Managing Law Firms in Transition

Managing Law Firms in Transition

Succession Planning at the Smaller Law Firm-Getting it Done

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

It is no wonder why a lot is written about law firm succession planning.  Transferring a law firm onto the next generation so the institution endures is the ideal for most but unattainable for many.  Sue Remley’s Succession Planning:  How to Hand Your Law Firm to the Next Generation presents the issue clearly and provides some thoughtful ideas about how it is best accomplished.  But as I wrote in Succession Planning at the Smaller Law Firm-A Bigger Challenge, affecting a succession plan at a smaller law firm can be far from easy.

Even though succession planning at a smaller law firm can be difficult, by no means is it impossible.  Positioning a smaller law firm so that it thrives generationally is a matter of advance planning and discipline.  Dramatic steps are not necessarily required but there can be no substitute for approaching each day with the future in mind.

Think About Your Firm with a Long-Term View.  One of the difficulties faced by large law firms is that true long-term value may become secondary to short-term financial rewards to the owners.  A large law firm that sacrifices short-term profitability so that it can build for the future risks defections from owners possessing a short-term outlook.  For that reason, large law firms often find it difficult to dedicate current resources to long-term value creation.  In a small firm, however, where ownership is less dispersed, a true sense of ownership can exist and be convinced into building for the future.  In some respects, therefore, a smaller law firm may be more suited to preparing for succession planning than often thought.

Make Hiring Decisions Premised on Longevity.  Not all associate candidates or lateral hires aspire to work at an AmLaw 200 law firm.  Many young candidates eschew the BigLaw option because it offers little in career longevity-a point BigLaw may acknowledge based on its turnover statistics.  Smaller law firm desiring a multi-generational future should make young lawyer hiring decisions thinking about how each candidate may grow into a long-term contributor.  Just because a firm is small does not mean potential long-term contributors are not available in the marketplace.

Include a Leadership Assessment in Annual Reviews.  Most law firms review their young lawyers annually to assess economic contribution and to provide constructive feedback.  Smaller law firms thinking long-term will include an assessment about an attorney’s leadership qualities and efforts for the firm’s institutional benefit during the preceding year.  Law firms thinking about the future cannot think only about billable hours and substantive milestones if the future of the law firm is valued.

Assign Firm Projects and/or Responsibilities to Your Younger Lawyers.  Sue Remley identified the difficulty that senior lawyers have with letting go of control.  It won’t seem so much like letting go if the firm develops the practice of integrating young lawyers into important roles for firm projects or responsibilities.  Not only will doing so make the transition to succession easier in the future, but the training of the younger lawyers “by doing” will be individually invaluable as well as beneficial to senior management.  Moreover, early involvement in firm projects or activities can reduce the demands on senior level lawyers.

Contributions to the Firm Should Be Rewarded.  Financial reward for firm projects or responsibilities tackled, even if modest, is crucial to the development of the next generation.  Just as one should reward business development successes, rewards for successful efforts at strengthening the firm should likewise be granted.  Positive reinforcement will aid the firm in the present but also create leadership for the future.

The seeds for succession planning must be planted and watered if future leadership is to be harvested.  Is there any reason these simple steps should not be a part of a law firm’s long-term strategy?

Law Firm Restructuring for Long Term Health: Yesterday’s Success Is No Guarantee For Tomorrow

Posted in Law Firm Growth, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition, Uncategorized

Porters_five_forces

The century plus old quote “success begets success” couldn’t be further from the truth. Today success only buys you the opportunity to survive to compete tomorrow.

Lest you think otherwise, the legal profession is no exception. The intensity of competition in our industry increases daily. The marketplace is littered with once highly successful law firms that awoke one morning to find themselves out of business. Scores of other firms wrestle with the realities of existence on the brink of, at best, enormous change; at worst extinction.

The good news is that survival need not be a mystery or matter of chance. Prudent law firms have found a way to constantly evaluate how they are performing, how their client’s needs are changing and what the competitive landscape looks like. Smart leaders find ways to set aside approaches grounded in we-have-always-done-it-this-way thinking, and critically assess ways in which they must change in order to compete.

One such law firm is 60+-year-old Dickstein Shapiro.

The firm had a long and successful history; but in 2014 it found itself at a crossroads. As is the case with so many firms, Dickstein Shapiro had been hiring lawyers year-in and year-out . . . and losing lawyers to the competition almost as regularly. They were experiencing the pressures that accompany a decline in revenue and profits.

