If falling into desperation worked to make things better, then I would say, ‘Let’s all jump into despair.’ But it doesn’t help. The only way to truly find meaning and fulfillment is to look at the disaster, the pain, the difficulty, and know with complete certainty that good can come from this.  – Yehuda Berg

 

This is part 4 in a 5-part series reviewing the typical stages of law firm decline.  The entire series is drawn from Jim Collins’ book How the Mighty Fall. See the previous posts:

  • Part 1 –Overconfidence and Law Firm Decline, here
  • Part 2, Aggressive Growth and Law Firm Decline, here and
  • Part 3, Denial and Law Firm Decline. here

In Stage 4 of decline, a firm has been struggling for some time.  The issue being faced is “if we don’t turn the performance of this firm around soon, it will be too late.” This stage is often reflected in one or more of the following:

  • a major change in the management and leadership team has resulted in significantly differing perspective, personal style and / or opposite  view from that of prior leadership;
  • failed initiatives, each taxing the firm’s resources;
  • panic and poorly thought through decisions;
  • drastic moves such as radical shifts in strategy;
  •  mergers; or,
  • significant loss of personnel.

No doubt, Stage 4 is the time for serious action; but alarmist thinking and reactionary steps will only serve to accelerate the decline. Instead what is needed is calm, clear-headed leadership through which the major threats to the organization might be addressed. This is not the time for innovative strategy changes.

Keys To Survival

If you know of a firm in (or approaching) Stage 4, here are the keys to facing the realities, and maximizing the likelihood of survival.

  • Quickly and honestly assess the core strengths of the firm. It is essential to ensure that time and resources are dedicated to calming and supporting the core.
  • In the event that a leadership change is necessary, select someone that is calm, methodical and has the deep trust and confidence of the firm. This is no time for playing politics, or blindly following someone simply because of personal charisma.
  • Avoid (unless it is the only option for survival) a merger of equals. A merger at a time of weakness is rarely the solution and a merger of equals in which the prospective merger partner         has its own set of challenges that are every bit as serious is a recipe for certain disaster.
  • Identify quantifiable areas for improvement. Progress that is demonstrable is of value in enhancing the bottom-line, decreasing risk and serves to create calm and confidence in the organization.

Collins says,  “When we find ourselves in trouble, on the cusp of falling, our survival instinct — and our fear — can evoke lurching, reactive behavior absolutely contrary to survival. The very moment when we need to take calm, deliberate action, we run the risk of doing the exact opposite, and bring about the outcomes we most fear” (Emphasis added).

Is your firm managed with calm and discipline?

Law firms planning for succession cannot rest easy even when the “next-in-line” process is settled or the next leader selected. No doubt thinking about these things is vitally important for a law firm hoping to weather transition. But it is just part of the task of succession planning.

One area of succession planning given short shrift at too many law firms is appropriately addressing transition of its partners reaching retirement age. As was recently reported in an American Lawyer article by Matt Greenslade, Boomers are marching towards retirement. Successive waves of older generations will wash ashore, so dealing with the issue requires more than short-term planning. If done right the firm’s culture is strengthened. Done poorly and the adverse consequences can be long lasting.

At a minimum, planning for the aging partner ranks must touch on the following:

Mandatory Retirement. If mandatory retirement, a policy at almost 50% of the nation’s large law firms, is your firm’s policy, planning for each year’s retirements must be a long-term exercise. Because retirement is 100% predictable when mandatory, there is no excuse for not planning and modeling years in advance the law firm’s alternatives.

Transitioning Relationships. Whatever the precipitating factors behind retirement, the firm is best served by institutionalizing the soon to depart partner’s client, civic and leadership relationships. Advance planning with financial rewards attributable to retaining the relationship in the firm should be considered.

Payment Obligations. Many firms, especially larger ones, have post-retirement non-qualified plans or benefits that commence upon a partner’s departure. Far too frequently; these obligations are funded out of cash flow. In smaller firms, the firm or its partners may face an obligation to buy the retiring partner’s equity. Regardless of how these obligations arise, in this time of shrinkage at law firms there is no excuse to not model the long-term impact of successive years of retirement. Because projections can be scarier than anticipated, early planning/modeling is important in order to address any adverse impact.

