What 'Overcapacity' Really Means (Jordan Furlong, Edge International)


The legal industry’s newest buzzword is “overcapacity.” It’s constantly invoked in reports of flat revenue and declining profits in law firms, usually as the reason for and precursor to cuts of all kinds, from secretarial firings to partner de-equitizations. I’d like to drill down a little deeper on that word.

“Overcapacity” comes to us from the industrial and manufacturing sectors. Overcapacity, in that context, compels companies to shut down plants and lay off workers because low demand is generating insufficient cash to pay the workers and keep the assembly lines running. It infers a dramatic misalignment between labor and inventory, one that must be re-balanced if the business is to remain viable.

When we talk about “overcapacity” in the law firm context, we similarly mean that a law firm has more lawyers than it needs to handle its available work, that supply has outstripped demand. But does that equally imply that the viability of the business is imperiled? That the firm’s lawyers aren’t generating enough revenue to even cover their own salaries and expenses? That dramatic cuts are needed to keep the firm afloat? In almost all cases, I contend, the answer is “No.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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