Anatomy of Law Firm Failures (PDF)

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					    Anatomy of Law Firm Failures
A Look at US Law Firm Dissolutions from 1998-2004

                By: William G. Johnston
        Since 1986, the year Herrick & Smith wound down in Boston, at least one law
firm with more than ten lawyers has failed every year. Some failures have been highly
publicized; others went largely unnoticed, even in the market where the firm practiced
law. Over the past year, it has been hard to overlook the fact that there has been an
increase in law firm dissolution activity. Indeed, after a few years of declining
dissolutions, 2003 brought an increase in both the number of firms that failed as well as
the number of large firms that broke apart. While trade publications include periodic
commentary regarding the precarious position of small and mid-sized firms within a
consolidating industry, the increase in large firm failures provides a clear indication that
being big does not necessarily ensure survival.
        The increase in dissolutions in 2003 was somewhat puzzling given that the US
economy continued to strengthen and the vast majority of our law firm clients enjoyed
extremely strong performance, financial and otherwise. This inconsistency fascinated us.
In response, we looked back over the past six years, researched the failures of 80 firms
larger than ten lawyers (as of the date of dissolution) and quantified the fundamental
reasons why the firms dissolved. In the end, we hope that others may be able to learn
from the mistakes of firms that are no longer in existence.

Dissolution Parameters
        Before starting our research, it was important for us to define what was and was
not a dissolution. As a general rule, we excluded from our analysis any firm when it was
not possible to verify completely that the firm had actually dissolved. For example, we
came across a small number of firms that disbanded, with a vast majority of the lawyers
joining one firm. Depending on the facts uncovered, we eliminated these firms from our
study as it was not possible to determine whether the firm had actually dissolved or was
acquired by another firm. As a general rule, if our research revealed that more than three-
quarters of a firm’s partners joined a single firm and the transaction was not described as
a dissolution or wind down, it was excluded from our analysis.
        In most cases, verifying that a specific firm had actually dissolved was relatively
straightforward (e.g., a press release issued by the firm stated the fact). In other
instances, firms disappeared from the legal landscape without notice. While our research
caught many of these “transparent” dissolutions, it is possible that some failures evaded
us. Since most, if not all, of the transparent dissolutions happened with very small firms,
we omitted from our work all firms of ten lawyers and less.
        In our analysis, we relied on significant, publicly available market research to
identify the law firm failures and the reasons the firms failed. Oftentimes, this required
us to interpret the data, though we always tried to let the research speak for itself and tell
us what the drivers of the dissolution were. With these general parameters in place, we
can move onto our findings.

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General Trends and Statistical Analysis

         From 1998 through 2003, we identified 80 law firm failures where the failed firm
exceeded ten lawyers. In 2003, 15 firms broke apart; the highest total since 2000. From
1999 through 2002, the
number of dissolutions                               Law Firm Dissolutions
declined from year to                                        (1998-2003)
year, reaching a low of                                                                                103
6 in 2002.                      100

         Over the past           75
                                          41                                              48
four years, the average          50                 41
                                                                 30           37
size of the failed firms         25                                           13
                                          10        20                                     6
steadily increased. In          -
                                                                 16                                    15
2003, the average                        1998      1999         2000         2001        2002         2003
spiked due to the high-
profile wind downs of a                        # of Dissolutions        Average size of Dissolving Firm

number of large firms
(Altheimer & Gray, Arter & Hadden, Brobeck, and Pennie & Edmonds). As we discuss
later in this report, one of the critical flaws we found in some of the larger failures was
overexpansion. Consequently, it does not surprise us that the average size of the failed
firm continues to creep up.
         In terms of geographic concentration, New York City, San Francisco and Chicago
all witnessed at least 9
dissolutions during the                             Dissolutions in Major Cities
period. These three cities                                     (1998-2003)
accounted for 34 of the             20
80 failures, or 43%.                15
Houston, Los Angeles,                          10       9
Boston, Washington,                                              5       5
D.C. and Dallas were the             5                                           3       3       2
only other large cities that
suffered through more


than one failure.














surprisingly, the city of
                                                               Total # of Dissolutions
Indianapolis ranked high
on our list of dissolutions,
with three firms failing between 1998 and 2003, each one sending shock waves through
that city’s legal market.

Dissolution and Firm Size

        We grouped the firms based on size to see whether or not firms of a certain size
were more susceptible to failure. We found that firms of 11-25 lawyers dissolved most
often (41 out of 80, or 51%). Taken alone, this statistic is a bit misleading; however,

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since the 41 dissolutions actually comprise a very small percentage of the total number of
law firms that fall within this size range. Using Martindale-Hubbell as a guide, we
identified roughly 3,200 US firms ranging in size from 11-25 lawyers. So, while 51% of
the dissolutions were of firms within the 11-25 lawyer size, the 41 failures accounted for
just 1.3% of all firms within this size range.
        Seven of the 80 firms (9%) had more than 100 lawyers at the time they dissolved
(Altheimer & Gray,
Arter & Hadden, Bogle                       Law Firm Dissolutions, by Firm Size
& Gates, Brobeck, Hill                                 (1998-2003)
& Barlow, Pennie &                       11-25
Edmonds, and Troop                       51%                                26-50
Steuber). It is                                                             21%

interesting to note that,
of these seven
dissolutions, only two
(Bogle & Gates, Troop
Steuber) happened prior
to December 2002.                                              9%
While it is too soon to
tell, one has to wonder whether the industry is entering a period where some larger firms,
particularly those that over expanded, lack strategic direction or have troubled
economics, are going to fall by the wayside.
        For comparison sake, we calculated the percentage of all large firms that failed
between 1998 and 2003. On average, the US legal market had approximately 325 firms
with more than 100 lawyers during the period. The seven dissolutions made up
approximately 2.2% of the total population of large firms, a bit higher than the percentage
for the 11-25 lawyer group.

