Volume 14, Issue 4

We’ve worked almost exclusively with large law firms for over two decades.  We’re not privy to the financial information of these large law firms but I’m willing to wager my house their financial position is becoming more precarious by the minute.  I maintain that leaders of these firms need to undertake financial stress testing, and they need to do it immediately.

One of my clients recently made a shocking statement that got my attention.  He said  “Most large law firms are turnarounds and don’t know it!”  What did he mean?  He meant that if large law firms continue with business as usual they won’t be around in 12-36 months. In a turnaround situation you need to take radical and drastic action to stave off complete failure or serious impairment of the enterprise.  As any turnaround expert will tell you, their biggest problem is to get the leaders of these troubled companies to act swiftly, decisively and radically.  Every day that passes reduces the margin for error and decreases the chance of survival.  Bet the company decisions need to be made almost weekly if not daily.  That is the place I think most large firms are at today!  Please understand that I really, really, REALLY hope I’m wrong, but I don’t think so!!!

newsletter-3It’s becoming crystal clear in our work that the gap between the value clients want (and expect) from their lawyers and what these large firms are delivering is growing wider.  [see graph]

The further firms get out of touch with client demands the worse it gets.  On what do I base my conclusion?  Several factors.

1. There are very few firms who systematically (and as a high priority) require the firm’s leaders to conduct high level client satisfaction interviews with their top clients.  The value of the information that can be gleaned from these interviews is nearly priceless.  You can’t act on information you don’t have.  There is tons of lip service to the idea of doing these interviews but very little ACTION being taken.  How can you assess what your clients need and value if you don’t ask?!?!?

2. Many firms are not moving fast enough to thin their ranks of unproductive partners.  How many of your partners are under budget for their hours in 2011?  How many seem to have an outdated skillset?  If you have more than 20% in either of those categories in your firm watch out.  One of my clients is an equity partner in his firm.  The partners in his practice area (both equity and non equity) simply do not have the skill sets he needs for him to double his practice.  The most talented person on his team who does have the skills is a relatively junior associate.

3.  Firms aren’t hiring the right people fast enough.  The client in 2 above could easily double his practice if the firm would hire the right people.  The problem is firm leaders want him to make use of the existing talent base.  Sound familiar?  It sounds great in theory, but it doesn’t work in practice.  My client is working in such a fast paced environment that he doesn’t have the luxury of time to turn his unproductive partners into productive people who produce tons of value for clients.  The client work is too all consuming.

4.  Firms aren’t taking swift and decisive action to keep the most talented people.  Has your firm done a person by person review to identify your best people?  If not, you will lose some of your best people.  That’s a prediction that is bound to come true.  If one of your most talented people is a 5th year associate what are the chances that you will make them a partner this year?  None.  But, if that person leaves the firm and goes to another firm that recognizes his or her talent and rewards it properly, you can bet that they will either be made a partner, or be given an assurance of a fast track to partner.

5.  Leaders of large firms don’t like making hard decisions so they put off making them.  Failure to decide moves them closer to the day of reckoning.  If you’ve got a massive number of underperforming partners THAT is a massive failure in leadership, not a failure of those partners.  Never, in its history, has a failure to decide held more potential for dire consequences in the legal profession.

6.  Most law firms need to undertake stress testing of their firm.  Think of the stress testing that took place with banks in the US after the financial meltdown in 2008.  Many of them are no longer around, having been absorbed by other better run institutions – think Wells Fargo taking over Wachoiva.   Large law firms need to do something similar.  How many leaders have made some assumptions and tested those assumptions by looking ahead 6-12 months to see how their firms will be doing from a liquidity standpoint?  Law firms generate lots of cash but they don’t really amass large cash reserves.   That means they don’t have a cash cushion in reserve should assumptions not pan out.  How much of your firms revenues will be from fixed or alternative fees in 2011?  How much of your revenues were from fixed fees in 2006?  How much of your revenues will be from fixed fees in 2014?

Firms have been following one of two paths:  Path A: Deny equity partners their monthly draws.  This is the more fiscally conservative approach but it can lead to loss of top rainmakers.  Path B.  Firms have lines of credit that they draw down in order to pay their partners. Taking on debt and hoping that it will be repaid by assuming the future will be like the past is a virtually guaranteed path to failure.  I’ m virtually certain that most firm leaders haven’t looked at their top 10-20 clients to see if they’re candidates for failure nor have they tested the impact those failures will have on their firm’s liquidity.

7.  Nothing less than a cultural transformation is needed in the larger firms.  They can no longer count on a small cadre of rainmakers to carry the firm.  They need many more people pitching in, building relationships and generating work.  This is an area we know well.  We’ve got lots of firm leaders saying they need to cause a major cultural transformation, but they aren’t even remotely willing to make the investment needed to bring that about.  They want to do a single program that they hope saves the day.  The graphic thought that comes to mind is this:  You can’t just put a band aid on a gunshot wound.

8.  Senior partners in slow practice areas are hoarding work.  That leaves the more junior people under productive and vulnerable to poaching from other firms.  In addition, you’re nearly guaranteeing you will have an unhappy client since the fees will be too high.   OR the write offs will be large and firm leaders will be unhappy because of a lack of profitability.

Any ONE of these factors should be cause for alarm.  The cumulative effect of all of these will be catastrophic!

Perhaps my biggest fear is this:  Most large firms are in denial about the extent of the problem!   There is an unrealistic hope by many in the profession that things will return to “normal” at some point in the future as the economy recovers and that belief will prove fatal to many large firms’ ability to survive.  I’m predicting that many firms will implode over the next 2-3 years in overwhelming numbers. I feel like I’m observing a train wreck in slow motion.  Again, I sincerely hope I’m wrong.

Please join in and offer up your assessment. I am very much in the market for reasons to be hopeful.  Am I missing something?