The firm’s chairman, Jim Kelly, realized the firm’s old approach to business couldn’t continue if the firm was going to survive. The firm’s leadership embraced a significant change, and a new strategy marked by three critical cornerstones:

  • Hiring (and empowering) a chief operating officer;
  • Focusing the capabilities and practice of the firm — no longer would the firm try to be everything to everyone everywhere;
  • Empowering leadership of these focused areas of practice.

The story isn’t completely written; but the early results of Dickstein’s new approach to the business side of practicing law are impressive. 2014 revenue per lawyer is reportedly up 17 percent, and profitability is up 30 percent. This is pretty impressive for a firm that has shrunk by 20 percent.

The point of the story is not who and how, but the what. Too few firms routinely take the time to look at where they are and where they are headed. Even fewer take the steps that cause performance to improve.

If your firm doesn’t, implementation of an at lest annual self-assessment should be part of your approach to business. It is admittedly difficult for most of us to honestly and completely see our weaknesses or shortcomings. As a result, most firms find it helpful to enlist an outside advisor to facilitate a conversation and help frame an executable strategy. There are a few very simple and basic steps to significant improvement in the months ahead.

How is your firm performing?

Succession Planning at the Smaller Law Firm-A Bigger Challenge

Posted in Law Firm Leadership, Law Firm Transition

In a recent article in The National Law Review about law firm succession planning, Sue Remley offered some great analysis. Ms. Remley’s Succession Planning: How to Hand Your Law Firm to the Next Generation makes the important point that succession planning at law firms is vitally important and should not be ignored. She goes on to identify some key issues that come into play in law firm succession planning.

One key issue she identified is whether a firm can get the founding partners to relinquish control and power. A second issue is the flip side of the same coin-can you persuade younger partners with leadership abilities to take on and focus on that role? Swirling around these two key issues are a couple others-communication and timing. Because installing new leadership can create the most dramatic change that a law firm can experience, communication about the change is very important. In addition to the need for communication, there is the ever-important objective of starting and executing on the succession plan in a timely manner.

Ms. Remley’s observations concerning law firm succession planning are excellent. For a smaller law firm, however, the identified issues may prove daunting and make succession planning an even tougher task. For that reason, smaller firms must be proactive about succession planning or they may struggle when the time comes. For smaller law firms, the task can be tougher because:

Competing to Stay Ahead Causes Time to Slip By. All law firms compete to be successful. For many smaller law firms, the management function often is filled by a practicing lawyer or lawyers whose obligations to clients reduce the time that can be spent managing. The dual responsibility of practice and management can be all consuming, leaving little time to think about succession planning in a thoughtful way. For the smaller firm that has little time to spare, the opportune time to plan succession can escape needed attention.

Leadership is More Likely to be of the Alpha Variety. Smaller law firms managed by founding partners are more connected to the entrepreneurial beginnings than larger firms. That tends to mean that the smaller firms’ leadership has been in control, likes being in control, and has had his or her way for a long time. Unlike the larger firm where compromise and inclusion is more common, smaller firms usually have no tradition of succession or delegation. With succession being the ultimate form of delegation, succession planning can be a foreign way of thinking.

The Next Generation Pool is Smaller and May Be More Transient. Smaller firms will have a small sample size for finding the next leader. From this limited pool, many firms are finding the candidates unready due to a generational lack of interest in pursuing a management role. Additionally, in light of the high degree of lateral movement by lawyers some “prospects” in the next generation pool may have a transient history and only have been at the firm for a short period of time. Drawing a successor from a pool that may be limited in these ways can be discouraging.

Mentoring on Management Plays Second Fiddle to Other Mentoring. To prepare for succession, mentoring the next generation in management skills is advisable. But due to a combination of a lack of time and the priority often given young lawyer practice and business development skills, law firm management training tends to trail in institutional attention.

The Next Generation May See No Benefit from Being in Management. Many firms have a reward system that focuses on work productivity and business generation. Do those things right and a lawyer tends to not only be duly compensated by may also maximize the power he wields. A young lawyer that brings these elements to the table also provides more security for his future. Incentives to encourage a future role in management are not nearly as compelling and this can be especially so at a smaller firm.

Ms. Remley’s article in The National Law Review addresses succession-planning fundamentals. Although her advice is not limited to medium to large firms, our experience has shown that smaller firms have a disadvantage of scale that can make succession planning a more difficult task. If your firm is a smaller one, will you be able to overcome these impediments and find a new leader from the next generation?

