Dewey – could it happen here?

This is not surprising, as most of the high-profile failures to date – Howrey, Heller Ehrman, Brobeck Phleger & Harrison, Coudert Brothers and so on – have been US firms.

Our own large-scale catastrophes are limited, of late, to the hubristic Halliwells, although if one goes back further, one could add Edward Lewis and Turner Kenneth Brown to the list, and perhaps throw in the odd firm that managed to stagger into a defensive merger before meltdown. I won’t name names but you know who you are.

The question on many people’s lips is: “could it happen here?” The answer, alas, coming from many UK lawyers is: “no.”

I beg to differ, but I will allow that the circumstances under which a UK firm might collapse are rather more esoteric. They might make it less likely, but it is perfectly possible and, I would offer, much more likely now than five years ago.

I wrote about the phenomenon of what I call ‘cascade failure’ on my website over a year ago (link here). In essence, this is where an escalating level of departures quickly renders a law firm non-viable.

I put this down in part to the eat-what-you-kill culture of many, particularly US, firms, creating an essentially porous organisation; partners ‘own’ their client relationships and are easily able to port them from one firm to another. Lack of restrictive covenants and notice periods compound the difficulty. This is fine as long as the firm is heading in a positive direction, revenues are increasing and lateral hires or internal promotions are outpacing the numbers leaving, but when the indicators start to go in a different direction, catastrophe can strike, especially if the firm is culturally diverse, has grown considerably by lateral hire or has over-expanded globally.

UK firms, meanwhile, have spent a long time institutionalising their client relationships. I blogged recently about how this might create a mildly toxic environment for the individual partner within a UK firm, but this defensive strategy is in part designed to prevent the kind of collapses we have seen in some US firms. It works on the not-unreasonable theory that individual partners leaving will not be able to take any clients of consequence, or at least not the entirety of a client relationship, with them when they do.

Nonetheless, it is not a surefire defence, and a change in the behaviour of the UK legal recruitment market and changes in the way UK firms manage themselves in the wake of the recession make it more likely that a catastrophic collapse will occur in a large UK firm.

The desire for UK firms to hire teams, rather than individuals, is one key factor. The team-hire is a move designed to get around institutionalised clients, as it is much more likely clients will port if you take a whole team rather than one partner.

My own research indicates that team hires currently account for 16 per cent of lateral partner hires in the London market, a steadily rising proportion, and conversations with recruiters suggest that the desire for teams accounts for a large proportion of current mandates.

As teams are being headhunted all the time – under the strictest secrecy – it is therefore highly unlikely that management at a given firm will have an idea that a team is in the process of being taken out before it actually happens. While the loss of a single partner is hardly likely to trouble any firm, the loss of three or four at once as part of a team-hire by a competitor will impact to some degree on even a 100-plus-partner firm.

Now imagine that a firm loses two or three such teams in different practice areas all at once, independently. As much as it might say that the departures are unconnected, as they are likely to be, the image of entire groups of rats leaving at once could trigger an unrecoverable implosion in internal confidence and quickly sink the entire ship.

With many, if not most, firms headhunting for teams now, it is starting to become practice for partners to think about organising themselves into teams, whether notional or actual. An individual partner being targeted will always be asked “is there anyone else?”, and either approach fellow partners ahead of time, or wait until they are safely ensconced. I am struck by the number of recruiters I talk to who are acting for self-organised teams, in some cases quite large ones. Firms with currently flat revenue figures and an uncertain future should be very worried, IMHO.

UK firm behaviour since the recession has exacerbated the problem. Many firms are becoming far more eat-what-you-kill  or, some might say, the disguise is simply slipping from what has been tacit reality in much of BigLawUK for some years. Partners are performance-managed as never before, subjected to internal competitive pressures and remunerated accordingly. Lockstep, seen as old-fashioned, inflexible and overly rewarding of underperformers, is becoming a thing of the past. It says something that no two firms have exactly the same remuneration structure, suggesting that there is no right answer, only variations on a theme, and that theme has become darker and less collegiate with every passing year.

Such cultural change can only loosen the bonds of partnership and remove the finer feeling one has for one’s colleagues, making hard-headed decisions on departure much easier for partners to make, unencumbered by sentiment.

Unfortunately for UK firms, their insistence on diffusing client relationships across the firm has to some degree forced partners’ hands; partners who do not have sole responsibility for client relationships now have no option but to try to organise themselves into teams if they want to make a move of their choosing. The more firms create a situation where partners feel they have no security of tenure, the more likely this kind of behaviour becomes a matter of necessity.

If anti-partnership behaviours continue as the economy continues to stumble and the limitations of law firm mega-structures become increasingly apparent, the first UK collapse of this kind will only be a matter of time.

Or, more accurately, a matter of timing. 

Mark Brandon is managing director of Motive Legal Consulting