Most problems are more easily resolved when addressed early. Pressures driving law firm instability and decline are no exception.
The likelihood of early detection is enhanced by incorporating a routine self-examination of the firm. This periodic checkup should focus on performance as well as the satisfaction of both personnel and clients.
Here are five specific areas that, when carefully examined and routinely monitored, combine to provide an assessment of what the future has in store for your firm.
- Client satisfaction and stability – Any significant decrease in the depth of relationships with key clients, or the loss of any material number of clients is reason for heightened attention. The percentage of revenue associated with key clients, as well as the quantity of clients served should be closely monitored. A substantial negative move in this area should be objectively reviewed to determine whether additional steps are advisable.
- Personnel unrest or disapproval – A serious negative shift in the way lawyer and staff feel about the firm is reason for further study and concern. Obviously in order to know if such a shift is occurring, the firm needs a means of benchmarking current satisfaction. This can be achieved through a network of engaged managers that stay in touch and are alert to growing dissatisfaction. Some firms routinely utilize satisfaction surveys. Whatever your approach, having a finger on the firm’s satisfaction pulse is critical to overall health.
- Economic stress – declining financial performance is an indication of a firm that must take steps to strengthen operations or face the prospects of very serious challenges to its survival. As obvious as this may seem, it is puzzling how often firm leadership manages to ignore economic issues. Several indicators to watch include:
- Falling revenue per attorney
- Declining productivity
- Failure to meet monthly budget
- Slower turnaround on payables and receivables
- Decreased partner distributions
All of the above are signs of a potentially weaker financial platform. In the end, the impact of financial decline is the decreasing ability to pay partners for performance. As partners make less and less for the same work, dissatisfaction will be followed by departures.
- Increased risk exposure – increasing litigation and/or debt are often drivers of law firm instability and ultimate decline.An increased reliance on debt relative to firm revenue is a reason for concern. If not cautiously managed, debt can become a short-term substitute for revenue, creating further pressure related to future profits. Better to focus on fixing the operational issues that are driving the need for borrowing, than to continue to borrow.
Unfortunately many law firms are targets of litigation at some point – whether from former clients or employees. A single case of such litigation may not be cause for alarm; but an increase in frequency or the size of claims against the firm is reason for concern.
- Turnover – the loss of attorneys, staff or clients is reason for concern. Some degree of turnover is expected in all organizations. Client needs decline, and people experience life changes that result in turnover however, an uptick in turnover or turnover that is higher than industry norms should be investigated in order to determine the root cause.
In summary, the sooner potential challenges to law firm stability are identified, the more probable that damage can be limited and long-term fixes can be implemented.