From time to time, a law firm stares down a claim or series of claims that threaten the law firm’s very existence. These claims can arise from any number of circumstances but are potentially so large that an adverse outcome will exceed the firm’s resources and likely lead to its demise. Due to the fragility of law firms, however, the mere threat of the negative outcome can be enough to result in a law firm’s collapse. The fear of the “worst case,” the reputational baggage felt, declining morale and the natural aversion to uncertainty can prompt a cascade of departures and prematurely kill the firm before it ever reaches its “day in court.” The “run on the bank” is never far away for the law firm facing this kind of crisis.

The existence of a massive claim or claims can quickly cause a law firm’s death. While facing these kinds of claims is never easy, their existence does not necessarily lead to a law firms’ fatality. The approach of two firms to this kind of crisis is instructive.

In the early 1990’s, Kaye Scholer’s attorney-client relationship with a notorious savings and loan failure subjected it to a federal court order that froze its assets. The order was so sweeping it prevented Kaye Scholer from paying its employees, contributing to ongoing benefit plans or satisfying operating expenses. In every respect, it rendered Kaye Scholer unable to function. Most firms would not survive such a punch to the gut, but Kaye Scholer did.

About a decade later, aggressive tax advice to its clients resulted in Jenkens and Gilchrist being sued or threatened with suit from hundreds of former clients suddenly unhappy with failed tax strategies. The potential damages exceeded billions of dollars. The press presented the firm as under siege and that reporting was not far from the truth. The existence of the claims frayed the firm’s edges and it began to wobble. While Jenkens ultimately went out of business due to other pressures, it was able to resolve the onslaught of client claims in a manner that positioned it for survival.

What did Kaye Scholer and Jenkens do that allowed each to avoid Custer’s fate at the Little Big Horn? Despite differences in circumstance, each was able to find a solution that averted destruction. In next week’s blog, we’ll examine the factors that allowed both Kay Scholer and Jenkens to survive what looked like insurmountable challenges.

 

Closing a law firm is a formidable task. The existing management team, prepared for running a going concern, is often unprepared for the various challenges that arise as the firm is wound down. Even though it is advisable for a closing firm to obtain outside assistance, a small but dedicated group from the firm must be put in charge of the closing effort.

Many interests must be accommodated in any law firm closing. Long time acquaintances and friends still at the firm will have special issues. Former employees and owners likewise will have issues and will seek assurances. It can be an emotional experience as a sense of loyalty is often felt towards these firm related people.

These legacy interests are not the only interests that must be served. The firm’s duty to its clients continues, certainly at least until matters are transitioned to new firms. Contractual duties are owed to third parties with whom the firm has done business. Finally, duties to the owners of the firm remain as the firm is closed and wound down.

When closing the firm it is crucial to appoint the right people to manage the wind-down, including these relationships.  The management team in charge prior to closing frequently is not right for the job of executing the wind-down. For one thing, the last members of the going concern management team may not want to be involved in the wind-down process.  Indeed, they may be the least suited to manage the wind-down, and may have little support among the owners for the job.

In all likelihood, a new team will be selected to manage the closing of the firm. In picking the right people, the following characteristics prove very useful:

Judgment. A law firm wind-down involves a never-ending presentation of unanticipated issues. Being flexible, attentive to detail and relentless in pursuing a fair and equitable close is extremely helpful. Yet wrapping up a law firm’s business requires the daily exercise of sound judgment. Selecting a team that has a history of exercising good judgment should be a primary concern.

Firm Knowledge. Good institutional knowledge about the firm pays dividends every day. Decisions that can be made with the use of historical recall save time and money. Historical knowledge also aids in knowing where to look when research is required.

Committed to the Task. When a law firm closes, many people otherwise suited to help in the wind-down move on to their next firm, career or challenge, and are not available to help. Thus, from the start your draft pool from which you select your team may be smaller than desired. Even though some of the best candidates may no longer be available, it is wise to select team members that have the time to see the task through its conclusion. Excessive unplanned turnover during the middle of the project can upset momentum that is critical to success.

