High stakes of running a practice in the 1990s

Running a legal practice is an increasingly risky business. Gone are the good old days, when entry into the legal profession meant a secure and fulfilling career. When partners were partners for life and profitability was assured. When firms could practise in peace without the serious threat of competition or the need to win market share. And when professional shortcomings were resolved without resort to writs.

Nowadays, running any business is risky and the legal profession is no exception. Partners leave unexpectedly to join rivals. Banks ask for their money back. Firms buy other firms and buy in new skills. They open new offices in their fight for growth and market supremacy. And then the writs pour in.

But then, risks are there to be taken, and risk-taking need not be reckless. What matters is that they are taken responsibly and confidently, which is what the best firms do.

Consider the recent case of a law firm that had the opportunity to take on someone as a partner who had previously worked defending hospitals from negligence actions. Any risks involved stemmed from the fact that the new partner had no inherent loyalty to the culture and objectives of the firm. His primary ambition was probably to carve out a niche practice of his own under the umbrella of the well-established firm.

After assessing the risks, the firm might have decided there was a danger of the person regarding his clients as his personal property, and that he might not be a team player. He might press for the lion's share of profits from “his” practice, irrespective of what others earned. The financial risks included the cost of staffing the new specialisation, the premises, additional library resources and computers.

The new partner might be poached once the client-base became established and there would be little cross-referral of business to add value to the existing general practice.

On the other hand, the firm would acquire a niche specialisation on which to build profitable work to compensate for any loss in the core market.

The outcome was fairly predictable. The poacher came, the partner and colleagues left. But luckily, the other partners were able to extract reasonable financial compensation from the acquiring firm. But it doesn't always work out like that.

The lesson is to place values on the risks involved, evaluate them and protect the downside. Perhaps it would have been better to specialise in a market where at least one existing partner could play an active role alongside the newcomer from the outset, bonding the new with the old. Possibly the niche was too remote from the core business anyway. And the partnership agreement with the incoming partner could maybe have been more tightly drawn.

There are four “P”s in the risk assessment business: people, pounds (or cash), progress and professional negligence.

Forecasting the cash implications of each development, as well as the day-to-day trading operations, is critical. Attributing probability quotas to a range of outcomes is essential. And that is particularly so when new ventures are envisaged.

At a seminar organised by Willott Kingston Smith Associates last year, delegates from law firms were invited to consider a hypothetical venture, which offered a range of income streams and related expenses. They were given a simple form to use to estimate the extent of the risks being taken, enabling them to make decisions to minimise those risks without destroying the positive potential at the same time. It's not a process many solicitors follow, but it is increasingly important to do so.

It is only by becoming familiar with the real risks involved – by measuring them – that firms can gain sufficient confidence to manage those risks, to cope with deviations from expectations and to take remedial action at the earliest chance. That is the way to build a successful practice.

But what if the risk assessment is too depressing, with more downsides than upsides? Even then, the exercise will have proved worthwhile. Preventative action may be called for and it can be implemented before it is too late.

And if professional negligence is the risk, or financial vulnerability from some other cause, consideration can now be given to incorporation, though this would not necessarily remove financial risk altogether. Where the risk is exacerbated by undue dependence on one client or one partner, a merger may be the best solution.

Risk analysis is not designed to discourage risk-taking. It is there to enable risks to be managed better.