When BigLaw Fails: Howrey

You might have missed it, but last week, but Howrey, the 50th largest law firm in the United States and a major player in Washington D.C. litigation, voted to dissolve.

Steven Pearlstein of the Washignton Post has a nice postmortem that hypothesizes what went wrong:

Howrey expanded too much too fast, its overhead expenses growing even faster than its revenue....

Fixed costs are a challenge for all law firms, but particularly so for litigation firms such as Howrey that can’t count on a relatively steady flow of work from corporate clients — leases to review, mergers to handle, securities filings to make. Revenue in the litigation business tends to be lumpy. You get paid only when there is a case to be tried and then often only after the trial is over. Howrey, in particular, had come to rely increasingly on revenue from such contingency fee cases, which rose to $35 million in 2008 and then fell to $2 million a year later.

Pearlstein also notes that Howrey ran into conflicts of interests problems as it grew, as well as a weak partnership in general that was not as committed to the firm itself as the partners were committed to themselves. This paragraph in particular struck me as interesting:

For me, it is of symbolic and substantive importance that law firms are no longer partnerships in the strict legal sense. Most, like Howrey, had transformed themselves into “limited liability corporations” or “limited liability partnerships,” a new hybrid form of business organization. Unlike old-fashioned partners, those in an LLC or LLP are shielded from individual responsibility for the liabilities of the firm. That means that they are apt to be less careful in making decisions about what risks and expenses to take on, knowing they do not face the prospect of losing all of their net worth.

This seems to be yet another instance where the respective bar associations rubber-stamped fundamental changes to the legal profession without fully digesting the consequences. When state legislatures started adopting the LLC and LLP business formats, law firms were some of the first on the boat (at least on the latter), and I wonder if anyone actually voiced opposition, claiming there was intangible value in the general or limited partnership structure (I'm not sure about this, nor am sure how law firms that operate as corporations play into it - will have to research in the future). But I will say that it's clear many intangible values in the legal system got left on the side of the road as excess baggage on the speedy voyage to multinational, 1000-firm behemoths.

But what about the future of the BigLaw model? As the Howrey example suggests, large firms dependent on big-money litigation to see profits have a volatile existence. It also seems to me that such firms are going to be more dependent on ace litigators who may have incentives to use the firm's resources to build their reputation and then spin off on their own when their own value exceeds that of their peers.

This seems, to me, like a problem stemming from law firms trying to run themselves like normal businesses. Law is analogous to sales in that your rainmakers rake in clients that the entire firm benefits from. However, a routine salesman has little power to leave because his future success is tied to continuing to sell the product, which is ultimately company property. Law doesn't work that way; the "product," the rainmaker's loyal and devoted service, is not really unique property of the firm. Thus, such a model fails. The cynic in me thinks that people realized this a long, long time ago and that's why law firms went towards partnership structures (liability for each others' debts promotes cooperation; tighter controls on people leaving) while other businesses incorporated as a matter of course, but I digress...

But what about transactional law firms? Surely, there's a BigLaw future for the white shoe operations that handle securities filings, mergers, etc., isn't there? For the most complex scenarios, yes. But my hunch is that transactional business profits will dwindle in the coming years as automation becomes an even greater force in the legal profession. If places like legalzoom can offer wills now, what's to say Fortune 500 companies won't figure out how to simplify all the transactional business they have to do? Securities filings are fairly standardized anyway. With more sophisticated electronics, I can't see 500+ attorney firms being a necessity for large companies in the future to do their routine transactional stuff. Heck, every company on the NYSE/Nasdaq/Amex would benefit if someone found a way to cut out the white shoe lawyers, and with increasingly-impressive computer technology, I'm sure someone will find the armies of Harvard and Columbia grads completely unnecessary.

Remember that most BigLaw have higher operating costs and overhead to even play the game, thus making them more susceptible to significant shifts in revenue. A solo P.I. attorney can feed his family on one or two juicy settlements. Not so at the top firms.

