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The old rules no longer apply in the legal world, so it’s time to focus on the business basics
We’ve all seen law firms unravel at alarming speed in recent years. We look apprehensively for reasons and quickly discount them as not applying to us. After all, it wasn’t you who took on massive lease liabilities or debt obligations. And you weren’t excessively exposed to any one client or partner.
Law firms are profitable propositions when they’re on the way up, when times are good and everything is in growth mode. But a turn of fortune does not have to be spectacular. Basic, simple, structural inadequacies mean we fail to acknowledge that law firms are simply businesses that need to be built on sound principles and strong foundations.
Consider the following scenario: By magic circle standards, yours is not a big practice. Historically, you have done well and made a fair amount of money. You certainly had no intention of widening the equity more than you ‘needed to’. In fact, the pyramid was looking rather neat - a tight group at the top and a good spread below.
You built a strong niche practice some years ago, perhaps with a few mates. Maybe you even offered a small slice to some who were pushing for a share. They should have felt indebted to you, privileged to have been invited into your inner sanctum. After all, equity is not something that should be distributed too lightly because it is yours and ‘one doesn’t want to devalue the concept and make it too easy to attain’.
Or so you thought. Now, profits are not so good. Generation Y does not covet equity in the way people once did. Perhaps you now want to extract some of your equity, but liquidity starts to be an issue and the banks are not lending in the way they used to - and there are not that many practices into which you can reverse your firm that want to give your professional indemnity risk a new home, thanks very much.
While the organ grinder keeps turning and everyone is making money, who stops to reflect and ask what happens when the music stops? How much would debtors be worth? Who will be left behind to bill the work-in-progress or foot the bills? Can I shut up shop and walk away? What liabilities would carry forward?
These simple business questions focus the mind like no others. Spend some rational, unemotional time thinking about the answers and then ask yourself - what am I doing to develop our people, to raise the firm’s profile, to create buy-in around our message, to differentiate our offering, to plan for the future, to improve our financial hygiene, to grow our client base and to raise the quality of our service?
But this Ponzi (okay, maybe that word is too harsh because none of what you have done is illegal, but you get the drift) only works when there are new people coming through, when all layers are being developed and when the capital is rejuvenated.
Once the pyramid stops refreshing itself everything comes tumbling down. Confidence erodes and the enterprise loses its sparkle.
You see, the model only works when you are building - if you’re not moving forward, you’re falling away.