The King & Wood Mallesons Collapse: Déjà vu All Over Again
Updated: Aug 15
It will be a glum holiday season for the lawyers and staff at King & Wood Mallesons (KWM). The multinational law firm giant, a single-branded legal network anchored by British, Australian, and Chinese member firms, is dissolving. The firm website describes the 2,700 lawyer amalgam as ‘the global elite firm of the next century.’ Its motto, ‘The Power of Together,’ is cruelly ironic—especially for many soon to be out of a job.
The American Lawyer has already performed a KWM ‘autopsy’ based on interviews with several current and former KWM partners. They attribute the cause of death to a host of maladies including: poor governance and management, succession issues, greed, lack of strategic direction, and chronic partner capital shortages. Other factors no doubt also contributed--inadequate due diligence, overheated expansion, integration challenges (IT is often a big one), cultural and practice differences, currency issues, and the firm’s Swiss verein structure. Swiss vereins market themselves as a unified firm brand but have balkanized member finances. Each verein member maintains separate books and (purportedly) liability. That’s why KWM’s Asian and Australian member firms will remain largely in tact--at least until their next hookup—even as their European member colleagues dissolve. It also explains how and why the Asian and Australian KWM members left their European ‘partners’ to fight off the vultures en route to insolvency without stepping up to save the unified firm.
What Does ‘Partnership’ And ‘Law Firm’ Mean These Days?
The collapse of KWM and its ‘bigger is better’ approach to legal branding and services calls to question what a law ‘partnership’ and ‘firm' means. This is especially so with Swiss verein law firms whose organizational structure was used by a handful of accounting firms to become global brands while retaining local finances. Vereins created a new type of ‘firm’ and ‘partner.’ The internal workings of this organizational structure--operating as a network--differed from the unified and integreated global brand it marketed itself as. Some years ago, growth-oriented law firms (DLA, Hogan Lovells, and Dentons to cite a few) adopted the Swiss verein structure and promoted themselves as integrated global firms. KWM’s implosion is a reminder that mega-firms-- whose inner workings can differ-- are legal networks masquerading as unified firms. Neither are they ‘firms’ in the sense of an integrated whole with shared interest, nor are they comprised of ‘partners’ who share risk, reward, or ethos. Consider that KWM’s Asian arm is now competing with Dentons- another Swiss verein law firm- and others to acquire all or part of KWM’s failing European partner. So much for ‘The Power of Together.’ This is not your mom or dad’s version of a partnership or a law firm.
Different Decade, Different Structure- Same Result
History repeats itself, and large law firm implosions bear this out. Finley Kumble’s (FK) 1987 insolvency is the seminal ‘too big to fail’ law firm event and came to mind when KWM imploded. For those not yet eligible for senior citizen discounts, Finley Kumble gave form to today’s large law firm reward model and culture. It also established the template for collapse of ‘bigger is better’ firms as seen again in the KWM implosion and others. It’s worth taking a closer look at Finley because of its unique influence on the large firm model. Disclosure: I was once the youngest FK partner and had first-hand knowledge of its management. I resigned from the partnership to start a national litigation boutique two and a half years before FK’s collapse.
Finley Kumble was the epitome of the go-go ‘80’s. Opulent offices, eye-popping lateral guarantees, and brashness defined the firm. Finley Kumble rewrote the unwritten rule that law firms don’t poach talent—at least not overtly. It raided firms with impunity- offering compensation packages difficult to refuse; enshrined rainmakers and relegated ‘service partners’ to second-class status; pursued a ‘too big to fail’ strategy by serially acquiring individuals, practice groups and firms across the country; paid princely sums to each with remarkably little due diligence; and created a compensation structure where top rainmakers made as much as 15 times more than other ‘partners’ did. FK introduced the lockstep legal world to free agency and created its first class of seven-figure big firm partners. It epitomized law’s version of Gordon Gekko’s ‘greed is good’ philosophy (FK’s collapse occurred the same year “Wall Street” hit theaters). FK’s transition from a small, Manhattan-based firm to a sprawling national powerhouse-the nation’s second largest firm-was remarkably quick--as was its collapse.
Finley Kumble, like many go-go firms that followed, cratered for a number of familiar reasons --governance and management failings, underperforming laterals, greed, an obsession with origination and internecine conflicts about it, a shortage of partner capital, reckless misuse of bank credit facilities to fund lateral guarantees and huge bonuses, and excessive client billing were all part of the mix. And while many see Finley’s collapse as nothing more than an unraveled Ponzi scheme, the firm’s aggressive collection of talent and billing became a blueprint for many of today’s large firms. And there’s one other element of the FK legacy worth noting. Finley Kumble had a true partnership structure—although functionally it was anything but a ‘partnership.’ That meant each partner—no matter their rank or compensation—was jointly and severally liable for the firm’s obligations. This had dramatic financial consequences—particularly for the vast majority of partners who had no clue about the real state of the firm’s finances until bankruptcy proceedings exposed them. Finley’s collapse led to the overhaul of law firm partnership formations. This resulted in a structural reformation of law firm partnerships, the first iteration of which was the 'limited liability partnership' (LLP). The LLP structure was initially met with considerable skepticism-- perceived by many as a reluctance of law firm partners to rely upon--and to be financially bound by--colleagues' judgment. LLP's gained market acceptance over time, paving the way for Swiss vereins and other liability limiting structures designed to accelerate growth. 'Partners' are no longer joined at the financial hip and firms are often individual fiefdoms that share resources but little else. What does this do for the client?
The implosion of King &Wood Mallesons-- like Finley Kumble's decades ago-- is a cautionary tale for mega-firms created by rapacious consolidation. No matter its organizational structure, firm success is principally derived from client satisfaction, not size, aggregate revenues, or branding. Meteoric growth--without more--often results in cataclysmic falls. History has confirmed this and will again.
Also published on Forbes.com (Marks' contributors pages)