Why law firms must innovate before they disintegrate
Wise consumers never accept a car mechanic’s first quote. This month, there were a variety of sales on sets of four tires for those interested in shopping around. At Firestone, buy three tires, and the fourth was free. With Continental, buy four passenger tires and win a Flip video camera. Incentive-based marketing, alongside gadget giveaways and creative pricing, has been alive and well in the automobile industry for decades. That’s why it’s so surprising that the second oldest market for great salesmen—law practice—has been relatively slow to adapt to today’s more mobile, technology-inclined customers. It’s especially ironic that one of the nation’s premier intellectual property law firms—focused exclusively on the defense of new ideas—has just blamed market innovation for its demise.
The dissolution of Howrey LLP is not unanticipated. The firm did not unexpectedly drive over a nail, it disintegrated from within. Over the course of one year, seventy of its managing partners have resigned.[1] Last month, eleven Howrey lawyers fled to Morgan Lewis & Bockius in just two days.[2] And recently, the Wall Street Journal scathing reported that “Winston & Strawn has abandoned efforts to merge with Howrey, in favor of plucking Howrey lawyers one by one.”[3] So on Tuesday, Chief Executive Robert Ruyak said it’s time for existing partners to hold “a series of votes” to determine the future of the firm.
Quintessential biglaw (but not too big to fail), Howrey has over 700 attorneys and is frequently listed as a “Global 50” firm.[4] It’s close could very well be the first Lehman-esque legal casualty of the economic recession. Who or what is to blame? According to its Chief Executive, Howrey is the latest victim of the market. Alternative billing and contingency arrangements, in tandem with growing industry competition, are the reasons, according to Ruyak, the firm has reached rock bottom as opposed to its bottom line.
It’s no secret that billing practice and the legal industry in general have changed since 2007. In terms of the number of lawsuits, there’s no better time than an economic downturn. Discrimination suits are on the rise due to the myriad recent lay offs. Credit card companies are seeking debt recovery for amounts between $3,000 and $15,000 at an increasing rate, by at least 25 percent in some States.[5] Even hedge funds have seized the opportunity to invest in the growing litigation market. A British hedge fund hired a former litigator to invest $100 million in European legal disputes, according to a 2008 New York Times article.[6]
Simultaneously, the once limitless funds of Fortune 500 companies have contracted with declines in public spending. Pocket books and portfolios of litigious clients are shrinking, giving them less disposable income to risk suing a neighbor or ill-behaved step children. To keep pace and meet demand, law firms began drafting creative contingency contracts and negotiating fees based on the success of their case. Like a good 50,000 mile warranty, law firms offered a service guarantee.
If there’s one lesson an intellectual property firm should have learned by now, it’s that innovation has a high return on investment. And during a cold, wintery economic climate, balding old business practices, like tires, will send a firm into a dangerous tailspin. Howrey serves to warn the litigious world that it’s time to reexamine client billing systems and engagement agreement strategy to meet new industry demand.
[1]http://online.wsj.com/article/SB10001424052748704132204576190554103993400.html?KEYWORDS=ruyak
[2] http://www.bizjournals.com/philadelphia/blog/jeff-blumenthal/2011/02/morgan-lewis-adds-12-lawyers-in-2-days.html
[3] http://blogs.wsj.com/law/2011/02/01/report-winston-strawn-extends-hand-to-majority-of-howrey-partners/
[4] http://www.howrey.com/news/newsdetail.aspx?news=24316
[5] http://www.nj.com/news/index.ssf/2010/12/recession_causing_rise_in_cred.html
[6] http://dealbook.nytimes.com/2007/11/28/uk-hedge-fund-hires-lawyer-for-legal-investments/
