Law Firm Repositioning/Turnaround/Restructuring

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Charles Darwin said  so profoundly “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

Our practice is seeing an increasing number of firms tested by their ability to adapt. The news reflects a growing number of firms in obvious transition. From high-profile names to lesser-known partnerships, the leaders of each firm faces pivotal decisions. Some of these firms will restructure or otherwise embark on a turnaround strategy.  Others opt for merging with another group or offering themselves as an acquisition target in an effort to  avoid dissolution. History has shown far too many end in a messy liquidation.

Identifying The Path That Leads To Decline

The decline of a once vibrant partnership rarely has much to do with the quality of lawyers engaged in the practice.  And though the marketplace is certainly tumultuous, what is at the heart of survival and success for some, and the dire straits of a struggle to survive for others?

In his book Corporate Turnaround, Dan Bibeault identifies four key mistakes that lead to organizational decline. These mistakes, paraphrased to the legal profession are:

  • Failure to respond effectively to a changing competitive environment
  • Poor control over operations
  • Overexpansion
  • Operating with excessive financial leverage

Let’s look at each one a bit more closely.…
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The typical press release announcing a law firm merger extolls the excitement, the opportunity to have one plus one equal three, and the great fit of culture, practices and people.  It’s perfect until it is not.  In fact, by some measures more than half of all law firm mergers fail. When the realization sets in that your law firm merger is a bad one and not the combination of your dreams, what can you do?

Besides whistling past the graveyard, you’ve got to do something.  And while a solution stimulated by panic is not recommended, prompt action is advisable. As action plan options go, the following three options generally are presented and often are considered:

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Law firm succession planning represents an important component to law firm longevity.  The two forms of succession most often discussed-leadership and client relationship transfer-should be top of mind to any firm thinking about being an enduring institution.  While leadership succession can be a significant challenge, creating an effective client relationship transfer strategy is among the most complicated things to achieve.

In client relationship transfer, it takes four different parties to make it work.  First and foremost is the client without whom there can be no client relationship transfer.  Surprisingly, too often the client’s thoughts and perspectives on relationship succession are not prioritized, at least to the degree desired by the client.  If the client’s interests are neglected, there is little hope for a successful plan.

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I am interested in the interaction of a group of people who have a common goal, or a common obsession, each contributing something unique to make something greater than the sum of its parts. I don’t know why, but from day one, that has interested me. – Steven Van Zandt, Bruce Springsteen’s E Street Band

The recent news of departures from Carlton Fields Jorden Burt is most interesting. The firm, was the product of the 2014 merger of Tampa based Carlton Fields with DC based Jorden Burt. At the time of the merger the synergies between the two firms was promoted as one of the real selling points. Now, 5 years late, at least 30 of the 48 original Jorden Burt partners have left, including name  partners Jorden and Burt.

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Fingerprints are unique.  No two snowflakes are alike.  And the more one looks at law firms, the more it is apparent that each law firm has its own personality.  Whether small or large, local, national, or international in scope, general service or specialized boutique, driven by profit or public service, each law firm has its own DNA.

Though distinctive, many law firms share common characteristics.  One shared by all law firms is the need to be financially healthy.  Law firm financial health is the universal need of every law firm—without financial health a law firm’s future is seriously suspect.

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It can’t be overstated. The legal services business is experiencing dramatic change.  For law firms as institutions, it is obvious because more work than ever before is brought in-house by clients, and alternative service providers are rushing into the competitive landscape.  Besides the increase in competition, there are technical and practice advances that have changed the way law firms do business.  Legal project management, once a novelty, is altering the focus law firms are expected to bring to a task.  Technology in law is evolving so fast that even law firms committed to investing in new tech have a hard time keeping up.  And artificial intelligence is finding its place in the ultimate objective of meeting the legal needs of clients.

With all the industry change, most firms know that settling on the status quo is risky. Still, more than a few firms are slow to change.  Some are overwhelmed by the idea of innovation itself or are worried about the appropriate time and capital to invest in its execution.  Without adequate experience or guidance, a firm can be paralyzed.

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Despite the seemingly “good” year that 2018 was for many law firms, experience tells us that ”good” can be  a relative thing.  While 2018 performance data compares favorably to the data from the prior years following the Great Recession, all is not completely rosy.  Today’s law firms face more competition than ever as market share is shrinking, and the industry is being disrupted in multiple ways.

The recently released Thomson Reuters State of the Legal Market 2019report provides some industry information about how the 2018 results should be viewed.  The report concludes that despite good results last year, a robust round of “high-fives” should be tempered.  As Thomson Reutersnotes, shared competitive industry information, technological advances, client control of legal service use and terms, greater competition among law firms and other resources, have all greatly altered the legal services market. This change in landscape has, among other things, stimulated a war for talent, causing valuable lawyers with valuable clients to move from one firm to the next in free-agency run wild.

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Strength and growth come only through continuous effort and struggle. – Napoleon Hill

The market volatility during the last year and the increasing concerns about a coming recession foreshadow risk for many law firms.   Additional market disruption may lead to challenges for firms of all sizes and in most practice disciplines.

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Although the final numbers are not in yet, 2018 has been touted as a good year for law firms.  Based on various reports including the 2019 Citi-Hildebrandt Client Advisory, revenues were up, billing rate increases held, and client demand increased.  These improvements are not shocking as law firm performance has been ascending in recent years.

Just because industry performance this past year was on the whole very good, not all law firms can look back on 2018 with such positive thoughts.  Indeed, the overall industry uptick is pulled along by strong performances among the AmLaw 100, especially the top 25 firms.  Performance among the second AmLaw 100 (or 101 to 200) generally was not as positive. Similarly, firms outside the second 100 did not, as a class, enjoy the kind of robust financial performance logged by the bigger firms.  Specialty firms (obviously focused in the right specialty) were the exception among smaller firms.

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The issue of succession planning at law firms is a topic of great importance.  The need to address succession won’t always wait until a convenient time and makes planning as important than ever.

Succession planning among firms, whether leadership succession or client relationship transition, is a mixed bag. Some firms have thought about it deeply…