Managing Law Firms in Transition

Managing Law Firms in Transition

What is a Law Partner

Posted in Law Firm Growth, Law Firm Leadership

Another year and more turmoil in the legal industry!partnership

Although the improving economy has led to improved performance for some law firms, for many (most?) the disruptions in the legal industry continue to create serious challenges. As firms continue to search for a path back to health, there will almost certainly be an unfortunate number of partner terminations and demotions.

In far too many cases the effected partner is surprised.

In a conversation with Larry, a successful lawyer I once worked with, asked, “In managing law firm performance, how do we manage performance cycles, while honoring a culture that values the individual? We all talk about loyalty and being partners; but the concept of removal or demotion seems directly at odds with those bedrock concepts.”

Larry has put his finger on the heart of the issue – a pivotal point that, in my view, warrants some consideration. In pondering Larry’s observation, a fundamental question dawned on me — exactly what is a partner?

Unfortunately most law firms have not made partner a defined term, leaving it to individual and inconsistent interpretations. Certainly many firms have defined specific characteristics necessary for promotion from associate to the partner ranks. Some firms specify at what age you must retire from being a partner. But what I am talking about is a carefully thought through definition of exactly what it means to be a partner during the 30-40 years between these two points!

Let’s look at the spectrum of possibilities. At one end you have the firm with high standards for conduct and performance, and little tolerance for variation from those standards. At the other end we have the firm that operates with a philosophy of once-a-partner-always-a-partner, no matter the conduct or level of performance. Obviously, there is a universe between these two extremes.

My point is not that there is a universally applicable combination of factors that is right for every firm; rather that it is essential that each firm define what “partner” means for that firm.

Defining expected conduct and performance would:

  • Dramatically improve the odds that the firm will achieve the collective aspirations of its partners; and,
  • Provide a fair means of assessing individual partners.

I believe the degree of a firm’s success will be directly tied to two issues that stem from defining what it means to be partner.

First, the longer you allow the lack of definition to exist, the more varied the conduct and performance of the Partners will become over time, threatening the competitive position of the firm.

Second, once you have defined what partner means, the firm’s management must demonstrate the resolve to manage performance to that definition. To not follow through violates a basic contract with the partners, undermines confidence in management, and threatens the long-term health of the organization.

The clear definition, communication and observation of what it means to be a partner will unify and strengthen a firm’s position in today’s turbulent market, and help maintain stability and strength in the pursuit of tomorrow’s goals.

Exactly how does your firm define Partner?

Boomer Law Firms: Some Demographic Challenges

Posted in Law Firm Crisis, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Succession, Law Firm Transition

Ward Bower’s Existential Threats to Law Firms provides an excellent review about a few of the economic and demographic issues that threaten today’s law firms. As Mr. Bower notes, some of the law firms previously fixtures in league tables and in the AmLaw 200 have either failed, been acquired or otherwise have disappeared from view-all because economic and/or demographic issues had a significant impact.

The five issues or “existential threats” are easy to understand thanks to the clarity of Mr. Bower’s article. Too much long-term bank debt at a law firm can cause earnings to erode and contributors depart. An expiring lease is another threat, causing landlords to demand partner guarantees prior to any new lease being offered. If the landlord’s demand cannot be resolved favorably, the law firm’s partners may disperse.

A particularly insidious third threat exists when a law firm has unfunded retirement obligations. Like the bank debt, the unfunded retirement obligations can eat into earnings causing younger partners to depart. Today’s competitive lateral hiring environment yields yet a fourth threat. Firms that lured laterals with minimum income guarantees may be more financially stressed, especially if the hires have been lackluster.

Finally, the lack of succession planning threatens many firms because boomer leadership may retire, die or become disabled. Without an experienced hand ready for the tiller, the good ship law firm can easily run aground.

Mr. Bower warns that the presence of any of the five issues can leave a firm at considerable risk. His admonition that today’s law firm leadership takes heed is well placed. Yet firms receiving a clean report card on the five existential threats may still face risk due to the aging of today’s law firms. Three demographically based challenges, tangentially touching on Mr. Bower’s existential threats, are discussed below:

Expiring Leases. Mr. Bower’s focus on landlords demanding lease guarantees is spot on. A standoff between the law firm and the landlord could lead to partners throwing in the towel and winding up their firm. But even if no guarantee is demanded, the advent of a terminating lease can cause partner reflection that leads to some of them deciding to go their separate ways. When facing another 10 years with partners no longer as symbiotic as they were 10 years earlier, some may decide to not re-up. A fracturing of the law firm can result thus leading to its demise.