Dissolution Trend and Merger Activity

        Between 1998 and 2003, there were 315 mergers involving US firms where the
smaller firm had at least
five lawyers. Much of                Law Firm Merger and Dissolution Trend
the merger activity has                              (1998-2003)
been in response to       100
client demands. Quite      75
simply, clients have                      47
become increasingly              26
sophisticated buyers of    25       10
                                                         16         13               15
legal services, which       0
has led to a                     1998     1999         2000      2001        2002  2003
segmentation of the
                                                # of Mergers # of Dissolutions
legal market as fewer
firms retain access to

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the highest level, most sophisticated work. In response (and in anticipation of further
segmentation), firms have looked to strengthen their position through merger.
         We believe that merger and dissolution activities are the products of a
consolidating, segmenting marketplace. As shown on the prior chart, during the period
1998-2003, the largest number of firms failed two years before merger activity peaked.
In fact, as merger activity increased, dissolutions decreased. In 2003, the trend reversed -
merger activity continued to decline (due to lack of attractive candidates, firms focusing
on integrating earlier mergers, etc.) while dissolutions picked up. Mergers and
dissolutions appear to be on opposite cycles. We believe they are linked to each other,
since part of the increase in dissolution activity is due to weak firms losing lawyers to
other firms, many of whom merged into specific markets and then expanded their
positions via lateral hiring. Recognizing that the industry is continuing to segment, we
expect a continued increase in dissolutions as weaker firms become less competitive and
partners choose to split up and take their practices to firms that are better positioned in
the relevant market.
         We also compared merger activity in major markets to dissolution activity in the
same markets. For years,
New York City has been                      Dissolutions & Mergers in Major Cities
the hotbed for law firm                                       (1998-2003)
merger activity, with 66           80
mergers over the past six          60
years. What hasn’t been
as well publicized is the          40
fact that another 10 firms                           16             18                          18
                                   20 1815      10            12
have fallen by the                                       9
                                                                           9                6
                                                                 5            3       3       2    1
wayside. Few would                  0
argue that New York City





is one of the most                                                                        la







competitive legal markets


in the country, much less                         Total # of Mergers Total # of Dissolutions
the world. It is
interesting to note, then, that 9 of the 10 firms that failed in New York City were small,
ranging in size from 12 to 60 lawyers. At the time the firms dissolved, well over half
pointed to an inability to effectively service growing clients and unexpected lateral
defections as the primary drivers of their break-up.
         In both Chicago and San Francisco, there was closer to one law firm failure for
every merger between 1998 and 2003. The firms that failed in Chicago spanned a broad
practice mix, from small IP boutiques to insurance defense firms to full-service practices.
In San Francisco, nine of the 15 failures were of firms with highly concentrated practices
(4 IP/technology, 5 litigation). The firms that failed in these and other major cities were
routinely the victims of unexpected lateral defections, often to firms that had recently
entered the market.

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Practice Concentration

        We identified a number of failed firms that had extremely focused practices or
operated as boutiques. In
total, 34 of the 80                                  Law Firm Dissolutions
dissolutions were of firms                (General Practice vs. Highly Focused Firms)
with highly concentrated          60
practices. These 34 firms                                                                    34
covered an array of
specializations, though it        20           13
                                                       11          8 5               7 8
                                       5 5                 5                2 4
became clear that
intellectual                           1998    1999     2000       2001     2002     2003  Total
boutiques were frequently                            General Practice Highly Focused

represented. More
specifically, of the 34 concentrated practice firms, nine were IP/technology firms. A
large number of the other firms had some sort of litigation focus, though the practices
spanned a broad range.
        A primary stated reason for IP/technology firm failures was external market
dynamics, particularly the
pressures felt by these firms             IP Boutique Mergers & Failures (1998-2003)
in terms of client retention      15
and access to highly                                                    10
profitable work. One of the       10

IP boutiques chose to                                                             5
dissolve because it actually       5              4
                                        2                                             2
had too much work and was                  1
                                                     0                     0
unable to attract the              0
lawyers, including                      1998      1999       2000       2001      2002    2003

associates, required to                                  IP Mergers IP Failures
service its clients. Prior to
dissolving, eight of the nine firms suffered from the loss of key partners and/or a failed
attempt to merge with another firm.
        From 1998 through 2003, the industry witnessed the disappearance of 47 IP
boutiques, either through dissolution or merger. While not represented on the chart, we
also uncovered another handful of failed IP boutiques with fewer than 10 lawyers that
were not included in our study.

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       The firms in our study routinely exhibited one or more major fundamental flaws.
In some cases, the firms inflicted the flaw upon themselves; in others, the flaw came
about because of market dynamics somewhat outside the reach of the firm. In the end,
we developed three primary categories, as shown in the table below:

                         1. Below Average Financial Performance
                                    2. Internal Dynamics
      (primarily leadership issues, partners with incompatible goals, differences over
                       compensation philosophy, lack of succession)
                                    3. External Dynamics
        (primarily competitive pressures related to the firm’s historical client base,
               access to new clients and desirable work, inability to recruit)

        A reader may wonder where strategic planning fits into the fundamental flaw
table. It seems to us that underlying each issue on the table above is some sort of
strategic failing. In troubled firms, there is rarely a well-articulated and implemented
        It will come as little surprise that many of the failed firms exhibited multiple
flaws. This seems natural to us given that the issues in the table above are somewhat
linked. For example, a leaderless firm that is faced with significant competitive pressures
will often have poor economic performance. In some of the firms that dissolved, the
flaws were often recognized well in advance of the vote to dissolve, but the firm either
chose to not act on the flaws or ran out of time to fix the issues before collapsing. Too
often, firms failed because they were unwilling to confront tough issues, perhaps hoping
that the problems would resolve themselves.
        In terms of the reasons for failure, we noticed a difference between the small and
mid-sized firms versus the
large firms. As shown on                  Law Firm Dissolutions - Fundamental Flaws
the graph, the flaw for                                      (1998-2003)
small and mid-sized firms          30
tended to be a combination                    18
of internal and external
dynamics. The internal                    10                      10
                                   10                                           7 8
dynamics typically                                         5 5             4              5 4
revolved around partners
having different strategic                   11-25          26-50            51-100          >100
goals for the overall firm or
a general lack of faith in
where the organization was                Below Average Economics Internal Dynamics External Dynamics

heading. The external
dynamics tended to focus on the firm’s inability to effectively service existing, growing
clients or the loss of access to the type and quality of new client that the firm had enjoyed
in the past. In contrast, the larger firms failed due to a combination of all of the flaws,
though external market dynamics tended to be less of an issue.

