To determine the financial stability of a law firm, how far should legal departments inquire?

When coalescing its group of outside counsel into a smaller number of primary firms or selecting a firm for a multi-year commitment, a law department rightfully wants to select firms that are financially solid, that will prosper during the term of the agreement. That desire prompts questions in the Request for Proposal about firms’ financial and management strength. But are there limits to the breadth and depth of those questions?

Say you believe that retention figures tell something about how stable a firm is, so you ask for data on partner departures in the past two years. But why not go back five years? And what about associates? Or you believe a firm that grows by bolt-on acquisitions is riskier as a long-term bet than a firm that shows steady organic growth. Is it fair to ask about all mergers (and how do you define a merger) and for how many years back? Is the capitalization of the firm a legitimate inquiry? What about unfunded pension obligations? Can you ask the number of clients that account in total for 30 percent of the firm’s revenue in the past year? Their names?

Just listing the range of possible questions makes the point: legal departments have a right to assure themselves that a firm will remain able to serve it, but there is a blurry line over which questions step too far.

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