 

Part 2 – Selling Your Law Practice – Succession Planning

Posted in Law Firm Liquidation, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition

 iStock_000022826726Medium

This is the second in a two part series addressing the idea of selling your law practice as part of a succession plan. Part one addressed
issues related to defining personal objectives, compliance with local bar rules, and practice valuation.

In this post we will look at three remaining considerations:

  • Finding a buyer,
  • Negotiating the transaction; and
  • Transitioning client relationships

Finding a buyer

There are a number of approaches to identifying the right buyer for your practice. At the outset we should emphasize that your local bar rule may influence your choice; so be certain to thoroughly explore them before proceeding.

Classic Advertising 

A simple advertisement in any of the bar journals or practice specific publications is a reasonably cost effective means of reaching potential targets. If you go down this road it pays to be aware that this is a bit of a shot-gun approach. Your plan will need to include an initial vetting process. Otherwise, depending on the size of your market and the practice you wish to sell, you could find yourself spending a lot of time fielding unproductive inquiries. The more targeted your advertising can be, the better.

Competitors Direct Approach

As is the case with most marketing efforts, the sooner you get face-to-face with a qualified target, the better. So your most fertile ground may be competitors, or those engaged in a complementary practice. Approaching these individuals or firms directly can expedite the process if interests and objectives are aligned. So some homework here can prove beneficial.

Search Firms

Just like in lateral attorney recruiting, search firms are a possible means of reaching potential buyers. Once again, you can streamline the process if you have clear objectives outlined.

Firm Members

Maybe the most overlooked and very frequently the best target for the sale of your practice is someone within your own firm. This greatly simplifies relationship transition.

Negotiating the Transaction

There a three keys to negotiating the transaction.

  • Valuing the practice in a fair and understandable manner.
  • Structuring a payout that is affordable for the buyer and acceptable to the seller and
  • Minimizing buyer risk through facilitating client retention

Like so many things, experience in negotiating these types of transactions is very valuable to both the buyer and seller. If you haven’t personally been involved in a law firm sale, get some experienced help.

Transitioning Client Relationships

The absolute key to making a sale transaction successful for both parties is the movement of client relationships to the new owner for the long term. A well thought out approach that begins with an introduction and eases the clients into working with the new owner is often most successful.

What are you doing to prepare for the ultimate transition of your practice?

 

 

 

Law Firm in Crisis-Five Things to Know and Remember

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

Law firm crisis can pop up at anytime during the year, but if it had a “season” it would be early on in the calendar. As I wrote in Like Divorce, Law Firm Crisis is More Likely as the New Year Starts, the beginning of each year is when key lawyers cut and run, disappointed partners complain loudly about a lousy year, optimism and morale plummet, pressure from the firm’s bank mounts, or a challenge to leadership consumes great attention. Crisis can take on other characteristics, as in many respects no two law firm crises are the alike.

When crisis occurs, it is absolutely vital that its presence be recognized immediately. Crisis can slide into disaster if leadership is slow to notice it and fails to take prompt action. If crisis is something your law firm is experiencing, there are five things to know and remember as crisis is tackled. They are:

Added Vulnerability Goes with Crisis. Whatever sparks the crisis in the first place may represent only the beginning. A child with a cold is susceptible to add illness-a law firm in crisis is vulnerable to added and unexpected problems. Because of this vulnerability, leadership must be aware that the other problems may arise and a game of “whack-a-mole” may ensure. There is no substitute to being aware and vigilant when crisis hits.

Control is Compromised. When a law firm is in distress, its ability to implement initiatives at a time of its choosing becomes limited. If a law firm is in crisis, leadership’s ability to control the firm’s destiny is compromised. Getting ahead of the crisis is critical because trouble at the firm will grow in severity the longer a solution is wanting. The risk of losing control grows with each passing day.

Time is Not on Your Side. Closely related to the potential loss of control is the issue of time. Any law firm leader that has faced crisis will tell you that solutions need to be found quickly. That does not mean that speed justifies “shooting from the hip,” but time is of the essence when solving crisis.

Getting it Right the First Time. In law firm crisis, there is little chance to experiment or launch trial balloons. Leadership’s solution to crisis needs to be right the first time. Don’t count on a do-over.

