Whether or not the bruited Bingham/Morgan-Lewis merger is consummated, Bingham as we know it is beginning to cease to exist. While I have no inside information and am not professionally involved in the recent developments, inquiring minds have to ask what has happened and why, and if there are any lessons for the rest of us.
The proximate cause of Bingham’s difficulties is obviously the 12.6% revenue drop in 2013 vis-a-vis 2012 and the corresponding fall in total profits of 24.4% and PPP of 12.7%. At the time the firm revealed those results (this past February), they chalked it up largely to the end of a few substantial litigation matters and to the firm’s structural predominance of “countercyclical” practices, which had stood it in good stead through the GFC, but which boomeranged when transactional volume began to pick up. To help explain the profit drop, they also noted the firm’s investment in its Lexington, Kentucky operations center
This was plausible in direction, if not completely convincing in extent.
For present purposes, let’s take this all at face value and as offered in complete good faith, and see if it leads us anywhere interesting.
The operations center investment first: Since law firms as we know them seem condemned to march forward into an uncertain future naked of the protective financial garment of retained earnings, the operations center investment would indeed have hit the P&L. But the implied lesson for the rest of us sounds uncomfortably close to “undertake such investments at your peril.”
The cruel, irrational, and hard reality of law firms stripping their balance sheets of cash at the end of every fiscal year to distribute to partners is that today’s partners pay more or less in full for investments that will benefit tomorrow’s partners. To do this on a meaningful scale requires deep commitment to intergenerational equity within the firm and a strong sense of shared purpose.
The outright revenue shortfall was far more serious and, we now know, potentially disruptive. While a 12.6% revenue drop is bad news by any score the consistent reports I’ve heard described it as pretty much a last-minute surprise sprung on the partners.
Assuming the reports I’ve gotten are correct, this method of handling bad news hardly meliorates the hard numbers not does it send a reassuring message of transparency in sharing bad news. Unfortunately, if management had a credible story to tell about how the good ship Bingham would quickly return to a steady course, the surprising announcement didn’t do much to enhance the odds of that story being warmly received.
What about the end of some major litigation matters?
The larger issue this brings to the fore is that law firms face an intrinsically challenging task in matching supply of lawyers (talent) to client demand, because of a fundamental timing mismatch. Client demand can and does ebb and flow, sometimes on a dime, but the pipeline of developing talent is years long. Firms are at peril of the Scylla of suddenly absent demand creating costly and idle suddenly-excess overhead, and the Charybdis of spikes in volume overwhelming capacity and, at the extreme, the exigency of turning valuable work away. Wisdom has long had it that “you cannot build the church for Easter,” and law firms face a similar challenge.
While it may be too late to solve Bingham’s encounter with this reality with a snap of one’s virtual fingers, I submit that in future we will see more and more firms building and relying on ways to create “accordion capacity,” using a combination of temp and contract lawyers-for-hire, alumni of the firm itself, and a re-imagined quasi-contractual understanding with flex-time professionals that “flex” is a two-way street.
And the “countercylical” argument?