Law firm growth over the last thirty years has been constant. Through economic ups and down law firms have pursued growth, by growing organically, hiring laterally, doing mergers. For all the effort by law firms to grow, it is surprising that the resulting law firms are not much larger today. Setting aside the franchise like Swiss Verein approach to growth, attempts to grow have failed to Super Size law firms for one major reason: attrition.

Lateral Hiring and Mergers and Their Uneven Track Records. Organic growth through the hiring of law students and grooming them to be the future generation still happens but takes a back seat to the more instant gratification forms of growth–lateral hiring and mergers. Yet as the American Lawyer has recently reported, lateral hiring is not nearly as effective at improving a law firm’s profits and thus must be understood for the other contributions they provide. Moreover, evidence exists that many lateral hires perform far short of what was promised or expected. Growth from mergers is disappointing as well. As I have reported previously, approximately fifty percent of all mergers turn out to be failures. In light of the American Lawyer study, and the poor track record from mergers, why do law firms continue to pursue these tactics over the organic method?

Non-Strategic Forces Behind Growth. The motivation of any firm in the pursuit of a particular growth strategy requires a study of the firm, its management’s challenges and its overall needs. But at the risk of generalizing, four non-strategic things prod law firm management into growth by non-organic methods. First, management wants to appear dynamic and aggressive rather than passive. A caretaker regime will lose support over time. Second, rank and file partners demand action. They want to be a part of a vibrant and exciting place and any shortfall by inaction can in itself be destabilizing. Third, non-organic growth helps defend a firm against unrestrained raiding by other firms. If a firm refuses to engage in the non-organic growth strategies, management may fear that a perceived lack of vibrancy may result in its best assets being picked off by other firms. Fourth, limiting itself to organic growth does not provide the firm with the more immediate results commonly desired.

Abandon Lateral Hiring or Mergers? Pursuing lateral hires or mergers for these reasons is not strategic. Even though few firms will cite one of those four reasons as the rationale for a non-organic strategy, these unspoken motivations behind growth can cause management to rationalize its actions that place an undue emphasis on non-strategic lateral hiring or mergers. And unfortunately, for most firms, these pressures can be found as a subtle influence in the growth strategy pursued. So given these dynamics, should a firm simply forego lateral hiring or mergers in favor of old-fashioned organic growth? As long as the lateral hiring and mergers are pursued rationally, the answer is ‘no.’  But, given the track record of most non-organic growth it does beg the question about whether firms would be better served in directing greater energy towards initiatives designed to strengthen the existing organization?

Even with these influences, a law firm can employ a number of sensible steps to minimize large scale attrition and make its lateral and merger strategies more effective. In next week’s blog, the sensible steps to make lateral hiring and merger tactics more effective will be reviewed.

 

History tells us that Heenan Blaikie’s failure was not an isolated event. It was preceded by more publicized failures, like Dewey, Howrey and Coudert Brothers, which failed due to a combination of their own unique reasons and maladies found in all law firms.  For good reason, many in Canada and the US note the challenges law firms face today.  Heenan Blaikie will not be the last law firm to collapse-others will follow.

As I wrote in There But for the Grace of God, go I, the Heenan Blaikie playbook was not all that different from other law firm playbooks. Heenan Blaikie did not fail from a watershed event that took it down–its bank did not call its loan and cut off its liquidity. Nor was its business strategy out of the mainstream. Rather, it experienced a dip in its financial performance that many of its partners refused to stay around to remedy. The financial challenges that sank Heenan Blaikie have been attributed to a changing legal market in which greater competition, fewer high-dollar deals and increased client expectations made it tougher to drive the kind of profits its partners expected.

If Heenan Blaikie was not much different from firms with similar profiles, how can a firm avoid a Heenan Blaikie? There is no magic potion that will guarantee a law firm a steady and prosperous future. But there are a number of things that can be done to improve the odds, including:

Build from Within. As much as possible, make a law firm’s growth organic. Invest in a law firm’s good clients, exemplary people and strong areas of expertise. These areas of opportunity can be as lucrative as other growth strategies and the attention dedicated to organic growth is deeply appreciated by the people that define a firm’s culture.