Rumors Can Undermine the Best Plans. When law firm leadership faces trouble, lawyers and staff not really “in-the-know” will think they are. They will sense that something is wrong and will talk about it, speculate and worry. Get ahead of the rumors by communicating clearly and precisely about the firm’s issues and your plan of action. Good communication skills can calm the troops and establish credibility. Keeping quiet or hunkering down in your bunker can kill your chance for success.Crisis at a law firm can be a watershed development that can threaten a firm’s future.

Crisis puts in motion at least five moving parts any law firm leader must know and remember. If your firm were in crisis, how would you handle them?

 

The Law Firm Sale and Succession Planning

Posted in Law Firm Transition

200px-For_Sale_by_Owner_Sign.svgIf you practice law, there is one eventuality that should be added to that familiar duo of Death and Taxes. No one talks much about it, but it warrants the same attention to detail. The subject? The end of your practice. 

As is the case with its two more familiar rivals for attention, ignoring it will not prove wise. 

The fact is that this change will probably be the most significant professional transition of your career — the transition of one’s practice to someone else. Transition drivers include:

  • Pursuit of another profession or passion;
  • Relocation to a new city
  • An unforeseen health circumstance; or the most likely,
  • Retirement

A critical part of practice (or firm) management is planning for the future. In its most productive form, strategic planning includes a deep-dive into both short-term and long-term possibilities. And this kind of planning can be the difference between a smooth and profitable transition, and one that resembles disaster.

There are, needless to say, a number of issues to consider. And as is the case with respect to your personal taxes or the distribution of a personal estate, expert counsel can help you avoid pitfalls. leverage every asset, and end up in successful transition.

Some of the most common issues include:

  • Defining personal objectives
  • Compliance with local bar rules
  • Practice valuation
  • Finding a buyer
  • Negotiating the transaction
  • Transitioning client relationships

In this post we’ll explore the first three issues; and we’ll tackle some ideas around the remaining three in the next post.

Defining Personal Objectives

This first and most important step sets the stage for the entire process. It outlines what constitutes success, and sets parameters that will facilitate decision-making. What must be accomplished, and in what time frame? Do you want to completely step away from the practice, or keep one foot in? Do you want the transition to be prompt, or take place over time? Those variables dictate your strategy.

If you want to transition the practice over a period of years the literal sale of the practice is not an option; whereas a sale is an option in most states if you envision a complete separation from the practice.

Compliance With Bar Rules

The ABA provides for the sale of your practice as long as certain conditions are met.  In Rule 1.17 sets forth the following conditions:

a) The seller ceases to engage in the private practice of law, or in the area of practice that has been sold, [in the geographic area] [in the jurisdiction] (a jurisdiction may elect either version) in which the practice has been conducted;

(b) The entire practice, or the entire area of practice, is sold to one or more lawyers or law firms;

(c) The seller gives written notice to each of the seller’s clients regarding:

(1) the proposed sale;

(2) the client’s right to retain other counsel or to take possession of the file; and

(3) the fact that the client’s consent to the transfer of the client’s files will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of receipt of the notice.

If a client cannot be given notice, the representation of that client may be transferred to the purchaser only upon entry of an order so authorizing by a court having jurisdiction. The seller may disclose to the court in camera information relating to the representation only to the extent necessary to obtain an order authorizing the transfer of a file.

(d) The fees charged clients shall not be increased by reason of the sale.

Please note that not all states (including Texas, where we are based) follow Rule 1.17. So check your local bar rules before moving forward.

Practice Valuation

Whether you literally sell your practice or transition it to a new owner through another means, the practice needs to be valued for fiscal reasons.

Fundamentally this is a matter of determining anything being transferred that is relevant to the generation of future profits. Portions of the practice relevant to valuation include:

  • Hard assets
    • Furniture
    • Equipment
    • Property
  • Soft assets
    • Cash
    • Receivables
    • Work in process
  • Business systems/intellectual property
  • Goodwill
    • Existing clients
    • Former clients
    •  Referral sources of firm
  • Liabilities
    • Actual
    • Contingent

Even though each of the above items can have a significant impact on the valuation of the practice, the most difficult and critical valuation issue is that associated with the goodwill. What future revenue stream is really being transferred based on this often difficult concept?

Transitioning out of practice is best accomplished when handled as a process — one that begins long before the eve of the desired transition.

