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The Collapse of the Large Firm Model
Recently, the New York-based law firm of Dewey and LeBoeuf filed for chapter 11 bankruptcy protection. At the peak of the firm’s size, it employed about 1,450 lawyers. However, due to poor money managing, compounded by the economic recession, things took a major turn for the worse. In May 2011, over 160 of the firm’s 300 partners resigned amid speculation that the firm was in serious monetary trouble. In early May, 2012, the firm had to terminate 433 of its 533 New York employees. The firm had hoped to find a merging partner in order to keep the firm alive, but after it could not find any potential partners, had to file for chapter 11. This is believed to be the largest collapse of any law firm in United States history. Dewey and LeBoeuf’s collapse is causing this entire legal industry to question the model that has been utilized successfully for many years. [1]
Under the traditional Big-Firm model, lawyers are made “Partners” based on numerous factors, including “seniority, revenue expectations and perceived benefit to the firm.” These factors can lead to lawyers being made Partner based more heavily on longevity than revenue stream. The issue with this business model is that it can lead to Partners getting paid for revenue that they are not generating. [2]
One of the main issues that led to Dewey and LeBoeuf’s ultimate demise was that its reliance on “lateral hires,” in which high earning lawyers were hired over from competing firms with the guarantee of more pay. Many lawyers were hired knowing that they were being fast tracked to partnership, often times at the expense of long-time associates. Many times, these lateral hires did not come close to the expectations the firm had for them. [3]
Another issue affecting Dewey and LeBoeuf was the promise of a guaranteed salary. At Dewey and LeBoeuf, nearly one-third of the firm’s partners had guaranteed salaries. Regardless of whether or not the partners were producing enough revenue to justify their pay, the firm was still on the hook to pay them. Over time, this ended up with the firm paying $124 million more than it earned. In addition, many of the associates, who worked hard and were producing a lot of revenue found out about the guarantees to the lower producing partners, which essentially killed any morale or incentive to continue to work to generate revenue. Often times, these associates left for greater opportunity elsewhere. [4]
Another problem that hurt Dewey and LeBoeuf, as well as many large firms is the increased demand for associates in order to make money to pay the partners. From 1996-2006, the 250 largest law firm’s numbers of associates hired rose 76%. The amount of people that graduated law school only rose 7% throughout that same time frame. The associates are then given more work in order to draw in more money. This leads to even worse morale, as associates often times are overworked, underpaid, and overstressed. [5]
Clearly, a change needs to be made to the current top-down model employed by the majority of the “big” law firms. Unless the problem is not fixed soon, there is no telling how many other Dewey and LeBoeufs there will be.
- http://news.yahoo.com/dewey-leboeuf-files-chapter-11-seeks-liquidation-015330179–finance.html
- http://blog.rimonlaw.com/blog/entry/an-alternative-to-the-traditional-law-firm-business-model6
- http://www.forbes.com/sites/danielfisher/2012/05/29/dewey-and-leboeuf-bankruptcy-tells-lawyers-change-or-die/
- http://www.americanbar.org/publications/law_practice_home/law_practice_archive/lpm_magazine_articles_v33_is4_an1.html
