Why Law Firms Collapse

Volume 3 • Issue 3 • March/April 2017
Cover
Main Article Image

Navigating Uncertain Waters

The client’s perspective on firm failures

Imagine you are the general counsel (GC) of a large company with a full spectrum of corporate legal needs. You have found a firm well suited to advance your interests, and you have formed deep relationships with a group of talented lawyers from that firm who know you, your needs, and your business. This hiring decision was thoughtful and deliberate. You have just the right representation in place. But what happens if your go-to firm undergoes a major restructuring or, worse yet, what if it fails? What factors do you consider to protect your company from the fallout? What do you do next?

In the lead story of this issue of The Practice (“Why Law Firms Collapse”), John Morley analyzes the mechanics behind law firm failures based on an internal analysis of law firms themselves—the business practice, regulatory structures, and organizational dynamics. In this article, we turn the tables and examine law firm failures through the eyes of their clients, from the first rumblings of trouble to once the dust has begun to settle. How does the client process information as the firm goes under? How can lawyers work with their clients amid the chaos to best serve their needs and retain their business? And, more generally, what can we learn about the client–law firm relationship from these failures? To help answer these questions, The Practice interviewed the chief legal officers/GCs at two major companies, Sabine Chalmers of Anheuser-Busch InBev and David Snively of Monsanto. Together, they have decades of experience working with outside counsel, and both have had to navigate the uncertain waters of a law firm failure.

Communicate, communicate, communicate

In his article, Morley notes that over the past few decades, law firm failures have happened to firms regardless of their size, longevity, reputation, and, interestingly enough, even their revenues. This can be an unsettling reality for companies and clients who have spent years—even decades—developing deep relationships with their outside counsel. As a case in point, Chalmers recalls her company’s relationship with the major law firm Howrey before its 2011 collapse:

It was truly a sad and unfortunate situation because Howrey had represented Anheuser-Busch for decades. When we, as InBev, combined with Anheuser-Busch, we were delighted because we had always respected Howrey from afar. They managed to cultivate that boutique expertise across so many different areas of practice, especially in areas where we needed support. So we spent a number of years building a relationship with them, doing a lot of detailed work in anticipation of how we would work together. Unfortunately, not all of that would come to pass.

Academic research supports Chalmers’s nod to the incredible stickiness of law firm relationships. A major study of the purchasing habits of U.S. GCs conducted by the Harvard Law School Center on the Legal Profession (the Corporate Purchasing Project, or CPP) found that, contrary to an oft-cited perception that increasingly sophisticated GCs are moving toward “spot contracting” models for outside counsel, law firm relationships have been and remain incredibly durable. On one side of the equation, GCs reported that “prior relationships” with their outside counsel was a primary driver of their hiring decisions. On the other side of the equation, the study found that GCs rarely terminate law firm relationships, even for significant matters.

The durability and long-term nature of client–law firm relationships makes sense, for both the clients and the firms. For instance, the give-and-take of long-term relationships generates trust and shared norms. These relationships also reduce information asymmetries and encourage the development of client-specific knowledge. (There is increasing evidence that law firm relationships are becoming more, not less, sticky, given the complexity around establishing clear data security procedures.) And long-term relationships produce what is sometimes called “legal capacity insurance”—in effect, a law firm sells a soft guarantee that it stands ready to provide legal services as needed by the client. What often happens next is the client provides a steady stream of work over time. As Snively notes, building any new firm relationship is serious business. “It is an investment, and it is generally not a short-term relationship. It’s a multiyear relationship where we are investing in and educating the firm.”

Given the stability, trust, and long-term nature of outside counsel relationships, any disruption—particularly an unexpected one—to these relationships is understandably disconcerting. “I have to say,” Chalmers notes, “when I was reading about what Howrey was going through in terms of the lateral hires and expansion, I often thought to myself, ‘Gosh, a firm like Howrey, which is built on the strength of its culture and its boutique expertise, how is all this expansion going to work?’” Monsanto’s Snively echoes Chalmers’s point. “Sometimes you can feel it from the tension in the firm and the people you work with. We give our law firms space to run their businesses, but when there is trouble, it’s our job to know.”