Dignity. Preparing the partner and the firm for the date of retirement is more than planning a gold watch ceremony. Advance counseling/training with the soon to be retired partner will prepare him for a new phase, may uncover issues about which the firm should know, will smooth the transition for everyone and will strengthen your firm’s culture. Bumbling the retirement of a partner is observed by your up and coming generation. Handled harshly or without the right degree of sensitivity can drive your young talent away instead of cementing them to the firm.

Never Saying Good-bye. Seldom does it hurt to stay in touch with a retired partner. The fact that they no longer occupy an office does not mean that their wealth of knowledge cannot be accessed when needed. Whether reaching out in this way creates a financial obligation is for a different discussion, but it is a universal truth that everyone appreciates being wanted. And including retired partners on an occasional invitation list is helpful on multiple levels. So do it.

Retirement of partners is inevitable, and more common every year. It presents financial, cultural and relationship challenges that are a part of succession planning. How have you dealt with mounting retirements at your firm?

 

Today, succession planning for law firms is more than finding the charismatic leader who is liked by most. Any new leader (actually, any leader whether new or not) must have the vision to compete in the age of New Law.

Jordan Furlong’s An Incomplete Inventory of New Law is an excellent summary of new players competing in the legal space. In this era of New Law, not only is it imperative to know about these non-traditional competitors, but a visionary leader also must think about the future of New Law. Furlong’s list is as much a clarion call about the upheaval in the market place as it is a list of competitors. Disruption will continue. Any law firm leader today must understand New Law, its implications and the prospect for further disruption. A firm’s next leader should have this understanding even more so.

Easier said than done. How do you pick your next law firm leader that has that attribute? And what do you do if that kind of visionary leadership isn’t obvious upon canvassing the potential successors?

Expand the Search Criteria. Past criteria in succession planning typically sought out the charismatic leader having good judgment, the respect of the greatest number of persons and willing to serve. These criteria typically limited the candidate pool to a small group of people that operated within the traditional law firm framework. Valuable criteria no doubt, but candidates that have an everyday familiarity with the latest in technology, client service trends and marketing techniques (including Social Media) should be added to the pool and carefully considered.

Make a Concerted Effort to Study New Law. Before facing the date a successor needs to be selected, make it a firm initiative to learn all that can be learned about the mindset that stimulates New Law’s explosion. Appoint thoughtful and respected partners to become the firm’s experts on New Law. Send them to conferences or just make them study. And make them report on market trends, their findings, and concerns. Get ahead of the curve.

Observe Best Practices. Some law firms, even those steeped in history, are looking at New Law and responding. Learn from these firms and the “vision” they display. It will help your firm now and aid any future successor.

Consider Outside Successor Leadership. If your firm’s roster is weak on the vision thing, consider going outside to find your future leadership. This is best executed prior to the need for the elevation of a new leader. If forward thinking can be added to the firm and observed for a few years, you might find a leader with the vision to lead you into the future.

Educate the Rank and File Now. A leader with vision that is too far ahead of his “followers” won’t succeed. Lawyers are notoriously conservative and independent. For that reason, educating them now on New Law can give your new leader the support he or she will need.

Nothing can be more important than picking the next leader of your law firm. Doing it the old way, however, where popularity and past performance as a great lawyer rule the day, is unwise. In this time of disruption for law firms, what would you do to select your firm’s future leader?

 

 

 

 


Don’t confuse cause with coincidence. – W. Edwards Deming

 

This is the second in a series examining law firm decline. Part 1 — Overconfidence and Law Firm Decline can be seen here.

In Jim Collins’ book How the Mighty Fall, he describes phase two of business decline as “Undisciplined Pursuit of More.”

When it comes to much of the growth we have witnessed in law firms, I think a bit more in-our-face is appropriate. When it comes to law firms, we can call the second phase of decline a period of Ego Driven Growth.

This type of growth is always represented as in the interest of the firm and its partners. In fact, it serves to weaken the firm, and puts it at risk.

In most discussions about businesses that are in decline, it is typically assumed that the root cause of decline is either management complacency, or the failure to innovate and respond to market changes.  The Collins research debunks this theory.