Trust. In a law firm closing, the potential for mistrust is significant. Virtually everyone relying on the closedown team will fail to appreciate the difficulty of the day-to-day decisions that have to be made. Questions will arise and answers may feel unsatisfying. For that reason, selecting your team from persons that were respected while at the firm will aid in the delivery of news. A wind-down team can’t rest on its laurels—it must continually work on retaining and building trust as the task continues.

Communicative. As the wind-down process unfolds, there can be no substitute for communicating with parties in interest. Silence causes parties to assume the worst whereas constant communication tamps down suspicion and keeps everyone informed of progress. Moreover, good communication breeds trust, a commodity that must be hoarded. For that reason, the team must include members that are good at communicating.

If your firm had to close, would you be able to assemble a team that had these traits?

 

Don’t waste your time trying to control the uncontrollable, or trying to solve the unsolvable, or think about what could have been. Instead, think about what you can control and solve the problem you can solve with the wisdom you have gained from both your victories and your defeats in the past.  – David Mahoney – Author

 

Now is a good time for all firms to conduct a quick self-assessment. Here are 5 areas that, if carefully examined, combine to provide an accurate preview of what the future has in store for your firm.

1. Turnover, any unexpected turnover is a sign of potential trouble. Law firm leaders should regularly (monthly) monitor turnover levels with a process that quickly identifies any material uptick. Rapid change is destabilizing, even when there is an excellent business explanation. When spotted, decisive action in one form or another is likely in order.  What does your turnover pattern look like over the past 36-months?

2. Dissatisfaction, this metric is a key indicator of business risk. A growing number of law firms find significant management value in systematically monitoring the satisfaction of their lawyer and non-lawyer employee base. And with good reason,  growing dissatisfaction is an indicator of future tourble. Do you have growing dissatisfaction in your firm?

3. Falling profitability, can quickly lead to stress for any business. I am not a believer in the Profits Per Partner (PPP) metric as a be-all-end-all; but if your law firm is paying progressively less for the same performance, it is at risk.

There are a numer indicators of declining profitability besides the exalted PPP metric. These include:

  • Falling productivity
  • Loss of a key client(s)
  • Increased aging of payables
  • Increased aging of receivables
  • Falling client billing

How is your firm’s profitability holding up?

4. Debt, an increased use for operations is a clear sign of stress.  Most law firms use some amount of debt, whether to smooth out collections cycles with a line of credit, or to finance growth and fixed asset purchases.  Any firm increasing its use of debt to cover basic operating obligation has embarked on a treacherous path.

5. Litigation, of any type,  against the firm can be enough to create problems for a law firm. Monitoring the frequency and size of claims against the firm is a must. If your firm has seen an uptick in claims activity, careful examination by leadership is essential.

The thing about organizational risk is that the sooner potential trouble is identified the greater the probability that a viable solution can be identified and implemented. The more serious the trouble, the greater the need for outside support which can bring an unbiased perspective.

Is your law firm at risk????

Following up on my recent post on the matter, I had the opportunity to discuss the lessons other law firms can learn from the Dewey LeBoeuf collapse and indictments with Colin O’Keefe of LXBN. In the video interview (click here), I explain what law firms can take away from the situation and what Dewey really should’ve done.

A lot has been written about the indictments handed down against the former Dewey leadership. To review, they are accused of manipulating the Dewey books and falsely representing Dewey’s financial condition, presumably for the purpose of keeping the Dewey ship afloat when it started taking on water in 2008. Unfortunately for these former leaders and the multitude of people and companies hurt by the Dewey demise, the shenanigans didn’t stop once the crisis of November 2008 was weathered. If the indictments are to be believed, the questionable conduct only ended as Dewey descended into bankruptcy.

Dewey’s problems went beyond a cooking of the books. Its strategy was suspect from the beginning and its tactics, including guaranteeing the compensation of partners right and left, were nothing short of mindless. When the Great Recession unfolded in the fall of 2008, the leadership at Dewey engaged in a DIY restructure, a fatal mistake. At this critical time for Dewey, true leadership would have recognized the seriousness of the problems, sought out expert assistance on how to fix them and then taken the needed steps, however painful in 2008, to fix them at their roots. Unfortunately, Dewey’s leadership failed and the rest is history.