Retirement. Mr. Bower’s article highlights how unfunded retirement obligations can sap a firm economically, causing instability, departures and then the end of the firm. But even if a firm does not have an unfunded retirement obligation, it may have productive boomer lawyers facing a life crossroads. These lawyers may be less concerned about the financial burden of an unfunded retirement obligation and more interested in having a retirement benefit itself. While younger partners may be pleased that the firm is free from an unfunded retirement obligation, the boomer lawyers may wish their firm had a retirement plan providing more financial security for their latter years. Those thoughts about retirement on the horizon can stimulate departures by critically important partners looking to supplement a nest egg. For smaller firms that can’t easily endure the departure of significant economic contributors, the lack of a non-qualified retirement plan may cause wanderlust, departures and then crisis.

Guaranteed Income for a Laterally Hired Partner. While a firm may feel very good about not having offered guaranteed incomes to lateral hires, that same firm’s legacy rainmakers may be lured away by that exact kind of unwise inducement. In a legal services market in which self-interest fuels lateral movement, no firm is free from the risk that its most productive lawyers, including those from the loyal boomer generation, will leave for greener (as in money) pastures. So even if a firm has avoided the questionable practice of guaranteeing income for laterals, its best partners may have their heads turned (see Retirement, above) by firms not so disciplined. In today’s market, all firms are at risk of losing their most valuable assets.

Many law firms are blessed with productive lawyers from the boomer generation. But how many of those firms can afford to see those same lawyers decamp for another firm? What has your firm done to guard against that happening? Is it prepared in the event boomer partners say adios?

Is Your Law Firm in Transition

Posted in Law Firm Crisis, Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring

 

With the on-going market challenges associated with the legal profession, firm leadership is smart to periodically stop and evaluate the state of the firm. Is it in a transitional state?

Here are four questions that can help serve as a baseline diagnostic. Is your firm:iStock_000013760109Small

  1. Facing a decision that addresses the fundamental way the firm has been doing business — Firms regularly face these moments — significant business altering decisions that prompt a re-examination of the way business is conducted.. Properly responding to the shrinkage of a practice, lawyer count or market evolution, adverse litigation, financial losses or growth opportunities are typical precipitators.  These kinds of decisions, even though not motivated by the existence of crisis, should cause a firm to re-think its approach to the practice of law.  A firm in this position usually has the benefit of some time to make the right decision — but not unlimited time.
  1. Needing to reposition/restructure — The need to reposition or restructure can arise from a number of developments. Repositioning or restructuring usually involves a firm being in a state of greater urgency than simply facing a business altering decision such as those noted above. The loss of significant clients, practice groups, offices, key lawyers, or a cost structure that has gotten out of balance with revenue can all signal the need to consider a repositioning or restructuring in order to turnaround the troubled firm.  When this is the case, the clock is ticking — and decisions tend to become increasingly time sensitive and critical.
  1. In crisis — Issues that will test survival take the discussion to a different level. Continued attrition, missing partner draws, declining profitability, and threatened or actual removal of borrowing ability signal crisis. In these moments managing the law firm is traumatic.  And time is of the essence.
  1. Requiring an orderly liquidation — An unfortunate (but all too frequent) occurrence in our present market is the most extreme form of transition — the closing of a law firm. Firms in this position no longer have go-forward restructuring options. Often there is an insufficient number of producing partners, fixed costs exceed revenue, and continued operation is not viable. In this case, an orderly liquidation that manages claims against the firm, and minimizes disruption of lives is what leaders should be working toward. Choices made here are critical to a successful outcome.

The nature of the transitional decision faced by a law firm does not always fit nicely into one of these four categories. At times more than one of the categories is presented; a law firm needing to reposition or restructure may, simultaneously, be in crisis.  If repositioning or restructuring is realistic, it may avert the crisis.

In other instances, a law firm may initially believe it has time to re-think the way it practices, and adjust some of the fundamentals that underlie its business.  But if the wrong decisions are made, it may soon find itself in crisis and needing a repositioning/restructuring lest it slip into requiring a controlled liquidation.

