Biglaw

Being Boring Is Hard

The legal industry won’t experience anything like WeWork’s $47B flameout, but that makes our problems more intractable.

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Adam Neumann (Photo by JB Lacroix/Getty Images)

If you want a microcosm of the schizophrenic, sugar-addled American economy in 2019, look no further than the rise and fall of WeWork. At the start of August, WeWork was a VC darling sporting a $47 billion valuation. Its eccentric CEO Adam Neumann was the subject of fawning press pieces focused on how he worked barefoot and forbade meat in the company headquarters. The company, which owned and marketed co-working spaces targeted at hip, urban, millennial entrepreneurs, seemed to have all the right buzzwords and demographics to remake commercial real estate in its image, and accomplish Neumann’s goal of being the world’s first trillionaire.

As Business Insider compellingly documented, though, it took all of six weeks for WeWork to come crashing down. The trigger was WeWork starting the IPO process mid-August. The IPO which was designed to get WeWork the funding needed to continue its expansion and continued domination of the shared workspace market. It may go down as WeWork’s undoing.

 WeWork WeWorked, Until It WeDidn’t

IPOs require disclosures, and when investors finally got a peek into the company’s otherwise opaque finances, they didn’t like what they saw. WeWork reported huge annual losses with no obvious path to profitability. The company’s commitments to future lease payments exceeded the income commitments they’d received from tenants by a factor of over 10:1. The Financial Times called its business model “magical thinking.”

Once the first concerns began to arise, the dam seemed to break, specifically around CEO Adam Neumann. Neumann’s many eccentricities had previously seemed like the sort of charming flavor we’ve come to expect from our Silicon Valley executives. New allegations that Neumann regularly smoked marijuana and did tequila shots on the job, though, seemed less colorful and more indicative of a toxic culture. Word also got out about Neumann’s prolific spending on personal real estate properties around the world, which only fed the indicia of mismanagement revealed in the disclosures.

In light of all the bad press, WeWork’s IPO flamed out. It suffered a major downgrade in valuation of both the company overall and bonds it had issued. Its primary investor is sweating bullets, with billions sunk into a suddenly precarious venture. Things got so bad the embattled CEO voted with the board in favor of his own removal.

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It’s Hip To Be Square

We lawyers probably take some solace in the fact that nothing like what happened to WeWork is likely to happen to any law firm we work for. The legal industry tends to be a much less volatile, much less interesting sector of the economy. WeWork’s CEO spent $60 million of company money to buy a Gulfstream jet; most law firm managing partners I know are cautious about even submitting an Uber receipt for reimbursement.

Law firms are still carrying around the lessons they learned from the 2008 recession. We’re not splashing cash around on summer associate dinners at the French Laundry. We’re not going on wild spending sprees to hire lateral attorneys with unproven books. For many law firms, we don’t have to worry about cutting the fat because we’ve already done it.

And that, it turns out, may be a problem.

I had a chance to connect recently with Chris Ryan, the Managing Director of HBR Consulting for his take on what strategies law firms can implement when the next recession hits. Chris noted that back in 2008, firms leaned heavily into cutting expenses. “They laid off administrative staff and attorneys, froze new hires, made significant cuts to overhead expenditures, and streamlined their operations.”

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Today, however, Chris noted those strategies aren’t likely to work as well as they did last time. “Much of the low hanging fruit in operations has been cut, so decisions may be much more difficult in the next downturn.” It’s easy to look at a company like WeWork and say, yeah, maybe don’t buy every intern a company Quarter Horse. Because today’s firms have been generally smarter about hiring and growth than they were in the mid-aughts, they don’t have those easy cuts to make when times get lean.

What Comes Next?

So, what is a management team looking to recession-proof their law firm to do? At the 30,000-foot level, it’s going to be either cut expenses, raise revenues, or both. Cutting expenses is generally easier to control, but finding places to cut is going to require getting technical and nerdy, diving deep into the weeds of the firm’s operations. Sitting down for a multi-hour technical review with the firm’s IT team to brainstorm ways to reduce the hosting costs of the firm’s document management system isn’t sexy, but it’s going to be the kind of effort needed to save your peoples’ money and jobs. We cut costs with an axe in 2008; now it’s time for the scalpel.

Raising revenues is the traditionally more challenging route, but it’s here I think law firms both face their biggest challenge and have their biggest opportunity. I’ve spoken at length in this column about the headwinds of increasing competition our once-insulated branch of the business world is starting to encounter. Non-traditional providers are taking more market share every year by offering structures and prices that law firms won’t.

If our customers are responding to these new offers, why not make them ourselves, and provide them the comfort of traditional law with the financial soundness of a modern business? Flat rate work in particular I suspect can be a huge area of growth for firms in the coming years. I recently attended a conference for firm management executives, and one team of law firm leaders out of the UK reported shifting as much as 50 percent of their work to flat rate pricing. One said, illuminatingly, “Why have we kept selling what our clients don’t want?” Doing this right requires careful attention to pricing, time investment, and technology. It’s otherwise too easy to underestimate the true costs of the services you’re providing and work yourself into bankruptcy.

I also maintain faith in us, in our profession, which is at heart more about personal relationships than price. There’s a faith placed in us that it’s hard for the competition to replace. We’re there for our clients in their most dire, difficult times. At our best, we’re secret-keepers and wise counselors. Those of us who can continue to forge and sustain those personal connections will always have work on their plate.

We’ve got three months left before we start a new decade. We might not know exactly what the future will contain, but I can promise you it won’t be boring. WeWork may be on its way out, but we’re still here, and our work is just beginning.

James Goodnow

James Goodnow is an attorney, commentator, 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.

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