Virtually every day, the news includes reports of additional law firm closures, layoffs, and compensation reductions.

What is driving these decisions, and what does it mean for your firm?

Without question, catching any developing problem early makes it easier and less traumatic to take appropriate action, increases confidence in management, and enhances the likelihood of achieving real stability.

With early recognition of critical issues as the objective, here are seven early warning metrics. Smart leadership is always keeping an eye on these, but each is worthy of extra attention in today’s marketplace.

Decline in Relative Production

Productivity ebbs and flows in any market and proactive management is always seeking ways to prevent dips. But when historically predictable dips turn into unprecedented declines, this is symptomatic of a deeper issue and is rarely the kind of normal fluctuations a firm has planned for. It is time to take note.

Increased Turnover

The movement of talent has become a characteristic of the industry. An abrupt loss of key contributors, often beginning with an individual or small group, may hint at decreasing confidence in a firm’s prospects. In the worst case, it may foreshadow mass departures.

Loss of Clients

This one is so obvious that it seems elementary to point it out. But it is surprising how often a firm finds ways to reason away a client’s decision to align with another firm. Proactive client communication should catch it before the fact, but the loss of clients is almost always about more than the impact on revenue. 

Tough Credit Terms

Decreasing dependence on a line of credit is, for some, part of a strategic approach to cash management. Still, if lenders are becoming more demanding and terms are less viable, the reliance on credit is an indication that resource management is misaligned with reality.

Falling Realization

We all know this. Quoted standard rates are meaningless if what is ultimately collected doesn’t cover the cost of doing business. Every firm should have a crystal-clear understanding of what must be realized in order to be profitable. As realization tumbles closer to that known minimum, the market is sending you a warning.

 Increased Reliance on Debt

This is closely related to realizing stricter credit terms. But plenty of firms were still able to negotiate attractive terms right up to a month or a quarter before they faced closure. If debt is funding operations or draws, it is past time to rethink operations.

Increase in Receivable Age

It can be caused by a number of realities, but when the payment of invoices takes longer and longer, it is likely to snowball. More credit is necessary. Credit terms become less tolerable. To collect there may be a temptation to discount value, and so on.

.If any of these early warning signs occur, now is the time to develop and implement responsive solutions.

Firms that respond early have a much greater record of successful management of the transitional issues related to these challenges.

In the turmoil caused by Covid-19, many law firms have had to adjust to unforeseen circumstances.  News stories tell the sad tale of law firms being adversely impacted.  Some firms have closed, and unfortunately others will follow.

With one firm’s demise comes opportunity for others.  Clearly, personnel leaving the firm in wind-down must find homes and for them, only the best is wished.  An equally dynamic opportunity exists for law firms surviving the pandemic.  For those firms, the added talent in the market provides a chance to add substantive and financial strength.

Firms considering adding this talent that should consider two things before jumping on the chance to add from a burgeoning talent pool.

First, the firm should consider whether the apparent financial strength associated with the candidate(s) is compatible with the firm’s long-term strategy and aspirations.  A short-term shot in the arm from a business generator may divert a firm from fulfilling its articulated vision of its future.  Focus on the future is important and should not be abandoned.  A careful review of the opportunity, with all its implications on the future, is required.

Second, any candidate to be added must be evaluated in the context of the firm’s existing culture.  Time and again, surveys and anecdotal evidence have shown that law firms have reason to place high value on preserving firm culture.  A good and sound culture can help a firm through good and bad times.  Any addition that undermines your firm’s culture will be regretted later. Evaluating the cultural impact is essential.

In these times, opportunity knocks.  But unless a firm is convinced its long-term financial strength and culture won’t suffer, the door should remain closed.

The headlines are beginning to paint a pretty clear picture: many law firms worldwide are taking more aggressive action in response to their COVID related economic challenges.

As part of an effort to create a cash buffer to weather current or anticipated pressure brought about by the virus, firms are focusing on containing revenue loss while decreasing cash outflow.

To decrease costs, firms are addressing three areas:

  1. Space,
  2. People
  3. General operating expenses

Space

For the last two decades law firms have been modestly but consistently trending to a smaller space footprint. The trend has been driven by a combination of technology-related capabilities and efficiencies, economic realities, and changes in work styles. Recent experiences, thanks in large part to “stay-at-home” orders and decisions to remain socially distant, have created a heightened awareness of how much less space law firms actually need to operate.

 We’re seeing firms proactively explore options as it relates to significantly reducing the fixed costs associated with physical space.

