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David Brancaccio: In what’s seen as the biggest collapse of a big corporate law firm, Dewey & LeBoeuf filed for bankruptcy protection last night. Financial mistakes, heavy debt, and the defection of top talent get the blame and there are analysts that say the firm won’t reorganize, it will liquidate instead.
Bill Henderson, a professor at the Maurer School of Law at Indiana University joins us. Hello, Professor Henderson.
Bill Henderson: Good morning.
Brancaccio: To really spell this out — you have a firm that’s aggressively hiring some big talent. And so one of the things they do is: Come over here! It’s not going to be pay-for-performance, necessarily — we’re going to actually guarantee you some of this. But then when the economy turns down, that turns out to be not, perhaps, such a great idea.
Henderson: The two firms that combined — Dewey Ballantine and LeBoeuf, Lamb — were two storied firms. And the idea, I think, back in 2007 when they combined was that with the pedigree of these two firms; the talent they had; and the ability to attract new talent; there’d be great synergies and they could continue to ride the crest of marvelous innovations on Wall Street. And that turned out to be the wrong strategy.
There was guaranteed partnerships’ income, which insulated certain key partners from the downside that happened in 2008. And that started the firm running through some capital — capital supplied by debt — and it wasn’t made clear to the partnership, the financial status of the firm. And when it became difficult to hide anymore, a lot of partners started heading for other firms.
But in 2007, I could see lots of rainmaking partners being excited about this combination.
Brancaccio: Also, some people trying to make a lot of hay about this shift within the legal industry away from the partnerships, in what they see as a real cultural shift. Do you buy into that idea?
Henderson: Yeah. I think that there is something to that. In the last half century, large corporate law firms have enjoyed an enormously lucrative run. And in the last, say, four to five years, that revenue has flattened out. And to recapture the magic of those prior decades, firms have gone very heavily into the lateral market, looking for heavy-hitter partners that can bring in lots of revenue to the firm. Firm management keeps a very close eye on profits-per-partner, because it’s a good barometer upon which you can look to see the kind of talent you can attract and the kind of people you can keep in your firm.
So we have many, many large law firms really aggressively managing their profits per partner, to hold the firm together. And at the end of the day, lots of your competitors can compete with you on profits. So we’re moving into a very tenuous area, where firms — even though they’re big and storied — are very unstable.
Brancaccio: Bill Henderson, Indiana University, thank you very much.
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