There has been much recent press coverage on the challenges facing high street firms in 2007. For example, there has been the suggestion that up to 15 per cent of law firms will be vulnerable to either takeover, sale or closure in the coming months. But will the larger high street and medium-sized firms be immune to the icy winds of change about to grip the legal sector? The simple answer is no; in many ways they may be the most vulnerable.
At the top of the ‘in danger’ list of firms that need to pay particular attention to their strategic options in 2007 are those that fall into one of the following three categories.
First, firms with a ‘complacency hangover’. These are likely to have a strong brand, with drawings having been set at a reasonable level for several years such that profit dips and margin squeezes are going unnoticed. Neither the Carter reforms (“We don’t do legal aid work,” they will say) nor the Clementi report (“We’re safe from acquisition”) are seen as a threat by these firms and the future appears secure and rosy.
Second, firms with stale leadership. At this type of firm the managing partner could well have presided over a period of relative success, but there is no natural successor and the earlier energy of the ‘new broom’ has dissipated. The firm’s strategy has been replaced by operation frenzy around the monthly partner table. The firm has grown without the need to invest in ‘management infrastructure’ and the part-time producer/manager model will be reinforced next time.
Third, so-called ‘ostrich’ firms, which believe the best strategy is to concentrate on existing client work and worry about change closer to the time. For example, many firms with more than 10 partners do little, if any, legal aid work and are dismissing the Carter reforms. How wrong they may be. As smaller firms consolidate, some will decide to move away from legal aid work and look to practise in other areas of law, probably competing on the basis of price. One scenario is that such firms will increasingly offer loss-leader work to attract better quality commercial work.
We will remember the profession cutting its own throat by giving cheaper and cheaper conveyancing to the public. Will the effect of the Carter reforms be to see real price competition in the commercial world?
Even successful firms’ strategies need refreshing and previously high-performing operational strategies need updating. Change is a constant, but what is different this time is that external forces – such as Urgent Issues Task Force Abstract 40, more discerning bank lending, Carter, Clementi, margin squeeze and increasing interest rates – are colluding to create the ‘perfect storm’ in 2007 for forcing strategic change.
Riding out the storm
So how might the well-prepared captain steer the ship through this storm and what options are available? First, it is absolutely vital to understand that the firm’s leader’s chosen approach to the task is just as important as the process they choose to adopt.
The approach and process must take into account the culture of the firm and of the ethos and make-up of the equity partner team in particular.
It is therefore vital to check individual partners’ aspirations. Partners’ motivations may have changed over time and misalignment of a shared vision and objectives is most common.
Firms must also engage all partners in the thinking process. Partners react badly to exclusion and those affected may subsequently reject future change.
And they must move quickly: a well- executed strategic review for a 15 to 30-partner firm should take no more than three months.
This should enable the creation of a clear, concise and robust process. But the key, of course, is timing – and where a firm is on the curve determines the strategic options available to that firm.
For those firms that identify genuine and sustainable growth opportunities, the future should be rosy. However, there are several practical options for those firms in stabilisation and distress modes.
A key task at this stage is to stabilise the financial platform before planning for the future. Specifically, the prioritised immediate actions are usually to:
Once a stable platform has been built the longer-term strategic issues can be prioritised, including which markets to play in and which clients and markets to drop. Careful consideration should be given to merger options and whether the partners have an appetite to be the acquirer or acquiree.
In a distress situation, the quality of relationship with the bank is extremely important. Such relationships encompass both the communication strategy and the quality of management information being provided. There is currently a dramatic increase in the number of banks that are requiring independent reviews to support existing lending propositions. In this situation the firm is clearly on the back foot and immediate working capital improvement actions will need to be implemented (as in the above stabilisation stage).
In addition, partners may need to seek insolvency advice to make themselves familiar with worst-case scenario options involving either individual voluntary arrangements or bankruptcy arrangements. Most commonly, however, the firm may be in a position to seek a ‘white knight’ to acquire a part or the whole of the practice. No doubt individual partners and teams will also be considering their own options at this stage and there is bound to be a considerable amount of tension and stress in the partnership.
During the pre-year-end partner retreat season, most firms’ agendas are likely to allow some time for strategy. No doubt most retreats will be supported by robust historical financial information and by future forecasts (probably predicting 5 per cent incremental growth).
However, the majority should also be supported by sufficient research and analysis to support a debate on how the ship might best navigate the perfect storm.
David Miles is a partner at BDO Stoy Hayward