owed to insurance bondholders, and assets amounting to $193-million. As more and more partners fled the firm, new revenue to pay off this debt started to dry up.

But this is only part of the big problem. Why did the firm need to borrow so much money? That’s been pinpointed to a massive spread between compensation for the firm’s big name partners and what the firm paid its junior associates, as well as an aggressive mandate to poach rival lawyers by offering up big bucks.

As Bloomberg noted: “Dewey collapsed amid a culture characterized by a lack of disclosure and controls where an inner circle of partners reaped most of the rewards,” including “pay guarantees divorced from performance.”

Add to that what the New York Times described as “unfettered growth, often through mergers” and you get a disastrous scenario. “Many large firms have discarded the traditional notions of partnership — loyalty, collegiality, a sense of equality — and instead transformed themselves into bottom-line, profit-maximizing businesses,” the Times noted.

It appears law firms have gone the way of investment brokerages that went public: accountability for the firm’s actions no longer falls to a small group of partners who truly care about the future.

That’s an important lesson for a firm like Norton Rose, which has been acquiring to become a global firm, and has recently sparked chatter of a new U.S. deal.

However, not all major firms fall into these traps. As the Times pointed out, “there remains an elite tier of firms – a group including Davis, Polk & Wardwell and Wachtell, Lipton, Rosen & Katz – that adheres to a so-called lock-step model of compensation, meaning partners are paid based on seniority, and within a narrow band. These firms also rarely recruit from other firms, but groom talent from within.”

The best part: “This group also remains among the most profitable in the country.”

 

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