 

Law Firm Capital Contributions-How Healthy an Investment?

Posted in Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Warning Signs

HealthRecent commentary on trends among law firms has highlighted the increasing popularity of requiring greater capital contributions from owners. As Law.com‘s Nell Gluckman notes, instead of capital requirements in the 20-25% range as was common for years, law firms more frequently are jacking up the owner capital requirements into the 30-35% level. In some cases, the capital amount expected by leadership is even greater.

Increasing owners’ capital obligations is partly in response to the negative experiences from the Great Recession as well as encouragement from bank lenders.

From a firm standpoint, the decision to make owners contribute more capital is fiscally sound. Unwilling to take only half-measures, Richard Acello writes that many firms have not only increased the capital required, but also have slowed down capital repayment with a combination of extending repayment term and by breaking up repayment into installments. These steps not only help the firm with its cash flow, but they can also cause some owners to think twice about leaving.

For law firm owners, however, increasing their capital contribution may not be so welcome. True, when thinking solely about the firm, an owner should be comforted to know that more capital should make his or her firm stronger. Yet when that same owner focuses on self-interest, the popularity of this new capital model can’t be so comforting for a number of obvious reasons detailed by Edwin Reeser.

If your firm is thinking about increasing its capital by requiring owners to contribute more, be ready to address the following concerns from owners:

The Investment is at the End of the Food Chain. As simple matter of priority, capital is subordinate to virtually all other law firm obligations. That may be okay as long as the firm is in business, but if Armageddon comes the priority of all other claims means repayment will come, if ever, only after a long time.

The Investment is “Covenant Light.” Generally, once the capital is invested in the firm nothing triggers its repayment other than a departure or liquidation. A firm’s poor financial performance, unwise decisions, “run on the bank” departures don’t activate an owner’s right to be repaid like they may for a third-party working capital lender. Unless an owner leaves thus triggering a repayment obligation, the capital will simply sit there even if management is running the firm into the ground.

When Things Go Bad, Recovery Prospects Depend on Others Who Don’t Care About the Owners. Because an owner’s investment is subordinate to virtually every other interest, it is the holders of priority claims that will dictate the steps taken to satisfy obligations. Those priority claimants will care little about the owner’s interest (other than to make sure it doesn’t get paid ahead of them). Worse yet, while all of the priority holders usually can sell their interests to obtain a market-based recovery, the equity holder is often legally or ethically restricted from selling the equity interest even if theoretically a market exists.

Borrowing to Buy Equity Can Be Scary. As equity requirements ramp up, the idea of financing a capital contribution gradually out of year-end bonuses and distributions becomes less practical. Body dragging your owner to the firm’s friendly bank so the equity owner can borrow the funds needed to make the contribution is easy for the firm, easy for the bank and heck, even easy for the firm owner. But when that owner departs for greener pastures or sees the firm fail, the demand for payment of the capital loan will come long before any capital, if any, is recovered. Taking on senior debt to acquire equity can be scary for your owner.

The Returns May Really Stink. Law firm equity has an unreliable return profile. Typically no interest is paid or accrued nor is there a stated maturity date. If the firm has some great years, the ownership interest may, in fact, deliver pretty decent returns. But unless good years are consistently delivered so that distributions over an owner’s “budgeted compensation” are regularly paid, the returns on the owner’s capital investment can be underwhelming. And it is not as if his or her equity is a passive interest. The owner is still expected to work hard during the year to justify the “budgeted compensation.”

When law firm leadership takes steps to increase capital, it seeks to strengthen the firm as an institution. From an owner’s standpoint, however, the capital call may be unwanted. If your firm is thinking about raising its capital, will leadership be able to address these owner concerns?

5 Easy Steps to Destroying a Perfectly Good Law Firm

Posted in Law Firm Crisis, Law Firm Growth, Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring

FailureIt has become an all too frequent occurrence — the story of yet another law firm closing its doors. The headlines rarely convey everything — displaced personnel, inconvenienced clients, and the pain and disruption for the firm’s owners.

What drives this result? How has this become almost commonplace?

I believe any one of five things can lead to crisis within a law firm. Execute two or three — certainly all five — failure is virtually assured.