Like Divorce, Law Firm Crisis is More Likely as the New Year Starts

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

In his January Divorce Rush Dates Back to the Middle Ages, Frederik Pederson examines the annual spike in English divorces every January and traces the phenomenon back to the Middle Ages. His research into the records of medieval church courts is interesting and supports his thesis. Mr. Pederson’s article backs the view that whatever the century, the built-up strains in a marriage finally prompt action as January starts. Indeed, among some divorce lawyers in England, Mr. Pederson notes that the first Monday in January is known as Divorce Monday.

In some respects, law firms are like the institution of marriage. Many married couples reach their breaking point at year-end and flock to divorce lawyers as part of their Holiday hangover. January is a time when partners at law firms likewise are more likely to reach their breaking point. Financial pressures, the prospect of another year in a dead end relationship, infidelity (or disloyalty) and discord of personalities can describe equally the dynamics in a strained marriage and a teetering law firm. Feelings and frustrations that have been pent up for too long finally bubble to the surface and someone vital to the relationship says “no more.”

Of course, not all spouses that initiate divorce discussions or proceedings end their marriages. Counseling, a change of heart, or a promise to “do better” can buy more time or solve the discord. And in law firms, not every threat of departure, actual departure, financial disappointment or disagreement over a firm’s direction means a law firm is at its end. But just as the strains in a marriage arise from some pretty typical situations, crisis in a law firm at a year’s beginning often comes from common occurrences. Five scenarios described below are repeated every year and create law firms crisis.

Take Their Money-Take Their Leave. The year-end ritual of distributing profits, bonuses or otherwise sharing a firm’s financial performance is commonplace. Also common is the all-to-frequent event of departure after financial rewards are shared. Stretching the rewards out by making payments in installments can reduce a firm’s “grab and go” experience. But for many firms, the early New Year amounts to an extended “moving day.”

Where is the Rest of It? While some partners will bolt after getting their year-end money, some stay but respond to a firm’s disappointing distributions by expressing dissatisfaction loudly and repeatedly. Even if they have good reason to complain, constant grousing can undermine a firm even if remedial steps to improve performance are underway. When the talk in the halls is negative, crisis can follow.

As Productivity Trends Down, So Too Does Optimism and Morale. Most people want to be part of something that is exciting, vibrant and improving. Stagnation is bad enough but when productivity trends down optimism and morale can fall as well. A firm facing a downward productivity trend is in trouble.

Banking Bad. Firms that rely on banking lines of credit can experience year-end results that adversely affect its banking relationships. Covenants can be broken creating the uncomfortable meeting with the bank. Even if covenant compliance is not an issue, the prospects for the coming year may project a need for increased borrowing, potential for covenant stress or the need for future additional availability. Finally, recent financial performance may cause your bank to try to exit the relationship. A strained banking relationship places a firm in crisis.

Palace Coup. The jungle drums may sound after a bad year. Unfortunately, existing leadership can be deaf to the cacophony of sound heard by everyone else. More importantly, if the natives are restless it means that leadership and the rank and file are not on the same page. Crisis can ensue.

When the intensity of year-end lightens and the law firm books are closed, there is time to reflect. There also is time to look at the hard data that measures a law firm’s performance. Like in the case of unhappy spouses, at law firms it can be the time for a Perfect Storm. This January, are you ready to respond to the potential for crisis?

 

Will Your Law Firm Improve in 2015?

Posted in Law Firm Growth, Law Firm Repositioning/Turnaround/Restructuring, Law Firm Transition, Uncategorized

Focus

As we enter the New Year, chances are good you’re dealing with a predictable slate of demands on your time: setting compensation and budgets; managing details associated with the latest departure;  and interviewing this week’s lateral prospect. All important activities, and worthy of serious attention; but none of these is likely to make the firm fundamentally stronger, and better positioned to compete.

May I suggest something to spend a little time on that does stand a chance of making a real difference? Something that has a shot at making your firm better and stronger?

Spend some time really wrestling with this question: What one thing if accomplished this year will leave us a healthier, happier firm — better positioned to compete in 2016?

My wife recently read The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results, by Keller and Papasan. The premise of the book is that we all face a tremendous number of distractions and demands on our time, most of which make no difference in our lives.

But if we take the time necessary to determine the most important thing to accomplish today, this week or this year, we can make a difference that really matters.

This isn’t a particularly complex concept; but it is one that far too few law firms (or individuals for that matter) seriously consider…much less, actually execute.

If you are in a law firm that doesn’t have a strong culture of planning, start by gathering the senior members of your firm for a discussion about the “one thing.” The dynamics will surprise you. Agree that you won’t be distracted…that you won’t attempt to solve every issue…but you’ll focus on one thing.

