Heller Ehrman – Business as usual or a disaster waiting to happen

Wall Street isn’t the only institution falling down around us. A law firm, not the first, that was first opened 118 years ago in 1890, collapsed in a heap of depressed lawyers, staff and clients, not to mention vendors. Many people were significantly impacted by the dissolution of this 600+ lawyer firm.

How could a banking institution, built over decades, collapse in hours? How could a law firm of such magnitude collapse in a matter of weeks?  For the law firm, there are a number of reasons provided in the public airwaves, each of which carries a significant lesson about The Business of Law®.

Here are a few of the lessons that popped out for me:

Lessons to be learned:

•    Expansion is always expensive and must be planned. If planned properly, one normally will still find a period of time in the beginning where expenditures are greater than revenues. Most law firms are not “cash and carry,” necessitating the extension of some credit in the form of increased accounts receivable. Though profitable, accounts receivable don’t get collected fast enough to pay expenses without borrowing. While the public accounts did not say whether the expansion offices were profitable, they did say that these offices were expensive and challenging. Their borrowing apparently reached the cap. Good planning would have suggested a slower pace for growth or larger line of credit.

•    Partner defections in today’s world are far more common. There is less loyalty to the firm. Strong firm cultures bonding lawyers together are harder to find.  “Free agency” is the rule of the day. One’ personal compensation is the top priority … and the RPP (revenue per partner) and PPP (profits per partner) are the most important metrics being considered when thinking about the location of one’s practice. As in baseball, free agency will strip many stars away from a law firm.  In Heller’s case, once the rumors of economic challenges and partner dissatisfaction were ripe, law firms and head hunters came knocking. Once a few left, more left; then the landslide began … just as on Wall Street recently.

•    When any one client represents more than 10% of one’s business, the firm is at risk of heavy loss if/when the client leaves. Leaving can occur when the client is acquired by another company, when the client has financial difficulties and either can’t afford your legal services further or actually disappears, or other business reason. The client can also leave because of dissatisfaction with the lawyer. Whatever the reason, innocent or not, the result for the firm is the same – economic hardship. When expansion or capital decisions are made based on sustaining the revenue from these large clients, the law firm is at serious risk.  In Heller’s case, more than 60% of its business was in the litigation practice group. And, more than 25% of its litigation went away suddenly. Of course, Heller would feel a significant impact economically, especially since they were unable to replace the revenue flow quickly … and in this case, the firm collapsed.

•    There was a “Tipping Point” along the way. Where it came, only insiders know. But, when the Tipping Point was reached, it was too late to arrange a merger. Previous attempts failed, and a marriage while one patient is sick is very unlikely. Whether because of the rumors or intuition, every merger candidate passed.  Sometimes, even bargain sales are not attractive. Just look at Wall Street today, as I’m writing this. Later, we might be remorseful that we didn’t act, but, for now, acting is just fraught with too many uncertainties and doubts.

Many people were hurt. Coming on the heels of a collapsing national/world-wide economy, the collapse of Heller Ehrman was even sadder. Other firms should learn the lessons of The Business of Law®  from this experience.

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