Given the depth of client–law firm relationships, how should law firms handle their end times from the client’s perspective? In a word: communicate. Put simply, GCs do not want to be caught off guard that the firm providing their trusted counsel has just failed. “If there is a restructuring of some kind that happens in a firm where we are a substantial client, and they fail to communicate with us prior to the announcement,” Snively explains, “that is truly disappointing on our end.” He goes on, “We do not want to be surprised. We would feel a little betrayed if a major firm that we are associated with imploded and nobody had the courtesy to reach out. I understand the firm is often in difficult position in needing to keep certain information confidential, but we need to know that our interests have been considered.”

The upside is that law firms often do communicate with their outside counsel. “The good news,” Chalmers notes, “is that Howrey was forthcoming about the problems they were having. There were discreet calls where they would say, ‘Look, this is terrible and it is truly unfortunate, but it is happening.’ Having that communication is absolutely key.”

How should law firms handle their end times from the client’s perspective? In a word: communicate.

Indeed, this client goal—early communication—matches up with what senior partners of failed firms told The Practice. Firms will often have internal discussions to determine how information is handled and who communicates what to their clients while nevertheless recognizing that they have a responsibility to inform the clients when the firm is in serious jeopardy of collapse. It is incumbent upon them not only to assure the clients that their interests are protected but also to ensure that those interests are not impacted by the firm’s existential crisis. Even while partners and associates prepare for the end, clients are paying close attention to how they bear the burden of their responsibility amid the chaos. Regardless of whether a firm goes under, reputations will carry on. As one longtime partner who went through a failure noted, “Law firm failures are scary. They happen fast, and there is an impulse to act in a self-interested way. But in a true partnership, everyone succeeds or fails together. Once news leaks outside the firm, you can’t control what happens to the story, so law firms need to take the responsibility to keep their clients informed.”

The bottom line is, as Chalmers advises, “if the inevitable is coming, give clients as much of a heads-up as possible in the right way and, specifically, try to come with a plan for how their work is going to be serviced. Try to think some of those things through like a business would if it was suddenly unable to deliver its product. I think that is the way to look at it.”

Law firms—or lawyers?

So what happens when a firm actually fails? The client has several factors to consider, chief among them whether to stick with their existing lawyers, many of whom are most likely now moving to a new law firm, or to seize the opportunity to reevaluate their law firm—and lawyer—relationships?

Reflecting on the aftermath of Howrey’s collapse, Chalmers recalls her company’s debates about whether to follow the lawyers or perform a broader review of outside counsel. On the one hand, although the law firm may have collapsed, in many cases she was happy with the work that her team of Howrey lawyers was performing. From that point of view, it was logical to follow the lawyers. On the other hand, all their Howrey lawyers did not move en masse to a single new firm, raising the question of whether the quality of the work was more attributable to the “team” than to any individual lawyer.

Reflective of that point, Chalmers says, “It would have been one thing if a whole group had gone to one firm, because then you have the option of following the group.” She goes on, “The challenge was, they all ended up in different places—they went to different law firms with which we had no relationships. We might have liked one or two individuals who went to a particular firm—and yes, we did continue to work with them—but in most cases we were not clear on the bench strength behind them.” Snively echoes Chalmers’s sentiment, stressing that retaining top talent is the priority, but that talent is an inclusive term entailing not only a single lawyer but also the team around him or her. “In this type of situation,” he says, “it is important to watch for who surrounds these lawyers once they move.”

There is increasing evidence that law firm relationships are becoming more, not less, sticky.

So what’s the takeaway? It is a difficult choice when a law firm fails or restructures. On the front end, “it is tough for clients,” Chalmers says, “because very often you are dealing with the individuals, yes, but you are also dealing with the strength of the firms that back them up. There have been a few cases in which we have moved for an individual. That being said, it is also very dependent on what the firm does and what people, if any, are staying. If the firm immediately reaches out and says, ‘So-and-so is gone, but we want to introduce you to Mr. or Ms. Such-and-such, who is going to do an amazing job for you and with whom you will have the same chemistry,’ if they are very proactive on that front, then you are less likely to leave.

