These are exceptional times for all of law firms. Staying safe and assuring good health is of paramount concern.  But for all but a few firms, these times also will test leadership as it seeks firm stability in uncharted waters.

In crisis,  leadership must  be seen and heard,  manage cash flow/liquidity prudently, and confront tough personnel decisions. The soon to be passed stimulus bill could be  of substantial value to  law firms fighting to survive.

For the last 15 years, our firm has served law firms in transition, in many cases firms facing crisis. In a series of perspectives to be published until normalcy returns, we will share our experience, provide guidance and give direction.

Our series  will address:

  • Leading a Law Firm During Crisis
  • Managing Law Firm Liquidity
  • Communicating During Crisis
  • The 2020 Stimulus Package and its Role in Law Firm Survival

Our insights will be  available widely, including through our blogsite, website, Twitter and Linkedin. You can guarantee receipt of the series  by registering here.

If our perspectives stimulate your thinking further or raise questions, don’t hesitate to contact us for a free 30 minute conversation at either:

Roger Hayse – Rhayse@HayseLLC.Com or

Andrew Jillson – Ajillson@HayseLLC.Com

Stay safe!

Recent years have been good for law firms of all kinds and sizes.  But good days can’t last forever.  Whether the next downturn hurting law firms gets traced to a world-wide virus, political disruption, or just a plain old recession, it doesn’t really matter. What matters for law firms having to ride the looming bumpy road is whether they can respond when the inevitable downturn hits.

In any downturn cycle, there are law firms that are winners, survivors and, unfortunately, losers.  Where your law firm ultimately finds itself in that spectrum does not reflect on its innate goodness, quality of work, or dedication to the finest tenets of the profession.  Rather, winners, survivors and losers experience different consequences because they are positioned for a path not anticipated.  Making that path a favorable one depends not just on their existing profiles, but also on the way they prepare those profiles for an uncertain future.

Based on past experiences, five things will play a big part in deciding your firm’s fate:

Financial Strength.     The foundation for surviving any downturn is financial strength.  A firm whose current success is built on strong financial principles, solid attorney productivity, and reward systems that motivate positive performance should do well in good times, but also in a downturn.  Conversely, a firm whose financial strength is based more on recent infusions of talent through lateral hires or mergers may be less strong than seemed.  Because financial strength is so important in any recession, understanding your firm’s financial ecosystem is critical.

Operational Flexibility.          In any downturn, cash flow can become constricted, so preserving liquidity by eliminating discretionary items, unproductive people, and excess real estate can be important.  While cutting back on some of these items can be achievable to a degree, paring back on long-term liabilities like real estate leases may prove more challenging.  This can be particularly true for a firm that has recently grown with the addition of multiple offices and the incurrence of long-term obligations.  For the firm facing potential inadequate operational flexibility, a review of its long-term commitments is an important first step.

Culture.           As the Great Recession showed, firms that survived owed no small thanks to solid and cohesive cultures in which key contributors stayed calm by taking long-term views.  Shaky cultures, especially ones built primarily on compensation or aggressive growth, heightened the risk of failure.  When challenges arise in the next recession, will your firm’s culture stimulate votes in favor of firm or self?  Assessing the kind of culture present at your firm is useful when thinking about the next downturn.

Leadership.     Steady and experienced leadership is an important element to surviving a downturn.  Does your firm have respected and trusted leaders who have exhibited sound judgment?  Or are your leadership young, inexperienced and/or untested in crisis?  The profile of your firm’s leadership says a lot about how it may fare in the next recession.  Working with green leadership today to build experience, demonstrate sound judgment and instill trust and confidence is an important step before crisis erupts.

Preparation.   No matter how your firm’s financial strength, operational flexibility, culture or leadership stack up, preparing now while things are good is critical for conquering the next recession.  Because there is always room to improve, shoring up these four elements is essential while other eyes at the firm remain fixed on the good times.  By preparing now, it will be far easier to confront recession when it comes.

Where your firm sits today and where leadership takes it prior to the next downturn will help decide your firm’s future. Firms whose profiles are suspect and not improved prior to the next recession have a future directed towards struggle if not disaster.  Other firms, blessed with solid profiles or vigilant about improving them, likely will not only survive but may be positioned for opportunity.  As you enjoy your current success, have you thought about where on the spectrum your firm will fall in the next recession?

