House of cards - Howrey's woes expose vulnerability of US model
It is customary when a large business calls it a day to seek out lessons from that fate. So what is there to take from the turmoil that has engulfed Howrey over the last 18 months if, as seems likely, the firm this week elects to start winding down its business? For one, it has to be said that the firm will have plenty of company. Brobeck Phleger & Harrison, Altheimer & Gray, Coudert Brothers, Testa Hurwitz & Thibeault, Thacher Proffitt & Wood, Thelen, Heller Ehrman – all have passed into the night since 2003.
March 09, 2011 at 07:30 PM
3 minute read
It is customary when a large business calls it a day to seek out lessons from that fate. So what is there to take from the turmoil that has engulfed Howrey over the last 18 months if, as seems likely, the firm this week elects to start winding down its business?
For one, it has to be said that the firm will have plenty of company. Brobeck Phleger & Harrison, Altheimer & Gray, Coudert Brothers, Testa Hurwitz & Thibeault, Thacher Proffitt & Wood, Thelen, Heller Ehrman – all have passed into the night since 2003.
In recent years, each downturn has typically claimed a couple of US law firms the size of Ashurst, and these firms generally folded under considerably less pressure than it took to break Halliwells.
There are familiar patterns to such failures. In some cases, firms were heavily exposed to bubble markets, such as Brobeck (West Coast tech) and Thacher Proffitt (mortgaged-backed securities), though Howrey's litigation-heavy practice doesn't fit that profile. Excessive or ill-timed expansion and a lot of idle office space has been a pretty common theme and contributed to Howrey's woes.
The firm's problems also have several wrinkles particular to the legal market right now. Howrey struggled with volatile revenues partly caused by use of contingent and alternative billing. By consensus, the firm's processes struggled to keep track of the complexities of scores of different deals with different clients. Howrey's fate is a reminder that if firms move sharply away from hourly billing they will need greatly improved financial discipline.
Another timely issue is the struggle to reconcile US conflict rules with global expansion, a tension that contributed to mass defections in Howrey's European practice.
But the key cause surely is one that has been increasingly apparent for years now. The US legal model, based around mobile partners 'owning' client relationships, is incredibly vulnerable once partners start leaving. Partners go, clients move and the rot starts.
The loss of partners has been the primary cause of most sizeable collapses in the US – mix in high levels of debt as happened in some cases, and the situation is even more precarious. Certainly, partner losses were enough to humble Howrey, which only two years ago was a near $600m (£373m) firm with a litigation brand apparently well positioned for the post-crunch years.
In contrast, the efforts of City firms to institutionalise client relationships have been very successful at fostering stability. Ditto restrictive covenants which, despite being written off a decade ago, have proved very effective tools for the modern law firm. Many US firms, of course, have the cultural 'glue' to offset these vulnerabilities, but plenty do not.
Without recognising these pitfalls, there will be more large US law firms sharing Howrey's woes. Such risks are also worth reflecting on for UK law firms as they once again get on the transatlantic merger trail.
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