A change is gonna come

Examining law firm failures from the client’s perspective and the debate between law firms and lawyers casts a spotlight on a broader issue, one that clients are facing in the context of the incredible increases in lawyer mobility the profession has witnessed over the past few decades. In other words, deciding whether to follow a lawyer who moves to a new firm or stay with the law firm he or she is vacating occurs frequently—and for factors far more common than law firm failures (e.g., laterals, mergers). For example, according to recent ALM data, from 2010 to 2014, lateral partner hires—a scenario that, like a firm failure, has the effect of forcing GCs to follow the lawyer or stick with the law firm—have increased nearly 40 percent (from 2,026 in 2000 to 2,736 in 2016). Of similar effect, ALM data reflects the high number of firm mergers and consolidations: nearly 40 percent of the largest 25 firms in the Global 100 were created from mergers or combinations, and nearly 70 percent of the Am Law 200 have taken part in some sort of merger since 2000. In each case, lawyers are moving, letterheads are changing, and, just like during a law firm failure, clients are increasingly forced to decide: go with the lawyers or stick with the law firm?

As Chalmers and Snively stressed in the context of the direr circumstances surrounding a law firm failure, there are good arguments on both sides of the equation. On the one hand, lawyers are the ones doing the ground-level work. They are the ones whose skills, expertise, and efforts are apparent in deals and in litigation. And, often enough, they are the ones holding the keys to client relationships. So it makes sense that some companies view the individual lawyers as the most important factor to consider.

On the other hand, any given lawyer is supported by the resources of his or her firm. The hard work of a partner is not just his or her own but also the hard work of his or her associates and the advice of his or her colleagues—as well as the structures and cultures within which the partner works. And there is some evidence that suggests clients do not always move with the lawyers. For instance, ALM data on an analysis of lateral partner hires found that 30 percent failed to bring in more than 50 percent of their expected book of business. Of course, we don’t know from this figure where the expected business went (e.g., it could have stayed with the partner’s original firm or gone to an entirely different firm or lawyer), but it provides some evidence that clients don’t always go with their laterals. At the same time, research does suggest that the more partners and associates work collaboratively on a client’s matter, the more institutionalized and sticky the relationship is to the firm itself. (For more on this, see Heidi Gardner’s research in “Teamwork and Collaboration.”) What is clear, however, is that law firms are more than neutral vessels. They are incubators of talent, with associates being shaped by partners and all the lawyers being shaped by the structure that surrounds them.

Clients are increasingly going to have to get used to their lawyers moving between firms.

One way of empirically examining this conundrum is based on the lateral movements of “star lawyers”: When a “star” leaves a firm, do in-house legal departments follow? According to Harvard’s CPP data, more than half of survey respondents (54 percent) reported seeing star lawyers at law firms move laterally during the three-year study period. And, despite possible conflicts of interest or the threat of damaging relationships, most GCs moved their work to the new firm of the star lawyer. Nearly 70 percent of GCs said they do so “every time,” and 84 percent said they do so the majority of the time. Work levels were also not affected following these star moves—they either stayed the same at the new firm or even improved in 20 percent of cases. As one interviewee noted, “I’m also a big believer that you hire a lawyer, not a law firm, so generally, the ability of that lawyer to service me is not impacted by the move, and there aren’t any other specialized skill sets in the firm that enabled that partner to support my needs. I’m kind of agnostic.”

That being said, GCs stressed the added value of teamwide, client‐specific experience. As such, they noted they were much more likely to move work when the star lawyer moved as part of a team than when the star lawyer moved solo. As one interviewee noted, “[Firm 1] had an attorney who did our IP work, trademark, trade name. She’s been in three different firms, and we have followed her everywhere she’s gone. She’s built a team in each firm. She happens to be at [Firm 4] now. And so yes, we do follow people around.”

Given all this, one thing is clear: clients are increasingly going to have to get used to their lawyers moving between firms, whether due to something as drastic as a law firm failure or as relatively routine as a lateral move or firm merger. The trend to watch will be how and when clients decide to stick with the firm or move with the lawyers.

1 2 Single Page

Why Law Firms Collapse Volume 3 • Issue 3 • March/April 2017

Cover