Crisis Management

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.

This article reprinted with permission from American Lawyer.  © 2009 by Incisive Media US Properties, LLC, futher distribution or reproduction without permission is prohibited.

Sometimes a firm is less than the sum of its parts. In a struggling economy, business misalignment can be fatal.

 

IT'S NO SECRET THAT WE ARE IN A period of significant economic stress. Many firms are struggling with declining revenues, lower billable hours, slower-paying clients, and, inevitably, declining partner incomes. A few firms have already called it quits. Time to circle the wagons and ride out the storm, right? Maybe, for some. But many firms will face radical restructuring, and some will fail, for reasons that go well beyond the downturn.

 

There are two reasons for this. The first is that the economy is not just in distress--it is being remade at a remarkable pace, in ways we do not yet fully understand. The second reason is more fundamental. Many firms are in greater-than-expected distress, because they were fundamentally misaligned as businesses before the economic crisis hit. The economy has simply forced some to come to grips with these challenges faster and more aggressively than they likely would have otherwise.

 

Firm-level alignment problems tend to fall into three primary, but sometimes interrelated, categories--economic, strategic, and cultural. Each has different roots and implications.

Reprinted with permission of The Recorder.  © 2009 by American Lawyer Media, ALM, LLC.  Further distribution without permission prohibited.

 

 

Barack Obama set his sights on the White House long before he knew the job would come complete with the worst economic crisis since the Great Depression. If you are a new practice group leader or managing partner of a law firm, the path to your position may have also been well under way before it was clear you would take your position in the most challenging environment your firm has ever seen.

 

As one seasoned firm leader recently said to me, 'Leading a firm in good times is difficult; leading a firm when net income per partner is off budget is impossible.' Numerous practice group heads and managing partners will lead meetings this month while holding a leadership title for the first time. Leading lawyers has never been easy, but the level of difficulty has increased dramatically. In the recent past, law firm leaders complained incessantly about how hard it was to find enough quality lawyers to do all of the work that was piling up in every corner of the firm. While that challenge did, in fact, keep law firm leaders awake at night, it hardly seems as daunting as what awaits leaders today: Profits and workloads are declining, payment cycles are stretching like never before, major clients are refusing rate increases, and associates and staff avoid eye contact with you because they fear layoffs.

 

How can a new leader with little or no formal training perform under these circumstances? Paying close attention to three facets of leadership will help.

 

Day One

It’s Friday afternoon, and you are the new Managing Partner of an old-line law firm in a significant legal market. Your firm has suffered three years of stagnating revenues and partner incomes, and has shrunk modestly in size, despite what has been for most firms a very profitable few years. You look around, and you realize that at 5:00, there are a number of dark offices—far more than can be accounted for by the shrinkage you’ve experienced. Your gut tells you the firm has lost its direction, and you are concerned about bringing the revenues back up to historical levels. For some reason, you’ve had a series of strikeouts with the various lateral candidates you’ve pursued. Cash flow has not been good, and you just heard from the controller that it is clear the firm will be off budget this year . . .

It’s time to head home. But, as you’re packing your briefcase, you receive a call from the firm’s most significant partner, who tells you he’s taking his clients and starting a new firm. He’s tired of subsidizing under productive people. He’s taking the best ten lawyers in his practice, along with $5.0 million in business. Suddenly, the firm is in crisis, and your partners don’t even know it. But, by Saturday morning, they will . . .

Keep your eyes open to ten signs that your firm may be at serious risk.

As we closed the books on 2001, many Managing Partners found that their worst fear—having to tell their partners they missed budget! —was avoided. But, while many firms saw their incomes hold up or even increase in 2001, some face less certain times in 2002. How can you know if your firm is at serious risk? And, what can you do to avoid trouble on the horizon? The following are some important short- to mid-term warning signs:

1. Serious profitability declines
Obviously, a significant decline in profitability is an indication that something may be amiss. Yet, how a firm should react depends in large measure on what the underlying causes are and the firm’s forecast for a rapid change in fortune. First, and obviously, firms should assure that their costs are kept under tight control and prudent management. This does not mean paring expenses to minimal levels, but rather that the firm ensures that its expenses are properly aligned with its business base and its strategy.

In addition, unless the profitability decline is viewed as short term, the firm should be focused on matching its capacity with reasonable expectations concerning the available business. This may require reductions in lawyers in practice areas subject to significant downturns, while still maintaining the critical base of core competencies necessary to compete in a turnaround.

Over the last few weeks, many of the top 100 UK firm’s 2010¹ provisional revenue and profitability figures have been announced. The full and underlying financials are yet to be published (we are awaiting more detailed information on productivity, leverage, costs, margin, etc.) but in the meantime enough indicative data is available to begin to discuss the potential drivers of this year’s results and expectations for the future.

The recent failures of Heller Ehrman and Thelen Reid & Priest – coming, as they did, at a time of serious economic downturn for the country and the legal market – have led a number of our clients to ask us about the root causes of law firm failure and whether it is possible to identify early warning signs of firms in distress. In fact, we believe that it is possible to point to certain commonalities in the law firm dissolutions that we have observed over the past several years.

At the outset, we should note that, while the current economic downturn may have exacerbated the distress of Heller, Thelen, and other troubled firms, it would be inaccurate to conclude that the downturn actually caused their problems. It is important to remember that Heller and Thelen are only the latest in a series of high profile law firm failures that stretches back at least two decades. The list includes (to name but a few):