Six Core Attributes of Successful Law Firm Turnarounds

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Law firm failures are rare, but as with all business endeavors there is risk. Some risk is inherent in the choices each firm makes to position and operate the firm. Some risk is inherent in the market and outside the control of the firm. Sometimes early warning signals are identified and corrective measures are implemented to mitigate those risks. Often, they are missed or simply ignored for too long.

A firm may find itself overly dependent on one market, service, client or partner. Shifts in buyer needs and purchasing and the enhanced activity of alternative providers (think in-house lawyers, specialized service providers, IT companies and the Big Four) can expose those weaknesses. Currently, the extremely active lateral market and the ease with which partners move from firm to firm creates greater vulnerability for law firms — where loss of a few critical partners can cause a largely unstoppable cascade into oblivion. Lack of financial discipline, too many under-utilized lawyers or a failure of succession planning can also tip a firm into dangerous waters.

Our consultancy has worked with many law firms facing extreme or even existential difficulty. This article sets out the common elements we have found in successful law firm turnarounds.

1. A true sense of ownership

Successful turnarounds require a core group of partners to view the firm as “theirs” — something they will stay with and defend, something they will sacrifice heavily to protect. There must be a fierce passion to make things happen, to lead, to manage, to be thoughtful and to do the right things. Conversely, when this element is lacking, there is almost no hope that the organization can right itself.

2. Shared values

Well defined and shared core values are another asset that can sustain a faltering firm. While not an absolute requirement, when present, these values supply a foundation that the partners can return to for solace and direction. The great enduring organizations and institutions are not always greatly successful. Yet, while they periodically undergo adversity, sometimes severe, they persist and ultimately outperform their competitors and their industry. They emerge from adversity much changed, but with their foundational values intact.

3. Clear strategic direction

The partners must generally agree to what they want the firm to be known for, whether for service to a particular industry, for practice specialty, for client focus, for the way they do business or for some other characteristic. Much turnaround success arises from these fundamental ideas of how the firm wants to be positioned and known in the market. Successful firms will know their core strengths, who is critical to deliver on those strengths and then set about to align the firm around those strengths and people. After emerging from a turnaround, those firms will continue to grow based on that fundamental idea. There exists a strategic underpinning to the restructuring and subsequent growth. In other words, there is a thoughtful and focused plan to execute, not simply a plethora of activities with a hope that something will work.

4. Investment in the firm first

Although returning profitability to a competitive level is of prime importance, maximizing profits is not first and foremost what drives partner thinking or actions. In successful turnarounds, the partners understood the need to invest in their organization, to defer some current income and to build. In any crisis situation, individual partners will have had opportunities to significantly increase and stabilize their personal incomes and wealth by abandoning “their” firm — something that simply was not acceptable to them. Instead, they relentlessly pursued productivity, and quickly aligned costs with market realities and the turnaround’s strategic focus. At the same time, they also pursued smart investment and improvement to the balance sheet.

5. A focus on client needs

Successful firms found within themselves a capacity to focus on their clients’ needs and expectations, to deliver consistent and extraordinary service even in very troubling times. They also cared less about what their competitors were doing and more about personal improvement. There was (and continues in successful firms) a powerful sense that skills, knowledge and client service must improve each day.

6. Stop hemorrhaging talent

To successfully turn things around, firms must stop the hemorrhaging of their best talent. When a firm is in trouble, the likely scenario is that first one or two key partners leave, sometimes with others in tow, and almost always with important clients and practices as well. Then more follow as those remaining begin to worry about who will be left (stuck) to turn off the lights. This strips the organization of its most precious assets, leaving a less competitive and sustainable entity in its wake. We believe that the talent pool must be stabilized quickly or the game is over. That said, it is still better to shed key people with difficult personalities who would only hinder the turnaround, than to let them continue with the firm where they will present a destructive obstacle to improvement.

These six elements were neither universally nor uniformly present in each successful turnaround. Nor did each firm subscribe to the same, or even similar core values or market position. But the successful firms did uniformly embrace most elements described here and worked to achieve the rest.

As the partners of a law firm facing possible dissolution consider the course of action to pursue, the author strongly advises that each explores his/her personal and collective commitment to these elements. Turnarounds are long, hard work. You will miss important clues and make mistakes. You will need to draw on your compassion, determination and a relentless focus on the objective. At times you will need to make extraordinarily difficult decisions and execute on them swiftly, adjusting course as you go. Challenges will seem never-ending and the proverbial light at the end of the tunnel will sometimes feel more like the light of an oncoming freight train. The journey is difficult, but it is possible to make it. 


James D. Cotterman is a principal with management consultancy Altman Weil, Inc.  He advises law firms on compensation, capital structure and other economic issues, governance, management and law firm merger assessments.  Contact Mr. Cotterman at jdcotterman@altmanweil.com.

 

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