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        In addition to the fundamental flaws, we recognized that a number of firms failed
after there was a triggering event (i.e., a catalyst). The catalyst took four primary forms –
the impending expiration of the firm’s primary office lease, overexpansion that weakened
the firm over an extended period of time, the unexpected or gradual defection of
significant partners to another firm, or the breakdown in merger efforts when the failed
firm was barely treading water. In many cases, the firm had multiple triggering events.
For example, a breakdown in merger discussions followed by the exodus of partners or
an exodus of partners led to last gasp merger efforts; when those failed, the firm failed.

Case Studies (See Exhibit A):

        In the sections that follow, we more fully describe each fundamental flaw. We
also focus on four, mid-sized to large firm dissolutions and describe how each of these
firms exhibited the fundamental flaw in question, as appropriate. While it might be an
obvious choice, we decided to exclude Brobeck from our case study group. We chose to
do this because that firm’s dissolution has been dissected any number of times and, quite
simply, Brobeck’s structure and operations bear little resemblance to the structure and
operations of most law firms. Our case study firms include:

         Arter & Hadden. Arter & Hadden was a Cleveland-based, full-service law firm
that reached a peak of 425 lawyers in 1999. Between 1991 and 1996, the firm opened
offices in Irvine, San Francisco and San Diego, California as well as San Antonio and
Austin, Texas. Given the firm’s dramatic growth, one would have to surmise that Arter
& Hadden’s strategy was focused, at least in part, on making the firm a significant
national player. To support the growth, the firm entered into long-term leases for some
of its office space. Unfortunately, the firm was unable to sustain its growth, began to
shrink and was saddled with high lease costs that damaged the firm’s financial position.
The first cracks in the Arter & Hadden’s foundation may have started to show in 2000,
when the firm suffered the defection of a prominent lawyer and former U.S.
Congressman, who set up a new firm with over 20 of the firm’s lawyers. Between late
2000 and early 2003, nearly half of Arter & Hadden’s lawyers peeled off to join other
firms. By the time the firm shut down, it had 240 lawyers.

        Bogle & Gates. Bogle & Gates was a widely respected firm that handled a
number of high profile matters, including the representation of Exxon Shipping Co. in the
Exxon Valdez oil spill litigation. The firm was well-known for its litigation expertise and
had successfully defended International Paper in a massive lawsuit over that company’s
timber-management practices. Bogle & Gates had been the largest firm in Washington in
the early 1980s, though it was down to the fourth largest in the state at the time of its
break-up. It appears that Bogle & Gates tried to develop a strategic plan, but did not get
to the implementation stage before the firm imploded. The firm’s plan reportedly
focused on updating the firm’s management and practice structures, changing the partner
compensation scheme, and dealing with underperforming partners in order to get the firm
in shape for expansion at some point down the road. Unfortunately, before the internal

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committee charged with developing the plan had a chance to present it to the partnership
as a whole, the firm unraveled.

        Hill & Barlow. In the 1920s, Hill & Barlow gained international attention when
it handled a murder appeal for anarchists Nicola Sacco and Bartolomeo Vanzetti. At the
time of its dissolution, Hill & Barlow was Boston’s 12th largest firm. The firm was
highly respected within the Boston community and its sudden failure shocked many.
The firm had a prominent real estate practice and a strong, general corporate practice. On
December 6, 2002, a large contingent of lawyers in the firm’s real estate and litigation
practices announced that they were looking to leave the firm. The following day, the
firm’s partners voted to dissolve the firm.

        Johnson Smith. Johnson Smith may be the least recognized of our four case
study firms. The story of the firm’s failure interested us because Johnson Smith went
through a remarkable growth phase, largely driven by lateral hires. The firm moved from
5 lawyers to upwards of 60 lawyers in a few years, ultimately becoming one of the largest
firms in Indianapolis. Unfortunately, in the midst of its growth period, one of the firm’s
leading partners and an individual largely credited with holding the firm together died
unexpectedly. In the years that followed, groups of laterals left the firm, often over
disagreements about the firm’s future direction, and Johnson Smith slowly faded away.


      Exhibit B summarizes the results of our research into each dissolved firm and its
fundamental flaws. In the sections that follow, we describe our findings:

Below Average Financial Performance

   We know that, at the end of the day, very little makes up for a lack of profitability.
During the late 1990s, weak firms had their financial fortunes propped up by an
abundance of legal work. During the recession that extended over the past few years,
lower workloads knocked many of these firms flat.
   There are many causes of poor financial performance, often intertwined, including:

      Poor billing and collection practices                   Lack of capital
                Lack of leverage                              Low realization
                Low productivity                           Excessive debt load
            Inadequate billing rates                    Unfunded retirement plan
           Excessive overhead costs                  Ineffective client intake policies
       Too many “loss leader” practices                   Ill-advised expansion

    Out of the 80 firms in our study, below average economics were cited as a primary
cause in 24 (30%) of the failures. Given that many of the 80 firms were small to mid-
sized and did not publicly report their financial results, we suspect that our figure of 24

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understates the true number. In our experience, virtually every failed firm has some sort
of material financial dysfunction.

Case Study Analysis: Our case study firms suffered from a number of financial issues,
each one a bit different, but each just as problematic.

         Arter & Hadden. As large firms go, Arter & Hadden was not particularly
profitable. In its August 2003 edition, The American Lawyer reported on the firm’s
financial results for 2002 – gross revenue of $114 million (the 151st largest firm in the
country), revenue per lawyer of $370,000 and profits per partner of $290,000. The firm’s
profits per partner ranked it #198 out of the AmLaw 200. At the time of the firm’s
failure, it was reported that the firm had been unsuccessful in its attempts to renegotiate
its office lease obligations. In October 2003, four retired A&H partners filed a Chapter 7
bankruptcy petition against the firm in an attempt to recover unpaid retirement benefits.
In response to the petition, two A&H lenders filed notices showing that they were owed
more than $6 million from the firm and indicating that another lender was owed over $3
million. Taken together, Arter’s financial issues appear to have included excessive
overhead costs, a sizeable debt load and an unfunded retirement plan.

