Bad economic times may have exacerbated law firm failures like those of Thelen and Heller Ehrman, but they certainly weren't the cause, according to a white paper issued Wednesday by Hildebrandt.

The consultancy said there are a few common characteristics shared by firms that have faced dissolution and often early warning signs are ignored. Firm failures, just like mergers, are generally the products of a "rapidly consolidating and segmenting marketplace," the white paper commented.

In a 2004 study, Hildebrandt looked at 80 firms that had failed between 1998 and 2004. They all shared at least one of three common characteristics.

Below average financial performances that included excessive leverage, significant deferred obligations, low productivity and poor realization was one main category. Internal dynamics involving leadership problems, incompatible goals among partners, differences in compensation philosophies and a lack of succession planning was the second common theme. External dynamics dealing with competitive pressures over a historical client base, access to new clients or an ability to recruit was the third major component shared by failed firms.

There were four types of events Hildebrandt highlighted as "triggering events" that brought these underlying problems quickly to the surface. Those included an overexpansion that weakened the firm over a long period of time, a rapid or gradual defection of significant partners, a breakdown in merger talks for a firm already financially stressed, and the impending expiration or renewal of the firm's primary office lease. There are often multiple triggering events, Hildebrandt said.

In the current economic climate, certain financial performance issues should be closely watched, the consultancy said. Problem areas include excessive borrowing to pay for growth or to pay partners, having high debt levels due to a lack of capitalization, chronic productivity problems among partners, and showing poor financial hygiene, which might mean giving partners too much autonomy over which clients they take or when they discount fees.

Poor growth strategies can also be a big problem -- the growth for growth's sake phenomenon.

Or as Hildebrandt put it, "some firms seem to be committed to a strategy of being the largest and least profitable firms in their markets!"

Other firms run into problems because of a failure to understand or plan for market changes. They don't pay attention to a potential loss of work because of changes in a client group's business.

"Failed firms often try belatedly to address these issues through eleventh-hour mergers or rapid expansion, but such actions are a poor substitute for careful strategic planning and action early on," Hildebrandt said in the white paper.

Law firms also have to be sure to manage partner expectations and know the firm's place in the market.

Hildebrandt said most of the firms that failed in the last decade could have avoided it if they acted earlier and more prudently.

This article first appeared on The Legal Intelligencer Blog blog on TheLegalIntelligencer.com.