November 4, 2008

Heller in the Cellar

4:38 pm

I read this article on the downfall of Heller Ehrman with great interest. What this doesn’t say is that Heller was a firm who last year had profits per partner in excess of $1,000,000, and in 2004 was ranked 2nd on the American Lawyer’s A List.  The key takeaways are that weak leadership, and the resulting lack of direction and ability to make key decisions, doomed the firm.   The dissolution of the firm was brought to bear by lenders who called in loans when the firm’s partnership numbers dwindled below what was allowed in financial covenants.  In essence, a “bank run” ensued with partners leaving, which caused the banks to act.  (The current financial crisis likely did not help).

There are other firms who are similarly exposed, and while law firms generally don’t have a lot in the way of “retained earnings,” it does not mean that their financial health should not be scrutinized.  Fixed costs, equity partner contributions, and debt financing are all things that can bring about the end of a firm in challenging times if managed inappropriately.  As a managing partner at the conference I attended last week said, “lawyers often vote with their feet.”  That’s what happened here.  In my view, this shows the delicate balance firms must face in building consensus while still being able to make tough decisions.  Increasing profits year over year certainly helps. 

- Bo Yancey

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Filed under Firm Culture, Law Firm Bus Model, Planning, economic outlook by BoYancey

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