Why did Dewey’s leadership fail so badly?

Ego. Steven Davis, Stephen DiCarmine and Joel Sanders did not ascend to their management positions without having self-confidence. Self-confidence is a good thing in appropriate doses. Unfortunately, their senses of self worth caused them to think they could bring an international law firm with 3,000 employees through the financial crisis of our time. They were incapable of understanding and managing the task at hand. A tempered hubris may have saved Dewey and themselves.

Fear. When facing the first crisis in November of 2008, no doubt they feared how Dewey’s banks, the partnership and the legal market would react to bad news. Underlying these fears was a probable concern that the firm was not strong enough to avoid chaos, a “run on the bank” and ultimate failure. They also probably feared for their jobs and their income. Rather than move beyond their fears to seek a lasting solution, however, management attempted to patch problems and allegedly lied so they could buy time.

Inexperience. Management’s inexperience in law firm restructuring undermined Dewey’s chances, especially because management did not turn to outside professionals. Without the skills and judgment of someone who had restructured law firms previously, management was temped to consider acts that proved ineffective and now leave them indicted for committing fraud. Their inexperience lead them to the edge and beyond, places they did not need to go.

Fear of Accountability. Dewey was formed in October of 2007- the culmination of a strategy devised by a management team that found it staring down failure a year later. At that point, the proper course was to design a lasting solution and describe it in a direct and sober conversation with Dewey’s banks and the Dewey partners. Unfortunately, obtaining buy-in was not assured and the conversation would likely have subjected the management team to criticism if not removal. Beyond November 2008, after the first books allegedly were cooked, the management team faced consequences scarier than criticism and a palace coup. Their responsibility for Dewey’s predicament, and their desire to avoid accountability, solved little, left Dewey ruined and resulted in their indictments.

Weakness. In times of crisis, tough decisions often must be made from an array of less than ideal options. Many times the best decision is not the easiest or the most popular. But it still must be selected. Making that decision-the right decision-takes courage. In November of 2008 and later, when tough and unpalatable options were presented, the courage needed to make the right decision was lacking. When mettle was required, weakness prevailed.

In the fall of 2008 the Great Recession hit and many businesses, including law firms, struggled to survive. While Dewey was not the only one to fail, its leadership did not give it a chance to survive. During that same time other large law firms faced dire consequences but managed through it due to great leadership. Wouldn’t you rather have those kinds of leaders?

 

 

 

One bad apple spoils the whole bunch. Various

 

Seth Godin (who you might consider following if you don’t already) had a great and very short post recently.

The essence of the post, translated to law firm business, is:

You must routinely and relentlessly monitor the quality of the individuals that comprise your law firm.

Just as the old fish will eventually have negative impact on business at the fish market, a few stale or stagnant individuals can drag a firm down. Anyone identified as not reflecting the attributes appropriate for building (strengthening) your firm and its brand —  internally and externally —  must be converted or removed.

This process should not be inhumane or reactionary. Successful law firms communicate who and what they are to all concerned, on a daily basis.

We’re not suggesting this is easy. It is not. It is critical that hiring mistakes be dealt with promptly. Personnel (lawyer or non-lawyer) who drift from firm standards deserve an opportunity for corrective change; in the absence of that change,  they have to leave.

Any other approach threatens the future of all.

Does your firm let rotten fish spoil the lot?

 

Last week’s indictments of four individuals formerly involved in Dewey LeBoeuf’s management reverberated through the legal industry. The reactions were varied. Some commentators surmised that the indicted were destined to such fate given the spectacular demise of Dewey. Others noted that the indictments were different since the alleged perpetrators gained no financial reward but instead simply tried to preserve a firm facing catastrophe. And others have observed the human tragedy associated with the indictment of a minor cog in the Dewey wheel, noting the tactics prosecutors use in order to fry the bigger fish.

Not heard in the indictment’s aftermath was any blame directed at outside advisors that steered the Dewey Four where they otherwise would not have gone.  No, it seems like any mess made was home grown.