Don’t waste your time trying to control the uncontrollable, or trying to solve the unsolvable, or think about what could have been. Instead, think about what you can control and solve the problem you can solve with the wisdom you have gained from both your victories and your defeats in the past.  – David Mahoney – Author

 

Now is a good time for all firms to conduct a quick self-assessment. Here are 5 areas that, if carefully examined, combine to provide an accurate preview of what the future has in store for your firm.

1. Turnover, any unexpected turnover is a sign of potential trouble. Law firm leaders should regularly (monthly) monitor turnover levels with a process that quickly identifies any material uptick. Rapid change is destabilizing, even when there is an excellent business explanation. When spotted, decisive action in one form or another is likely in order.  What does your turnover pattern look like over the past 36-months?

2. Dissatisfaction, this metric is a key indicator of business risk. A growing number of law firms find significant management value in systematically monitoring the satisfaction of their lawyer and non-lawyer employee base. And with good reason,  growing dissatisfaction is an indicator of future tourble. Do you have growing dissatisfaction in your firm?

3. Falling profitability, can quickly lead to stress for any business. I am not a believer in the Profits Per Partner (PPP) metric as a be-all-end-all; but if your law firm is paying progressively less for the same performance, it is at risk.

There are a numer indicators of declining profitability besides the exalted PPP metric. These include:

  • Falling productivity
  • Loss of a key client(s)
  • Increased aging of payables
  • Increased aging of receivables
  • Falling client billing

How is your firm’s profitability holding up?

4. Debt, an increased use for operations is a clear sign of stress.  Most law firms use some amount of debt, whether to smooth out collections cycles with a line of credit, or to finance growth and fixed asset purchases.  Any firm increasing its use of debt to cover basic operating obligation has embarked on a treacherous path.

5. Litigation, of any type,  against the firm can be enough to create problems for a law firm. Monitoring the frequency and size of claims against the firm is a must. If your firm has seen an uptick in claims activity, careful examination by leadership is essential.

The thing about organizational risk is that the sooner potential trouble is identified the greater the probability that a viable solution can be identified and implemented. The more serious the trouble, the greater the need for outside support which can bring an unbiased perspective.

Is your law firm at risk????

According to many law firm leaders, having a good law firm culture is a key to sustainability.  Not infrequently leaders attribute their firm’s culture for the success enjoyed.  When new mergers are announced or reviewed, the importance of compatible cultures gets top recognition.  And when law firms fail, the impact of a dysfunctional culture reaps its share of the blame.  So, the importance of culture is consistently acknowledged.  But what makes a law firm’s culture “good?”

A “good” culture can be difficult to define.  Like Justice Potter Stewart’s “I know when I see it” test of one observable fact, law firm culture means different things to different people.

A firm with a good culture need not subscribe to a particular business philosophy.  Indeed, firms with good cultures fall across a broad spectrum of business fundamentals and strategies.  For example, despite thoughts by some to the contrary, an “eat what you kill” firm can have good culture.  Conversely, a “share and share-alike” firm can have a challenging one.

Even with this seeming lack of clarity, because the quality of a firm’s culture matters to its well-being, periodically assessing it is an excellent practice that all firms should adopt.  And as 2020 begins, there is no better time to give it the attention it deserves by performing a culture audit.

A culture audit assesses a firm’s performance in five non-financial areas.  Although non-financial in focus, an audit identifies cultural disconnects that can be addressed before they fester and impact a firm’s stability.

A firm performing a culture audit reviews its connectivity in the following five areas:

Aspirations. Common aspirations for the firm and its owners are extremely helpful to a firm’s culture.  By “being on the same page,” owners are more likely to have similar goals and ideas about the future.  For that reason, an audit starts with determining if the firm’s owners share the same ideals, objectives, and philosophies.  If they do not, a firm’s culture could be out of sync.  Taking steps to align aspirations can help eliminate harmful dysfunction.

Trust.  Do the firm’s owners trust leadership and each other? It is easy to understand that a lack of trust can undermine culture.  Using the audit to determine the level of trust within the firm is essential.  If the audit uncovers questions about trust, a deeper dive into the root causes of the mistrust is necessary.  Once known, the difficult challenge of restoring trust is the next but essential step.

