Another One Bites The Dust

LeClairRyan’s splashy downfall and the reasons law firms fail.

No matter how you’ve been doing, chances are you’ve been doing better in the past two weeks than LeClairRyan. The blows have been coming for the Am Law 200 firm at a break-neck pace. Gary LeClair, the first named partner, announced he was leaving for regional firm William Mullen. Other partners, associates, and staff have been jumping ship in droves, including entire practice groups. The landlord of a shuttered satellite office has sued for hundreds of thousands in overdue rent and promissory note payments. Every day has brought more bad news for the firm.

So it was no surprise that LeClairRyan officially announced it was forming a wind-down committee on July 31 and is in the process of dissolving. A firm with over 270 attorneys and $120 million in annual revenue will soon be no more. How in the living heck does that happen?

Why Do Law Firms Fail?

Two caveats: (1) I do not have any insider information on what happened at LeClair beyond what’s been publicly reported; and (2) I have deep sympathy for the staff and attorneys who are in the midst of this professional upheaval. That said, and with all due respect to the people living this chaos, I would be derelict in my duty as a law firm managing partner if I didn’t try to glean some lessons from LeClairRyan’s meltdown. They’re far from the only firm that’s failed publicly in the past few years, and I doubt they’ll be the last. The segment of the market we occupy is facing unique challenges in the legal market, and complacency today might mean shutters tomorrow.

The silver lining of the spate of recent firm failures is that we have some data to analyze. I’ve spoken to many lawyers who have gone through firm dissolutions, and a number of themes continue to recur in those conversations.

Coasting when times seem good. When things are going well, it’s easy to get comfortable and assume things will always remain good. This mindset is comforting to lawyers, who are trained to love the predictable and status quo, but it can be death to a business. Someone’s always coming for your market share. If you’re not taking active steps to expand your current book to keep pace with potential client attrition, then you’re just biding time until that book slips through your fingers.

Not addressing underproductive lawyers. Lawyers who don’t appear to be pulling their weight can be poisonous to a firm’s morale and cohesion. The high performers carrying an unfair share of the load feel dissatisfied. The low performers stress further, feeling simultaneously like everyone knows they’re dragging the firm down while also feeling like they’re waiting to be unmasked as unsuccessful frauds. I’m an advocate for attorneys treating each other, and themselves, with kindness and compassion. But compassion doesn’t mean inaction, and too many in firm management are unwilling or unable to address chronically underperforming attorneys. Firms need to be proactive and direct in these situations. Compensation cuts aren’t a substitute for substantive planning and discussion. It’s not pleasant to have tough conversations, put people on strict performance plans, or ultimately cut headcount, but doing so helps everyone in a firm feel more at ease. When the firm trusts management to actively handle internal disputes, its members can focus outward on building their practices instead of inward, defending their piece of the firm’s pie.

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Diluting the equity pool. At a recent Hugh Simon lecture, he pointed out that if you adjust for inflation, Am Law 200 firms’ current revenue-per-lawyer stats are about where they were in 2008, but profits-per-equity partner have gone up over time. The market has shifted in the past decade toward constricting the equity pool, raising the compensation of the rainmakers who are keeping firms afloat in these leaner times, while cutting the comp of lower-performing or service partners. Whether we like it or not, this shift in the market price of rainmaking means firms that aren’t willing to pay to keep their biggest books happy are at risk of losing them to their competitors.

Letting expenses devour profit. Lawyers love the trappings of our practice, but too often lose sight of the costs we’re incurring until we’ve already begun to feel the bite. We lock our firms into expensive leases in swanky buildings, only to see our prices undercut by virtual firms and less flashy boutiques. We spend money on decorations and perks that look impressive, but probably don’t generate much new business. We get excited by high-revenue practices without considering how much expense those practices incur to bring that money in. Firms that don’t manage their costs often don’t realize they’ve slipped into unprofitability until it’s already too late.

Over-democratizing the firm. Lawyers are used to studying law. They don’t, usually, study market forces, business trends, or the emerging best practices of business management and accounting. Yet that has rarely prevented partners from developing passionate, vehement opinions about the management of their firm. Owners undoubtedly deserve a voice in the management of what they own, but firms that spread their agency too thin find themselves stuck in gridlock, unable to respond quickly to new challenges. Businesses need agility, precision, and clear delegations of power. Management teams that delegate all their power to committees, or that aren’t granted any real power to begin with, might as well be trying to paddle a canoe with a toothpick. They can make a big show and expend a lot of effort, but they’re not going to have much say over where they end up.

An Opportunity for Growth

LeClairRyan’s implosion is just one chapter in the much larger story of the sea change our industry is continuing to experience. We’ll learn more in the coming weeks what precisely brought this firm down, but the major strokes of the larger story are already well understood. We owe it to ourselves not to let this opportunity for learning and growth pass us by. We can pay attention to the forces around us, or let them drag us down as well. The choice, as always, is ours.

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James Goodnow

James Goodnow is an attorneycommentator, and Above the Law columnist. He is a graduate of Harvard Law School and is the managing partner of NLJ 250 firm Fennemore Craig. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.