        Bogle & Gates. In the 1998 AmLaw 200 ranking of firms based on financial
performance, Bogle & Gates had gross revenue of $62 million (#193 in the US) and
profits per equity partner of $190,000 – dead last in the listing. In comparison, some of
Bogle’s competitors enjoyed much greater financial success – Perkins Coie had NIPP of
$335,000; Preston Gates had NIPP of $325,000; Stoel Rives had NIPP of $295,000. The
firm’s financial performance was negatively impacted by a combination of low leverage,
low productivity and an unfunded retirement plan. From a dissolution standpoint, there
was one positive – the firm failed at a time when it had very little debt.

        Hill & Barlow. Hill & Barlow’s revenue base was too small for inclusion in the
AmLaw surveys. As a result, it is difficult to say whether the firm was facing financial
difficulty at the time of its failure. What is known is that approximately one month
before dissolving, the firm laid off roughly a dozen associates and an equal number of
staff. During the firm’s wind down, local press picked up on a story that the firm would
not be able to pay fully all creditors, including a few former partners who had unfunded
retirement obligations.

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Internal Dynamics

         Out of the 80 firms, 34 (43%) had at least one recognizable internal flaw. Most
commonly, the flaw
manifested itself as
                                     Role of Internal Dynamics in Law Firm Failure
incompatible goals                                     (1998 - 2003)
between partners, a                     Incompatible
lack of leadership,                      Goals, 53%
disagreement over
philosophy or, in a                                                            Compensation
handful of cases, a                                                              Philosophy,
lack of succession
planning. With the                                                          Succession
                                           Leadership                      Planning, 10%
possible exception of                     Failure, 20%
the succession
planning flaw, all of the other characteristics seem to be tied directly to a general lack of
faith in the future of the law firm, which we believe is often a leadership issue.
         Leaders in weaker firms rarely have the authority and ability to deal with the
toughest firm issues, including taking action on underperformers. Too often, they are
impeded in their desire to make tough decisions by a real or perceived unwillingness of
the other partners in the firm to support making such decisions. As a result, in the case of
underperforming partners, these individuals remain with the firm in their existing position
and essentially poison the partnership directly or indirectly. Over time, the firm splits
into two or three firms within the firm, with the end result often a break in the partnership
as partners lose the desire to practice together.
         In contrast, successful law firms tend to have strong leaders and a strong
leadership coalition that thinks alike on important, strategic issues. They usually have a
well developed sense of the firm's clients, their needs and their future direction. They
virtually always have strong interpersonal skills, which helps not only with internal
communication, but also when presenting the “public face” of the firm to existing and
prospective clients. Most importantly of all, strong leaders always have a clear idea of
where they want to take their firm, even though they may not always have a clear idea of
how they are going to get there.

Case Study Analysis:
         Bogle & Gates. Bogle & Gates suffered from more than one internal flaw. With
respect to leadership, the firm’s CEO was described as extremely hard-working and
dedicated to the firm. Unfortunately, he may not have been able to effectively lead the
firm since many of the firm’s partners were unwilling to follow strong leadership. A few
publicly recognized this flaw during the firm’s post mortem. The second issue was an
apparent split between the firm’s major practices - corporate and litigation. After the
firm broke apart, former corporate partners reported that, because of Bogle’s emphasis on
litigation, the firm effectively drove them away. Conversely, a leader within the firm’s
litigation practice blamed the firm’s failure, in part, on the fact that the corporate practice

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had lost its critical mass. These differences reportedly led to corporate versus litigation
factions and a drop in collegiality within the partnership.

        Johnson Smith. Partners at Johnson Smith were described as having different
strategic interests for the firm, with some espousing a large regional position, while
others wanted the firm to remain a mid-sized player in its existing market. The firm’s
partners were routinely characterized as a group of lawyers with very strong personalities
who operated with a high degree of autonomy. The firm avoided traditional law firm
management practices. At the time the firm dissolved, some pointed to management’s
desire to implement stricter policies and procedures as one reason for the failure.

External Dynamics

         In our study, 45 firms split up, at least in part, because of competitive pressures –
most often related to the
firm’s inability to                  Role of External Dynamics in Law Firm Failures
service its existing                                     (1998 - 2003)
client base, to recruit                     Inability to                          Inability to
new lawyers or to                             recruit                               service
                                                                               existing clients
obtain new clients and                         12%
desirable work. Some
of the small and mid-
sized firms that                          Lack of
dissolved recognized                  access to new
that the market was                    clients/work
growing increasingly
competitive and that the
firm would no longer be able to practice as it had in the past. Partners perceived that
their firms were going to be handicapped in the future and, rather than try to keep the
firms afloat, proceeded to go through an orderly wind down. In a few cases, the firm’s
clients prodded the firm to do something about a lack of breath and depth in its practice,
which led to a split in the firm as partners reacted to their clients’ pleadings. Other firms
recognized that their primary practice areas were going in opposite directions relative to
the market and reached a mutual agreement that it would be better to separate.
         Small to mid-sized firms suffered the most from an inability to service growing
clients or attract new, significant clients. Time and again, we found firms that had served
significant clients for years but were unable to keep up with client needs – either in terms
of expertise or breadth/depth, or some combination of both. Some firms lost access to
key clients after the clients had been acquired by another business and the legal work
passed to another firm. This typically set-off a downward spiral, which manifested itself
in declining productivity and profitability, a loss of market position, an inability to grow
the firm and ultimately failure.
         Still other firms failed because of an inability to recruit. Not surprisingly, firms
that felt recruiting pressure were usually small to mid-sized and, most often, operated in

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major cities. The firms were hurt two ways – they were unable to keep their associate
compensation levels competitive relative to larger firms and, for those with lower
economics, they were unable to compete effectively in the lateral market.

Case Study Analysis: As large firms within their respective markets, the case study
members were somewhat protected from the competitive pressures felt by others.