 People

Given that compensation and benefits represent a significant percentage of a typical law firm‘s costs, it was not surprising to see firms enact furloughs, temporary compensation reductions, conversions to part-time schedules, and the suspend of hiring initiatives. As the dust begins to settle, we’re witnessing many of these moves morph into permanent changes.

  General expenses

More and more reports are finding their way into the news, reflecting an increasing focus on overall expense reduction and investment deferral. The prevailing attitude seems to be, “if we don’t have to do it right now, let’s not.”

Closing

A June 25, article in the ABAJournal had an interesting summary of actions being taken by law firms. The material includes results of a recent Altman Weil survey, which further describes the changing mindset of law firm leaders. I recommend it.

 The fact is that wise law firm leaders are taking steps today that are designed to cushion the impact of further decline. There is no single template for addressing uncertainty, so the challenge is to accurately analyze options and develop a strategic approach to the next six, eighteen, and twenty-four months that is consistent with your firm’s vision and the shared aspirations of your partners.

What is your firm doing?

Covid-19 has upended law firm normalcy.  What might have been perceived last March as a couple of month hiatus from business as usual has been extended with no end in sight.  With no known end date, it can be difficult to plan in ways previously thought routine.

The current Covid-19 world for law firms can be felt in matters of employee health, reduced client demand, depleted inventory, declining revenues, and external pressures from banks, landlords and vendors.  Dealing with this panoply of challenges requires leadership that can identify solutions uniquely suited to the circumstances.

Beyond addressing the crisis du jour, two firm initiatives can help “hold the fort” until normalcy returns.

First, as my colleague Roger Hayse noted in his Client Revenue Loss and Covid-19, staying in touch with clients by establishing a listening program can prove beneficial.  Keeping and enhancing existing client relationships through a frequent-touch listening program shows clients you fundamentally care about them and postures your firm well for the future.  When the legal services industry reopens, having a stockpile of nurtured relationships is better than having to find new ones.

Second, a law firm’s success is inexorably tied to the talent it has.  Firms that lose talent in these Covid-19 times may miss the competitive edge needed when normalcy returns. For that reason, frequently communicating with your talent to bind them to the firm is critically important.  Firms may even see value in touching base with talent lost through furloughs or lay-offs.  Covid-19 has not changed the fact that law firms are in the talent business and always will be.

When it comes to clients and talent, a law firm slowed by Covid-19 should not slow down.

 

 

I have previously referenced the excellent McKinsey report COVID-19: Implications for law firms. In a re-read of it this morning, a universal truth regarding client relationships struck me: the stronger firm communication with its clients, the less likely there will be a surprise in decreased work.

During normal times a routine communication between the firm and its clients is helpful to both client retention and relationship growth. During times of turmoil, communication becomes even more critical and can provide solid indicators that assist in cash flow planning.

For those of you without a structured client feedback/communication program, here are ideas you might consider implementing immediately..

Design a listening process

Whether it be a 5-question electronic survey, a 30-minute Zoom meeting, or (when you deem appropriate) a 45-minute in-person visit, create a regular outreach to clients that asks how can we do better.  A client feedback initiative will do at least two things: (1) build relationship equity, provided you act on what you hear, and (2) uncover issues-in-the-making, giving you an opportunity to proactively respond to client needs.  Note that this is about listening, not pitching. Resist the temptation, and leave a discussion of your capabilities for another conversation.  Nothing you do over the next 6-months will have a more positive impact on revenue tied to client relationships.

Institutionalize this listening process as part of firm culture

The best process will include an open dialogue within the firm about what is learned and what should be done in order to perform better. To this end, you should immediately, involve all attorneys with significant client contact in the client feedback process. Regularly reporting to the firm on the number of client interviews and the number of professionals involved will further the activity as an ingrained part of the institution.

Include leadership

The more significant the client relationship, the greater the need for senior management involvement in the client meeting. The inclusion of senior management sends a clear message of importance to the client.

Follow-up

We referenced this above: the failure to respond to concerns or issues raised during client feedback sessions should be a firing-offense. It is essential that any comments related to how the firm can do better be responded to with an action plan to resolve the issue. Those action steps should not only be taken; they should be the subject of on-going communication with the client.

Eric Fletcher, a person with great perspectives on client communications, just posted a terrific piece on this very topic. I encourage you to read it.

 

For more insights on managing issues related to crisis and COVID-19 click here.

Virtually all law firms have had to adjust business practices to address the pandemic’s impact.  Whether working remotely, refocusing or changing firm economics, making personnel moves, or partnering with clients more, today’s challenges have fundamentally changed the way law firms operate.  For the law firms grappling with too many upheavals in their world, crisis looms.