Temper the Enthusiasm for Lateral Hiring, Mergers and Multiple Offices. Lateral hiring, merging with other firms or opening offices are popular growth tactics but they can be destabilizing. As Robert Denney recently noted, mergers fail half the time.  And the American Lawyer suggests that lateral hiring doesn’t guarantee higher profits. More importantly, none of these tactics provide a firm with the glue needed in time of crisis but instead add components that pull at any adhesive that exists. A firm concerned about a Heenan Blaikie outcome will compliment each lateral hire, merger or office opening with strategies directed to cement each addition to the firm.

Constantly Monitor Performance. Heenan Blaikie may have closely monitored the performance of its practice groups, its offices and its lawyers, but even if it did it was not able to avert its disaster. Nonetheless, there is little hope for a law firm if it does not constantly monitor the performance of its business segments. Close performance monitoring puts a firm in position to recognize its problems. And recognition is the key to any saving action.

Assume Business Will Decline-Develop a Contingency Plan. There is no reason to assume that business will always increase. Every firm should have a contingency plan that identifies likely areas of risk and how the firm plans to deal with those risks when they arise.

Respond to Signs of Decline. The good old days are over. Law firm management does not have the luxury of allowing a performance decline to right itself or to cycle back around. Unfortunately, with the heavy reliance on lateral hiring and mergers, law firms are populated with many lawyers that give their self-interest primacy.  As Heenan Blaikie found out, lawyers with that attitude will not stick around to see a turnaround through.

Develop a Succession Plan and Future Leaders. Numerous reports on the Heenan Blaikie story recount Roy Heenan’s history as the primary firm leader and his ability to keep his firm together. Many of those same accounts lament a leadership vacuum that arose after he stepped down. When a restructure was needed, new management could not pull together the disparate segments necessary to make one work. It is clear that Heenan Blaikie failed to have strong leadership that could take Roy Heenan’s place when needed most. Law firms hoping to last many generations will systematically find, train and prepare future leaders to lead in the next generations.

What else could Heenan Blaikie have done better?

 

 A house divided against itself cannot stand. A. Lincoln

 

 

When you see the word “Culture” used in a discussion about today’s law firm environment, what comes to mind? A metric defying intangible that, though referenced in reverent tones in firm literature, bears little relevance to the bottom-line? Or, as a palpable reality that impacts human resources?

Or as something in-between?

Here’a a working hypothesis for today’s conversation: you can’t help it – every firm has a culture. However, for law firm leadership the concern should be less about good versus bad, and more about ensuring a culture that is aligned with the aspirations of those wth whom you wish to share the advernture of partnership.

This seems worth discussing, given the excessive rate of partner churn in Big Law, highlighted once again in the recent American Lawyer piece on partner turnover.

Partner Turnover, Growth and Stability

What causes a firm like K&L Gates, according to American Lawyer, to be the “number one gainer” of partners in 2009, but in 2011 they were the “number one loser” of partners, and the “number two loser” of partners (percentage wise) for the five year period 2009-2013?

I suggest the answer lies in firm culture.

But as I mentioned above, this is not a good versus bad issue. Culture – as fuzzy as it sounds — is how a firm is day to day. What its behaviors are, what it feels like and what it cares about. There is a strong correlation between a firm’s culture and what it most values. Not what it says about these things on the website or in recruiting materials; but where investments are made and stakes put in the ground. Eloquent copy describing a shared commitment to client service, community, collegiality, and collaboration are common. There is often a world of difference between what the website says and what the law firm is.

In fact, a keen focus on certain of these firm characteristics may make a culture a better fit for one individual than the next; but there is nothing inherently wrong with any of them. Cultures vary greatly. For example:

  • One firm may be family orientated, committed to a serious balance between work and personal life in an environment that provides quality services to clients while earning a reasonable level of income;
  • Another firm might be committed to driving the greatest level of profitability possible; in this culture there exists the expectation of a continual sacrifice of personal time in order to yield those profits.

There are obviously countless variations between these two extremes; but the point is that they are both cultures. Neither is good nor bad. A person attracted to one is not likely to be attracted to the other. It is reasonable to think that one landing in or recruited into a culture that does not align with personal values and objectives will not last long in such a firm.

