Fourth Quarter 2015 Prognosis

With Labor Day firmly behind us and the summer of 2015 wistfully fading into our memories, now is an opportune time for Hanover Legal to offer a look back into some key BigLaw events over the last few months and a glimpse forward into the trajectory of our collective ice-breaker as we head into fiscal year 2016.

We commence here with a sobering reminder that the waters in which we sail remain perilous as we recall the late 2014 demise of our once venerable Bingham McCutcheon, following into the murky graveyard beneath the waters which we continue to navigate deceased stalwarts such as Dewey & LeBoeuf, Wolf Block, Howrey, Thacher Proffitt, Heller Ehrman, McKee Nelson, Thelen and Dreier — continuing, since the demise of Brobeck in 1999, the rate of one major firm fatality every year-and-a-half.  If this pattern continues, which all observations and logic would dictate, another major firm will collapse within the next twelve months or so, one major firm New York managing partner recently sharing with us his own perception of many of the now highest ranking firms on the infamous Am-Flawed ranking charts as merely “houses of cards.”  While many leading media outlets attempt to predict the identity of our next casualty by pursuing superficial criteria such as mere numbers of lateral departures and take every opportunity to add fuel to the fire of anxiety by correlating such numbers to levels of financial distress, the sad general perception is that most of our remaining major firms continue to hold their cards tightly to their chests, inflating revenue and profitability numbers in order to enhance the impression of health and stability wherever possible, only increasing the need for careful due diligence of a firm’s financial health when any player may be seeking a merger partner or contemplating a lateral move.  To be sure, the ongoing saga of the collapse of Dewey & Leboeuf and criminal trial of its former Chairman and top financial officers for inflating financial figures and misrepresenting the firm’s financial state with the goal of retaining and attracting top rainmakers and securing loans is only our most egregious public example of this disturbing phenomenon.

Nonetheless, the quest for global omnipresence remains ever-alluring.  The firm that has most closely approached Dewey & Leboeuf in terms of media attention thus far in 2015 is Dentons, whose attorney head-count on its “vereins” platform which loosely congregates under one corporate umbrella disparate offices while allowing individual offices to largely operate autonomously, has swelled to over 6000 worldwide spread out over 125 some-odd offices, primarily as a result of mergers this year with China behemoth DeCheng and Australia’s McKenna Long.  In doing so, Dentons has now easily eclipsed the previous BigLaw leader in those categories, namely DLA.  Tellingly, DLA’s recently departed managing partner Tony Angel remarked just before parting ways with DLA on April 30, 2015, only four years after having been brought aboard from Linklaters in one of the most high profile hirings this decade, as follows:  “This is an extraordinary time. In five years, firms like ours will have had to become much more optimized because our other global advantages will have been watered down. You need to add another string to your bow. That might be having a Peerpoint-style operation or a Belfast, for example.”  (See http://www.thelawyer.com/analysis/dla-pipers-wingman/3033806.article?cmpid=dnews_1043004.)   We at Hanover Legal similarly consistently encourage all major players to shed fat wherever possible so as to maximize the chances of competing effectively no matter what the overall revenue rankings will yield, and caution observers not to confuse careful and deliberate trimming sometimes in the form of necessary layoffs and lateral departures as a symptom of illness, but rather consider the equally plausible possibility that such trimming may be the best evidence of a conscious and healthy effort on the part of management to trim-down and shape-up.

More generally, the financial performance of our major firms so far this year appears mixed, Citi’s Private Bank’s Law Firm Group offering the following summary of the performance of our major firms during the first half of this fiscal year in its August 2015 report:  “The optimist and pessimist will each find support in the first half 2015 results: Momentum clearly improved, but overall results fell short of the first half of 2014. The legal industry picked up steam in the second quarter after the slow start to 2015… Revenue growth accelerated due to improved demand, and expense growth slowed, relieving the pressure on margins.”  (See http://www.americanlawyer.com/id=1202734681984?rss=rss_tal_amlawdaily&slreturn=20150820111400.)

That said, our increasingly few financially robust and healthy firms continue to recruit lateral talent aggressively and pay handsomely for superstar talent with portable books of business or business generating potential particularly in regulatory-oriented fields like white collar defense and even more explosively cutting-edge areas like cyber-security, especially given the lightning speed at which the technology driven environment in which we all toil is evolving and with which our firm leaders recognize a client-driven imperative to stay one step ahead of the curve.

In sum, we predict a robust fourth quarter 2015 in terms of lateral activity as firms gear up for fiscal year 2016, which promises to be the most competitive and challenging year for our major firms in decades, and assure all our law firm and attorney clients that we remain on board with you as you seek to better understand the market of BigLaw and optimize your ability to successfully navigate these tumultuous waters during the months ahead.

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