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

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

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

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

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