Understanding. Is there a common understanding about the firm’s intended path to achieve widely shared goals?  A firm whose tactics are understood has a better chance of a positive culture.  On the other hand, if there is confusion about the firm’s plan for reaching its intended goals, the seeds for a difficult culture may have been sown. Remedying any misunderstanding about the firm’s direction is an important step to improving a firm’s culture.

Consistency. Does a firm act inconsistently towards its owners and its approach to business?  A firm that acts consistently is more likely to be both trusted and understood.  In contrast, a firm whose decision making is inconsistent and unpredictable can find itself struggling. Using the audit to learn the perspective of the firm’s owners respecting its consistency can provide a vitally important piece of information.

Communication.  It is not surprising that most firms with positive cultures communicate well with their people.  Because good communication is a “two-way street,” if done well good communication helps leadership build trust while keeping it informed about the mood of the firm. All components that impact a firm’s culture are aided by the existence of good communication.  Thus, shortcomings in communication revealed by the audit signal the need for improvement so that the firm’s culture avoids undue stress.

As much as culture seems “touchy feely” and thus not worthy of focused attention in this increasingly data driven world, nothing could be further from the truth.  An audit may reveal surprising information that is best known sooner rather than later.  As 2020 begins, will you take the time to assess your firm’s culture?

 

Law firms and the economy

Many or even most law firms are coming off their best year ever. It may be a time to celebrate, but I continue to think about the inevitable bursting of the bubble. Yesterday I was catching up on some long-overdue reading and came across this Forbes article by Mark Cohen. The Cohen article is excellent and makes a case that the next economic downturn is likely to be very disruptive for many law firms. A falling economy will undoubtedly result in a decrease in demand for legal services, and most law firms are ill prepared.

Timing

Rational professionals all agree that a downturn is coming, the unknown is when we will see it. There are two fundamental approaches, prepare now or wait and see what happens. I am reminded of the fact that:

  • Many people first join a gym, stop smoking or start eating better right after their first heart attack,
  • Others, buy new tires after a flat on the expressway,
  • Couples often agree to counseling after a divorce filing and
  • Too many law firm leaders begin taking corrective action once their firm begins experiencing the loss of key lawyers or clients.

Get lean

Prudent leaders recognize that now is the time to start getting lean. As most know, the two drivers of law firm financial cost management are people and space. The current market is strong for addressing an excess of both of these today; it won’t always be so.

Forward-looking law firm leaders are focused today on preparing their firms for tomorrow. Is yours?

While law firm change is scary, in today’s evolving legal services market the absence of change may be scarier.  Law firm leaders don’t need to read expert’s opinions about the quickly moving marketplace, they see it close-up as competitors proliferate and competition intensifies.  Simply standing still by relying on tried and true practices is not an effective response.  More is required to transform your law firm for a better future.

Too often the press of business and comfort with the routine leads law firms to roll the calendar over, adjust last year’s plan, and forge ahead.  But by taking a pause, law firm leadership can think about preparing for the future. If that introspection raises the concern that one’s firm is not sufficiently prepared for the years ahead, five steps should be taken to transform a firm for the future.

Perform a Firm Self-Assessment.      If you are considering the need to move your firm from Point A to Point B, it makes sense to understand what Point A looks like.  A holistic review of your firm is the obvious first step towards an effective transformation. What does your firm do well?  How are you perceived by your clients?  What does your firm’s financial performance show and what does that tell you?  What does individual attorney performance say about your firm’s culture.  Taking stock honestly and objectively allows a firm to understand itself so it can determine the change, if any, it needs to make.

Perform a Market Assessment.         Like performing an assessment of your firm, it also is critical to assess your firm’s marketplace. In your firm’s traditional market, what has been its sweet spots?  Similarly, what kinds of clients have fueled your firm’s past success?  Are there trends that have recently developed regarding your firm’s market position?  For example, are the firm’s client relationships waning, or becoming less profitable than they once were.  Does a macro view of that market in the firm’s greater eco-system suggest that the firm’s position is headed to less prominence or that its practice is becoming anachronistic?  A critical eye that examines your firm’s market presence and the market itself is essential when thinking about transformation.

