I finally had some time by the pool this summer to read the
June 2010 issue of Law Practice Today.
The theme of the issue is Sifting Through
the Ashes of Law Firm Dissolutions, which turns out to be a very revealing
look back over the past few years of economic turmoil within our profession.
While I recommend reading all three articles on the topic of why firms dissolve, I found the thesis of one article far more insightful and compelling than the others.
The first article, by venerable management guru, Ed Poll, focuses on the need for firms to aggressively manage cash in harsh economic times. Paying attention to cash flow, promptly collecting receivables, and reducing overhead are his keys to avoid failure.
J. Mark Santiago, makes a strong case in the last article that the lack of three traits--leadership, strategic focus, and financial discipline—has brought down some once-mighty firms.
But the article by San Francisco lawyer Will Nathan contains the most compelling and often overlooked reason behind law firm failure: The move from true partnerships to limited liability companies. Nathan writes that LLCs have made it easier for rainmaking partners to flee their firms at the first sign of trouble because their personal assets are not at risk. He contrasts this to true partnerships where lawyers risk losing their personal assets; partners tend to stick together longer to work though financial problems in order to avoid losing personal assets to creditors. To support his thesis, Nathan points out a number of San Francisco firms that converted to LLCs and have gone bankrupt in the past few years, namely Brobeck, Heller, Graham, and Thelen.
Without the responsibilities of a true partnership, Nathan
writes, rainmakers flee to other firms on more solid ground, leaving remaining
LLC members and creditors to stave off bankruptcy or dissolve.
I seems to me that leadership, cash flow and focus are important, but without the integrity and accountability of a true partnership, a firm will remain subject to the whims of a few.
With the U.S. and world economies still not in the clear, if I were a “partner” in a big firm LLC today, I would definitely be checking my firm financial reports on a regular basis, and check out any rumor of a big rainmaker leaving the firm.