In most cases the root cause of decline is over-reaching and growing in a reckless manner.

Brobeck – A Case of Reckless Growth

When the charismatic Tower Snow was elected as the firm’s chairman in 1998, Brobeck was coming off 72 years of steady growth. The firm was a highly regarded San Francisco based operation that proudly sat in the AMLAW top 50.

Snow had high aspirations, and sought to accelerate the firm’s rate of growth.  Focusing on the emerging technology sector, he had visions of building Brobeck into one of the world’s largest and most prestigious firms – quickly.  His strategy of hyper-aggressive lateral hiring was launched in the middle of the dot.com craze, a time in which it was difficult for law firms to go wrong.

And then the market cooled dramatically.

Instead of moderating the approach and battening down the hatches, Snow pressed ahead with his growth strategy.

With profits falling and partners and clients leaving, Snow stepped down as chairman. His resignation was followed by the firm’s decision to close its doors. Ultimately, Brobeck was forced into bankruptcy.

In my experience, the needs of clients and working lawyers drive a very small percentage of law firm growth.  Rather, a leader who has determined that success is defined by size is almost always at the heart of a relentless appetite for growth.

When growth outstrips a firm’s ability to integrate and ensure quality, the firm is in decline.  The longer the trend continues the greater the firm’s risk of permanent damage.

Disciplined growth of a law firm — or any business for that matter — is not a problem; but growth that threatens an organization’s future is. Common indicators of this kind of problem include:

  • Growth in size that has outpaced the experience of leadership and management
  • Disproportionate growth in debt
  • Additions are not being 100% integrated
  • Profitable areas of the firm are not receiving appropriate investment
  • Support systems are strained

On the other hand, disciplined growth is measured, strategic in nature, and the product of partner consensus and shared aspirations.

Jim Collins says it so well, “While no leader can single handedly build an enduring great company, the wrong leader vested with power can almost single handedly bring a company down.”

How is your firm managing growth?

 

 

 

 

Succession planning among law firms is uneven-some law firms do it well, some not so well and some not at all. Even the law firms that go about planning for succession won’t always do a good job when it comes to executing on the plan. But because succession of leadership can have serious ramifications, a misstep in planning for succession can take years of recovery if recovery is even possible.

Succession planning and execution in 2014 is far more difficult than its was a decade or more ago. It is not that it is harder today to identify credible candidates to succeed existing leadership; searching for the best talent is a task that has not changed much. Rather, the changing face and nature of the legal industry has made succession a more complicated matter.

Not only must a law firm pick the right leader for the future, but also the new leader and the firm must be prepared to transition from past practice norms to a legal market vastly different than the past. In yesteryear, a new leader’s promise to maintain the status quo meant good times would continue. Today, in our different legal market, promising to continue the status quo means the opposite. Only through strategically addressing change in today’s legal market can new leadership provide the kind of stewardship a law firm needs.

Succession planning today means that a number of complexities are presented:

Competing in the New Age. Until recently, competition in the legal industry was almost entirely between law firms, with the occasional accounting firm intruding on the law firm enclave. That is no longer the case as the proliferation of alternative legal providers or services has exploded. Jordan Furlong’s  An Incomplete Inventory of New Law, an excellent summary of these alternatives, starkly demonstrates the growth of new competition. A new law firm leader will need to lead the firm in a market saturated with competition not previously present.

Riding Into the Sunset. Matt Greenslade’s  Your Boomer Partners are Retiring.  Is Your Law Firm Ready? notes the Boomer’s march towards retirement age and rightly suggests that any succession plan needs to deal with a spate of lawyers facing retirement. Many of those lawyers aren’t interested in the gold watch and want (or need) to work longer. If your firm doesn’t have mandatory retirement, should it? If it does, will it work well as so many productive partners reach retirement age? Are your elder lawyers still productive, do they have relationships that need to be preserved for the firm, and does the firm have the bench strength to replace their expertise? How is the firm going to deal with its aging population; with dignity and compassion? How a firm deals with its elders says a lot about the firm and its culture. Doing it right sets the tone for later years since, as Mr. Greenslade notes, the aging in the AmLaw 200 will continue.