Regardless of one’s view on the indictments, there is a lesson to be learned from the current predicament of the Dewey Four. Whatever each individual’s role in the acts that have caused the District Attorney to pursue prosecution, it is clear that all were involved in a high-risk endeavor as to which none were well suited. Giving each the benefit of the doubt by assuming that they sincerely tried to solve a crisis for the greater good, none were capable of dealing with the transitional issues associated with a law firm in distress.

Some lessons already identified: don’t cook the books; don’t communicate by emails; and don’t naively think prosecutors have no agenda. No doubt these “lessons” have their utility. But the simplest lesson learned from the Dewey indictments is that do it yourself law firm restructuring is fraught with peril.

The alleged conduct leading to the indictments can be traced to Dewey’s excessive bank debt and its decision to refinance through a bond offering.  Alleged false statements in connection with the refinance and the efforts to comply with bank loan and bond covenants reflect an internally designed, or DIY, restructuring.

Unfortunately for Dewey and many firms before it, an internally designed restructuring rarely works.  In a DIY law firm restructuring:

Those That Try to Solve the Problem Often Had a Hand in its Creation. Too often a DIY approach enlists some or all of the law firm managers that created the issues that require solutions. These legacy managers may be predisposed to stay away from the kind of dramatic steps needed that reject past strategies. Based on the reports of Dewey’s demise, at least three of those indicted were unlikely to eschew the steps that placed Dewey at risk. A third party not invested in the past can more capably deal with the present and future.

Leadership May Have Conflicts. Self-interest often clouds the judgment of law firm leaders. Even while in the midst of a “bet the company restructure,” a leader’s own financial imperatives are similar to the law firm’s owner populace. “Missing budget” not only has severe repercussions to the ownership group as a whole, but it can directly impact the managing partner’s pocketbook. Since the typical law firm leadership team fears the results of bad news more than the bad news itself, the pressure to deliver good news can be immense and unduly influence leadership’s judgment. An outside advisor whose financial interest does not depend on the outcome is more likely to give desperately needed unbiased advice when a law firm faces the precipice.

Leadership is Inexperienced and Its Judgment Untested. Most law firms have never faced a challenge like Dewey’s, and that type of crisis is no place for on the job training.  The lack of experience can lead to decisions that may seem good at the time but prove less so later. Sound judgment is critical in any restructure and a first timer seldom has the necessary perspective to consistently exercise the kind of judgment required. This lack of perspective is compounded by leadership’s penchant for keeping sensitive issues tightly controlled. In contrast, an advisor steeped in law firm restructures has none of these limitations, and can prove extraordinarily helpful to the management team needing “another voice.”

Adopting a “Do it Yourself” approach to law firm restructuring is a close analogy to a lawyer representing himself—an adage inducing approach that universally is scorned as unwise and ineffective. In law firm restructuring, a law firm leader seldom gets a “do-over” when the risk of a fatal mistake is greatest. And as is evident in the case of the Dewey Four, the adverse consequences from unguided decision-making can linger for years. Would you DIY your law firm restructure?

 

 

 

Never look down on someone unless you are helping them up. J. Jackson

 

I have been troubled ever since I read the  Above The Law article titled Dewey Know Why Patton Boggs Is Consulting A Top Bankruptcy Lawyer? 

I have no issues with, and in fact support, probing the challenges and changes that are so prevalent in our industry; but what has bothered me is the degree to which much of the commentary around firm transitional challenges hints at a preoccupation with watching a train-wreck in progress.

More to the point — I wonder how and why one of legal’s premier information outlets finds humor in another organization’s problems.  Two parts of the post bother me.

First, there was this. . .

“Maybe the floundering firm of Patton Boggs can actually right itself. It doesn’t have the Biglaw mark of Cain, namely, a name that lends itself to bad puns — e.g., Dewey and “do we,” Howrey and “how are we,” and Thelen (rhymes with “feelin’”). In hindsight, Patton Boggs did the right thing when it dropped George Blow’s name from the marquee and went from “Patton Boggs & Blow” — a name we would have had a field day with — to simply “Patton Boggs.

(Yes, Patton Boggs has some pun potential. But there are only so many “bogs down” and swamp-related plays on words to be had. Yes, even for us.)”

Really? The not so veiled linking via childish name-play of a firm that is clearly wrestling with transition with that of a couple of high profile failures strikes me as the first low blow.