        Bogle & Gates. Even though it had historically been one of the most significant
legal players in the Northwest, Bogle & Gates never fully tapped into that region’s high-
tech boom which lifted the fortunes of so many other firms. Instead of working for some
of the Seattle area’s large, well-known companies (Microsoft, Boeing, Starbucks,, etc.), Bogle’s corporate practice included smaller, less well-known names.
Bogle failed after losing an important chunk of its corporate practice (and roughly 10% of
firm revenue) to another firm. It is interesting to note, though, that the firm was
ultimately felled by a defection of partners from a practice that was not the firm’s
primary strength (litigation).

        Hill & Barlow. Any firm that is based in the extremely competitive Boston
market has a number of competitive pressures to overcome. Fortunately for Hill &
Barlow, the firm had a very good reputation and had some significant specialization.
Unfortunately, partners in the firm were characterized as not spending enough time
nurturing new client relationships. Only one year before its failure did the firm
streamline its operations to increase its focus on cross-marketing and actively seeking
new clients. Shortly after the firm rededicated itself to enhancing its market position,
partners with significant client demands left the firm.

        Johnson Smith. Johnson Smith may have inflicted some competitive problems
on itself as it was frequently described as a firm struggling over its strategic position and
the type of client it wanted to represent. Within its market, the firm was a mid-sized
player and partners differed sharply over whether that was the best competitive position.
Apparently, many wanted to stay mid-sized, others thought the firm needed to grow and
others thought the firm needed to specialize. In the end, the firm’s inability to service
large and growing clients within its mid-sized structure resulted in partners leaving the
firm, which gradually caused it to fail.

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        As noted earlier, many of the firms in our study were impacted by one or a
combination of “catalyst events.” The chart below compares the frequency of a firm
                                                    Catalysts in Law Firm Dissolutions
impacted by                                                       (1998 - 2003)
a catalyst to      50                   41
the total          30    22
number of          20                                                17
                                                                              13            15
                                                  11                                                  7 4 5            7
dissolutions,      10       6
                                1 3
                                                                                      2 0                            1
split by size       0
                              11-25                       26-50                     51-100                    >100
of dissolving
                               Lateral Defection Failed Merger Attempt Overexpansion Lease Renewal # of Dissolutions
        Within each size range, lateral defections were a primary catalyst to dissolution.
For most of the firms that suffered defections, the unexpected departure of a number of
the firm’s lawyers was a crippling blow as the firm had to struggle under the weight of an
existing overhead structure, but did not have the same number of timekeepers supporting
it. Not surprisingly, the economic impact of the lateral defections tended to limit the
firm’s ability to recruit lawyers to replace those that had left. We also noticed that some
firms that “lived” through lateral hiring also died through lateral defection when their
lateral hires left for greener pastures.
        Six of the firms in our study, five with 50 lawyers or less, chose to dissolve at the
time the firm’s lease expired. Partners in these firms tended to view the expiration of the
lease as an opportunity to reevaluate where the firm was going and whether or not they
wanted to practice together anymore.
        Just two of the firms with less than 100 lawyers failed due to overexpansion.
Contrast this to the larger firm failures – in virtually every one, the firm failed because of
overexpansion, combined with lateral defections and last ditch merger attempts. In the
case of a failed merger attempt, it is incorrect to say that the merger discussions caused
the failure, though ill-timed merger attempts did send a few of the firms into a rapid
downward spiral. Instead, it is likely that the firm had been on the cusp of failing and the
merger just happened to be the last thing that the firm attempted.
        While not represented on the chart, we were struck by the rather short period of
time between a catalyst event and a firm failure. While the failure did not follow within
hours of the event, it was not uncommon for the firm to fail within days.

Case Study Analysis: Each of our case study firms experienced at least one “catalyst
moment” that helped push the firm over the brink.

        Arter & Hadden. Former partners point to aggressive expansion in the 1990s as
one of the primary reasons the firm failed. As a decline in work and partner departures
put a crimp on the firm’s finances, excess office space consumed more and more of the
firm’s revenue. At the time the dissolution was announced, the firm’s chairman noted
that one reason for the wind down was that much of the firm’s growth had been
unprofitable. By 2003, long after the firm had hit its peak size, it was saddled with
excessive costs related to its earlier expansion drive.

Hildebrandt International                                                                               March 2004
                                                     Page - 14
         Bogle & Gates. Bogle & Gates experienced both partner defections and a failed
merger attempt. The catalyst initially came in the form of the defection of a group of 16
lawyers, including eight partners, to a firm that had a small outpost in Seattle. The
defection was followed by hasty merger discussions with that firm. When the merger
discussions failed, Bogle & Gates came crashing down. Weeks after the firm announced
its intention to dissolve, the firm’s former merger partner had added upwards of 50
former Bogle & Gates lawyers to its ranks.

        Hill & Barlow. Hill & Barlow dissolved almost immediately after a large piece
of the firm’s real estate and litigation practices announced their intention to leave the firm
and set-up a branch office for an out-of-state firm.

        Johnson Smith. The firm had multiple failed merger attempts and ultimately
pulled the plug after merger discussions with one last firm failed. Before the vote had
been taken to fold up the firm, Johnson Smith had suffered significant lateral defections.
The American Lawyer presented the firm as one that focused on “cutthroat lateral
hiring… regularly raiding other firms for talent.” In the post-mortem on the firm, one of
the cited reasons for failure was a lack of cohesive culture. While Johnson Smith did not
over expand through a merger or broad office expansion, the firm may have failed
because of overexpansion – of the lateral kind. In the end, the firm that was largely
comprised of laterals split up into many small teams that each went their own way.
Differences of opinion apparently reached up to the highest level, as multiple name
partners left the firm over disagreements about the firm’s future positioning.