An Expanding Market is History. Today, law firms can’t count on an ever-expanding market. Annual raises for partners, increasing starting salaries for first year associates, adding offices, markets and lawyers is, for most firms, a thing of the past. So are automatic annual rate increases. Clients have begun to pushback on rate increases; practice inefficiency and young associate training at client expense. There is no indication that the pendulum that has swung to the client’s side will swing back anytime soon. The difficult task of operating in a contracting legal market is not something last year’s leaders faced.

Unfunded Pension Plans. Law firms’ non-qualified pension plans typically are funded from cash flow. Establishing these plans long ago during an expanding legal market made sense at the time, but some firms face retirements and funding obligations at the same time they are shrinking. The financial strains imposed by upside down demographics in a contracting legal market can be severe. So when a law firm with non-qualified plans seeks to deal with succession planning, it needs to consider these obligations as it plans for the future.

The Many Faces of Loyalty. As Sandra Bekhor notes in A Firm Handshake for Unsure Times, life at law firms has changed.  Many of the partners getting ready to retire are among the most loyal employees at the firm. Some have spent their entire legal careers toiling for Mother Law Firm. Younger partners have grown up knowing a legal market where lateral movement, and reduced loyalty, has been a way of life. The associates’ generation typically is even less attached to the firm-many are not even sure they have a long-term future. Succession planning requires that these differing perspectives about life at a law firm and its future be understood in connection with any long-term planning.

Today, when a law firm picks a new leader, the new leader must possess the skills and vision to deal with the transition hitting the legal industry. The issues described above are five each new leader must address. Are there others that are equally important?

 

 

 

Every institution is vulnerable, no matter how great. No matter how much you have achieved, no matter how far you have gone, no matter how much power you’ve garnered, you are vulnerable to decline. There is no law of nature that the most powerful will inevitably remain at the top. Anyone can fall and most eventually do. –Jim Collins

 

Confidence

Jim Collins, the author best known for the positive and uplifting books Good to Great and Built to Last, wrote another provocative volume in 1999. How The Mighty Fall looks at the causes and stages of organizational decline.

In a recent reread of the book I was struck by how much of what is proposed by Collins applies to the success or failure of law firms.

The First Sign of Decline

Collins calls the first stage of decline “Hubris Born of Success.” I translate this to leadership driven by false confidence. Whatever you call it, it marks the beginning of a law firm’s decline.

As a firm moves from figuring out how to survive, to enjoying measured success, some begin to lose sight of what it was that brought about their initial progress. This blind spot causes a drift away from continued improvement in favor of the pursuit of additional or different ways to grow.

This cycle — from early success to beginning to fall — looks like this.

  1.  An initial struggle for footing.
  2.  Some success doing what it does well.
  3.  The prospect of climbing new mountains becomes increasingly attractive (this comes in the form of new client types, new practice disciplines, new industries served or a new geographic presence).
  4.  Significant resources of time and money are redirected to the “something new”
  5.  The “something new” doesn’t work near as well as envisioned.
  6.  The source of original success slips; momentum is lost; future success and stability are threatened.

In order to avoid decline, effective law firm executives direct the majority of firm resources to improving the value proposition that brought about the original success of the firm.

By contrast, executives presiding over a declining firm confuse their initial success with keen business insight, and begin diverting significant resources in pursuit of “something new.”

How is your law firm growing?

 

 

Last week The Wall Street Journal’s Jennifer Smith wrote about the new reality for law firms as they try to adjust to change in the legal profession. In her Law Firms, Market Pressure and Change: How Soon is Now?, Ms. Smith quotes from an Altman Weil Inc. survey from law firm leaders:

 “Firm leaders also agree on the consequences of the shifting marketplace, although with less unanimity. Most expect to see smaller annual billing rate increases, fewer equity partners, more part-time and contract lawyers, reduced leverage, and slower growth in profits per partner. Despite this daunting self-assessment, law firms are proceeding without an apparent sense of urgency. Most firms are making some adjustments, and some are testing new strategies, but there is certainly not a groundswell of change.”

