Fail to Align Profit Expectations at Your Peril

I wrote a few days ago about "the cautionary tale of Coudert," but with more background emerging from Legal Week's excellent coverage, some additional insight into the firm's truly alarming predicament is possible.

Let me preface all I'm about to say by repeating that I have good friends at the firm (albeit no inside information), and that it thus pains me to dwell on what by any lights is now a firm in distress.  But I'm a big believer in the value of "lessons learned," and hope that some beneficial ones might be extracted even now, before the next chapter on Coudert is written.

Tim Newbold, the Legal Week reporter, sets the proper overall tone when he concludes:  "Coudert’s current predicament is particularly poignant given the fact that it did so much to blaze the [international] trail."  That predicament dates to Coudert's expansion efforts on continental Europe in the 1990's. 

What went wrong?  Fundamentally—and we have seen this happen before—both the profit capability, and the expectations, of its US and European practices began to diverge, now with potentially lethal results.  While the US chafed at Europe's lower profits dragging down the mean, Europe's view was that the US had reneged on promises of investment, which would have brought them up to par.  It matters not who was right; what does matter is it went unresolved.

Now, as a strategic matter, the firm faces a difficult cross-roads.  It's safe to say most analysts view a merger as ultimately the best, or only, salvation for Coudert, but at the moment they're in a defensive, underperforming crouch:   Not the stance from which to execute a merger-from-strength.   If a merger is to be more than a distress sale, Coudert needs to take the time to restore its attractiveness—by, I would recommend, focusing on its strong Asian network and the indispensable New York office.  But time is a luxury they may not have a lot of. 

In short, they need to merge because they're weakened, but because they're weakened merger prospects are unattractive.  My choice?  Go for broke (perhaps literally) and try to rebuild on your own.

As I said, there is no schadenfreude for me in this sad tale.  But there is at least one key lesson:  When it comes to reconciling different profit expectations, you cannot survive half-pregnant.  Make a choice; bite the bullet; become, perhaps, a different firm.  But a healthy one.