Without regard to the type, firm cultures range from strong to weak. Those with strong cultures have a high degree of consistency between their behaviors, policies, procedures and practices. They hire, train, recognize, promote and compensate in ways that further strengthen that culture.

Weak cultured firms are the opposite. There is little consistency in what they do and how they do it.

Strong Culture Is No Accident

A strong culture does not just happen. Leaders of those firms have an understanding of what is important to partners, and direct the development of the firm in a manner that progressively builds on and strengthens culture.

A strong culture helps shape and define successful hiring (hires that further strengthen the firm for an extended period of time) at all levels of the organization. To maximize success in hiring, a firm must understand its own culture and have the skills to draw out the aspirations and values of prospective hires.

So back to K&L Gates and firms like them — the more rapidly a firm grows the more difficult it is to maintain culture and hire in a manner that consistently reinforces that culture. Think about the challenges a firm faces when it is on the acquisition fast track. Each incoming group of laterals brings varied practice and cultural make-ups. At the same time injecting lateral hires with varying aspirations . The successful integration of those firms and individuals is very difficult, if not impossible.

So my theory for the day is two fold; firms that have a strong culture and knowingly recruit individuals and groups with values and aspirations that align with that culture will enjoy the benefits of a higher retention rate. Those that have a weak culture (probably synonymous with but not exclusive to rapid growth) will continue to have a high rate of turnover .  And, if you are going to grow extremely fast, you’d better be extremely profitable…because compensation is likely to be the only glue that will hold those hires in your firm.

 

Your thoughts?

 

Last week’s decision by major Canadian law firm Heenan Blaikie to dissolve received a lot of coverage in the Canadian press as well as among legal commentators. Yet discounting its demise as being peculiarly Canadian is unwise. The market and competitive dynamics that contribute to a Canadian law firm’s success or failure are very similar to those confronting US law firms. Canada’s legal market is more like the US market than not.

Some law firms collapse due to circumstances uniquely their own or fall victim to an unexpected outside event that impacts a wide swath of the industry. Heenan Blaikie’s fall was not about an ill-conceived merger, illegal behavior like Dreier, or a direct result of an overtly macro economic slug to the gut like the Great Recession. Rather, most post-mortems attribute Heenan Blaikie’s dissolution to the increasing strains that are imposed on law firms generally, including heightened client expectations, increased competition and the dearth of high dollar legal work.

It is too early to write the definitive story on why Heenan Blaikie collapsed. Some finger pointing has begun, but it is unlikely that any one issue was “the reason.” Heenan Blaikie failed because the legal services industry changed around it in multi-dimensional ways and it did not adequately respond.

Nothing about Heenan Blaikie’s management, strategy or law firm DNA made it more susceptible to failure than the next firm. After all, by most accounts Heenan Blaikie embarked on many of the same initiatives or strategies pursued by a large cross-section of today’s law firms. So much of Heenan Blaikie can be found in other law firms that hope to live on. Here are some Heenan Blaikie characteristics that will be found in its peer firms, whether “peer” is limited to firms in Canada or expanded to include firms in the United States:

Conservative Operations. Viewed from afar, Heenan Blaikie appears to have operated like most law firms and was not guilty of falling for a “get rich quick” scheme. Like many major law firms, it attempted to provide legal services to commercially based clients in a highly professional manner befitting of the fifth largest law firm in Canada.

Growth by Lateral Hires and Opening Multiple Offices. Heenan Blaikie hired lawyers on a lateral basis like most firms its size do these days. Perhaps it placed too much value on laterals that were exiting government service but it would not be the first law firm to see value in that profile. And it opened offices in numerous cities, having eight offices at the end. Its growth strategy was pursued with the expectation that the new partners and offices would leverage their deep relationships into greater business for the firm as a whole.

Stiffer Competition For Fewer Deals. Many reports attempting to explain the Heenan Blaikie outcome cite to the nationwide dearth of corporate transactional work and the increased competition for the few deals available. Because the shortage of high-end corporate deals was market-wide, other firms no doubt were impacted in a similar way.

