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LawBiz® TIPS – Week of February 5, 2013

LawBiz(r) newsletter

I'll be in Tucson, AZ the week of February 4th. If you're there and want to visit, contact me.

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How Does a Law Firm Commit Suicide?

Financial blogger Bruce MacEwen recently said that more Wall Street and middle market firms are quoting "suicidal prices" for legal fees simply to get enough work to keep lawyers occupied and cover their fixed costs, and attributed it to firms paying too much money to too many lawyers. "A law firm cannot really lose money for even one year and remain viable," he said, "because that's what they pay their partners with."

The issue of too much pay for too many lawyers is definitely a "BigLaw" phenomenon at large corporate firms with many hundreds or even thousands of lawyers. Earlier this year a book on law firm economics called Declining Prospects, by corporate attorney Michael Trotter (see review) demonstrated what happened to firms that added larges numbers of lawyers beginning several decades ago, to advise clients about global growth and surging regulation. Trotter noted, for example, that Baker & McKenzie LLP, the largest U.S.-based firm with almost 4,000 lawyers, has a leverage ratio of 4.48 associates to each partner but ranks 79th in average per-partner profitability. Other big firms show a similar disparity between size and profits.

The conclusion is stated clearly in the review cited above: "By bulking up so aggressively, law firms made themselves more vulnerable to economic downturns. Partners at many firms failed to appreciate that all those salaried employees needed to be paid every month, whether or not new business is coming in the door." And now, because of advances in technology, many tasks like discovery can now be done in a fraction of the time with a fraction of the number of lawyers. This is anathema to the economic model BigLaw had built

For law firms of any size, the old advertising cliché "we lose a little money on each sale but make it up in the volume," can indeed be a suicidal course. Firms cannot indiscriminately add lawyers. The work must be there for any lawyer added, at rates that can cover the lawyer's fixed technology, staffing and training costs. Like every other profession and trade, the practice of law is a business. That means law firms are governed by the same formula that defines all business success: P = R - E. Profit equals revenue collected less expenses. Ignoring this message is suicidal for any firm.

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In this issue:

How Does a Law Firm Commmit Suicide?

Growing Your Practice... 30% OFF - Special price!

Video: 8 Action Steps To Stay Afloat

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American Bar Association

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