Get out the Crystal Ball.         After having assembled a dossier about your firm and your market(s), a comparative analysis of both with a view to the future moves your firm further in this exercise.  Does that analysis suggest a need to restructure your firm to keep pace with a market that is already changing?  Has your firm fallen behind so that it must catch up to a market that has already changed?  The Crystal Ball really can get cloudy if the indications are that the market is likely to change, but its direction is still unclear.  Getting ahead of a market that is changing or likely to change is a difficult challenge.  But because complacency is not an option, thinking about the future and identifying objectives for the firm’s future is essential.

 Develop an Action Plan.       Law firm transformation grows from realizing that the status quomust, over time, give way to a new paradigm.  Once a new model is settled upon, a plan for getting to the new approach can take shape.  Like any attempted change, it has the greatest chance of being successful if the objective is clearly understood and specific steps for getting there are established.  Experience has shown that a plan’s effectiveness requires a known objective and action steps with measurable milestones on the way to full implementation.

Create a Realistic Timeline.   If specific steps towards a selected objective are identified through the development of an action plan, creating a realistic time-line for full implementation is the final step. Depending on where the objective falls on the continuum of change, the plan can be executed more quickly or phased in over a longer period of time.  But for transformation to work, the timeline for the action steps necessary to fulfilling the objective must be carefully laid out.

Today’s firms that intend to remain relevant in the future will transform themselves to keep pace with the shifting legal services market.  If your firm wants to be ready for the future, is it prepared to take action now?

 

The global consulting firm, McKinsey and Company, recently released a number of articles related to research they have done on transforming businesses. One in particular, Why your next transformation should be ‘all in’, resonated with me.

In summary, the article presents a persuasive argument suggesting“all in” transformations— initiatives that address both services (or products) delivered as well as how they are delivered are much more successful than piece-meal transformations.

Specifically, McKinsey attributes the majority of transformation-driven success to five primary initiatives, categorized in two areas:

  1. Performance
  • Productivity
  • Differentiation
  1. Portfolio
  • Resource allocation
  • M&A
  • Capital investment

Generally speaking, every business — including law firms — approaches the future in one of four ways:

  1. doing substantially what has always been done (standing still);
  2. Investing in performance related changes;
  3. investing in portfolio related improvements; or,
  4. investing in both performance and portfolio-based improvements.

What the Data Says

A multi-year McKinsey study of more than 2,000 of the world’s largest companies yields interesting insights into the relative results associated with each approach to addressing challenges and opportunities of the future. And the statistics associated with companies that operated in the middle third of their market is especially telling.

The Table below indicates the probability of a medium performing business moving into the top 20% of competitor set, depending on the strategy chosen.

Approach to Future Probability of Moving Into Top 20% of Competition
Remain static 4% probability
Focus on Transforming Performance 8%
Focus on Transforming Portfolio 11%
Transform both Performance & Portfolio 20%

The Clear Message

For law firm leaders, there are numerous take-aways. One that is impossible to miss is that middle (or worse) performing law firms examining options to turn-around their organization will avoid standing still — doing the same things the same way — and will embrace performance and portfolio-based improvement strategies.

One other item of note from the study is that industries that are in decline (many believe that the traditional law firm model is one) are at the most risk and are in the greatest need of a combined transformation strategy.

How is your law firm transforming?

 

For a lot of law firms, “business as usual” is like a favorite pair of shoes-they seem to fit and sure feel comfortable. When that is the case, falling back on usual practices continues as long as there is no pressure to change.  But once a watershed event occurs that shakes the foundations of management practices and strategies, it is not uncommon for leadership to rethink its way of doing things.

Unfortunately, if leadership awaits the advent of a significant departure, an unexpected drop in revenues, or some other unforeseen development before thinking about fundamental change, it may be too late. Smart leadership doesn’t wait for crisis-it prevents crisis by planning for change and acting proactively.

At the beginning of every year all law firms should consider whether past practices should be modified or replaced by new ideas and strategies.  Thinking about a firm reset, even if not ultimately implemented, is worthwhile.  A serious effort at rethinking a firm’s present and future protects against complacency, helps identify bad habits that can be eliminated, and keeps a firm’s strategy fresh.