With it appearing that 2010 may have seen the peak of law school applications, perhaps it's time to ask if we're also seeing a peak in large law firms. I honestly don't know for sure, but given the confluence of certain events, it seems like a good possibility.

For further reading on this topic, I'd recommend a recent post over at the Legal Dollar citing the recent demise of several big firms and how to look for stability in a law firm.

State Budget Cuts "Hurting" Arizona State

From the National Jurist:

As state governments struggle, many have slashed their high-education allocations. . . At Arizona State University Sandra Day O'Connor College of Law . . . Dean Paul Schiff Berman has suggested a five-year plan where tuition will rise between 5 to 10 percent and student enrollment with increase from about 195 to 225 per class.

Other schools facing "significant shortfalls" mentioned in the article include Minnesota, Michigan, and Virginia.

But what strikes me about the article is that their definition of "significant shortfall" seems to be slightly different than mine, especially as it applies to Arizona State. To wit:

"The University has asked us to find a way to make us self-sufficient with regard to our operating expenses," [Berman] said. "That requires us to generate about $6.5 million more than we currently generate over the next five years."

Arizona State, as a whole, received approximately $380.93 million in state appropriations for the 2010-11 fiscal year. If the law school only has to make about $6.5 million over a 5 year period to become de facto private, that means that, excluding interest considerations, its 2010 revenue from the state is about $1.3 million, or about 0.3% of Arizona State's total take from the state.

That is a paltry, token amount that few law schools wound have any serious trouble raising (or finding in the budget, if necessary). Arizona State tuition is current $21,598 for in-state residents. At that total, adding 30 in-state students would raise roughly half the yearly total instantly with almost no additional burden on the school as long as they have auditoriums that seat more. If alumni fundraising drives couldn't raise the other $650,000, across-the-board salary cuts of like 8% (or equivalent layoffs) would take care of the rest (this is a rough estimate looking at their number of staff and guessing an average salary of over $100k, which is reasonable given that it's a top-50 law school).

Even a modest tuition increase, like the one Berman proposes, isn't that bad (although I think staff and program cuts should come before tuition increases as a matter of ethics).

But I have a problem with Berman's general attitude towards the situation.

Berman said students will be minimally impacted by increases in tuition and class size. To that end, ASU is boosting its financial aid to qualified students, and it has created a post-graduate public interest fellowship program, designed to provide a stipend to students entering the public sector. And first-year students are looking at following the example of their 3L peers by creating a fund-raising effort to help fund new scholarships. (Emphasis mine)

Wow, what a business running a law school must be.

• Your consumers are "minimally impacted" by paying $9,000 (over 3 years) at 7.5% interest.
• Although your budget has a "significant shortfall," you can boost financial aid (discounts) to guaranteed customers (e.g., to boost offers to high LSAT kids) and give out stipends to boost your post-graduate employment numbers.
• Your current consumers are setting up voluntary, unpaid fundraising drives to help with your expenses.

And now you get the advantage of being free of the guesswork involved in state budgeting.

The New Normal; Can "Entreprenurial" Dayton Adjust?

Great article from Claire Zillman at AmericanLawyer.com:

After two years of turmoil, the nation's largest law firms are settling into a new normal.
...
"The loss of leverage is not a short-term reaction, it's a significant long-term change," says Bingham McCutchen chairman Jay Zimmerman. "We're hiring selectively and using paralegals and staff lawyers for more mundane tasks." He's not alone: A little more than half of our respondents (55 percent) said that their firm had used contract lawyers, up from 44 percent a year ago.

Moreover, few firm leaders worried that a smaller class size would leave them short-staffed in the event of a sudden uptick in work. With so many recent law school graduates looking for jobs, firms can staff up quickly if the need arises, says Perkins Coie managing partner Robert Giles.