  • Spend indiscriminately
  • Borrow to pay partners
  • Recruit, associate with (and pander to) partners because of the size of their practice
  • Grow simply because you believe bigger is better
  • Assume successful partners equate to effective leaders

If you want to avoid these missteps, consider seriously addressing each issue. Here’s how.

  1. Make commitments/incur cost at a modest and sustainable level.

There is an almost unexplainable inclination to lease more space than necessary in expensive office buildings, and to add permanent personnel in advance of an assured level of client work. Be slow to make long-term commitments on space and to people.

  1. Live within your means.

Duh. Every single one of us knows this. Yet, bank loans and lines of credit have become the norm for today’s law firms. If you’re using a line of credit to pay partners before the profits have been earned, you have embarked upon a proverbial slippery slope. Surviving the ride depends on taking some quick action.

  1. Associate with those who share your values and aspirations.

Maybe the most under appreciated aspect of building a successful law firm is affiliation with those who share a common set of values and aspirations.

Today, a huge factor in deciding whether or not to add a new partner to a law firm is the size of that lawyers practice. There is no institutional glue associated with a large practice. When tough times come (and they always do) practicing with people that are trying to get where you are trying to get and who have a similar perspective on what is important along the way will help get you through to better times.

  1. Grow prudently

The days of adding lawyers and their capabilities to serve the needs of existing clients has largely gone by the wayside. The new norm is to add lawyers (one at a time or through mergers) because they are willing to come — and the apparent belief that being bigger makes us better There are countless studies that indicate that half of law firm mergers fail to deliver the expected benefits, and the results of lateral hiring aren’t any better. The bigger is better theory is significantly flawed. Pursue it at great peril.

  1. Develop leadership capabilities

The skills necessary to become a great leader are developed over time, through a combination of reading, educational programs, mentoring, affiliating with other leaders and through the fires of experience. Rainmakers are not necessarily good leaders. Strong personalities are not necessarily indicative of great decision making skills. The prudent lawyer that seeks to improve their firm’s future will invest in the development of firm leaders. It doesn’t matter if you are in a one or one thousand lawyer firm the message is the same — leaders are made through hard work and the honing of those skills essential to decision making, consensus building, compromise, collaboration, and listening. Leaders skilled in these areas have a shot at leading long-term success.

Is your firm taking steps leading to success or failure?

Law Firm Focus-When Positive Financial Performance Is Not Really Positive

Posted in Law Firm Growth, Law Firm Leadership, Law Firm Transition

focusIn a time of increased competition among law firms, a firm’s positive news, developments or performance always seems welcome. Peer recognition for the firm is nice. Likewise, having clients show confidence in the firm by hiring it again and again naturally is a boost of confidence. And climbing revenues and profitability is almost always viewed as a barometer of success.

But not all indicia of positive financial performance means a law firm is doing well or headed in the right direction.   For performance data to be truly positive it should be indicative of advancing a firm’s values, culture and strategy. While it may be hard to imagine that more money can ever be a bad thing; if it comes at a cost to values and culture or causes a diversion from a well-considered strategy, it may be a dubious marker of success. Simply put, some financial success may not always be probative of the success a law firm seeks or needs.

When a firm enjoys a bell weather year financially it should look at that performance a little deeper. The proper perspective is to not just assume that a good financial outcome is the true measure of progress. Indeed, an uptick in revenues or profitability may mask substandard performance when tested against a firm’s values, culture and strategy. If you are incredulous about such a proposition, ask yourself how many times have you read about a law firm that closes while its last managing partner states, “we just finished our best year ever.”

That being the case, strong financial performance should be understood with the following thoughts in mind:

It May Be an Aberration. Some financial aberrations or one-time events are easy to spot. A significant bump in revenue and/or profitability may not be repeatable-at least anytime soon. If the spike in partner profits came because departures leave fewer shares to be divided, the concern over attrition may take priority over congrats for the extra money spread around. Collecting a large but old receivable or contingent fee may say nothing about your firm’s current direction. Patting oneself on the back may be unjustified. Equally concerning, complacency can ensue.

Is Performance Aligned with the Firm’s Values? Strong financial performance may or may not measure whether the firm is doing a good job standing strong about its values or being true to its culture. A firm deeply committed to teaming and building an institutional client base should not be overly swayed from a boost in revenues caused by laterals that can’t seem to un-silo their practices. The firm may still like the revenue created, but it cannot be sanguine that the uptick signals a faithful adherence to its values and culture. A firm should test the results to see if they are consistent with the long-term needs of the firm.

