Law School Has Failed The Profession

Too many Biglaw lawyers are financially illiterate -- putting their practices and firms at risk.

I had a mildly terrifying experience a few months back. I attended a seminar on law firm leadership. The audience was primarily composed of the managing partners of large national and regional law firms. During the presentation, the speaker discussed the need for law firm managers to take a hard look at their firms’ income statements as the economy starts to tighten up.

Across the room, the managing partner of a major firm put up their hand. This individual, who shall remain nameless, is in charge of a $100 million+ enterprise and is personally responsible for the professional well-being of hundreds of people. They asked the speaker, “Can you define ‘income statement?’”

Look, I try to believe that there aren’t any bad questions. I champion intellectual humility. I believe strongly in identifying what we don’t know and doing our best to educate ourselves, gracefully and gratefully. But come on — seriously? This is not an acceptable gap in a managing partner’s knowledge base.

Ignorance Fuels Biglaw’s Broken Business Model

Unfortunately, I would wager that the brave soul who raised their hand and cured their ignorance that day wasn’t the only person in that room with that same question on their minds. Far too many people in law firm management don’t have the training to even understand the categories on their balance sheet without resorting to Google. That should not happen in a firm with $100,000 in annual revenue, much less one with $100,000,000.

This lack of basic financial literacy has been holding back the management and growth of the legal industry for decades. Many large law firms are only now starting to adopt the financial analytics tools that have long been commonplace in the broader business world.

Plenty of national firms are still struggling with the basic concept that big revenue does not necessarily equal profits. At those firms, a partner’s compensation is still entirely pegged to the revenue they generate, without sufficient — or any — consideration of the overhead it takes to bring that revenue in the door. This creates fundamentally bad incentives. In that kind of system, it makes sense for a partner to spend $1,000 of the firm’s money to bring in $500 of new business. The expense gets split among the entire partnership, but the benefits of that new business are concentrated in the originating partner. This “sell it at a loss, but make it up in volume” mentality is a dangerous business practice, but it’s still a dominant strategy at too many law firms across the country.

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This isn’t just a concern for law firm management; it’s a concern for competently representing our clients. Our clients pay us to be their experts on call. If we can’t even speak the same language, how can we effectively counsel them on their business decisions? This problem isn’t limited to the world of private practice. Attorneys working in the public sector, like prosecutors, public defenders, legal activists, and the like, all will likely need to review and understand financial documents at some point in their careers. Deficiencies in basic business competence impact every attorney practicing law.

The source of this financial illiteracy certainly isn’t that lawyers lack the intelligence to understand business finance. Some attorneys joke that the legal profession is made up of people whose math scores weren’t good enough to get into medical school, but in reality we’re mostly pretty sharp people.

Law Schools Have Let Us Down, But We Can Fix It

The problem is one of training. Most of us didn’t get any formal training on business, accounting, or finance at any point in our careers. Law schools don’t generally require business classes, since it’s assumed we’ll learn the business side of the practice on the job, if we even end up in private practice to begin with.

By the time we get out of academia and into our first years as attorneys, however, most of us spend so much time just trying to stay above water that there’s no time, or incentive, to dig down and learn the finer points of P&L statements, accrual vs. cash basis accounting, or what a cash-flow statement is. We tend to just pick up what we have to, when we have to, and muddle along on a piecemeal basis until we need to learn some new tidbit to muddle a little further.

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For those of us already out in the wilds of practice, there are resources available to start getting caught up to speed. I’ve taken courses through Harvard Business School Online, read as many business books as I can get my hands on, and am contemplating signing up for an executive MBA program. I’m not doing this because I need a new hobby or out of any need or desire to spruce up my résumé; I’m doing this because if I wasn’t, I think I’d be failing at my job.

On a more global level, I think law schools need to look at incorporating mandatory business finance training into their curricula. Most business schools have a required law course; why shouldn’t we return the favor? Especially given how widespread the belief is that the final year of law school is a waste of time. Every law student would likely benefit from a comprehensive introduction to the concepts that underlie every private organization in the world. And by forcing our incoming classes of attorneys to step up to a higher level of financial knowledge, we increase the literacy and competence of the profession as a whole.

Goodbye, Easy Street

Law firms had it easy for decades. We made enough money that we could afford to be sloppy with our business practices. Those days are long gone, and most firms have already tightened their belts as much as they reasonably can. Law firms need to remain lean, efficient, and intelligent to survive in the new economy, something that’s impossible to do if we can’t even read our own accounting statements. We owe it to our clients, our firms, and ourselves, to do better.


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 an NLJ 250 law firm. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management category. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.