However, the law schools continue admitting students by the thousands even when their most notable practitioners have full cognizance that there is a massive oversupply of labor, so much so that elite students no longer have leverage.

And yet law school administrators, charged with instilling ethics in the next generation of lawyers, continue to place a premium on advertising. For example, Dayton just hired SIU Law Professor Paul McGreal as its new dean. What drew him to Dayton?

"This is a law school that's been entrepreneurial in looking at curriculum and the recruitment of students."

"[E]ntrepreneurial in . . . the recruitment of students?" It's hard to tell what exactly Dayton is doing that is so "entrepreneurial" since it's attracting students with a median LSAT of 152. Perhaps it's in the slick marketing as evidenced in their 2010 Viewbook that drew McGreal's attention. Let's see some samples:


For those who cannot read the small type (or cannot avert their eyes from the egregiously-hilarious large type), on this second page Dayton boasts of having a 94% job placement rate for the class of 2008 within nine months of graduating and having 90% of graduates pass the bar on the first time.

This is curious, to me, because their 2005 numbers were only 85.4% employed and 81% bar passage. Given that the school obviously has no scruples with lying ("the world definitely needs more lawyers?" "Long hours in the law library" will make someone NOT want to call Dr. Kevorkian?), my healthy skepticism is running at full blast. Perhaps this link for the Class of 2007's data better explains why the school can claim 94%:

					Job Type
					Bar admission required or anticipated (e.g., attorney and corporate counsel positions, law clerks, judicial clerks)		83.0%
					J.D. preferred, law degree enhances position (e.g., corporate contracts administrator, alternative dispute resolution specialist, government regulatory analyst, FBI special agent)		11.0%
					Professional/other (jobs that require professional skills or training but for which a J.D. is neither preferred nor particularly applicable; e.g., accountant, teacher, business manager, nurse)		5.0%
					Nonprofessional/other (job that does not require any professional skills or training or is taken on a temporary basis and not viewed as part of a career path)		1.0%

Right. 2007 was before the "new normal" fully set in and 17% of your grads did not need a Juris Doctor. Tell me again why the world needs more lawyers, please. Tell me why I should invest 3 years in a field where the "new normal" means the labor supply is so grossly oversaturated that firms believe they can hire good talent quickly if they need to.


Ah, yes. Dayton, that city of my dreams. To think someone actually wrote these pages and didn't collapse, instantly dead of a laughter attack, is astounding.


I agree completely.

Dean McGreal, if the outright dishonesty at work here is what you call "entrepreneurial," I think you need to brush up on your ethics. This is a moral issue, and viewing prospective students the way large retailers view poor people with welfare checks is unethical behavior.

As the survey and article cited above point out, there is a "new normal" in the legal world. Telling your students or prospective students the old one will return is no more based in rationality than believing Santa Claus will show up with a bag o' jobs this Christmas. The world does not need more lawyers right now. It needs better lawyers, and even better models of doing things, but raw fourth-tier graduates are not likely to be the former or do the latter.

Law firms no longer hire in increasing class sizes and raise fees every year. As they are now run like businesses, they track every associate's financial contributions to the firm in ways not present under the old model. Your job as an educator should be helping whatever students you have navigate a world where they will not only be attorneys, but also salesmen and debt collectors. If you have a model that you think will train students to excel in this world, by all means, continue it. But under no circumstances is it ethical or moral of you to charge tuition as if the old model were still in place at large firms and 90% of your students had hopes at attorney work. They don't.

McGreal plans to assess . . . ways to keep tuition affordable. Fundraising will be a key aspect of his new job. "We have to think about ways we can address the increasing cost of law school," he said.

Considering that most law schools are highly profitable cash cows for their larger universities, how about you start by slashing tuition across the board and lowering salaries in line with the reality that there is an oversupply of attorneys able to teach at your law school?

Just a simple suggestion, but maybe it's not "entrepreneurial" enough for Dean McGreal.

