Ward Bower’s Existential Threats to Law Firms provides an excellent review about a few of the economic and demographic issues that threaten today’s law firms. As Mr. Bower notes, some of the law firms previously fixtures in league tables and in the AmLaw 200 have either failed, been acquired or otherwise have disappeared from view-all because economic and/or demographic issues had a significant impact.
The five issues or “existential threats” are easy to understand thanks to the clarity of Mr. Bower’s article. Too much long-term bank debt at a law firm can cause earnings to erode and contributors depart. An expiring lease is another threat, causing landlords to demand partner guarantees prior to any new lease being offered. If the landlord’s demand cannot be resolved favorably, the law firm’s partners may disperse.
A particularly insidious third threat exists when a law firm has unfunded retirement obligations. Like the bank debt, the unfunded retirement obligations can eat into earnings causing younger partners to depart. Today’s competitive lateral hiring environment yields yet a fourth threat. Firms that lured laterals with minimum income guarantees may be more financially stressed, especially if the hires have been lackluster.
Finally, the lack of succession planning threatens many firms because boomer leadership may retire, die or become disabled. Without an experienced hand ready for the tiller, the good ship law firm can easily run aground.
Mr. Bower warns that the presence of any of the five issues can leave a firm at considerable risk. His admonition that today’s law firm leadership takes heed is well placed. Yet firms receiving a clean report card on the five existential threats may still face risk due to the aging of today’s law firms. Three demographically based challenges, tangentially touching on Mr. Bower’s existential threats, are discussed below:
Expiring Leases. Mr. Bower’s focus on landlords demanding lease guarantees is spot on. A standoff between the law firm and the landlord could lead to partners throwing in the towel and winding up their firm. But even if no guarantee is demanded, the advent of a terminating lease can cause partner reflection that leads to some of them deciding to go their separate ways. When facing another 10 years with partners no longer as symbiotic as they were 10 years earlier, some may decide to not re-up. A fracturing of the law firm can result thus leading to its demise.
Retirement. Mr. Bower’s article highlights how unfunded retirement obligations can sap a firm economically, causing instability, departures and then the end of the firm. But even if a firm does not have an unfunded retirement obligation, it may have productive boomer lawyers facing a life crossroads. These lawyers may be less concerned about the financial burden of an unfunded retirement obligation and more interested in having a retirement benefit itself. While younger partners may be pleased that the firm is free from an unfunded retirement obligation, the boomer lawyers may wish their firm had a retirement plan providing more financial security for their latter years. Those thoughts about retirement on the horizon can stimulate departures by critically important partners looking to supplement a nest egg. For smaller firms that can’t easily endure the departure of significant economic contributors, the lack of a non-qualified retirement plan may cause wanderlust, departures and then crisis.
Guaranteed Income for a Laterally Hired Partner. While a firm may feel very good about not having offered guaranteed incomes to lateral hires, that same firm’s legacy rainmakers may be lured away by that exact kind of unwise inducement. In a legal services market in which self-interest fuels lateral movement, no firm is free from the risk that its most productive lawyers, including those from the loyal boomer generation, will leave for greener (as in money) pastures. So even if a firm has avoided the questionable practice of guaranteeing income for laterals, its best partners may have their heads turned (see Retirement, above) by firms not so disciplined. In today’s market, all firms are at risk of losing their most valuable assets.
Many law firms are blessed with productive lawyers from the boomer generation. But how many of those firms can afford to see those same lawyers decamp for another firm? What has your firm done to guard against that happening? Is it prepared in the event boomer partners say adios?