When Law Firms Fail

Abstract

Large firms had, until last year, been advised to grow, enter new markets, and concentrate on "high value" work, especially in structured finance. Now, those firms have terminated thousands of lawyers and other employees, and some well-established firms have gone out of business. The firms that expanded most aggressively are now in the most trouble. Those firms competed for high stakes cases, for which they could charge premium fees, and the resulting "winner-take-all" market incentivized risky strategies. The firms hired large numbers of associates to exploit the human capital of the partners, but, when the credit bubble burst in 2008 and transactional work declined sharply, corporate lawyers became underemployed and associates were then the most readily terminated. As assets held by the firms declined and lawyers left, voluntarily or involuntarily, banks that had extended credit to the firms began to demand repayment, forcing some firms into insolvency. Corporate inside counsel sought to take advantage of the buyers' market by pressuring the law firms to restructure billing practices, especially advocating or demanding fixed fees and reduced rates for the time of junior associates. These pressures, together with other developments in the international market for corporate legal services, promise fundamental change in the business practices of the firms.

Keywords: legal profession, law firms, legal services markets

JEL Classification: K40, K10