A law firm’s strategy must evolve if its fortunes deteriorate. It is important that priorities are understood by management and clearly driven from the top down.

The greatest thing about the future is that it comes along day by day and allows us the time to influence its outcome - (paraphrasing Abraham Lincoln). Some law firms have never seriously tried to influence, much less manage, their own futures. They have either never taken a hard look at themselves, or worse, have allowed their focus on basic business health to fall by the wayside as the boom economy made business discipline seem less important and unattractive. These firms are waking up to a new reality where some are suffering downturns, stagnation and similar challenges, while others are on the verge of implosion or catastrophic upheaval. Amazingly, either due to a singular focus on expenses, or because they remain blind to their own situation, many of these same firms still don’t recognise the gravity of their condition, nor do they understand what they need to do to fix it.

A law firm’s strategy must evolve if its fortunes deteriorate. It is important that priorities are understood by management and clearly driven from the top down.

The greatest thing about the future is that it comes along day by day and allows us the time to influence its outcome - (paraphrasing Abraham Lincoln). Some law firms have never seriously tried to influence, much less manage, their own futures. They have either never taken a hard look at themselves, or worse, have allowed their focus on basic business health to fall by the wayside as the boom economy made business discipline seem less important and unattractive. These firms are waking up to a new reality where some are suffering downturns, stagnation and similar challenges, while others are on the verge of implosion or catastrophic upheaval. Amazingly, either due to a singular focus on expenses, or because they remain blind to their own situation, many of these same firms still don’t recognise the gravity of their condition, nor do they understand what they need to do to fix it.

Firms in distress won’t recover solely through normal preventative measures – it’s too late for that. Intervention is in order, and the severity of that intervention depends on the extent of the distress. Firms today align themselves along a continuum from ‘healthy’ to ‘near terminal’, but for the purposes of this discussion we will focus on those in the middle of the range – those with serious, but not yet terminal issues. At the more extreme end is the range of firms that are in, or near, crisis. The firms near the middle are generally sloppy in their business discipline, may have tolerated underproductive people for a while, are fairly laissez faire in style, and aren’t particularly focused strategically. They are probably facing a downturn in business and profitability. As the firm nears the more critical end of the spectrum, its problems tend to compound. In addition to those above, more critical firms usually have severe productivity issues; a long-term failure to enforce standards; flagging profitability even prior to the downturn; compensation systems that reward inertia or worse; divided and divisive management approaches; weak economic balance sheets; internal politics; weak leadership and more. The departure of important partners may have already begun, sometimes ‘unnoticed’. These firms would be at risk in good times. The additional stress of a severe economic downturn could easily prove fatal.

What should these firms do now? The answer depends, of course, on the severity of the symptoms, but for most of them, decisive action is long overdue. As firms get closer to the extreme end of the range, the number and severity of actions necessary will increase.

Closer to the middle, but with clear problems

There are a number of common actions firms in this situation should consider taking, including:

