The demise of Dewey & LeBoeuf only a few years after the merger of Dewey Balantine and LeBoeuf Lamb is a shot across the bow of the legal establishment, for the failure of the firm is not the result of an isolated incident of mismanagement. To be sure, the guaranteed payouts to star partners and the unusually large debt amassed by the firm did precipitate the fall; however, the payouts and the debt were only symptoms of a much deeper structural malaise affecting the entire legal industry.
The economy in which legal services are supplied is in the midst of a profound transformation. Rapidly advancing technology has caused an increasing globalization and privatization. The legal establishment has endeavored to respond to these forces by creating increasingly larger law firms with high fixed overhead costs in multiple jurisdictions. The merger of Dewey Ballantine and LeBoeuf Lamb is a classic example. However, as explained fully below, this does not appear to have been the right response. Like a house of cards, large law firms like Dewey can collapse at the slightest downturn in the economy.
Let's consider why. First, changing technology has created whole new lines of business that require legal services, while it has destroyed other businesses, eliminating or shifting their demand for legal services. The contrast between Instagram and Kodak illustrates the point. Instagram, a photographic services company that is only two years old, was acquired by Facebook for one billion dollars; a few months before, Kodak, another photographic services company but one that has existed since the nineteenth century, filed for bankruptcy. Law firms providing legal services to clients in the photographic services industry must adapt to the changing landscape in that industry; otherwise the demand for their services will inevitably shrink. In this context, smaller, more specialized firms, the so-called "boutiques" will have a clear advantage over the larger, generalist firms. Boutiques employing experienced, tech savvy lawyers can respond to specific client requests quickly and cost efficiently.
Yet, any law firms have reacted to this change by growing in size, bringing different practice groups under one umbrella, hiring many untrained associates, setting up multiple offices and increasing their overhead. This is unsustainable. Clients are unwilling to pay ever higher hourly rates, especially for junior lawyers who are being trained on the client's dime. Yet because of their high, fixed overhead, large law firms are not able to reduce their rates. Therefore, the large firms are increasingly competing for a shrinking pool of business where cost is not a factor. On the other hand, firms that have the specialized expertise to provide solutions to their clients' problems at the right price are likely to thrive.
The technological forces have also created a globalized economy. Clients are increasingly providing their products and services in many different countries. This means that clients require advice and legal services across multiple jurisdictions. Again the legal establishment has responded, or rather reacted, by growing in size, taking on more overhead in many different countries. The classic example is Coudert Brothers, a once venerable French and American law firm, whose rapid expansion in the face of globalization led to its demise. In this context boutique firms with the necessary expertise that can provide advice and services in association with other value based firms in different countries, provide a more competitive solution to globalized legal issues.
A bubble economy will mask these issues, but when the tide recedes, the heaviest ships will sink. We have experienced two major bubbles in the last decade alone -- the dot.com bubble at the turn of the millennium and the housing bubble that collapsed in 2008. The wreckage left behind by each of these bubbles includes names such as Brobeck, Phleger & Harrison, Morgan & Finnegan, Heller Ehrman, Dewey & LeBoeuf, Thielen Priest & Reid.
The large law firm model is stressed by the technological forces that have spawned a global world where money and power are increasingly in private hands. The fate of the remaining firms will be dictated by their clients' choices. And clients have been examining alternative solutions. Glimpsing the future of the law firm therefore entails understanding the choices available to clients. Here are some:
- Consolidate all of your legal work with one firm and ask for discounts. While it may be more convenient for the client or its in-house legal counsel to have one firm to communicate with, consolidation of legal work with one firm will not result in cost efficiencies for the client. In addition, a single law firm may not have the expertise to handle a client's multifaceted legal needs. Incidentally, it is this mentality that has allowed, and even encouraged the large firms to exist and grow in size. However, as clients are pressured to reduce cost, this solution will be discarded.
Any business that is able to provide what its clients want at the right price will thrive. The future may well bring smaller, more specialized, more tech savvy law firms, with connections to each other across multiple jurisdictions. This does not mean that large law firms will disappear overnight; only that the trend is likely to be more towards boutique, more specialized firms, rather than the mega firms created through mergers such as the one that gave us Dewey LeBoeuf. Meanwhile, there is a great deal of pain in store as the legal establishment is forced to adapt to the shifting economic landscape.
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