And secondly when “reporting?” on the firm’s retention of Al Togut, who was/is  bankruptcy counsel to Dewey LeBoeuf, the article states . . .

“Or maybe Patton Boggs wants to merge with Togut, Segal & Segal? Over the past few months, Patton Boggs has been talking about its exciting strategic discussions with some unknown New York firm. An 18-lawyer bankruptcy boutique sounds like the perfect lifeboat for a Biglaw firm with more than 350 attorneys.”

The cheap-seats seem beneath the stature of Above the Law.  Personally, I find much of its content to be interesting, well written and informative. But it is my opinion that this post has the ratings-grab tenor of sensational news / sports talk radio.  This kind of commentary is potentially destructive.

Patton Boggs, like so many law firms over the last few years, has confronted numerous challenges. The firm has been attempting and continues its efforts to stabilize itself — for the good of its partners, associates, staff and clients.

Before we focus on the humor in clever headlines, let us not forget that the firm is home to approximately 600 lawyers and supporting personnel. The issues the firm is facing could have a dramatic impact on the lives of many.

This is not to suggest that the struggles of Patton Boggs, or any other firm, should be swept under a rug and not spoken of.  But it is one thing to examine, analyze and offer insight.  It is another to construct puns that insinuate impending failure.  Having managed the liquidation of an AMLAW 100 firm, I don’t find anything amusing in this type of reporting.  Do you?

 

History is littered with failed law firms. Dewey, Howrey, Thelen and most recently, the Canadian law firm Heenan Blaikie, succumbed for various reasons. In the case of most of these failed law firms, the decision to cease as a going concern was largely reactive as they fell apart at the seams. While no troubled law firm management team wants to prematurely give up on pursuing a go forward strategy, too few struggling law firms objectively assess “thumbs up/thumbs down” when the time is right. More often law firm management fights for survival until the “run on the bank” forces the decision to close. If circumstances force a firm’s closure, as they did in the most recent spate of law firm failures, the financial repercussions for creditors and owners alike can be severe. As significant, an uncontrolled closing can adversely impact a firm’s people and its clients in profound ways.  And as we were reminded by the indictments handed down from Dewey, survival efforts can extend into an area where no one wants to go.  A closure, designed with foresight and executed while still in control, can prove far better for all parties concerned.

A pre-emptive decision to close, rather than wait for the unraveling of the firm, is rare. For any law firm that is troubled, asking the “closure” question early as opposed to later is critical. When, you may wonder, should this question be asked?

A preemptive decision to close should be explored when the following circumstances (or many of the following) exist:

The Thrill is Gone and Seems Unlikely to Come Back. The loss of dynamism within a firm is not always obvious, but it can manifest itself when departures or other reversals have continued for so long that the hill is too steep to climb. In most instances, when the decline has continued for a while, it is unlikely to be reversed quickly. Seldom is a “surge” strategy available. Bottom line, momentum has been lost and there is nothing on the horizon to suggest that it will be regained in the short run.

A Long-Term Restructure is Uncertain. A problem with law firm restructuring is that tangible success is needed in the short-term but usually not realistic except in the long-term. Valuable assets (lawyers) can be impatient and in the absence of immediate results, they look around to leave. Solidarity among the troops over an extended period is difficult to achieve and is uncertain.

Remaining People, Offices and/or Practice Groups Are Attractive. Even while a law firm slides into decline, many of its component parts can retain their market value. A troubled law firm proactively deciding to close can work with its attractive groups to place them in a way that minimizes financial loss and enhances the well being of the greatest number of its people.

Real Estate Market is Favorable. A huge lodestone around the neck of any troubled law firm is its real estate portfolio and its associated financial obligations. When the economy is robust and real estate dear, as it is in many markets today, unloading a firm’s real estate with little to no negative financial consequence is more likely. Next to “location, location, location” being a fundamental of real estate investing is the need to think “timing, timing, timing.” Unloading real estate at a time when values are up may be an opportunity that needs to be seized.