For most law firm leaders, the advent of crisis is a new experience.  Instead of making decisions that merely move the dials of profitability, growth or long-term strategy, the leaders confronted by crisis are playing for all the marbles.  A misstep here or there can lead to disaster.  When crisis looms, two areas of focus can be key to avoiding catastrophe.

First, leaders should act immediately with a blend of short-term and long-term objectives.   Immediate action demonstrating that solutions are being implemented, essentially real-time wins, helps avert a downward momentum that can suck away confidence in the future.  Short-term actions that seek tangible results will counter lingering doubts about the firm spinning out of control.  But as good as immediate responses can be, they need to fit into a bigger picture-they need context in a long-term vision that speaks to the firm’s future.  This blend can’t advance disparate ideas-the short and long term must be in sync.

Second, the firm’s solution(s) must be communicated quickly, consistently and honestly.  Leadership credibility depends on telling and selling the path back to stability in a way that is believable.  Disparate messages delivered by uncertain and confused spokespersons will harm more than help.  Getting the message right is enormously important.

If these thoughts on communication in crisis prompts additional thinking, don’t hesitate to reach out to us for a brief no obligation conversation at either:

ajillson@haysellc.com  or

rhayse@haysellc.com

 

In last week’s post, we explored the surprise loss of a law firm leader. Today I want to suggest an orderly approach to this inevitable event.

The Zeughauser Group conducted a survey that included several interesting issues. Three observations related to planning for the long-term health of the firm struck me.

· When describing the top objectives for their firm, the most frequently stated objective was to “achieve long term stability.”

· When describing the biggest challenge facing their firm in the next 3-5 years, the most frequently cited challenge was “transitioning leadership to the next generation”, closely followed by “transitioning client relationships to the next generation.”

· Finally, when asked about the biggest priority in the next 3-5 years, the number one answer was “building a more stable future.”

These responses aren’t surprising — especially when considered along with repeated surveys indicating a minority of firms have developed any formal plan to transition leadership and or client relationships to the next generation. (See here for some good discussion related to the lack of preparation industry-wide.)

Is it possible that Covid-19 has prompted us to rethink how we prepare for the future?

If you are a law firm leader, the challenges do not surprise you. We regularly visit with managing partners and governing bodies that see the writing on the wall. Except for those who choose to bury their heads in the sand, most agree succession must be addressed. A comprehensive and workable succession plan is essential if a law firm hopes to survive beyond the current generation.

A 3-Step Path to Survival

Step 1– Start now. As simple as this may sound, it may be the single toughest part of developing a plan. The day-to-day demands of managing a practice make it difficult to step back and consider the future. This reality is one of the biggest reasons many firms find themselves in the current predicament — years of not having time to address relationship continuity and succession.

To think too long about doing a thing often becomes its undoing” –Eva Young

Step 2– Engage your colleagues in a series of discussions intended to yield a plan for succession. Inclusion is essential to obtaining the buy-in necessary for a plan to succeed. Conversations with those impacted (clients as well as lawyers) that focus on long-term benefits, continuity of representation for clients, and the value of legacy are critical pieces of the puzzle. Some of these conversations may not be easy, but without them, you are reverting to a strategy of hope.

Step 3– Execute and monitor the plan. Very few plans roll-out precisely as intended, but the routine monitoring of performance to the plan provides a means of adjusting as necessary to achieve the objective. Succession is about the future–and any conversation about the future must be on-going. Inside a successful firm, a good plan must be able to evolve.

A successful succession plan doesn’t necessarily mean future leadership comes from within your firm. The plan may include the recruitment of new talent in leadership areas and or client generation and servicing. It may mean that the core of your firm survives as a part of another organization. The real key is that the result your firm ends up with is the result you desire. Without adequate planning, the desired result is highly unlikely.

One additional note that many firms miss regarding succession planning is —-Succession is likely on the mind of your clients. The issues of experience and continuity are likely being dealt with inside your client’s organization. A thoughtful collaboration between the relationship partner, the client, and firm leadership is an opportunity to demonstrate that level of client-centeredness all law firms proudly tout.

Our experience is that most firms wait too long and suffer the consequence of fewer or no options. Don’t let that happen to your firm!

See here for additional reading on this topic.

recent post in Law.com about Boies Schiller and Flexner reminded me of the critical dynamics associated with losing key members of a law firm. The departure of individuals responsible for a significant amount of client revenue, or those who serve in leadership positions can be traumatic events and may pose a considerable threat to firm stability. This post addresses the loss of law firm leaders.