Greater Client Expectations. Canadian law firm prospects have changed in recent years with clients taking steps to control legal expenses. Heenan Blaikie felt the consequences of client legal expense control initiatives and these new client expectations added to the financial pressure it experienced.

Limited Control Over Lawyer Departures. As the financial pressures mounted, a trickle of departures could not be stemmed and turned into a torrent. Heenan Blaikie faced the one thing feared the most: a run on the bank. Having no way to counter the unrelenting exodus, Heenan Blaikie’s end was inevitable.

Heenan Blaikie was “everyfirm.” Reported personality clashes, a vacuum of leadership, a tardy effort at restructure may have provided the spark to the explosion, but there is nothing about the firm that makes it unique. Unfortunately, its closing does not fill a yearly quota of failed law firms and could be followed by others. Like John Bradford before them, many law firm leaders may be counting their blessings. Only law firms with capable leadership will make sure that the similarities end there and that they do not go forth as did Heenan Blaikie.

How are you going to prevent your firm from ending up like Heenan Blaikie?

 

“Focusing is about saying No!”   Steve Jobs

I was reviewing an article regarding the 13th Annual America’s Best Corporate Law Firms study and was struck with how consistent the same names appear on this list — year in and year out. Even if you haven’t seen it, chances are you can name many of the firms that have a stranglehold on a position on this enviable list.

It begs the question for firms seeking to achieve a similar position — How did these firms secure their position?  And what will it take for your firm to capture a similar position?

The answer is simple……….. Focus

Firms that hold dominant market positions have found a way to align who they are and what they do on a daily basis with the market position to which they aspire.

Dominant law firms hire, spend, acquire, merge, and compensate based on one question: Does this investment align with our strategic focus?  If it does not, it eats away at the desired position…and weakens the law firm.

The path to dominance is easy to define in theory.  Identifying and navigating the right path for your firm is much more challenging in practice.  A thousand good ideas, disparate aspirations and diverse views combine in an assault against focused and disciplined decision-making.

Without unwavering focus on the desired market position, every good idea seems worthy of investment.  Any opportunity to expand can appear to support growth.  Every opportunity can seem to be a good one; however, at the end of the year you find yourself having made significant investments, but no closer to your firm’s desired market position.

And the discussion is not limited to aspirations of a position of market dominance. The principle applies to whatever your aspirations are. Without disciplined focus your odds of achieving what you would like to achieve are greatly diminished.

Here are the guideposts that lead to the aligned law firm…and will help you chart your firm’s course to stability, the profitability you desire, and yes — market dominance.

  • Identify the market position to which you and your partners aspire.  (You can guess…but this is most effectively accomplished through a series of interviews/discussions designed to identify your shared vision.)
  • Audit your expenses and define which move you closer to the position you desire.  (Whatever they are – office space, infrastructure, people — begin now to create an expense ledger that is devoid of the things that do not move you toward your desired market position.)
  • What is lacking…in terms of talent, location, support and infrastructure?  Build a plan that moves you from where you are today to where you need to be…and invest appropriately.
  • Consider each decision in this context – will this move us closer to the market position we’ve targeted?

 

Is your firm on its way to the top?

Let me hear from you!

The media reports about Canadian law firm Heenan Blaikie present a classic case of a law firm facing transition. The well-known and regarded Canadian law firm has seen its foundation shake as lawyers depart, reports of dropping business abound and speculation mounts about merger or dissolution. Without being on the inside it is difficult to identify the reasons for its struggles. One report suggests that it has been caused largely by macro-economic factors that have reduced deal flow.  Whether Heenan Blaikie can maintain control during transition remains to be seen.

Even though Heenan Blaikie is north of the border, its travails are worth thinking about. Law firm dynamics in Canada and the US are not that different. For the most part, both countries’ typical law firms are quiet about business affairs and only disclose good news. In both countries law firms compete for a limited amount of business and year in year out success can be subject to the ebb and flow of client engagements. The loss of business and attorneys is always a risk and management of law firms in each country tries to minimize non-strategic turnover. And in both countries, setbacks can get out of hand and accelerate with the loss of rainmakers, practice groups and offices—sending a law firm reeling.