BAR/BRI Looking to be Sold - Why?

Yesterday I heard a rumor from some colleagues who actually paid into the Bar/Bri scheme that they received an e-mail that Thomson-Reuters put Bar/Bri on the sale block. I wanted to post, but wasn't able to find an article or press release to source. Now AbovetheLaw has gone ahead and reported on it, complete with a connection to T-R's acquisition of Indian outsourcing company Pangea3 and the full letter sent to Bar/Bri's subscribers.

This decision to sell is in no way related to BARBRI’s performance. BARBRI is the leading bar review course in the United States with over 40 years of experience, strong leadership and quality of service. Our parent company believes, however, that bar preparation no longer fits its long-term strategic vision, which is to provide intelligent information and workflow solutions to professionals.

As disclosure, I want to note that I think Bar/Bri is a leach that does a disservice to the legal field. I have little regard for its business and believe that its continual existence is evidence that the bar associations are not doing their job to the best of their abilities (e.g. that the bar exam doesn't test the skills it should). But that's an entry for another day.

To be fair to all parties, Bar/Bri is something of a misfit in Thomson-Reuters. Its existence there is an accident of corporate history. Bar/Bri first merged into Harcourt and then into Thomson-West publishing. This made sense because Thomson-West was the largest legal publisher in the country, providing a broad range of legal information. Acquiring a small, profitable company who published legal books designed to aid bar passage made sense. Furthermore, Thomson Corporation (the parent company of Thomson-West) was one of the world's leading textbook publishers and had an expansive business in standardized testing (through Prometric). So Bar/Bri fit in multiple ways in Thomson-West's overall scheme.

Fast forward to the 2000s. Research of all stripes is moving rapidly online. Thomson Corporation begins acquiring all sorts of online information distillers across a wide range of industries. In 2006, Kenneth Thomson dies and is replaced by son David Thomson. In 2007, Thomson sells its entire textbook publication and standardized testing division, leaving Bar/Bri as an outlier saved only by the fact that it's grouped with West ("Thomson Legal") and not Thomson Learning. In 2008, Thomson acquires Reuters, the 2nd largest news dissemination service in the world. The resulting company was a $30 billion behemoth whose interests is in professional news distribution. Westlaw fits in this mold; comparatively-small Bar/Bri does not. Consequently, from their perspective, it makes sense to sell Bar/Bri as an outlier to their current business interests.

But why NOW? And why announce it publicly?

Even if a company is a misfit, a corporate conglomerate isn't going to sell it unless it's a good time to sell; to do otherwise would be a disservice to shareholders. Furthermore, leaking it to the world that a sale is happening guarantees that no one's going to overpay for it.

It is true that Bar/Bri has increased competition, but they're still the king of Bar preparation services with a rather large moat. Maybe I'm reading too much into it, but my guess is that Thomson-Reuters looks at this being the best time to sell Bar/Bri because they don't see much revenue growth in the business. Even with new law schools being accredited every day, they don't see Bar/Bri being a worthwhile investment to hang on to, when it's the default choice for Bar preparation?

Is there a chance that Thomson-Reuters sees what's going on in the law school world and realizes we may be reaching the end of the line with lawyer saturation? The people at T-R aren't dumb. The reason they're still around in a post-newspaper, post-print world is that they were forerunners in online information. Things like Westlaw and a plethora of science, financial, and healthcare tools.

Anytime anyone with that kind of vision to see where the world was going in 5-10 years does something like offload a subsidiary that by all accounts is profitable and the leading bar review preparation course, one should ask a simple question: what do they see the market looking like in 5-10 years?

Since they apparently don't see the market for Bar/Bri's services being as strong in 5-10 years (or as relatively strong) as they see it now, at least enough to keep it within their legal services family, why might that be? And why would they be so desperate to unload it that they don't care that Bar/Bri went public with the information? What do they know that the people supporting law school don't?