The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year.

— John Foster Dulles

Former Secretary of State

  

We’ve Got Trouble…With A Capital “T”

Most law firms go through a similar cycle. Initially partners share an almost blind and intoxicating optimism. As the firm grows and matures, the dreams and ambitions of many of the partners are realized in increasing measure.

But the inevitable occurs. Momentum slows and the intoxication of the early days turns to a pessimism-tinged sobriety. Confidence slips, and the future doesn’t appear as bright.

At this point, often months before it ever shows up on the bottom-line, the partnership has officially become a Troubled law firm.

But troubled is not synonymous with doomed. In fact, a key difference between strong enduring firms and those that fail is defined by how quickly and decisively leadership responds to challenges.

A brief look back reveals the reality that law firm failures are becoming frighteningly commonplace. It seems that big name collapses began with Finley Kumble, followed by Brobeck and Coudert in 2003 and 2006 and then someone opened the floodgates. In 2012 it was Dewey.  In 2014,  Heenan Blaikie. The trend hasn’t stopped.  Just this past week Sedwick announced the closing of their San Francisco based firm. Two years ago the 80+ year old firm had more than 300 lawyers in 15 domestic offices, plus one in London and another in Bermuda.

There is no question, the profession is in a state of transition.

So, this post will look at one of the principal causes of law firm trouble.

Underperformance: The Root of Many Problems

The truth is that, in most cases, a troubled law firm is, quite simply a firm that is underperforming. The degree of the trouble correlates strongly with two factors – how long the condition has existed, and the extent of the underperformance.

In the earliest stages, underperformance is manifest in declining market position. In this context, a number of things conspire to undermine market position, including how the firm is perceived by owners, employees, clients, law schools, and vendors.

A declining position left uninterrupted ultimately triggers a loss of confidence among clients and partners…which leads to a loss of partners…which leads to the loss of clients…which pressures the economics of the organization, leading to the further loss of partners and clients.

This cycle ultimately leads to a potentially fatal loss of confidence among vendors. Creditors begin restricting or even ending lending relationships – the harbinger of an ultimate loss of the organization. When troubles reach this level the most fortunate firms find themselves to be an acquisition target; the least fortunate file for bankruptcy.

The recent Sedgwick announcement demonstrates just how quickly developments can accelerate toward the point of no return. No doubt the firm had been faced with some revenue driven financial challenges in the preceding couple of years; but it was the relentless attrition of partners that led to the firm’s demise.

A quick summary of their  past 11 months tells the tale:

• January 2017 – 30 plus lawyers and staff, including the firm’s former chairman, leave to form a boutique
• February – 23 lawyers leave to open the Dallas office of Drinker Biddle
• April – a couple of Los Angeles partners depart for Cozen
• June – a couple more partners including the former managing partner of the DC office and partners in Los Angeles move to new firms
• August – a dozen partners and associates in Miami and New York move on
• September – New York office head and others leave
• October – Head of Chicago office departs as does the Bermuda office

By November the firm had lost more than a third of its attorneys. A very sad ending to the once highly regarded firm formed in 1933.

The pressures of a profession in transition are relentless.

For firms seeking to avoid a similar outcome, a routine review and of performance-to-expectations along with corrective action is essential. It doesn’t take long for the “run on the bank” to result in closure.

For additional reading on restructuring or turning around the troubled law firm see–> here.