Two observations are made about law firms in "Big But Brittle: Economic Perspectives on the Future of the Law Firm in the New Economy" by University of San Diego Law professor David McGowan and academic fellow Bernard Burk of the Center of Corporate Governance at Stanford, recently published in the Columbia Business Law Review: that firms are getting larger, but that the larger ones are also more prone to rapid collapse. 

Firms are getting larger, according to their analysis, because referrals fuel business, so adding additional partners with a new circle of contacts increases revenue for everyone.  But that same dynamic encourages partners with the most business to then go to firms with even bigger or better networks. seriously unbalancing the firm they leave.  Howrey may be our most recent example of their theory, and a fairly stunning one.  

Howrey grew quickly after the beginning of the 21st century, primarily through acquisition of outside lawyers, establishing 16 global offices and achieving outsized gains in profits. But starting in 2008 some of its biggest producers either left or, sadly, died. Many departed in response to a 2009 PPP drop of over 35% below the firm projection, the biggest PPP decline among the Am Law 100, which was followed by projections for 2010 of a continuing decline. While Howrey says it has not calculated PPP for 2010, former partners are reporting that 2010 PPP was $550,000–down significantly from $846,000 in 2009 and $1.3 million in 2008. And that is the average.  With the widening spreads in partner compensation that lateral hires are generating (as we discussed at length in the CCM audio conference last month), those averages hide the true picture for alot of partners.  

Speculation is that other factors–extensive conflicts in the primarily litigation firm, low realization rates and the "lumpiness" of contingency payments–all took a toll on Howrey’s finances. 

Since March 2010, more than 60 attorneys—nearly 10% of the total—have left Howrey, both willingly and unwillingly, including the New York-based co-chair of its litigation practice who joined Sidley in December, its San Francisco-based Vice Chairman who moved to Dewey last month, and a Brussels-based co-chairman of its antitrust practice who announced his resignation last month as well. Currently 200 are listed as partners.

Premerger talks begun with Winston Strawn were quickly shelved and Winston last week offered @ 3/4ths of the remaining Howrey partners a place at the firm, which Managing Partner Bob Ruyak has urged partners to accept.  With over $35 million in reported secured debt, tens of millions more in other liabilities and nominal accounts receivable of $100 million and dropping, Howrey is likely to end with a crash and not a whimper, joining the illustrious megafirms Thelen, Brobeck, Phleger and Heller Ehrman.

Some of the Howrey lawyers went to Morgan Lewis. That firm explained that after adding 50 lateral partners in its 2009 fiscal year, it had only added three lateral partners in the 2010 fiscal year and is "ready to start growing again."

They might think twice.