        Every time a law firm dissolves, the failure reinforces the fact that law firms are
fragile enterprises. In such a competitive, consolidating industry, it is almost a given that
there will be failures every year. In fact, a few firms announced their intention to
dissolve during the first few weeks of 2004. As our data revealed, the majority of law
firm dissolutions take place in larger cities. We expected that. What we did not expect
was that our 80 failures would be spread around 37 cities - from Austin to Memphis to
Wichita. So, while it is difficult to be successful in the largest, most competitive cities, it
is often just as difficult to tread water, much less succeed in smaller markets. At the end
of the day, no firm is completely insulated from failure.
        The seeds of collapse are generally sown long in advance of the actual dissolution
– in most cases, even long before the firm begins to noticeably decline. It is clear that a
firm’s unwillingness or inability to confront tough issues is an overarching reason for
failure and one of the primary reasons why partners lose faith in their firm. Too often,
firms recognize their issues, including partner dissatisfaction, but only act after a
“catalyst event” takes place. For most, this is too late.
        The recent disappearance of a handful of large firms serves as an effective
warning shot to those who believe that being large ensures survival. Instead, most of the
large firm failures reinforce the importance of using extreme care when undertaking any

Hildebrandt International                                                         March 2004
                                          Page - 15
sort of expansion initiative. While firms need to plan for and respond to competitive
pressures, including the continuing entrance of new players into specific markets, simply
embarking on an expansion strategy as a way to combat the plans of other firms or
expanding without sound strategic and financial reasons is foolhardy at best and possibly
fatal to the firm at worst.
         The challenge for law firm leaders is to make their firms as strong as possible and
know where to focus their efforts. As we found, the underlying source of failure is
almost always a weak or non-existent strategic focus which manifests itself and is
compounded by a failure to deal with the root causes of:
       •   Below average financial performance;
       •   Internal dysfunction; and
       •   Weak competitive market position

         Firms with poor economic performance -- those that are unable to pay market
compensation levels -- risk losing key partners. Lateral defections and failed merger
attempts are usually symptomatic of other, fundamental firm issues. Over and over, a
few lateral defections have transformed reasonably successful firms to failing firms
overnight. The larger the economic gap between firms, the higher the probability that
partners will decide to make lateral moves.
         Clearly, the effectiveness of a firm’s strategic plan and how well it is
implemented can have a monumental effect on a firm’s success. Regardless of a firm’s
history, any firm that is not carefully and constantly renewed and developed is in danger
of falling apart. Leaders today need to be properly focused and motivated as there is
almost always time to intervene and change a firm’s direction before it is faced with a
final crisis.

          William G. Johnston is a consultant at Hildebrandt International, a leading
  management consulting firm for professional services organizations. Mr. Johnston is
  based in Newtown, CT and can be reached at (203) 364-0293 (x-238) or via email at

Hildebrandt International                                                       March 2004
                                         Page - 16
                                                                               Exhibit A

                         Comparison of Case Study Firms

                         ARTER &           BOGLE &           HILL &          JOHNSON
                         HADDEN             GATES           BARLOW             SMITH
Main Office              Cleveland          Seattle          Boston          Indianapolis
Year Founded               1860              1891             1895              1983
Year Dissolved             2003              1999             2002              2001
Lawyers (approx.)
          At Peak            425               250             150                60
    At Dissolution           240               175             130                35

             In 1991          5                   6              1                  2
     At Dissolution          10                   6              1                  1
Was there a            Yes – Lateral           Yes –          Yes –          Yes – Lateral
catalyst to the          defection,        Unexpected       Unexpected         defection,
failure?                 starting in           lateral        lateral      starting in 1999;
                           2000;            defection;       defection      Overexpansion;
                       Overexpansion      Failed merger                      Failed merger
                                              attempt                           attempt
Where did the            Andrews &           Dorsey &          Piper       Ice Miller; Krieg
lawyers go?              Kurth; Lord,        Whitney;        Rudnick;      DeVault; Barnes
                           Bissell &      Perkins Coie;      Ropes &         & Thornburg;
                       Brook; Tucker,     Preston Gates        Gray;            Sommer
                        Ellis & West          & Ellis;      Goulston &          Barnard;
                          and Bailey      multiple small      Storrs;       multiple small
                       Cavalieri (both    firm spin-offs   Kirkpatrick &     firm spin-offs
                       large spin-offs)                    Lockhart; Day
                                                             Berry &

