[author: Brenda Edwards]

Creating and sustaining a profitable midsize law firm is challenging, especially in 2015.  With many firms shrinking, becoming unstable or simply dissolving, both clients and employees are pursuing stability.  While there are many pressures, the following ten reasons are driving forces behind midsize law firm’s financial struggles or failures. 

1. Top heavy partnership agreements.  While this is not a new phenomenon, the timing of the maturation of these partnerships has exasperated the challenges of operating a law firm’s profitably.   The leverage pyramid has inverted.  Many firms have too many partners, not all of which contribute equally to revenue generation and firm management.  There isn’t enough profitable work to support the firm.  They either have too many employees or too many attorneys that are marginally profitable.  The reverse is also true, where support staff or attorney reductions have been too deep. 
2. Partners not retiring.  While there is some alignment with the first cause, it may also be unrelated.  Because of the recession and slow recovery, attorneys may not be in a financial position to retire.  Instead they choose to continue working.  In the best cases, they are contributors, productive and profitable.  In the worst cases, they create limited value and profit, yet expect to maintain the same level of compensation. 
3. Fundamental market shift.  This cannot be ignored.  Certain consumer market segments are gone or substantially reduced.  Simple estate plans are frequently provided by internet legal providers such as Legal Zoom rather than an attorney.  Business clients are leaner, have gone out of business, merged with a larger company or simply don’t have the cash to expend on preventative legal fees. 
4. Clients requiring more and paying less.  Larger corporate clients continue to shift costs to their legal team.  Downward pricing pressure, fixed or flat fee work and third party billing review companies who are valued by the legal fees they save their clients.  Additionally, corporate clients are requiring that firms increase administrative staff to comply with more complex billing, reporting, and compliance requirements. 
5. Market oversupply.  There are fewer students in law school and fewer graduates, yet the market remains bloated, especially in the second tier legal markets. There has been little improvement in the past 6 years and Bloomberg reported in June that only 64.4% of law school grads are working in positions that require a law degree.   Many recent graduates, unable to find a paid position either take an unpaid intern position or become a solo practitioner.  Ill prepared to run a business and practice a varied range of law, they undercut the market and become potentially difficult opposing counsel which can result in high legal fees which some clients are unable to pay.
6. Chasing the same lateral partner.  While hiring a lateral attorney with a portable book of business can resolve some problems, it is increasingly difficult. Firms, anxious to make themselves sustainable, are frequently chasing the same lateral attorneys who have a portable book of business.   This is simply a market supply issue.  There are not enough attorneys with portable books to meet the needs of firms that are looking for them.  Once a lateral is identified, the compensation structure that they require may create new problems for the firm including over-compensating the partner or the inability to deliver the anticipated new business. 
7. Lack of strategic thinking.  Continuing to think that the market will recover to pre-recession levels and not making decisions, in some instances, unpopular choices to create a sustainable firm. 
8. Costs continuing to escalate.  Health care costs and increased regulation are just two examples.  For the majority of law firms personnel costs and then occupancy are their two most costly line items.
9. Not hiring business people and if they do, not letting them manage the business.  Strong management will make the hard decisions.  While some firms have strong executive committees with strong business background, many do not.  The traditional “country club” law firm structure does not align with lean market driven management. 
10.  Client Hoarding.  While potentially protecting a partner or practice group, it does not help the organization and makes that practice group vulnerable if there is a change in decision making for their client.

Firms can address difficult internal operational challenges.  External market factors will require thoughtful strategies and adjustments.  Law firms that are proactive, well managed and aware of the changing market will create both a profitable and sustainable future.

About the Author: Brenda Edwards is the Executive Director of Phoenix law firm Jaburg & Wilk.  She has expertise in business management and marketing of midsize law firms.