Based on recent reports, Heenan Blaikie is deep in its restorative steps. It has been communicating with partners, has hired a law firm restructuring pro, and is looking at options including a merger if one is presented. Any law firm in transition like Heenan Blaikie must act quickly to maintain or regain control over its future. Certain basic steps to take include:

Solidify the Firm’s Relationship With Its Most Important Lawyers. A successful law firm enjoys its success only if its most valuable lawyers have a reason to stay. When finding itself in the midst of transition, law firm management should immediately meet with the most valuable lawyers in the firm (rainmakers, charismatic leaders and respected practitioners), seek their input and deliver a calming message. Not only does the overture reflect calm on the part of management, but also it shows the firm’s core that their presence is valued.

Seek Professional Help. Few law firms facing serious transition have been through such a crisis previously. Unfortunately, a law firm facing transition will not get a “do-over” if it succumbs after missteps. Experienced restructuring help with a track record of solving law firm problems is a must. General restructuring professionals, while usually versed in crisis management better than existing management, will still be unprepared for dealing with the nuances a law firm restructuring presents.

Understand the Underlying Reasons for the Crisis and Seek Stability. Communicating with your lawyers is critical. It is from your people that the reasons for the current challenge will be heard. You likely will also receive suggestions on how to arrest the slide. Listening is a great quality, but not every issue is going to be material and not every suggested solution will be effective. Consequently, management must triage the issues and focus on the steps that will stabilize the firm.

Develop a Plan that Remedies the Problems. Using what was learned, sound management should develop a restructuring plan that is realistic in terms of action steps. Trying to accomplish too much can destroy management’s ability to implement the most important goals. Because there may not be a second chance, energies should be focused on implementing a plan that has the greatest chance to succeed.

Rally the Troops to Support the Plan. At the outset, management met with the most valuable lawyers to convince them that the firm’s future was secure. Once a plan is developed, management should reconnect with those same people to get their feedback to the plan. Armed with the feedback, management should revise the plan if required to gain the needed buy-in. With the revised plan in hand, supported by the greatest number of people, management should execute the plan.

Whether a law firm effectively deals with transition turns on many things.  Early recognition, decisiveness and communication are three keys that are important.  What other keys have you seen as important?

 

 For no matter what we achieve, if we don’t spend the vast majority of our time with people we love and respect, we cannot possibly have a great life. But if we spend the vast majority of our time with people we love and respect — people we really enjoy being on the bus with and who will never disappoint us — then we will almost certainly have a great life, no matter where the bus goes. The people we interviewed from the good-to-great companies clearly loved what they did, largely because they loved who they did it with. Jim  Collins

 

 

 

 

 

Not So Fast

 

 

 

Part 1 of this post reviewed the extraordinary attrition in law firms compared to well-run companies in almost any other business sector.  We looked at what some suggest are the drivers for this problem. In this post I want to suggest  a different perspective for your consideration.

A Closer Look at Partner and Associate Attrition

I hear many law firm leaders talk as if they have come to terms with extraordinary attrition  as a “fact of life.”  The bottom-line cost, as well as the drain on productivity and the psyche of the firm are accepted as part of doing business.

But in a marketplace that has seen more than 10,000 partner moves in 5 years and an even greater number of displaced associates, are we really willing to accept this as a function of working in the legal industry? We certainly should not be satisfied to simply chalk it up to being a price of running a law firm.

Something is fundamentally wrong and I’d like to suggest something else is at play…..

The churn is the predictable and natural byproduct of a conflict between the direction and goals of a firm on one hand, and the career aspirations of an individual lawyer on the other.

Some may suggest that the right set of handcuffs would slow the rate of movement, and minimize its cost, but does any firm really want to build barriers that bind dissatisfied lawyers?  This approach doesn’t work with trade tariffs, and it won’t promote the creation of successful, stable law firms.

A more practical approach begins with management  acknowledging and understanding just how critical career aspirations are when it comes to determining an individual lawyer’s long-term fit in a partnership.

It is this simple: attentiveness to the things the majority of your lawyers value most will breed stability and provide a solid foundation for growth. A recruiting process – associate and lateral – that begins with a clear understanding of the firm’s common values and shared aspirations is one of the basic building blocks of stability. Firms that begin here are on the road to less waste and greater retention.