It Can Lead to Rewarding Contrary Conduct. Whenever a firm’s strong financial performance is attributable to the efforts of a few, there is a natural tendency to laud or reward that effort. But with humans being humans, the motivation to emulate the latest “stars” may yield more of the same behavior. As long as the original conduct was consistent with the firm’s values, culture and strategy, all will be good. But if that is not the case, the firm should beware. A firm should understand the nature of financial success before rewarding those responsible.

It Can Change Your Firm’s Values, Culture and Strategy. Repeatable strong financial performance can be a beautiful thing. But if it consistently is contrary to the long-held values, culture and strategy, it likely will forge those things in a new direction. That is not to say that the values, culture and strategy were right in the first place or unchangeable, but awareness of the change should stimulate an introspective look at where the firm is headed. If ownership is happy with that direction, fine. But if not, action will be required. Consistent performance not in sync with stated values, understood culture or adopted strategy should be discussed and evaluated. If the firm’s direction is to change, it must be done willingly.

Popping the champagne because of great financial success is always fun. But smart leadership looks beyond the bottom line results to see where their firm is headed. When your firm has enjoyed its “up” years, has it looked at its performance critically?

 

 

Leadership and the Small to Medium Sized Law Firm

Posted in Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring

 

Leaders aren’t born – they are made. And they are made just like anything else, through hard work. And that’s the price we’ll have to pay to achieve that goal, or any goal. —Vince Lombardi

 

There has been plenty written about the difficulties associated with leading law firms. Much of the commentary relates to large law firms. It struck me that the leader of the small to medium sized firm faces an even more daunting task. The large firm provides infrastructure and mentors that the smaller firm often does not have.

 Leading A Law Firm

Since (according to Dunn & Bradstreet) almost 90% of all business failures are a direct commentary on leadership, consider the implication of these law firm realities:

  • Most law firm managing partners get their first experience leading an organization when elected as the leader of their firm;
  • The criteria most often used to select a law firm leader are success in building a practice (versus success in leading an office, practice group or another organization).

The training most successful lawyers receive rarely focuses on the skills essential for success as a group, team or firm leader. Much has been written on the difference between what it takes to be a successful business leader and the career experience of most successful lawyers. Deborah Rhode’s paper — What Lawyers Lack: Leadership — is particularly good.

McBassi & Company conducted an interesting study regarding law firms and leadership. The conclusion — that the top three factors in predicting a law firm’s profitability are:

  • Leadership skills – setting direction, building consensus and reinforcing values
  • Inclusiveness
  • Managerial skills – seeing that work product is prepared and delivered in a manner that the client expects

Two of these — leadership and management — receive little to no focus in most law firms.  If you question this, consider how many practice or committee leadership positions are near afterthoughts, having little to do with the ability to build consensus or engender collaboration.

What To Do

The essential role of leadership is nothing new. The increase in pivotal moments in the life of a law firm, however, may be.  A number of realities differentiate today’s market from the 90’s and early 2000’s when quality lawyers could insure a thriving practice. Among the changes,

  • A number of rapidly developing alternatives;
  • Competition has become global;
  • Technology is replacing services (and people);
  • Outsourcing is more than a passing fad;
  • Clients expect more for less;
  • Consolidation is running rampant.

In the context of today’s turbulent market, the shortage of effective leadership in law firms is a real and growing issue.   What every partnership should be seeking is a measurable increase in the:

  • Leadership and management capabilities of the organization;
  • Percent of decisions made by those with proven management and/or leadership experience;
  • Commitment to find specific expertise in areas where internal competence is lacking.

Healthy, Stable and Strong Firms

If this describes your firm you have the luxury of time, and the opportunity to develop capability organically. Some of the strategies to target include:

  • Development through experience. Experience is the best teacher. Building experience among younger lawyers in a structured manner where mistakes can be comfortably made is ideal.
  • Development through education. There are numerous excellent formal leadership programs. A few to consider include
    • Harvard’s Leading the Professional Services Firm;
    • Local MBA and EMBA programs;
    • Any one of the numerous seminars on the subject offered through the AMA – typically excellent and cost effective;
    • Development through mentoring. Resist the temptation to write this off as touchy-feely stuff. Quality mentoring programs can be incredibly effective. This is an area where outside assistance is typically the cost effective way to go.
    • Development through feedback. Feedback and self-awareness are critically important to the development of leadership and management capabilities. The formal programs noted above make extensive use of feedback, and it is part of any serious on-going focus. Investigate the options, select an approach that is right for your firm, but don’t skip this critical step to improving leadership skills.