Agreeing on the “one thing” is more than half of the battle; but you will still have to execute. Things are more likely to really happen with some accountability built into action items. I recommend a regularly scheduled monthly meeting with your partners during which progress towards the “one thing” is discussed.

With these simple tools,you and your partners can take a giant step toward being in a different place when you take stock of 2015, and plan for next year.

What do you think?

 

 

 

Year End At the Law Firm-When the Best Laid Plans Can Go Astray

Posted in Law Firm Crisis, Law Firm Leadership, Law Firm Transition

As law firms work their year-end activities, there is much to do. Collecting bills, awarding bonuses, budgeting for the coming year, promotions, evaluations, and in some cases, compensation setting, are among the things on law firm agendas. Focused firms also begin, continue or complete identifying their strategic imperatives for 2015 so that the New Year has the direction needed for success. If well done, all of these activities and initiatives can be traced back to planning exercises in which common firm goals coalesce in the well-managed firm.

We all know, however, that the running of any business, especially a law firm, involves dealing with challenges that arise without notice or warning. Trying to plan for the unexpected is a little oxymoronic. Despite the apparent futility of preparing for the unknown, smart year-end planning anticipates the potential for adverse developments and the need to adjust.

With that in mind, here are five things any law firm should keep in mind when closing out a year and preparing for the upcoming one.

Plans Should Allow for Flexibility. A plan that is too rigid can fall off the tracks when the unexpected happens. Because the unexpected should be expected, every plan for the coming year should provide for some flexibility. With a flexible plan management is more likely able to adjust and respond decisively without abandoning the firm’s long-term strategy.

Stay Calm. When something unwanted and unexpected happens, all eyes will be on management to assess its reaction. If management panics, the rank and file will panic. Don’t let that happen. Show your leadership by being calm in the face of adversity.

Don’t Overreact. Any response to an adverse development should be proportional to the development itself. If some lawyers decide to leave for another firm, deal with it rationally and with a view to pursuing future firm success without the departed. Implementing procedures that treat the remaining attorneys as suspected rats on a sinking ship would create untold harm-not the least of which could be a loss of confidence in management.

Be Decisive and Quick. Twiddling of thumbs does not instill confidence nor does it resolve any problem created by the unexpected development. While the interests of speed should not come at the cost of sound judgment, finding a decisive solution quickly should be a paramount objective.

Communicate. Whatever the development or the firm’s response, communicating about the event, the facts, the solution and the planned execution is a vital part of putting the unforeseen hiccup behind you. The value of communication can never be underestimated. Remember, while management may have confidence in the response selected, the less informed professionals and staff will worry if not informed. Make sure a communication plan is developed and rolled out. It will pay dividends.

Poet Robert Burns often is credited with the well-known admonition “the best laid plans of mice and men often go astray.” Law firms and their leaders should heed Mr. Burn’s warning and expect the unexpected, especially as one year ends and another begins. Will your law firm be able to weather the unexpected?

 

Law Firm Growth and Basic Financial Modeling (Don’t Let Numbers Mislead)

Posted in Law Firm Growth, Law Firm Transition

Rise and falling

At times, numbers will mislead. Bigger doesn’t always mean more. More doesn’t always translate to better.

A recent new client engagement reminded me of how tricky numbers can be; and why it is important for law firm leaders to rely on basic financial modeling at critical junctures.

A firm’s revenue can be one of the most deceiving numbers of all. Often, as a law firm’s revenues begin to grow there is a tendency to commit additional capacity in support of the growth. Typically this means more space, attorneys, staff and other overhead.

When these commitments are made without modeling their long-term impact, the numbers reflecting that revenue growth may be leading a firm down a destructive path.

The recent engagement noted above is a perfect example. After investing in what the firm interpreted as opportunity, they realized that the bottom line (net profit) has not grown much, if at all.

The result is unnecessary pressure on owner’s compensation, and in the worst case, this pressure evolves into a threat to firm survival.

Prudent growth includes forecasting the economic impact associated with long-term commitments — to people, space and other forms of overhead.

If we look only at revenue numbers, growth can lead to a series of decisions that result in a decline in profit.

Effective modeling tells a more complete story, including the inevitable fluctuation in future revenue.

A firm may still decide to invest in the opportunities that generated the initial growth in revenue; but it will be a decision that comes with realistic expectations.

Does your firm routinely utilize financial modeling when planning for growth?

 

 

 

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