The death of Wolf Block

Philly Mag reports on (HT Law Blog) what it calls the “wrongful death” of former powerhouse law firm Wolf Block. The article tries to make the point “that there was nothing inevitable about Wolf Block’s demise.” Other firms, seemingly no stronger, survived. WB’s most powerful partners tried to save it. So what happened?

The story begins with the usual lament about how law practice has turned into a “trade, akin to journalism or cooking” – and specifically about how Wolf Block changed from a “craftsman’s paradise” to a nasty business under the leadership of three hard-charging rainmakers. Then the firm’s culture was temporarily rescued by a gentler soul with wavy hair, Mark Alderman. Unfortunately, hair and avuncularity proved not to be enough. Alderman couldn’t execute a critical merger, profits sunk and the firm’s bank refused more credit without a personal guarantee, which the partners wouldn’t give. In other words, having become a business, the firm had not become a good enough business.

Ultimately the firm’s future came down to a key group of rainmaker partners, one of whom almost saved the firm by finding new bank loan that didn’t require a guarantee. But the rainmakers turned the loan down, and the firm was left with no option but to dissolve.

The article says the problem was “trust.” More precisely:

People who study human decision-making call this a “prisoner’s dilemma.” In a prisoner’s dilemma, cooperation is the choice that gets you the best outcome, but only if everyone cooperates. You don’t want to be the only one who decides to cooperate if everyone else is bolting, because then you’re screwed. Ultimately, in those final days, what Wolf Block needed to survive wasn’t a line of credit, or a merger. What it needed was some kind of larger glue to counteract the shearing logic of the prisoner’s dilemma. It needed, for lack of a better word, faith.* * *

A law firm is a strange, liquid thing. It doesn’t own anything. It’s just a group of people. It’s people and a lease and a collective sense of shared history. Nothing more. So if this is how a great and important law firm finally dies * * * there’s no reason to be shocked. It’s silly to see a law firm as a Promised Land when the true Promised Land is out there, diffuse and gleaming, beckoning to those with the courage to leave sentimental attachments behind.

A pretty good analysis, but the lesson is muddled. Although the article begins with the idea that WB didn’t have to die, in the end it says “there’s no reason to be shocked” by the death. That's correct. Because the firm “doesn’t own anything” there’s nothing to tie it together but mutual faith -- which might get you an afterlife, but not save a law firm.

Although the death of this particular firm may not have been inevitable, the death of many firms like WB may be. On the other hand, in a more general sense, it’s true that law firms don’t have to face such dismal prospects. Law practice should be a fantastic way for firms to make money in our increasingly law-saturated world.

The problem is, as the article says, that law firms don't own anything. Ownership of firm-specific property is critical to an ongoing business. Law firms theoretically could own property rights to legal products, reinforced by intellectual property laws, non-competition agreements and other contracts. Like other firms they could get outside financing based on these property rights. But as I've discussed, law firms are prohibited by ethical rules from, among other things, having non-lawyer owners and entering into strong non-competition agreements. And many legal products cannot legally exist because of rules against unlicensed practice of law.

These rules push law firms into a precarious hand-to-mouth existence. They need to squeeze profits out of their lawyers based on a failed time-based revenue model, with a significant markup purportedly based on an increasingly illusory promise of mentoring and supervision. Even worse, law firms face a mismatch between their revenues and fees and rely on bank financing to fill the gap. As the Philly Mag article says, “law firms tend to borrow at the beginning of the year, collect fees at the end of the year, and then pay the bank back.” When WB started sinking, the firm lost its bank credit and faith wasn’t enough to keep the bank or the partners in line.

As long as our absurd approach to regulating law firms persists, expect to see more "wrongful deaths" like Wolf Block’s.

Comments

[save_the_rustbelt]

Having done consulting for both lawyers and physicians, both often share the same problem.

Neither group will sacrifice short-term profits for medium to long-term stability and prosperity, driven by massive egos and good old fashioned greed.

Both groups tend to block out the potential damage to clients/patients as a result of the short-term focus.

[Onlooker]

Most U.S. law firms (exceptions only at the very top of the heap) are controlled by a relatively small group of financial pillars who have the best of all worlds: they can stay put and continue the benefits of control, or they can depart and take their relationships with them (as most clients don't give a fig about internal firm loyalty) and join another control group somewhere better. Short of having the opportunity to sell into an IPO and retire, that's very unlikely to change, even if firms have contracts and non-competes available to them (who'd sign one without a giant payday for doing so?).