That said, in any enterprise there will be individuals whose professional desires are in conflict with the organization. Smart leaders in healthy organizations strive to identify a mismatch, and facilitate an orderly transition that fosters a collegial relationship and potential referral source.

How about this for a point of discussion: is it possible for  today’s law firm to grow an organization around common values and shared aspirations?  And will this speak to the incredible rate of partner movement, and reverse the churn game?

I’d appreciate hearing your reply.

Last month, a large bankruptcy law firm in Michigan filed chapter 11, citing the fallout from the dissolution of another law firm. The irony of a bankruptcy law firm filing bankruptcy aside, its struggles show that any firm is susceptible to financial stress. In many instances, law firm stress leads to or follows a loan workout.

As was reviewed in Part One-Preliminary Steps and Part Two-Devising a Strategy, the unique nature of law firms and law firm loans requires careful study. But all the review and study in the world will not maximize the result if the implementation plan is any less methodical than how Part One and Part Two were approached. While every workout is different and no execution strategy will be like another, certain basic steps, outlined below, hold true when implementing the selected strategy.

Contact the Borrower. Having assessed the situation and consulted with your outside advisors, the next step is starting the dialogue with the law firm. If appropriate, contact can be relatively low key with the bank relationship manager contacting the law firm managing partner to request a meeting. When the situation has moved beyond the low key stage, contact may need to be initiated by your professional to the law firm management unless it is already represented by counsel, then the contact goes from professional to professional. In this communication, whether low key or of the more intense variety, it is appropriate to make any request for additional reporting or other deliverables. Anything other than the low key approach justifies asking the law firm to execute a pre-negotiation letter in which all parties agree that the discussions are confidential and not admissible if legal proceedings follow. This letter also typically protects the bank from later claims about oral agreements to extend the loan or provide additional financing.

Meeting with the Borrower. The meeting with the borrower is vitally important. It is almost always better to seek a consensual resolution of any issues and the tone of the meeting and the conduct of the bank can have a profound impact on whether this can be achieved. That means conducting yourself professionally, listening to your borrower’s position and striving to understand what it is telling you. Be respectful of your borrower-remember it was not that long ago that you were delighted that it was a bank customer.

Reacting to the Borrower. Once you understand the borrower’s position, deliver the bank’s position to the borrower clearly, firmly and without emotion. Listen to its response if there is one, and assess any reaction that can be gleaned from the borrower’s words, conduct and body language. Based on what you hear and observe, try to assess whether the borrower’s current management is up to the task. If you think not, consider whether you want to recommend that the borrower seek outside assistance. But do not recommend whom they should select. Finally, before the meeting ends, establish the bank’s expectations and deadlines.

Post Meeting Follow Up. Convene with your advisors after the meeting and decide on next steps. Your next steps should be selected after reviewing the bank’s original objective and plan. While there is nothing to prevent the bank from changing its objective or modifying its plan (especially if something said at the meeting suggests the plan is flawed), most often the original objective is sound so any tweaking will be to the plan. If so, evaluate any modification of the plan, settle on the final plan to be executed and then, implement the plan.

Taking the steps discussed in Parts One, Two and Three of The Bank Workout of the Troubled Law Firm Loan will prepare you for a law firm loan workout and position you as the give and take of the workout unfolds. Remember, your law firm borrower’s recurring assets (attorneys) depart the office every day. Whether they return the next day may depend on how successful you are in striking the right balance with your borrower.

What steps have you found helpful in implementing your workout strategy?

 

Recently, I was asked if I was going to fire an employee who made a mistake that cost the company $600,000. No, I replied, I just spent $600,000 training him. Why would I want somebody to hire his experience?                THOMAS J. WATSON SR.

 

 

How many lawyers have you watched move from one firm to another in the past year?  “The churn” as it has come to be known has become commonplace in the legal industry.

According to numerous reports, the average firm loses 20% of its associates per year.  And this is not a new phenomenon. This statistic seem to be relatively consistent for periods before and after the economic downturn and downsizing from 2007 to 2009.