Thinking about a reset is particularly important for any law firm that:

Has an Aging Leadership.  Strong leadership is the lifeblood of any successful law firm.  Because good leadership can be hard to find or develop, firms that are blessed with it tend not to rush to make changes.  Yet as time passes and leader continue in their role, a law firm can find its leadership aging out.  Whenever a firm’s leadership is getting on in years, it is time to examine a reset to assure good leadership continues.

Wonders About the Next Generation as Business Getters.  Closely connected to the leadership question when leaders grow old is the concern over sustained business generation.  Past comfort from having a steady group of business developers can become less so when senior lawyers responsible for key client relationships begin to slow down. Finding successors to manage long-time relationships or building a roster of business generators will be essential to continuing law firm success.  Forecasting the need to reset the origination team well in advance is something all law firms should consider often.

Suffers from Upside Down Demographics.  Much can concern a law firm if its demographics have become unfavorable over the years. Attrition through the loss of future talent and/or the inability to hire quality attorneys can leave a firm top heavy with little promise in the next generations.  If a firm’s demographics are upside down, a strategy rethink is a wise move.

Is Undifferentiated in the Market.  Meh. Is that the marketplace’s reaction to your firm?  By taking an objective look at your firm’s place in the market, it may become apparent that change is required.  If nothing differentiates your firm from other firms, a slide towards mediocrity may have occurred or is trending.  Making your firm stand out should be a constant focus.

Is Financially Uninspired.  There is no right answer to the question “how much money is enough?”  But firms that are stressed financially are always in need of a reset.  Fixing a financially challenged firm may mean cutting back on out of control overhead, spending money wisely on practice enhancing technology, or creating expectations for work ethic and business development.  Assessing your firm’s financial performance and asking tough questions can lead to a fundamental reset desperately needed.

Transformation from routine to exciting should be on every firm’s mind.  If mired in the past or uninspired present, a reset may be in order.  Will you take a look at your firm as 2020 approaches?

 

 

 

 I don’t know where we should take this company, but I do know that if I start with the right people, ask them the right questions, and engage them in vigorous debate, we will find a way to make this company great. Jim Collins

 

So many law firms — big and small — continue to struggle in this increasingly competitive marketplace.. This might lead you to believe that building an enduring firm is a complex undertaking.

I don’t think it is.

Certainly, if a firm has a dominant personality in need of having the ego stroked, or engaged in acts of self-aggrandizement, there can be challenges. And those challenges will give rise to workshops, white papers, seminars and retreats hoping to address the issues.

But if a firm sticks to the following, stability, balance and longevity are not only possible; they are easily within reach.

Here are three keys to building a law firm that will last for the long haul.

  • Gather the right people – When it comes to individuals working together, the equation is straightforward: the greater the degree of shared values and aspirations between lawyers, the greater the probability of survival. If members of the firm have a similar perspective on what is important they will find a way to work through the challenges. Firms that include partners with great variance in basic beliefs and ambitions face a high risk of failure.
  • Deliver quality client service – Nothing is more fundamental to a business remaining viable than the ability to satisfy clients. The strongest firms have an absolute, unwavering commitment to serving clients in a manner that the clients value and appreciate.

Client centered firms routinely seek opportunities to listen to their clients – about what the client values, and how the service of the firm measures up. Client interviews and surveys are effective means of receiving feedback.

Great firms seek innovative ways to instigate on-going conversations. Imprudent firms become aware of problems in service quality through the loss of client relationships.

  • Operate conservatively – Building a firm around conservative principles helps mitigate the risks that cause pressure for so many firms. It is often a simple trade off between low risk and immediate rewards. Focus on these areas:
    • Cost structure – maintain a low cost structure by:
      • not hiring personnel materially in advance of the need;
      • not taking down space materially in excess of needs; and,
      • avoiding shiny new space.
  • Debt – any level of debt carries a degree of risk. Prudent firms maintain low to no debt, including operating lines of credit;
  • Draws – maintaining draws at a modest level minimizes pressure on cash flow and helps keep your firm out of debt;
  • Capital – invest in your firm for the long haul. Adequate capital levels provide stability, and help keep debt low;
  • Rate of growth – aggressive, fast and imprudent growth may have caused more law firm failures than any other single factor. Adopt a strategic and measured approach to growth.