Firms That Are In a State of Transition or Stress

If this describes your firm, time is not your friend. Implementing the above will serve you in the long term, but you likely do not have enough time to nurture the needed skills organically. The prudent leader of a firm in transition considers:

  • An outside perspective. Seek out an advisor that can help the firm through the transitional period, and then focus on hiring and developing in-house management and leadership talent.
  • Lateral Leadership Acquisition. Though an approach that is used frequently and successfully in the corporate arena, laterally hiring a Managing Partner is rarely considered by law firms.
  • Employing non-lawyer CEO/COO. Although the role of non-lawyers as COOs has been steadily growing, some farsighted firms are now hiring business leaders as CEOs. Time will tell how this trend develops; but my bet is that in 20 years it will be the norm.

Conclusion

The serious partnership does more than talk about leadership. The law firms that thrive in the context of high-consequence change will be those that find a way to focus the same energy here as is invested in the development of legal expertise.

Firms that choose to believe every rainmaker is a leader, or every partner should lead a committee, or the way to silence a strident voice is to bestow token leadership – these will be the firms caught in the most extreme forms of transition in the months ahead.

Kirkland’s Attrition is a Case Study for All Law Firms, Big and Small

Posted in Law Firm Crisis, Law Firm Growth, Law Firm Leadership, Law Firm Transition, Law Firm Warning Signs

The American Lawyer article about recent attrition at Kirkland & Ellis gained attention in no small part because Kirkland’s reputation for success runs counter to the idea that people want to leave. While departures from even the most successful firms is inevitable, the depth of attrition at Kirkland reported by The American Lawyer was surprising. According to  The American Lawyer article Amid Defections, Kirkland Extends Notice Period for Departing Partners written by Susan Beck and Anna Ward, Kirkland’s exodus is happening even as the firm adds more lateral talent. Making generalizations about the reasons for the Kirkland departures may be unwise but for some of the émigrés it was new additions and the strategic direction behind the new additions that was cited as a motivating factor to leave.

As headline grabbing as the Kirkland departures are, there is nothing unique about Kirkland, its policies or direction that explains its turnstile experience. The factors behind its losses are largely the same kind of things that can cut into any sized law firm. Indeed, attrition at law firms, whatever their size, often is attributable to a few common issues.

For law firms only wanting to emulate Kirkland for its positive attributes and not the negativity of attrition, taking a look at the frequent issues that drive law firm attribution is useful.   Recognizing that there can be many issues that drive attrition, it is still possible to note four frequent ones:

Bottom-Line Orientation. Many law firms experiencing a revolving door have an orientation that focuses heavily on the bottom line. Such an orientation is not necessarily a bad thing. In fact, many firms inattentive to financial strength find themselves suffering attrition as lawyers leave for greener (as in money) pastures. Nonetheless, even a thoughtful bottom line orientation can sometimes come at the expense of team focused conduct, can create the anxiety that goes with a “what have you done for me lately” environment, and foments a culture where score keeping between attorneys and between the firm and attorneys permeates. Thus attorneys may feel under appreciated given their “numbers” and may get antsy. Conversely, some attorneys performing below standards may be asked or encouraged to leave. A bottom line orientation creates a culture susceptible to departures that can come from both ends of the performance spectrum.

Lateral Growth, Limited Loyalty and a Sense of Mobility. Firms that see significant lateral growth may be hiring a mercenary army that may march off to the highest bidder at a later date. Moreover, an attorney induced to join a firm laterally already knows how to move, often has already learned to silo his practice and has shown that loyalty was a subordinate consideration when leaving his or her last law firm. That said, lateral hiring can be effective but requires a serious integration program to counteract the negative tendencies that can come from lateral growth.

Unrealized Owner Expectations. If owners have certain expectations about their law firm and those expectations are dashed, the disappointment can create uncertainty. Substandard performance by the firm will seldom be received well. As such, it must be addressed with the owners directly and a solution agreed upon. Whistling past the graveyard abdicates leadership and causes many attorneys to begin their search for a new home. Unrealized owner expectations, allowed to go unaddressed, often stimulate happy feet.