The cost of the attrition, whether measured in terms of the bottom line or raw human drama, is extraordinary.  In term of dollars, on average, it costs law firms $200,000 plus to recruit, hire, train and replace the average associate. Compare this to the well run corporation, where turnover averages  2-3%.

The picture for partners isn’t any prettier. This article, by Michael Allen of Lateral Link, reports 2,000 to 3,000 lateral moves per year over the last 5 years. How successful have these moves been?  In short it is horribly unsuccessful. According to this post, a third of lateral partners leave their new home (for one reason or another) within three years. Almost half leave within five years.

The Reason For The Churn

There are a number of suggestions as to the root cause of such a high rate of attrition among law firms. These include:

  • The economy
  • Poor hiring practices
  • Overselling of individual value
  • Lawyers as managers
  • Overly aggressive recruiting from search firms

I’d like to suggest that something else is at play. (See next Tuesday for Part 2)

 

Like a lot of things, the workout of a troubled law firm loan is neither mechanical nor predictable. Facts unique to the situation guide a bank’s approach, and finding the correct strategy is as much art as it is science. But because the problem loan is not likely to resolve itself, the smart banker seizes the initiative and acts promptly.

As noted in Part One-Fundamentals and Preliminary Steps. it is imperative that a bank initiate steps designed to get a sense of its challenge. Generally understanding the task at hand prior to getting too deep into the workout is always a smart move. Indeed, having done so, the banker can then move on to assessing the level of risk and, on the basis of the risk recognized, creating a plan.

ASSESSING THE RISK

Documentation. Now is the time to review all the basic documents. Loan agreements (and any ancillary documents such as account control agreements), correspondence and the law firm constituent documents must be carefully reviewed. Does the law firm’s documentation waive and release an attorney’s unfinished business? What is the law firm’s current cash situation, future cash needs and the quality of any offset rights held by the bank.

Collateral Quality. You have already determined the extent of your collateral, but in this stage it is imperative to research whether others have competing liens, whether you are perfected in your collateral and the quality of the collateral that you hold. If you have a lien on accounts receivable, but they are over 180 days old, you may be less secure than you would desire.

Financial Statements. Your review should also include examining the most recent financial statements or other financial reporting from the law firm. If others are liable, review any financials in the file that they have provided. If you have the right to ask for updated financials, be prepared to make that request. Does the law firm appear solvent?

Relationship Quality. Assess the bank’s relationship with the borrower and anyone else that may be liable to the bank. Is the law firm’s management trustworthy? Does the law firm appear to trust the bank? Has the relationship become strained and if so, what are the reasons? Are there steps that can diffuse the strained relations? Is the management team long-standing or new? Is it experienced and capable? Is it willing to listen and will it work with you? Even if you have a favorable impression of the management team, is it distracted by something, and if so what distracts it?

Recent Operations. A closer look at recent history is vital. Is the firm’s current situation the result of turnover, in particular the loss of attorneys with the most client relationships? Have there been recent client departures? Is the law firm facing an onslaught of litigation and if so, is it covered by errors and omissions policies? Is the insurance adequate to cover the potential exposure? What recent distributions have been made to the law firm’s owners (and others) and are the distributions consistent with the law firm’s constituent documents and past practices?

Timing. Are you dealing with any timing constraints? Having to respond to an emergency compels a completely different tact than when ample time exists to develop a plan that contemplates a law firm repositioning.

THE PLAN

Options. On the basis of this investigation and understanding of key facts, your action plan will probably fall within one of four options. Hopefully, the situation allows for you to continue the relationship but simply be more attentive in the future. Even if that is not the case, your second option may permit you to reach a consensual resolution with the law firm in which the bank shores up any substantive deficiencies and additional covenants are imposed in a loan modification agreement. If the foregoing two options are not realistically available to the bank, requesting the law firm borrower to move the loan to another lending institution may make sense. No doubt that risks the continuation of tangential banking activity that currently exists, but losing the ability to provide those services may be a small price to pay in order to assure payment of the outstanding loan(s). Finally, if those options do not fit your situation, you may be left to exercising your remedies against the law firm.

In past workouts, did you use additional ways to assess the risk and develop a plan? Were there some approaches that you did not use but wish you had?