 The loss of a law firm leader can occur as an orderly planned-for event, or it can come as a surprise to the organization. When the departure is one of those out-of-left-field surprises, it can result in disruption, loss of confidence and loss of more lawyers.

Or, it can be managed in a way in which stability is maintained.

Responding to the surprise

There are several steps a firm should consider in response to the unexpected loss of a leader, including:

  • Appoint the right spokesperson – the key members of the firm should immediately come together to select one individual to speak on behalf of the firm. The message should be clear, concise, and forthright, and address transition issues, with special attention to matters that will impact clients as well as processes inside the firm. The designated spokesperson need not be seen or presented as a replacement or new leader; however, the individual must enjoy the trust of the organization. When this individual speaks, it must resonate with authority and inspire confidence.
  • Create a transition committee – the committee should consist of a small group of respected firm personnel. Their job is to design and implement a leadership transition process. The process should strike a balance between being thorough, inclusive, and fast. Although getting a new leader in place quickly is essential, making the right choice is far more critical.
  • Communicate, communicate, and communicate – those that are involved in the transition must remember that honest, regular communication is essential to creating the confidence necessary to minimize anxiety and the risk of additional losses.

In next week’s post, I will address the creation of a leadership succession process that contemplates the eventual loss of a firm leader.

The pandemic has caused an unprecedented change to the practice of law for many law firms.  Since March, the delivery of superior client service has required a new way of thinking and a little bit of scrambling.  Yet after a couple of months living in the Covid-19 world, some law firms feel a new normal that instills confidence about the future.

While trust in the future may have grown, fully returning to past practices is unlikely.  Remote work processes and client interaction are commonplace and established.  With legal services now understood and delivered differently, firms reshaped by change should reassess their paths forward.  And because the merry-go-round of the past has slowed or jumped to a new carousel, the time is right to freshly assess two components key to firm success.

First, are today’s owner’s aspirations in sync?  Now that the autopilot from past years has been disengaged, your changed firm should be viewed against your owner’s aspirations.  If a new path has rendered untidy the collective aims of the firm’s owners, assessing the reason for aspirational disorder is critical.  Addressing newly identified disparate views about the firm’s bearing is important.  In this transformed world don’t assume that owners previously “on the same page” still are.

Second, the firm’s prior strategic course may be stale in light of its pandemic response.  Taking stock of the firm’s pre-pandemic business plan is essential.  Does it fit with the firm’s new practice paradigm, geographical footprint, service offerings, talent and client base?  If the firm’s practice remains largely unchanged, the earlier strategy may retain its vitality.  But if pandemic driven adjustments have altered the firm fundamentally, a fresh strategy may worth considering.

Surviving the pandemic does not end a firm’s challenge.  Reassessing immutable past beliefs about the firm’s unity and objectives deserve a careful review as well.

If these thoughts prompt interest in additional discussion, we are offering private, confidential, and free 30-minute discussion sessions from 3:00-5:00 (CST) Tuesdays and Thursdays. To reserve a slot, send an email to either of the below:

ajillson@haysellc.com  or

rhayse@haysellc.com

To read more on leading through law firm crisis, visit Managing Law Firm Transition.

In a conversation last week, a friend who is a partner in an AMLAW 100 firm told me that he received a record number of calls from search firms during the previous month. In a separate conversation last week, a Managing Partner client noted the incredible number of calls she was receiving pertaining to hiring opportunities.

It appears that the lateral market is abnormally active.

There are a number of reasons an individual lawyer might be available during this unique period; let’s consider two:

  • Concerns about current firm. While an impressive number of firms seem to be weathering the challenges associated with the pandemic, we are seeing many forced to respond with cuts to compensation and/or draws, furloughs and layoffs. Given the environment, it is not surprising that some partners are unhappy with how their firm has responded to the pandemic, and have decided to leave, or at least test the waters of the lateral market. These individuals may represent a real opportunity for a firm with a need for their practice.
  • Individuals who have been victims of the pandemic. Many lawyers have been let go or had their compensation reduced (many more will be subjected to this reality in the months ahead), and are looking for a new home. In a significant number of these cases, a decision to hire will actually make your firm immediately weaker, and more vulnerable to the inevitable stresses of the coming months.

If there was ever a time for real due diligence in the hiring process, it is now. We urge firms to cautiously calculate whether you are really adding value. Most industry observers and advisors agree — more than 50% of lateral hires deliver less than expected.