Hildebrandt International                                                    March 2004
Law Firm Dissolution Matrix                                                                                                                                                                                                                                                     Exhibit B
                                                                                                                                                                           FUNDAMENTAL FLAW (See Note)                                              CATALYST (See Note)
                                                                                                                                                                                                                                   Loss of
                                                                                                     Firm                    Bankruptcy       None       Below Ave. Financial                           External Dynamics       partners/Key   Failed merger
                        Firm Name                    Specialization             City         State   Size   Month   Year   Filing/Petition?   Given          Performance         Internal Dynamics    (Competitive Pressures)    defections       attempt      Overexpansion   Lease Renewal
Altheimer & Gray                                         General              Chicago         IL     300     Nov    2003         Yes                                                Leadership
Annis, Mitchell, Cockey, Edwards and Roehn               General               Tampa          FL     75      Apr    2001         Yes                                            Incompatible goals
Arter & Hadden                                           General              Cleveland       OH     240     Jul    2003         Yes
                                                                                                                                                                                                        Servicing existing
Bachner Tally & Polevoy                                Real Estate            New York        NY     40      Dec    1999                                                                                      clients
                                                                                                                                                                                   philosophy,            Access to new
Bogle & Gates                                            General               Seattle       WA      173     Mar    1999                                                        Incompatible goals         clients/work
Brand Lowell & Ryan                                      General             Washington       DC     11      Aug    1999                                                        Incompatible goals
Brobeck Phleger & Harrison                             Technology           San Francisco     CA     518     Jan    2003         Yes                                               philosophy
Bronson, Bronson & McKinnon                              General            San Francisco     CA     60      Apr    1999
Burditt & Radzius                                   Food & Drug Law           Chicago         IL     37      Dec    1998                                                        Incompatible goals
Butler & Binion                                          General              Houston         TX     58      Dec    1999
                                                                                                                                                                                                         Servicing existing
                                                        Labor &                                                                                                                                       clients, Access to new
Clark, West, Keller, Butler & Ellis                    Employment               Dallas        TX     18      Jul    2001                                                                                    clients/work
                                                                                                                                                                                                          Access to new
Cohen, Swados, Wright, Hanifin, Bradford & Brett         General               Buffalo        NY     17      Aug    2001                                                                                   clients/work
                                                                                                                                                                                                          Access to new
Diepenbrock, Wulff, Plant & Hannegan                     General             Sacramento       CA     55      Nov    1998                                                                                   clients/work
Doherty Rumble & Butler                                  General               St. Paul       MN     90      Jun    1999         Yes                                            Incompatible goals
                                                                                                                                                                                                        Servicing existing
Donovan Leisure Newtown & Irvine                         Litigation           New York        NY     60      Apr    1998                                                                                      clients
English, McCaughan & O'Bryan                             General            Ft. Lauderdale    FL     20      Dec    2001                                                            Succession
                                                                                                                                                                                                          Access to new
Feldman, Waldman & Kline                           Litigation, bankruptcy   San Francisco     CA     20      Oct    1999                                                                                   clients/work
Fogel, Feldman, Ostrov, Ringler & Klevens                General            Santa Monica      CA     12      Dec    2003
                                                                                                                                                                                                         Servicing existing
                                                                                                                                                                                                      clients, Access to new
Foran & Schultz                                          Litigation           Chicago         IL     17      Dec    2000                                                            Succession              clients/work
                                                                                                                                                                                Incompatible goals,
French, Kezelis & Kominiarek                            Insurance             Chicago         IL     13      Apr    2002                                                            philosophy
Gibson Ochsner & Adkins                                  General               Amarillo       TX     25      Sep    2003
Ginsburg, Feldman and Bress                              General             Washington       DC     63      Oct    1998
Gordon Altman Weitzen Shalov & Wein                      General              New York        NY     50      Feb    2000
                                                                                                                                                                                                        Servicing existing
Greenberg Peden                                          General              Houston         TX     17      Jan    2002                                                        Incompatible goals            clients
                                                                                                                                                                                                         Access to new
Haims, Johnson, MacGowan & McInerney                    Insurance              Oakland        CA     11      Oct    1999                                                                                   clients/work
Hannoch Weisman                                          General              Roseland        NJ     24      Jan    1999         Yes
Hardin, Cook, Loper, Engel & Bergez                      General               Oakland        CA     40      Aug    1999                                                        Incompatible goals
Henry, Lowerre & Frederick                            Environmental            Austin         TX     12      Jul    2001
                                                                                                                                                                                                         Servicing existing
                                                                                                                                                                                                      clients, Access to new
Hertzog, Calamari & Gleason                              Banking              New York        NY     25      Jan    1999                                                                                    clients/work
Hill & Barlow                                            General               Boston         MA     130     Dec    2002
                                                                                                                                                                                                        Servicing existing
Hill & Simpson                                              IP                Chicago         IL     35      Aug    2000                                                                                      clients
                                                                                                                                                                                Incompatible goals,
Holleb & Coff                                            General              Chicago         IL     65      May    2000                                                            philosophy           Inability to recruit
Hutcheson & Grundy                                       General              Houston         TX     71      Feb    1998                                                        Incompatible goals       Inability to recruit
Jackson, Tufts, Cole & Black                             General            San Francisco     CA     60      Feb    1999                                                                                 Inability to recruit
                                                                                                                                                                                Incompatible goals,
                                                                                                                                                                                   Compensation         Servicing existing
Johnson Smith                                            General             Indianapolis     IN     60      May    2001                                                            philosophy                clients
Kahrs, Nelson, Fanning, Hite & Kellogg                   General               Wichita        KS     25      Jan    2000                                                        Incompatible goals
                                                                                                                                                                                   Leadership,          Servicing existing
Kassler & Feuer                                          General               Boston         MA     22      Dec    1999                                                        Incompatible goals            clients
                                                                                                                                                                                                        Servicing existing
Kay & Boose                                         Entertainment /IP         New York        NY     20      Apr    2003                                                                                      clients
                                                                                                                                                                                   Leadership,           Access to new
Keith/Mack                                               General                Miami         FL     12      May    2000                                                        Incompatible goals         clients/work
Kleberg Law Firm                                         General            Corpus Christi    TX     36      Sep    2003         Yes
                                                                                                                                                                                                        Servicing existing
Landels, Ripley & Diamond                                General            San Francisco     CA     40      Jun    2000         Yes                                                                          clients

