It’s common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.”– Franklin D. Roosevelt
Last Tuesday Part 1 of Law Firm Decline and Leadership Mistakes was published. In today’s post we look at the other two leadership errors that lead to decline.
Imprudent growth may be the number one mistake law firm leaders make. There is a tremendous bias for numerical growth in our industry. Unfortunately, the growth in which we engage is often far from strategic, and about little more than becoming bigger. As a result, most lateral expansion is not – in the long run — beneficial to the partners of the expanding firm. Most growth changes the numbers, but adds little value. Growth is expensive, tests culture, strains the limits of the management and leadership infrastructure and is just plain risky.
- Add institutional capacity only when existing capacity has been significantly and consistently utilized. Until that threshold has been achieved, learn to use contract, temporary and outsourced solutions.
- Restrict lateral growth to individuals or groups that meet strategic criteria, and have been documented to be accretive through objective analysis. Increasingly, business that is thought to be “portable” is actually far from it. Vet relationships. Add laterals in a manner consistent with strategic direction of the firm.
The general inclination in most law firms is to maximize immediate cash flow to owners while minimizing the amount of owner cash tied up in contributed capital. The combination of these two often leads to operational stress, and — if extended too far, organizational failure. Edwin Reese has an excellent article here on law firm capital.
Counsel/Advice – Better to be safe than sorry. We recommend that firms maintain a balance of contributed capital that is equal to 25-45% of annual owner compensation and that monthly distributions to owners be based on a distribution of 60-70% of projected annual income with the balance distributed at year-end.
Follow Basic Guidelines And Avoid Crisis
Serious law firm decline can almost always be avoided if leadership understands the trajectory of its current path. To improve your firm’s odds of avoiding deterioration; monitor and proactively address change, tightly control legal and administrative operations, expand cautiously and maintain a healthy level of financial leverage.
In a statement often associated with leadership and innovation, Wayne Gretsky said “I skate to where the puck is going to be, not to where it has been.”
What might law firm leaders be doing today, to better predict where firms end up in the coming months and years?