Readers of the business press have been watching the slow
decline of the famous New York law firm Dewey and LeBoeuf, which took on too
much debt and is reported to be investigating financial misconduct by one of
its leaders. Most troubling for a law firm, which lives on the expertise and customer
networks of its leading partners, it has experienced an increasing stream of
defections by its partners to other law firms. To many observers, the doubling
of departures in four months (8 in February, 22 in March, 40 in April, and 81
in May, according to Wall Street Journal) is a signal that the end is near.
What if it had not been a rush like the one we are currently
seeing, but instead fewer exits? We might think that a firm would withstand a
smaller stream out, as job movements are a common sight on most industries. But
if these are key personnel, a case can be made that even a smaller number of exits
is dangerous. So which is it? In fact, Wezel and coauthors have looked at exactly
this issue (for accountant firm partners), and found some interesting effects.
First, departures do harm the firm - a plausible first result.
Second, departures of individuals were much less damaging than departures of
groups. This is not just because groups are "bigger", but also because their
experience working together means that they add up to more than the sum of the
individuals. Third, reasonably, the effect is worse when they depart to a
nearby competitor. Fourth, and perhaps most surprising, the damage to the firm that
they depart is greater when they start a new firm than when they join an
existing one. What makes this surprising is that existing firms are often stronger
competitors to begin with, and adding more expertise to current competitors
seems to create a greater threat. But a startup is worse than a greater threat;
it is a new threat.
This may not quite be news that rescues Dewey, which seems
to have a bigger set of problems than the departure of a few partners. But, for
other firms it may be useful to know that retaining key employees is not just
good one’s own competitive strength; it also avoids strengthening existing
competitors or creating new ones.
Spector, Mike and Jennifer Smith.
2012. "Bankruptcy Specialist at Dewey Heads for Exit." Wall Street Journey, May
13 2012.
Wezel, F. C., Cattani, G., & Pennings, J.
M. 2006. Competitive implications of interfirm mobility. Organization
Science, 17(6): 691-709.