The Firm’s Owners Have Not Panicked. If a firm’s owners have not yet hit the panic buttons, it is more likely that a rational plan to “sell-off” people, practice groups and offices as “going concerns” can be discussed, planned and pursued. In some instances, whole offices can be transferred to another firm willing to assume real estate and operating leases. Even when that is not possible, developing a cohesive strategy with the owners to negotiate for new homes gives the firm a chance to not only avoid a Dewey-like unfinished business future, but also enhances the chance to enjoy a return of capital.

Deciding when to close a law firm is never easy.  To do so preemptively takes a great deal of courage, especially since the competitive nature of lawyers shuns any action that can be interpreted as “giving up.”  But in these times of challenge for law firms, it is an option that must be explored.  Would you consider a closure before you were forced to?

 

FocusLast week’s blog Law Firm Growth: Maintaining a Sensible Strategy (Part One) reviewed the uneven success from the non-organic growth tactics of lateral hiring and mergers. Also reviewed were some of the unspoken motivations behind lateral and merger growth. Despite noting these non-strategic reasons, last week’s blog concluded that these two popular means of growth continue to have relevance and value, but only if exercised with discipline.  Through discipline, a firm maximizes the likelihood of success and minimizes attrition, the greatest challenge to an effective growth initiative.  Such an approach requires a firm to:

Be True to the Firm’s Strategic Plan.  Strategic plans typically are developed when thinking is clear, unhurried and after healthy considerations of a firm’s strengths, weaknesses, challenges and opportunities. Yet strategic plans lose their value if they are not followed.  Thus, it is senseless to pursue lateral or merger acquisition tactics that ignore the firm’s strategic plan. For law firm management, it means confining the lateral and merger efforts to opportunities that are squarely consistent with the firm’s strategic plan.

Eschew “Opportunistic Growth” if it Veers From the Strategic Plan. From time to time a “great deal” arises because a group of lawyers or another firm’s office look for a new firm. These opportunistic transactions, attractive in isolation, should be avoided if they do not fit within the firm’s strategic plan. Excitement over hiring a “big name” should not cloud a firm’s judgment and cause it to turn away from its strategic plan. It may prove difficult, but a disciplined approach to growth will avoid hires that undermine the firm’s soundly developed strategy.

Do Not Hire Laterals or Consummate a Merger if An Integration Plan is Not Fully Developed. Doing deals that add lawyers can be fun, exciting and invigorating. Assuring that recently added lawyers fit within the firm and can thrive is harder to do and not as much fun. Even more difficult is making certain that existing lawyers are actually successful in creating leverage from the new additions. If a well thought out integration plan is not developed contemporaneously with the plan for consummating the transaction, consummating the lateral hire or merger opportunity is premature. If an integration plan is not developed prior to bringing in the laterals or merger candidate, the opportunity for effective integration will be lost. More importantly, because the integration planning process can test the suitability of the additions, a failure to develop the integration plan prior to agreeing to the additions may result in bad additions and/or unwanted legacy attrition.

Reject “Churn” as a Natural Consequence of Growth. So much of lateral hiring and merger activity is followed by attrition, either among additions or among legacy personnel. The high level of attrition generally signals one of three things.

  • First, the attrition can suggest a view that many of a firm’s existing people were not “keepers” anyway and the new additions are not only good replacements but also upgrades.
  • Second, the loss of people may suggest voluntary departures due to the failure to adequately integrate the new with the old, and elements among either group feel unwanted and leave.
  • Finally, attrition can mean that the new additions were oversold.

Significant attrition for any one of these reasons is unacceptable.  Circumstance one-the winnowing out of the “non-keepers” represents deferred maintenance and delaying the culling from the herd until after an acquisition squanders the opportunity for momentum.  Losses due to reason two suggest a lack of attention to integration-an example of indifference or laziness.  And losses because laterals or mergers don’t work out, a consequence reported by American Lawyer and others as common, simply demonstrates that diligence, discipline and wisdom were lacking with respect to the additions in the first place.

As much as one desires to turn back the clock to a time when organic growth was the norm, it won’t happen.  Lateral hiring and mergers are here to stay.  To make these tactics effective-far more effective than history has shown-firms need to be more sensible.  The steps are not difficult, but require discipline.  Do you have the kind of discipline to pursue non-organic growth sensibly?