Why Law Firms Fail

Over the past 18 months, the failure of New York-based global firm Dewey & LeBoeuf and several longstanding Florida firms, including Ruden McClosky, has highlighted how business strategy and good internal management can be as important to a firm’s survival as its legal competence.

In the case of Adorno and Yoss, a longtime, successful Miami firm that failed early in 2011, disciplinary action against co-founder attorney Hank Adorno set off a spiral that ultimately brought the firm down. But in the absence of conduct issues, attorneys in Florida and legal experts elsewhere say firms that fail tend to fall victim to one of several problems:

» Overconcentration in one area of the law. Rutherford Mulhall, a more than 20-year-old Boca Raton-based firm that at one point had about 20 lawyers, closed suddenly in October. Reportedly, much of the firm’s business involved real estate and mortgage law — a concentration that was also a factor in the demise of Ruden McClosky.

» Debt. Ronald Kammer, partner in charge of the Miami office of Chicago-based Hinshaw & Culbertson, says when firms “go into lines of credit to pay for overhead,” you know they are in trouble. He says several attorneys who were considering joining his firm wouldn’t sign on without assurance that the firm wasn’t borrowing in that way.

» Failure to manage overhead. Ruden McClosky suffered from its focus on real estate and failure to diversify, but also because it waited too long to reduce its office space, too-generous benefits and compensation agreements, according to a Daily Business Review article. Some partners left when the firm asked them for signed personal guarantees to back up its credit line.

» Poor hiring. Dewey & LeBoeuf’s downfall came in part because it gave new, high-profile hires big guaranteed contracts that it wasn’t able to pay. Kammer says the desire for growth or prestige can lead firms to hire attorneys who don’t fit with the firm’s culture — or whom the firm can’t really afford. Christine Howard, Tampa regional managing partner for Atlanta-based Fisher & Phillips: “We’re very careful who joins our firm, even if they have a large book of business.”

Manuel Garcia-Linares, managing shareholder of Miami-based Richman Greer, says maintaining the culture of his law firm has been critical to long-term success. Garcia-Linares says he would rather lose a lawyer than put up with disruptions in the office. Because of that, morale and productivity are high. “We have a very healthy place to work,” he says.

» Poor client selection and management. Firms can run into trouble if they accept clients who can’t pay. Ruden McClosky reportedly stuck with some clients to a fault, extending credit to some who couldn’t pay their bills. Garcia-Linares says he takes the measure of potential clients the same way many other managing attorneys do — a bit of gut reaction. “If there is hesitation about paying the initial retainer, maybe they are not the client we want,” he says. “You need to watch what kinds of business is coming through the door.”

» Failure to develop younger leaders. Howard says her office uses the fairly new and unusual practice of “rotational leadership,” where a different managing partner is installed every three years. “It gives more attorneys the opportunity for leadership roles, for experience,” she says.