Keels in the Mud

As economic conditions in the main western economies start slowly to ease we are noticing that the financial performance of some of the major law firms in the USA and Europe are starting to improve.  The old adage is that “the rising tide lifts all boats” but all the indications are that the uptick has come too late to aid a significant number of troubled law firms.  Over-peopled and under-powered, some firms have their keels so firmly stuck in the mud that the rising tide may simply engulf them. 

If and when the recovery increases in pace, I expect to see the better law firms starting to hire and acquire the best available talent, and a further exodus of star players at all levels may prove to be a blow too far for weaker firms.  Currently, the more mobile and effective partners are grimly hanging on in their firms through fear of the financial liabilities that might attach to them should their departures increase the probability of a collapse.  There will however come a time when such partners will decide to swim rather than sink with their boat. 

Firms in trouble face some stark choices particularly when their lines of credit dry up.  One solution is to seek a structured rescue from bigger firms; DWF’s rescue of Cobbetts and Penningtons acquisition of Manches provide two UK examples of this approach, involving structured arrangements (individual and collective) with creditors and ring-fencing of liabilities. 

Another solution, which may benefit firms whose performance and financial position is poor rather than terminal, is for such firms to trade their way out of crisis.  This course inevitably requires the cutting of overheads to match expected revenue turnover and that in turn means letting yet more people go.  This is easier said than done.  Firing yet more partners sometimes needs a special resolution of partners and those who feel threatened may be reluctant to become “turkeys voting for Christmas”.  Additionally, the departure of more partners affects the balance sheet structure of the firm which may not be able to afford to repay exiting partners’ capital.  Faced with this impasse, some firms appear to be choosing the default option of firing associates and expecting partners to take up a heavier ‘grinding’ workload – effectively working as associates for the firm rather than partners. 

Some firms however have simply run out of options.  They may have cut and cut again and may well have become lean and efficiently managed; but they still face ruin through their inability to increase or stabilise revenue production in an increasingly competitive environment.  Ironically, therefore, it may be some of the historically badly managed firms that have the best chances of escape, as by putting in place basic hygiene measures  (particularly better management of receivables and lock-up, and improved performance management generally), tighter management controls may just be sufficient for those firms to suck their keels out of the mud.

As is so often the case, fortune favours proactivity.  It is best to ensure your boat is buoyant and ship-shape before the tide comes in and to avoid waiting passively for the ebb and flow of economic conditions to power recovery.

This post originally appeared in the Edge International Communique for December 2013