Whenever you see a successful business, someone once made a courageous decision. – Peter Drucker

We have previously written  about the unique nature of the law firm turnaround and how commitment from owners is one of the keys to turnaround success. In Part 2 we will look at resource management (or cost management) as a second key to success.

Cost Management – Relieve the Pressure

Turning-around a troubled law firm, or any business for that matter, is difficult. To give the challenged firm the greatest chance of success it is critical to relieve the organization of as much financial pressure as possible.

Although there are other steps that we will discuss, managing a firm’s cash commitments to as low a level as practical is the first and most important step in minimizing financial stress. Typically, the two largest demands on the financial resources of law firms are:

• The cost associated with personnel

• The cost associated with lease space.

Managing People Cost

The most important cost to manage when planning for resource containment is cost of lawyer and non-lawyer personnel. This is often very painful work because it typically includes delivering difficult news to individuals that have been long time members of the firm and/or friends.

The core objective is to re-size the firm so that the excess capacity in terms of the quantity and cost of personnel is minimized. Preparing a simple budget of conservatively projected client work is the first step in that process. The projection should attempt to forecast the amount of work and the estimated fees associated with the work.  With this forecast or work plan in hand, a staffing model can be designed that determines the professionals needed to support the work plan.  Since the objective is to minimize cash outflow, the staffing model should anticipate, to the extent possible, the retention of only those professionals whose contribution to the work plan provides the greatest return.

A simple way to “test” return is to compare projected collections associated with a professional divided by the compensation associated with that person. Most firms strive for a ratio of 3:1 or better return.

To the extent a firm’s projected needs are highly variable over time, many firms manage the peak production demands with contract, temporary or even outsourced legal personnel.

After completing your staffing plan, perform a similar analysis to determine which non-lawyer staff members of the firm will continue as part of the restructured organization.

A review of non-lawyer personnel, by its nature, will be more subjective but the target is to move forward with the leanest most productive team possible.

Managing Space Cost

Almost as important as people cost is the cost associated with office space. Although content on this topic would support a white paper of its own, for our purposes we will focus on some basic steps that can be taken to decrease cost associated with office space.

  •  If you have more space under lease than you need or if your lease is at or above market, a renegotiation of the lease is appropriate. Make your landlord a “partner” in your turnaround.
  • While keeping client confidentiality obligations in mind, consider the option of subleasing your excess office space.
  •  Consider implementing some aspects of the evolving “virtual law firm model”  work -at- home, office sharing, hoteling and other space saving related strategies.
  •  If you have an expiring lease, consider a below market sublease for the next 1-3 years as the firm regains its footing. In most markets there is well-appointed law office space available.
  • Use a professional – Most importantly if you don’t have significant expertise in negotiating office leases, employ a real estate professional that does have the experience.

Other thoughts – additional potential savings

In addition to addressing people and space there are several other means of reducing financial pressure during the rebuilding period:

• Consider the addition of more permanent capital to the firm to reduce reliance on bank financing for operations.

• Reduce draw levels, for the same reason as above.

• Make sure your bank is on board with your restructuring plan and that you have established an appropriate working capital line of credit.

• Evaluate all operating expenses for elimination or reduction. Especially for a firm that has been in business for a number of years, the amount of unnecessary spending that has become “legacy cost” can be astounding.

We are seriously committed to helping troubled law firms and creating a dialogue focused on law firm turnarounds will have value to all of us. What are your thought regarding “Resource Management” as being key?