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The WeWork of Law Firms?

We tend to hold law firms apart from the rest of the business world. There are good reasons to do so: the uniqueness of the partnership model, lawyers' ethical obligations and the norm of "self-regulation" within the profession, the historic notion that "legal advice" is inscrutable—impossible to categorize as any other good.

There's a growing list of efforts to shrink this distance. That includes concrete efforts such as hiring veterans of the corporate world to modernize and rationalize how law firms operate. Other examples are more philosophical, like Hunton Andrews Kurth CFO Madhav Srinivasan's recent exercise in placing market valuations on law firms.

Of course, as we've learned from following the travails of WeWork, market valuations can be, well, amorphous. Maybe an even better word is "flawed." At the beginning of the year, WeWork was valued at $47 billion (over twice Srinivasan's $23 billion valuation of Kirkland & Ellis, the top law firm on his list.) After the company's IPO plans collapsed and SoftBank Group stepped in with a new infusion of cash to avoid being left with simply a smoldering pile of rubble, that figure fell to $8 billion. (That's slightly above Sidley Austin and White & Case, fourth and fifth on Srinivasan's table.)

Anyway, I found myself thinking about WeWork's catastrophic plunge while I was reading my colleagues Lizzy McLellan and Gina Passarella's deep dive into 30 years of law firm collapses for The American Lawyer. Is there anything we can do to further narrow the gap here? Surely, there are some areas where WeWork and now-shuttered law firms made the same mistakes.

How about poorly strategized expansion:

[Some] firms, hungry for growth but without a strategy, find themselves "just throwing things up against the wall and seeing what sticks," says Mary K. Young, a consultant at Zeughauser Group. These firms pick up laterals and small groups for the sake of growing, and they fail to identify unsuccessful offices that should be seen as sunk costs.

Ok. WeWork did this too. And unlike law firms, which still need to deliver legal services even when a practice isn't the right fit, the company managed to stray much farther afield from its core business: short-term leases for shared office space. In the mix at WeWork: event-planning website Meetup.com, a search engine optimization company, and an elementary school WeGrow, helmed by the wife of WeWork founder Adam Neumann.

On to costs:

Many of the 12 firms analyzed in The American Lawyer story on law firm failures were growing in head count and revenue until, suddenly, the jig was up. The catch at all of them? Cost per lawyer kept climbing at a higher rate than profits per lawyer.

"Profits" might have been a foreign concept at WeWork. But the company had plenty of cash coming in the door: $9 billion in investments from SoftBank alone.

Nonetheless, WeWork's apparent indifference to costs, even in its core real estate business, helped the company burn right through it all. Per The Wall Street Journal, after the failed IPO, SoftBank found the company—stuck with high vacancies and big discounts throughout China and surprisingly high expenses in smaller U.S. cities—needed to pare $500 million in annual costs to survive.

Or leadership:

What does a quality leader look like? Young says firm leaders have to stay in touch with their clients and stakeholders, never losing track of what those people want. They need a vision for where the firm will go next. And they need to be transparent about business decisions that impact those clients and stakeholders—compensation in particular.

There's been plenty of ink spilled about WeWork co-founder Adam Neumann. Let's push aside the goofy stuff—the "sizable chunk" of marijuana reportedly found stuffed in a cereal box in the private jet he'd flown to Israel, his reluctance to cut short a surfing trip to the Maldives short to put work on the key document to be presented to IPO investors. Instead, the issue here is the governance structure at WeWork. Until the IPO process, Neumann was able to keep a number of questionable moves under wraps: leasing properties he owns back to the company and borrowing heavily against his stock. Or, his brazen move to trademark the term "We" before selling it back to the company for $6 million.

I'm left wondering if the law firm world could ever produce a leader akin to Neumann. I've been pushing the similarities between crumbling firms and unicorns with clipped wings, but that's not to say there are no fundamental differences. Even if regulatory changes open the door to outside investment in law firms, you'll never see a deposed managing partner walk away with $1.7 billion from venture capital, like Neumann did earlier this month.

But even if there's no perfect parallel, the recent history of upstart litigation firm Pierce Bainbridge Beck Price & Hecht comes to mind. Like Neumann, who had reportedly told people his personal goal is to become the world's first trillionaire, Pierce Bainbridge founder John Pierce has an appetite for bold statements. "We are, by orders of magnitude, I am confident in saying, the fastest-growing law firm in the history of the world in terms of law firms that have started from absolute scratch," he told The American Lawyer last year.

Both men can point to military service, too. Neumann rose to captain in the Israeli navy, Pierce was a tank commander in the U.S. army.

His firm has run into headwinds lately too, facing partner exits and a contentious legal fight, prompting a comparison to the armed forces. "Not everyone is cut out for SEAL training or Ranger School," Pierce said two weeks ago.

Pierce has also said that he treats his law firm like a startup, with an increased appetite for risk, commitment to new funding models, and increased reliance on technology.

But with a growing cloud over the long-term prospects of many startups after the WeWork debacle, there may be an argument for keeping law firms distinct—and maybe even a little stodgy.

In the News

➤➤We all know that the traditional partner-associate training model in law firms doesn't necessarily fit the 21st century economy. Clients don't want to pay for associates on-the-job training, too many law school grads gravitate to Big Law for the main goal of paying off loans, firms face rising attrition rates. At Legal Evolution, Chapman & Cutler CEO Tim Mohan shares how his firm is putting undergraduates on a different kind of legal career track.

➤➤A survey focused on U.K. firms found that investment in technology, while still viewed as crucial, was trending downwards, according to my colleague Frank Ready. Meanwhile, Frank reports that U.S. leaders are looking to leverage tech to cut costs.

➤➤Finally, I told myself I wouldn't write about Burford Capital this week. Then I saw this note (with video) in the Financial Times about Muddy Waters crashing the litigation funder's 10th anniversary party in New York. The fake gift bag maneuver is quite a stunt.

You'll hear from me again next Thursday! Thanks again for reading, and please feel free to reach out to me at [email protected]. Sign up here to receive The Law Firm Disrupted as a weekly email.