Competitive Marketplace. Lateral movement might be tamped down a little were it not for the fierce competition among law firms for legal talent. Law firms are motivated to add expertise, clients and revenues that often are more easily achieved if lawyers are added. A more conservative approach premised on organic growth takes too long for most firms. Virtually any firm with successful lawyers is susceptible to having its talent lured away by another firm willing to pay more, offer an enhanced platform or promise things not available at his or her current firm. And every law firm that gets poached may react in kind by trying to replace its losses by raiding other firms. Even the most conservative firms can be adversely affected by the feeding frenzy in the market.

Kirkland’s attrition is not unique in today’s legal services industry. Because of the four dynamics described above, its experience is being replicated at firms across the country. Preparing to address the effects of these dynamics requires good leadership that recognizes the challenges and responds accordingly. If your firm begins to see a revolving door, can it respond in the face of these four common issues?

 

A Five Step Process For Turning Around the Small to Medium Sized Law Firm

Posted in Law Firm Crisis, Law Firm Leadership, Law Firm Repositioning/Turnaround/Restructuring

Recovery as a ServiceBold headlines tend to focus on the spectacular failures. But consequential transition — even crisis — are equally traumatic for the small to medium sized law firm. Given the fact that fewer partners must carry the load, the impact across the smaller firm may be even more intensely felt.

If you are part of the management of a small to medium size law firm wrestling with how to turn things around, here is a five-step process that will help you set priorities and marshal resources in a way that can begin to ease the pressure…and the pain. 

  1. Know Your Pain-Points

The issues that cause us pain are as varied as each partnership is unique. However, there are a handful of themes that push a law firm (of any size) to consider restructuring or “turnaround.” Awareness of these “warning signs” is critical to managing a transition with minimal upheaval in your firm.

  • Loss of a key client(s). The loss of any significant relationship — or worse yet, a series of relationships — often points to underlying issues that will put pressure on the law firm.
  • Loss of a partner(s). Losing a partner or partners is often a precursor to other losses that will inevitably create stress on the organization’s ability to generate the revenue necessary for ongoing operations.
  • Litigation against firm. More than one law firm has found their future in question because of litigation against it.
  • Market changes. A poignant example of the impact a market shift can have is the recent collapse in energy prices. One of the country’s most prominent energy focused law firms found itself in dissolution a few weeks ago.
  • Lack of attention to your economics. Debt service, the growing use of credit, unprofitable work — these are just a few example of law firm economic factors that allowed to get out of balance, will drive a law firm to a need to restructure. Or worse . . . bankruptcy,

Regardless of the core reason behind a law firm’s difficulty, there are a series of key steps that, if followed, improve the odds that the firm will be viable for the future.

  1. Get a Handle on Cash

Without sufficient cash reserves any business is in serious trouble. Here are five ways you can strategically manage your cash position.

  • Produce a monthly, weekly and daily cash flow forecast. Not only will the forecast provide critical information regarding potential crisis points, it will assist in the identification of ways you might actually decrease cash outflow.
  • Engage your banker. Bankers hate surprises as much as you do; and they are well positioned to be a valuable resource during transition if you treat your banker like a business partner. Don’t make the mistake of trying to conceal your challenges from your banker. As soon as they suspect they’ve have been misled, all trust is gone. And with it, the assistance of an ally.
  • Reduce expenses. The two most significant outlays of cash are people, find a way to humanely and prudently decrease your commitments in these two areas, and you’ve significantly turned the arithmetic in favor of a positive outcome. Also review all planned operating expenses, defer or reduce all that you can.
  • Consider reducing partner draws. It goes without saying that this step must be taken with care and skillful communication. If you’re already facing challenges, little is worse than partners losing faith that there is a successful path forward.
  • Capital contributions can also help through challenging periods of economic uncertainty. Once again, this subject must be approached with the same sensitivity as reduction in partner draws. For many firms, internal communication is a significant challenge. Tread carefully.
  1. Bring In Some Help

Self reliance is great; but there are critical junctures when the experienced perspective of an outsider is what is called for. As is the case in the practice of law, the perspective and counsel of a trusted advisor can provide an objective approach to a plan for the firm’s turnaround.