• Inventorying the firm’s client base and assessing the current balance between clients and legal capacity. Does the firm actually have enough good business for the current complement of lawyers? Unfortunately, a mismatch is unlikely to cure itself quickly through increased business, especially in a recession. Obviously the firm should take steps to improve its relationship with its best clients and look for opportunities to increase the flow of quality business. However, steps must also be taken to align the firm’s capacity with the available base of good business. Depending on the severity, firms in this condition may have the luxury to deal with this issue compassionately, but deal with it they must; 
• Linked to the first step, there is reexamining the intake standards to ensure that the work coming in the door is both appropriate to the firm and is from clients capable of paying for it. Sometimes the right answer is to turn down the representation; 
• Dusting off the firm’s partnership standards (or drafting some) and holding the partners accountable to these standards. There are usually some partners whose performance falls well below the expected levels. Be extremely careful about simply recategorising (‘deequitising’) partners who should find a different home; 
• Focusing on getting the work to the right lawyer – whether pushed down to the associate level, or sideways to a partner with a more appropriate specialty. Too often, when work is in short supply it is hoarded by those who can. As part of this, focus on keeping your most valuable young lawyers busy in the long term Insufficient work is a key cause of poor morale and could result in loss of future stars; 
• Doing the work in the firm – now! In a downturn, it is common for people to put off the work they have, stretching it out over time. Increasing the tempo in the firm is crucial. The extra time should be focused on quality business development; 
• Revisiting the compensation system to ensure it is focused on performance over time, with the flexibility to reward teamwork and economic performance; 
• Taking a hard look at your management model and culture. You can no longer allow a solopractitioner, laissez faire approach to individual performance. This is hard to change, and will require both leadership buy-in and aggressive management, as well as partner engagement. Make sure the management team is composed of capable, decisive firm-minded leaders; 
• Trimming costs where you can, but concentrating on the right areas of cost reduction. Make sure administrative staff ratios are in line with industry norms. Examine supply contracts. Focus on accountability for marketing expenditures (but don’t eliminate marketing in a downturn!); 
• Reexamining the firm strategy, or developing one. Make sure it is realistic given the firm’s actual market position.

Closer to critical

As the firm moves closer to the critical end, the intensity and the pace of the intervention necessary to put the firm on track increases. In these situations, it is likely all the above actions will be necessary as part of the solution – and on a fairly aggressive basis. They may not, however, be enough to stabilize the firm and get it back on track. Now you will need to take far more drastic action, including: 

• Creating a sense of urgency. Most law firm failures can be prevented if the firm recognises the situation early enough and takes action. Unfortunately, there is a strong cultural tendency in many firms, either to ignore the problem, or to hope it goes away on its own. Partners must be convinced the situation is real,immediate and dangerous; 
• Shaking up the management team and its authority. It is extremely difficult for a small, focused management team to fix a firm in this condition, even if it has the authority. It is impossible for a full partnership to take the actions necessary to overcome the problems. The partners must be convinced to turn substantial authority over to a small team of highly-trusted, business-savvy leaders. Often this cannot be the same team that presided over falling into the mess, and in many cases partnership rule changes are needed to provide appropriate levels of authority to the management team; 
• Conducting an aggressive client base inventory, and realigning capacity to match the available quality work (a far more aggressive version of point number one, above). This almost always means cutting capacity further than a lawyer’s first instincts suggest. It must be done intelligently, with the needs of both clients and firm foremost in the team’s minds. You can’t afford to get it wrong the first time, but it is too late to wait for marketing to change the equation; 
• Realigning the cost structure, wherever possible. For example, if the lawyer base is significantly trimmed, administrative ratios and occupancy costs will likely jump. Those and other costs must also be addressed; 
• Dealing with economic balance sheet stress, with a long term plan to strengthen economic capital (for firms where this is an issue); 
• Reestablishing a sense of partnership. A firm this traumatised will remain in a fragile state for quite some time. Putting it back on the road to health requires the partnership to be reconnected around a sense of common purpose, core values and strategic direction. This will take some time, but it is the leadership’s duty not to stop with the initial economic restructuring, but instead to go forward and build a stronger law firm. Partnership meetings, communication and retreats will all be part of this effort. A good strategy process can help, but too often a firm gets emotionally and culturally ‘exhausted’ at this point. Don’t give in to the temptation to rest on your accomplishments.

None of these steps is easy, nor will they take the firm out of risk quickly. Most of the work must be done by the firm, but for those who are serious about change, outside assistance can be helpful. In particular, it is rare that those in this situation will be able to see where their firm falls on the spectrum with any clarity. Partners are frequently ‘surprised’ by crisis. Firms don’t get into this situation quickly, and the long-term fix involves long-term sustained behavioral change. Life for the partners must be different in the end, but most would agree that it’s better to be different and successful while in control of your destiny than to have the firm dissolve.