When one of the world’s leading authorities on the legal profession writes about the demise of law firms, we should pay some good attention to it. Arguably, the financial crisis in 2008 changed the mindset of many law firm partners and their associates around the world, but to what extent? What lessons can law firms learn from this abrupt downturn after years of expansion both domestically and abroad? John P. Heinz’s article offers insights on the reasons of corporate law firms’ continuous expansion in the past decade and why their developmental strategies led to the failure of many firms in the financial crisis.
Large corporate law firms, despite their variations in areas of practice and professional expertise, follow similar strategies in their management. As Heinz points out, competition among law firms was heightened in the late 20th century by ready access to comparative data concerning the business of the firms. As a result, “profits per partner” has become the single most important statistic in evaluating a law firm’s performance. Indeed, a law firm chairman even described it as “our stock price” (p. 69). Heinz argues that this unitary evaluation standard has led to risky strategies in recruiting/eliminating partners and diversifying practice areas, with the goal of getting a profits per partner “higher than the next firm’s” (p. 70). When the corporate law market was booming, firms often had enough profit margins to afford those risky strategies, such as focusing on high-value financial transactions work. But now, the negative consequences are clearly seen in many large law firms across the world.
The profits per partner rule not only influences the hiring and retention of equity partners, but also junior partners, associates, and paralegals – everyone in the firm. Another impressive (and even a bit scary) quote in the article is that, as a senior partner told the author, hiring more associates and paralegals was “like printing money” (p. 71). This is because a large number of associates per partner would increase the profits per partner, as the firm pays much less to these associates than it bills the clients. Accordingly, the size of corporate law firms kept increasing to hundreds and even thousands of lawyers. And, needless to say, now many of these associates have lost their jobs. In comparison to the well-known “tournament of lawyers” rule that Galanter and Palay proposed many years ago, the profits per partner rule seems to be even more powerful, as it connects the internal and external factors of corporate law practice.
A big push behind the profits per partner tournament, as Heinz repeatedly reminds us, were the high-priced consultants who advised law firms to increase their size, open more offices abroad, specialize in high-end financial transactions, and, more importantly, “jettison routine, high-volume, ‘commoditized’ work” (p. 67). The advice sounded quite rational, given the fact that the corporate market had been expanding worldwide in the past decade or two. The problem, however, is that economic rationality only works when the economy itself is functioning well. Therefore, it is not surprising that the advices given by these consultants became much more ambiguous after the financial crisis – they told law firms to “be more efficient,” “work smarter,” and “seek to reduce costs creatively” (p. 78).
Heinz is deeply skeptical of this advice, but he does not provide any concrete alternatives. Indeed, who can? Corporate law firms are highly dependent on the corporate market to survive and make money, so when the market is in disorder, firms have few choices to maintain a good performance. Yet the vast majority of law firms are (painfully) surviving the crisis, and there are still lessons for the survivors to learn from this short article. Above all, it shows the importance of diversity for law firms, not only in terms of personnel or business, but also in terms of developmental strategies. There is no single rule of law firm growth or management, be it tournament of partnership, or profits per partner. The strength and beauty of the legal profession lie precisely in its large variety of expertise and organizational forms, even for the corporate sector which has often been regarded as the least diversified.
In addition, Heinz suggests that the excessive use of comparative statistics across firms could be toxic to law firms seeking advantages in fierce market competition. The organizational theorists, particularly the neo-institutionalists in the 1970-80s, tell us that firms in each field would become similar over time as they imitate each other’s structures and best practices, voluntarily or by coercion. But they also indicate that the isomorphic structure could become an “iron cage” for these firms – it binds them rather than liberates them. The rise and fall of the corporate law market since the late 20th century offers a great example of this process, and we are still witnessing the power of its “iron cage,” characterized by the wide use of comparative statistics and business consultants in law firm management. After the burst of the financial bubbles, hopefully firms can think more about the law, not business, when they try to manage a thousand lawyers.