In an unrelated news story from a day earlier (Law Firm Succession: Bingham McCutchen Chair to Hand Over Duties), Ms. Smith reported that Bingham McCutchen’s chairman was stepping down after 20 years. Although Bingham McCutcheon’s performance has lagged in recent years and departures have been noted, the law firm termed the change at the top as the “next step” of its succession plan.

On the same day as Ms. Smith’s Bingham McCutchen report, The American Lawyer published an article entitled Your Boomer Partners are Retiring. Is Your Firm Ready?  Matt Greenslade’s article reviewed the aging population of partners among the AmLaw 200 law firms. The Boomer Partners article is chock full of information about the generational make-up of AmLaw 200 law firms as well as the need among those firms to deal with the critical issue of succession planning. Mr. Greenslade asks a number of provocative questions that lead to the ultimate question—Is Your Firm Ready?

Last week’s articles all point to one of the major challenges facing law firms today: succession in this new age for law firms. As these writings indicate, however, succession is not a matter of simply picking the younger version of the current leader and anointing him or her.  Today, any law firm and its new leader must additionally possess the vision and experience to deal with the changing legal industry, a requirement not so important in the past.

The Altman Weil survey cited by Jennifer Smith says that “seismic” changes have occurred since the financial crisis. Finding solutions to these “seismic” changes will become the task of any of today’s successors seeking to preserve his or her firm for the future. Matt Greenslade’s census review underscores the challenge, especially because AmLaw 200 law firms must deal with partner ranks that are getting on in years.

Today’s succession planning for law firms will be particularly challenging. Not only will new and untested leadership face the typical tests of any new leader, but new leadership will be thrust into an emerging legal market that his or her predecessor either did not face or recognize, did not solve or simply left for successor management’s handling.  Law firms and their leaders addressing the next generation will deal with a myriad of issues, including competing in the new age, transitioning senior lawyers, shrinking demand, unfunded pension plans and the changing faces of loyalty.

In next week’s blog, we will review these issues in depth.

 

 

Diligence is the mother of good fortune. –  Benjamin Disraeli

Major, Lindsay & Africa recently released its 2014 Lateral Partner Satisfaction Survey. The results offer numerous insights into the state of lateral law firm recruiting. With so much at stake — for the lateral and the firm — three statistics seem worthy of special attention.

  1.  Barely more than half (52.8%) of lateral partners responded that they were “very satisfied” with the firm they moved to. Although the survey results do not provide any insights into the lack of enthusiasm, two other statistics might provide a clue.
  2. Almost two-thirds (63.4%) of lateral partners reported that they had not reviewed financial statements or documents related to the obligations of their new firm prior to making the move. In an environment in which so many law firms continue to fail, downsize and restructure, this statistic is stunning.
  3. Equally surprising is the fact that almost two-thirds (60.7%) of lateral partners did not review the partnership (shareholder’s) agreement of their new firm prior to joining. One has to wonder what percentage of those partners would have required that a client read any such document prior to making any business decision — much less, a career move.

These three statistics point  to the need for change in the hiring process on both sides of the lateral hiring process. To avoid surprise or disappointment lawyers need to do their homework before committing to a new law firm.

A Change for Law Firms

Law firms should, as a normal course, provide prospective lateral hires with recent monthly financial statements, as well as  audited statements for the two preceding years. Those statements should include a comparison between actual and budgeted firm performance. Additionally, the firm should provide a copy of the firm’s applicable governing documents. Of course, the privacy of such information should require that the lateral sign a confidentiality agreement.

A Change for Lawyers

Every lawyer (partner or not) should require the above information from his/her prospective new firm, prior to making any commitment.

Many lawyers are understandably inexperienced when it comes to reviewing law firm financials, governance documents and terms of employment.  However, the significance of a career move justifies the need for professional counsel. And, for a relatively small investment a lateral candidate can access the appropriate assistance.  The risk of a mistake is simply too high…… and the statistics seem to indicate that mistakes are all too frequent.

A Positive Indicator

If our practice is any indication, there is an encouraging move toward a more business-like process on the part of both hiring firms and individual laterals.  We have noted an increase in demand for this type of service;  in each case, the lateral lawyer and new firm benefit from the heightened due diligence.

 

What other changes would you add to the lateral process?