US law firm Dewey & LeBoeuf had a pedigree dating back to 1909 and was regarded as one of the most prestigious in the country. On 28 May, though, what took over a century to build became little more than a footnote in history as Dewey filed for Chapter 11 bankruptcy protection, in preparation for a ‘managed wind-down’. The speed of the firm’s demise – which unfolded over mere months – was startling. But given recent evolutionary trends in the legal sector, driven by client demands for more cost-effective services, the reasons behind that demise are perhaps less surprising.

Dewey & LeBoeuf was created in 2007 through the merger of Dewey Ballantine – a powerhouse in corporate law for decades, with 500 lawyers around the world – and LeBoeuf, Lamb, Greene & McRae. The resulting firm had 1300 lawyers, with annual revenues of roughly $1bn, and made the American Lawyer’s 2011 A-list, in which it was ranked one of the Top 20 law firms in the US. But the timing of the merger was ill fated. The corporate world was soon enmeshed in the fall-out from the banking crisis, and fee work began to dry up.

Outdated strategy

Dewey responded by poaching high-profile partners from other firms, assuming that the client bases the lawyers would bring across with them would generate new business. Last year alone, Dewey made 37 new hires.

Meanwhile, the firm’s debts soared – thanks in large part to multimillion dollar, multiyear pay guarantees made to the firm’s most prominent partners in an attempt to both retain existing talent and attract the new lateral hires. The guarantees – paid to some, but not all, partners – helped to create a toxic ‘them and us’ culture. And those rising expenses combined with the recession to squeeze profits.

In October 2011, salaries were slashed in view of the firm’s wilting performance. Soon after, disgruntled and aggrieved partners started to defect in droves. Five months later, there were fewer than 50 partners left from around 300 that had been there at the beginning of 2012. In late May, the firm admitted defeat. Announcing its Chapter 11 filing, executive partner Stephen J Horvath said: ‘We are proud of the dedication and professionalism that has characterised Dewey & LeBoeuf over many years, and we intend to bring the same focus to the unfortunate task of closing out our affairs.’

That process, said the firm, would be carried out ‘in the most orderly and efficient way possible.’

Dewey vs Howrey

Dewey’s bankruptcy can be compared and contrasted with last year’s collapse of Howrey LLP. As NewLegal Review reported in March 2011, Howrey had made a push for rapid expansion into international markets, which proved unsustainable. At Dewey, meanwhile, rapid growth was orchestrated through lateral hires funded in part by heavy borrowing, and backed by lavish pay guarantees that the firm could ill afford. NewLegal Review asked Brad Blickstein, principal of US legal consultancy Blickstein Group, to comment on the learnings that could be gleaned from the two collapses.

‘The similarity was that they were both on a big expansion growth curve, and bit off more than they could chew,’ he said. ‘The big difference is that Howrey tried to be innovative with its document review work, document review centre, and taking alternative fee arrangements.’ However, as NewLegal Review pointed out last year, by the time Howrey implemented those innovations, more experienced LSO providers were commercially outstripping the firm. That prevented it from deriving any advantages from its new offerings. But according to Blickstein, Dewey’s problems stemmed in part from a reluctance to innovate. ‘Dewey was very old line, white shoe, hourly bill,’ he said. ‘I never heard of them doing anything differently.’

In sum, Dewey’s decision to invest further in the traditional model of hourly billing rather than take a more modern, flexible approach proved fatal. With the firm becoming top heavy with partners who were unwilling to take pay cuts, Dewey could not respond to a changing marketplace in which alternative legal services companies such as LSO providers were able to offer comparable services more cost effectively. With cost an increasingly important issue, clients are becoming more receptive to firms that can provide more efficient solutions.

‘When your business model is reliant on your people and not much else,’ said Blickstein, ‘you are at risk. If you are not hedged somehow with either process, technology, alternative fee arrangements or efficiency, you are at risk. You have all your eggs in the “great people” basket. Great people who could walk out of the door with their client bases.’

Forced to compete

Taylor English Duma partner and legal economics expert Michael Trotter would undoubtedly agree. In a recent interview with the New York Times, the author of two books on the finance and management of law firms said that Dewey’s problems have reflected ‘a change in the fundamental competitive environment’ of the legal services industry.

‘Many legal services,’ Trotter stressed, ‘have become commodities that can be supplied by a large number of firms, and corporate general counsel now know that they can get what they need at a lower cost if they force the major firms to compete for the work.’

With cost and efficiency the key differentiators, LSO providers – and alternative shoring solutions – have grown in popularity and taken root in the spending strategies of corporate counsel. As the type of work handled by LSO providers moves from process-driven tasks to more sophisticated ones, the competitive threat they pose to the inefficiencies of traditional – and expensive – law firms has increased.

Blickstein believes that law firms are beginning to move on from the traditional model – but not at any great pace. ‘That sense of entitlement is going away,’ he said, ‘and people are starting to look more carefully at different ways of doing things. But it is an evolution – not a revolution.’

At that pedestrian pace of change, it is small wonder that Trotter told the New York Times: ‘Many of the larger firms that serve major business clients are caught up in these [industry] changes. We’ve already seen several go under, and I think we’ll see quite a few more over the next few years.’