It is simple. To give your firm the greatest opportunity for stability and longevity, focus on having the right people, meeting the clients’ needs with quality service, and operating in a generally conservative manner.

Nothing spectacular. But as is so often the case, the seduction of the spectacular is difficult to resist.

What are your thoughts on leading a law firm in today’s transitional market? Is the conservative approach and the long view passé?

In an earlier blog, Law Partner Retirement in Place—Solving Won’t Work/Won’t Leave (Part One), we presented the vexing problem of having a partner that slows down workwise but still draws a full partnership share.  Unfortunately, this upsetting situation exists at more firms than are willing to admit. While eliminating the awkwardness the abuse represents can be one objective, excising the potentially significant and precedent setting financial hit is more important.

TacklingWon’t Work/Won’t Leaveseldom is easy, but it becomes especially difficult if it is not recognized until the offending owner has throttled back into a semi-retired routine all the while drawing a full partnership share. Smart firms deal with WW/WLprospectively while favorable negotiating power exists.  Dealing with the issue prospectively also minimizes the angst, turmoil and hurt feelings that can come from confronting the problem later.  But preventative medicine is not always possible.

Thus, dealing with WW/WLfalls into two stages: Advance Preparation and The Here and Now.

Advance Preparation. Before a firm’s partner population has reached the age to create theWW/WL problem, a firm should consider at least three measures to negate its risk, including:

Institutionalize Mandatory Retirement.  The idea of mandatory retirement, typically articulated in a firm’s constituent documents, may seem like a simple solution and for years many firms used it at least partially to avoid WW/WL. Yet mandatory retirement can implicate age discrimination issues that can morph into a bigger concern than the WW/WLchallenge.  For that reason, experienced employment law counsel must be involved if mandatory retirement is an avenue that is going to be pursued.

Institutionalize Relegation.  A firm can prospectively address WW/WL by adopting policies that will cause a partner to be converted to some other status if there is a consistent and prolonged drop off in performance.  For this to work, the firm should establish clearly understood criteria that if met will result in a change in status.  Ambiguity is the hobgoblin of this strategy so a carefully constructed and understood set of standards is essential.

Institutionalize Acceptable Behavior.  A firm’s culture can protect against WW/WLif such conduct within the firm is known to be unacceptable, unprofessional and unseemly.  As an initial matter, a strong firm work ethic is an essential ingredient to establishing an understanding that expecting a “free lunch” is unthinkable. With a strong work ethic being a part of a firm’s culture, having a partner take advantage of the firm by attempting WW/WL is much more unlikely.  If that culture does not already exist or it has not been tested, it will be aided by taking strong action (intervention, vote to expel) the first time a partner attempts to stay without giving a fair contribution. Once such action is taken, later attempts at WW/WLincreasingly will be unlikely.

The Here and Now.  Unfortunately, advance preparation is not always an option because it is not until a partner is uneconomically hanging around does leadership see the problem.  This can be a difficult situation, especially if the firm has not institutionalized mandatory retirement (subject to legal restrictions), or relegation.  In that circumstance, a firm typically has two options:

Intervention.  While its effectiveness can be uneven, an intervention with the older partner can cajole, shame or otherwise persuade him or her to end retirement-in-place.  Having the message delivered by a trusted long-time colleague or a respected member of the firm can help greatly.  But in all instances, the message delivered must be carefully calibrated to avoid igniting a war that nobody wants.  And depending on the situation, a financial easing may be the key to gaining a voluntary retirement and ending WW/WL. Moreover, ending the first attempt at WW/WL swiftly sets the needed precedent and hopefully institutionalizes acceptable behavior.

Vote.  A vote to expel the retired non-retired partner is the last resort.  By the time a vote to expel is considered, all efforts at persuasion should have been attempted.  Voting out a long-time colleague can be ugly, hurtful, destabilizing and unfortunately, sometimes ineffective.  But despite the downside, it may be the only option.  If carefully planned so that expulsion is successful, it sets a precedent at the firm that soon can become its part of its culture.

WW/WLis a problem for everybody except the person intending to cruise on the firm’s nickel indefinitely.  Recognition and action are required to avoid the practice becoming commonplace.  In the unenviable world of WW/WL, where is your firm?