  1. Focus on Communication

Many otherwise workable plans miss the boat here. Have a process that provides routine updates in a confident forthright manner. Silence is decidedly not golden. Careful communication will provide the comfort necessary for the firm’s personnel to remain focused on serving clients. Adopting a “bunker mentality” creates suspicion, breeds distrust and will ultimately turn a difficult situation into a crisis.

  1. Do Not Hesitate

Unlike fine wine, time is not the friend of the distressed law firm. As soon as you suspect that your firm is under pressure it is time to react. Not panic; but react. Building a plan that will result in a confident and comfortable future.

How stable is your firm?

Law Firm Merger or Combination-A Solution That Can Suit Many Situations

Posted in Law Firm Growth, Law Firm Leadership, Law Firm Merger, Law Firm Succession, Law Firm Transition

As we have seen recently, law firm combinations have continued at a brisk pace. In layman’s terms, most of the combinations are referred to as mergers although many are at best “merger-like.” Indeed, “true” mergers appear to be the exception and not the rule as law firm combinations continue to be announced.

Gina Passarella wrote in her The Legal Intelligencer piece Law Firm Tie-Ups Getting More Creative, Complex that transaction creativity can be essential in order for some law firm combinations to happen. Instead of walking away from complicated and difficult combinations, the pressure that some firms feel to grow or survive can stimulate creative thinking when impediments appear.

The transaction activity observed in the market signals a number of things. Mergers or other law firm combinations are not just for large law firms. Nor are they simply for firms thinking that one plus one equals three. As is always the case, firms of all sizes and circumstances think about their futures. That thinking is causing many firms to focus on growth, eschew reliance on organic growth, and turn to the alternatives of mass lateral hiring and/or mergers. So as firms seek practice depth, increased attorney head count and geographic diversification, the record number of mergers and other combinations noted is no surprise.

The large spate of transactions would not occur were it not for the fact that mergers or large combinations can suit many different firms facing many different circumstances. Firms of all sizes and predicaments look at merger or large combination as tactics that serve their needs. In looking back at many of the transactions reported in recent years, it can be said that most of the combination activity can be grouped into five general categories:

Rescue Combinations. Some of the more publicized combinations are those involving a firm hoping to survive that join, at least partially, with another firm smelling an opportunity. These combinations typically are least like a true merger but involve a large group jumping from the distressed firm to a more stable one. The distressed firm is left to liquidate and satisfy its original obligations-all without the help of the rescuing firm. Think Morgan Lewis/Bingham McCutchen and Blank Rome/Dickstein Shapiro to name two.

Defensive Combinations. These combinations often involve like law firms that have shrunk or otherwise are languishing. In order to provide a jumpstart and create energy, combining the two firms arrests the shrinking and malaise at both-at least temporarily. Although the combination can be helpful, leadership must look past the closing lest the combo amount to little more than a short-term solution.

Multi-National Combinations. These combinations get a lot of press and usually are reserved for firms enjoying an international footprint. For many of these transactions, the combinations join firms together into what is known as a Swiss Verein. Such combinations are far from a true merger and may amount to little more than a marketing alliance. In any event, the combinations tend to involve strong firms that are convinced that growth is a strategy unto itself.

Strategic Combinations. These combinations pursue a strategic need previously identified and the combination is a tactic designed to satisfy that strategic goal. Whether the underlying strategy seeks to add substantive capability a client needs, supplement an already existing area of expertise, or broaden a geographic footprint playing to the firm’s strength, the combination can make sense as long as the diligence does.

Traditional Combinations. Calling a merger or combination “traditional” can seem ill advised since all mergers or combinations are unique in some way. But combinations in which two firms joined together to maximize their strengths in lieu of battling to the death was a rationale for mergers/combinations more common in the past. These still happen, but they are not as prevalent as they once were.

Merger or large combination is not for every firm. Yet the reasons supporting a transaction of that type are not limited by a firm’s size or its particular circumstance. The activity in the market demonstrates that the tactic of merger suits far more firms that had been the case previously. Given your firm’s situation, is it suited for a merger or large combination today?

 

This blog won the BiglawWorld Pick of the Week.  The editors of BiglawWorld, a free weekly email newsletter for those who work in midsize and large law firms, give this award to one blog or article every week that they feel is a must-read for this audience.

 

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