What Lessons Can Small Firms Learn From the Recent Bankruptcy of Dewey & LeBoeuf?

Vol. 1, No. 12

Richard Schenkar is an attorney who writes and speaks on online research technique, computer security, and law office management. His column “Practical Resources” appears monthly in the Washington State Association for Justice Trial News. He edits the Washington Lawyer Practice Manual chapter on “Law Office Management.” His blog is online at http://theinfoconnection.blogspot.com; his website is online at http://www.richardschenkar.com, and his email address is richard_schenkar@juno.com.

 

  • Foster a firm culture that thrives on efficiency.
  • Relate compensation to productivity.

 

Dewey & LeBoeuf is a New York-based law firm with worldwide connections that filed for bankruptcy on May 28, 2012, with approximately $315 million owed to more than 5,000 creditors and with $13 million in cash and $255 million in accounts receivable.

The cautions to small law firms framed by the Dewey & LeBoeuf bankruptcy include 1) cultivate a firm culture that is open to new ideas and change; 2) know your numbers and understand their significance; and 3) relate compensation to production.

 

Firm Culture

Dewey & LeBoeuf was formed from the merger of two large law firms—one of which had Thomas E. Dewey as a named partner. He is familiar to many as a former candidate for president of the United States. The firm organized itself as one of insiders that served insiders. That attitude—and the great success that attitude brought—created an insular culture that made it difficult to consider changes or new ideas. The way the firm grew—especially in later stages—was by lateral transfers with substantial financial guarantees to the transferring lawyers. That is good for the transferring lawyers until clients stop paying bills. Then a battle starts for whatever crumbs are left. The success of the firm kept people from asking questions about what could be done to practice law more effectively. An irony is that the firm’s own website touted its capability to shape solutions for its clients (but, perhaps, not for itself):

Based on decades of experience in corporate law, governance, restructuring and litigation, Dewey & LeBoeuf has assembled a next generation capability to achieve clients’ goals . . . Our multidisciplinary approach enables us to develop special tools that allow directors and management to avoid “not knowing.”
 

Know Your Numbers

One of the big problems lawyers have is that we are not always comfortable with numbers. It may have been one of the subjects that we really sought to avoid. But running a business—and the practice of law is a business—requires a certain awareness of numbers. If you are numerically challenged, you do not have to admit it—here are some sources you can use to get comfortable with the numbers you need. Merrill Lynch Pierce Fenner & Smith offers help in the form of two online documents-”How to Read a Financial Report” and “Understanding Financial Reports.” Both of these documents explain each line in a financial statement and the significance of some ratios between certain items on balance sheets and income statements that are accepted indicators of financial health.

Key ratios are important in financial analysis of business. When they are used in comparison with similar ratios of similar businesses, they suggest occurrences significant to competitive intelligence specialists.

There is an explanation of key business ratios on the Dun and Bradstreet website and a one-page guide available from the US Small Business Administration’s Service Core of Retired Executives (SCORE).

Ratios themselves for various lines of business are available online on http://www.bizstats.com and on the MSN Money Central site.

The two most valuable assets in a law firm are the firm’s reputation and the firm’s client list. With those, the firm can always build possible connections and client relationships as long as the firm’s reputation is positive and the clients are happy (or, at least, positive about the firm). They are not liquid or easily measured, but they are reflected in the objective measures that accounting generates.

 

Relate Compensation to Production

The classic law firm with its tiered partnership tends to award senior partners for their interest in the law firm, rather than the production of legal work. This is undoubtedly in deference to the years it takes to build a positive reputation that generates current business. But financial guarantees, pension payments, and other financial commitments create compensation that may be disproportionate to income actually produced. When cash flow stops, the crisis begins.

A small firm can avoid the problems of Dewey & LeBoeuf by cultivating a firm culture that is open to new ideas, adverse comments, and new processes; by being aware of the vital statistics of the firm; and by paying people (even you) by what they produce.

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