        Hildebrandt International                                                                                                                     Page - 1                                                                                                                     March 2004
Law Firm Dissolution Matrix                                                                                                                                                                                                                                          Exhibit B
                                                                                                                                                             FUNDAMENTAL FLAW (See Note)                                                 CATALYST (See Note)
                                                                                                                                                                                                                        Loss of
                                                                                       Firm                    Bankruptcy       None       Below Ave. Financial                           External Dynamics          partners/Key   Failed merger
                        Firm Name            Specialization        City        State   Size   Month   Year   Filing/Petition?   Given          Performance         Internal Dynamics    (Competitive Pressures)       defections       attempt      Overexpansion   Lease Renewal
                                                                                                                                                                  Incompatible goals,      Servicing existing
                                                                                                                                                                     Compensation          clients, Inability to
Lane, Altman & Owens                            General          Boston         MA     25      May    2001                                                            philosophy                 recruit
                                                                                                                                                                                           Servicing existing
                                                                                                                                                                                        clients, Access to new
Leagre Chandler & Millard                       General        Indianapolis     IN     29      Sep    2003         Yes                                                                        clients/work
                                                                                                                                                                                            Servicing existing
                                                                                                                                                                                         clients, Access to new
                                                                                                                                                                                        clients/work, Inability to
Limbach & Limbach                                  IP         San Francisco     CA     31      Dec    2000                                                            Leadership                  recruit
Long Weinberg Ansley & Wheeler                 Insurance         Atlanta        GA     44      NA     1999
                                                                                                                                                                  Incompatible goals,
                                                                                                                                                                     Compensation            Access to new
Lowe Gray Steele & Darko                        General        Indianapolis     IN     12      Mar    2003                                                            philosophy              clients/work
Lowe Price LeBlanc & Becker                        IP          Alexandria       VA     38      Feb    1998
                                                                                                                                                                  Incompatible goals,
                                                                                                                                                                     Compensation           Access to new
Lyon & Lyon                                        IP         Los Angeles       CA     90      Aug    2002                                                            philosophy              clients/work
                                                                                                                                                                                           Servicing existing
Majestic, Parsons, Siebert & Hsue               General       San Francisco     CA     13      Nov    2000                                                                                       clients
Manta & Welge                                   General        Philadelphia     PA     20      Dec    2000                                                        Incompatible goals
                                                                                                                                                                                           Servicing existing
Martin, Ade, Birchfield & Mickler               General        Jacksonville     FL     23      Dec    2000                                                        Incompatible goals             clients
                                                                                                                                                                                            Access to new
McGlynn, McLorg & Ritchie                      Insurance      San Francisco     CA     13      Oct    1999                                                                                    clients/work
O'Connor Cavanaugh                              General          Phoenix        AZ     60      Aug    1999
O'Neill & Sun                                  Litigation     Los Angeles       CA     20      Nov    2003
                                                                                                                                                                                             Access to new
Pennie & Edmonds                                   IP           New York        NY     190     Dec    2003                                                                                    clients/work
                                                                                                                                                                                             Access to new
Peterson & Ross                                Insurance        Chicago         IL     50      Feb    2003                                                                                    clients/work
Ravin, Sarasohn, Cook                           General         Roseland        NJ     45      NA     2000
                                                                                                                                                                                           Servicing existing
                                                                                                                                                                                        clients, Access to new
Riden Earle & Kiefner                           General       St. Petersburg    FL     18      Dec    1999                                                                                    clients/work
Rockey, Milnamow & Katz                            IP            Chicago        IL     16      Mar    2002
                                                                                                                                                                                           Servicing existing
Rose, Brouillette & Shapiro                     General        Kansas City     MO      45      Feb    1998                                                                                       clients
                                                                                                                                                                                           Servicing existing
                                                                                                                                                                                        clients, Access to new
Rosenblum, Parish & Isaacs                    Technology        San Jose        CA     32      May    2000                                                                                    clients/work
                                                                                                                                                                                          Servicing existing
                                                                                                                                                                                          clients, Inability to
                                                                                                                                                                                        recruit, Access to new
Rosenthal and Schanfield                        General         Chicago         IL     20      Jul    2001                                                                                    clients/work
Rudolph & Beer                               Entertainment      New York        NY     12      Jul    2003
                                                                                                                                                                                          Servicing existing
                                                                                                                                                                                          clients, Inability to
                                                                                                                                                                                        recruit, Access to new
Schachter, Kristoff, Orenstein & Berkowitz      General       San Francisco     CA     20      Sep    2000                                                                                    clients/work
                                                                                                                                                                                           Servicing existing
                                                                                                                                                                                        clients, Access to new
Schwalb Donnenfeld Bray & Silbert              Litigation      Washington       DC     11      May    1998                                                                                    clients/work
                                                                                                                                                                                           Servicing existing
                                                                                                                                                                                        clients, Access to new
Sharfman, Siviglia, Poret & Ross               Litigation       New York        NY     13      Mar    1999                                                                                    clients/work
                                                                                                                                                                                           Servicing existing
                                                                                                                                                                                        clients, Access to new
Sheinfeld, Maley & Kay                        Bankruptcy        Houston         TX     60      Jul    2001                                                                                    clients/work
Simon Anisman Doby & Wilson                     General        Fort Worth       TX     14      Jul    1998                                                        Incompatible goals
Skjerven Morrill                                   IP           San Jose        CA     62      Feb    2003         Yes                                            Incompatible goals
Thomson Muraro Razook & Hart                    General           Miami         FL     11      Sep    2001                                                        Incompatible goals
                                                                                                                                                                                           Servicing existing
                                                                                                                                                                                        clients, Access to new
Titus & McConomy                                General         Pittsburgh      PA     20      Sep    1999         Yes                                                                        clients/work
                                              PI, Labor &
Tomar O’Brien Kaplan Jacoby & Graziano        Employment        Cherry Hill     NJ     25      Jun    2003                                                            Leadership
                                                                                                                                                                  Incompatible goals,
                                                                                                                                                                     Compensation            Access to new
Troop Steuber Pasich                         Entertainment    Los Angeles       CA     120     Jan    2001                                                            philosophy              clients/work

       Hildebrandt International                                                                                                        Page - 2                                                                                                                        March 2004
Law Firm Dissolution Matrix                                                                                                                                                                                                                                   Exhibit B
                                                                                                                                                         FUNDAMENTAL FLAW (See Note)                                              CATALYST (See Note)
                                                                                                                                                                                                                 Loss of
                                                                                   Firm                    Bankruptcy       None       Below Ave. Financial                           External Dynamics       partners/Key   Failed merger
                     Firm Name         Specialization          City        State   Size   Month   Year   Filing/Petition?   Given          Performance         Internal Dynamics    (Competitive Pressures)    defections       attempt      Overexpansion   Lease Renewal
                                                                                                                                                                                       Servicing existing
                                                                                                                                                                                    clients, Access to new
Tuttle & Taylor                            General         Los Angeles      CA     40      Dec    2000                                                        Incompatible goals          clients/work
                                                                                                                                                                                      Servicing existing
                                                                                                                                                                                      clients, Inability to
Walsh, Donovan & Keech                    Litigation       San Francisco    CA     11      Jun    2000                                                                                      recruit
                                                                                                                                                                                       Servicing existing
                                                                                                                                                                                    clients, Access to new
Waring Cox                                 General           Memphis        TN     28      Dec    2001                                                        Incompatible goals          clients/work
                                                                                                                                                                                       Servicing existing
Wartnick Chaber Harowitz & Tigerman       Litigation       San Francisco    CA     20      Oct    2001                                                            Succession                 clients
Werner & Kennedy                           General           New York       NY     20      Jul    1999
                                                                                                                                                              Incompatible goals,       Access to new
Woodard, Hall & Primm                     Litigation         Houston        TX     21      Jan    2002                                                            Succession             clients/work
Zimet, Haines, Friedman & Kaplan      Corp. & Securities     New York       NY     15      May    1998                                                        Incompatible goals

       Hildebrandt International                                                                                                    Page - 3                                                                                                                     March 2004

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