Some downturn risks

Chasing debt and effective cash flow management are critical in a downturn (see Rob Millard’s Heads of Pigs and Golden Rules, posted yesterday) but also consider:

client take on: not following the necessary risk management procedures when taking on new clients may be disastrous. I hope you aren’t replying to the email scams from the widows and orphans of third world dictators, but the next worst thing is not doing the appropriate DD on the new client.

working outside your competence: it is all too easy to say you will do something that you simply don’t have the expertise to do. At the best of times clients are not impressed by your learning on the job; taking on work because you cannot face turning it away (all too easy when you’re sitting at your desk trying to look busy) is a surefire recipe for an indemnity claim.

soft terms: winning work sometimes requires you to take a view on fees ~ discounting for the future. It is also important to be realistic over cost. But agreeing terms that devalues the work not only sets a precedent that in better times it may be hard not to follow but it also demoralises the team.

Partner ego: in many firms power and politics is intrinsically linked to partner performance. Maintaining this in a downturn may mean that work is kept, not delegated. It all comes back to Spending time wisely.

Batten down the hatches?

Another excellent article, Taking Advantage of a Recession in Kerma Partners Quarterly: a lot of sense and not just about weathering the storm but more how to make the weather.

One further thought is that in the UK the danger is that concentrating on getting through the downturn may mean that we ignore the impending changes in the legal services market. I am not sure that I would have used the expression ‘Big Bang’ (given that some commentors see the beginnings of the current economic crisis in the heady days of City deregulation 22 years ago), but see Peter Williamson’s Rehearsing for the Big Bang in this week’s Law Society Gazette.

And while looking at the Gazette, a stunning lead article Review of Regulation that nails once and for all the myth that we are one profession (for those of us at the coal face, we know we are not).

Professional unease

Stefan Stern’s FT column Pssst . . . get smart and wipe out whistleblowing some weeks ago had a telling quote from Dov Seidman, founder and chairman of LRN, a US based business ethics consultancy. After reporting Seidman’s view that ‘ethical clarity cannot be established quickly’, Stern quotes what Seidman told the Journal of Leadership and Organisational Studies,

“Doing the right thing” is not a painless option either. . . I actually think that in many cases doing the right thing is often inconvenient . . . Sometimes that is exactly when you know you are doing the right thing, when it feels so inconvenient.”

I carry around with me a (now dog eared) copy of Practical morality for lawyers by the great Bill Knight, one of the doyens of corporate law in the City. This article is only available by subscription to PLC , which is a great pity as every lawyer should read it. In it he anatomises the dilemma that most of us face at some stage or other in our professional careers, ‘when your client wants to do something which is legal, but in your view highly questionable’, and in the doing of it will be looking to you for help and advice.

As Knight notes

Look hard; this is dangerous territory. One day you’re devising off-balance sheet structures, the next you’re letting the senior executives get rich on them, then you’re shredding documents and, before you know it, you are explaining to your family that you may not be seeing them for some time.

It all seems so easy but sometimes, especially when a valued client asks a favour, and times are hard, it isn’t.

The long view

I posted some weeks ago about cultivating a habit of optimism: something which is increasingly difficult as the news gets worse, but stick at it. Keeping the morale of the team up should be one of a law firm leader’s main responsibilities.

Another responsibility, and this has to be linked in to that optimism, is to hold onto the long view. Short term solutions often seem to offer immediate relief to problems, but there is the very real risk of missing the wood completely as you concentrate on the trees.

Business planning in uncertain times is an article by David Hunt in Smith & Williamson’s Summer 2008 Professional Practices News was spot on. In it he identified two principal tasks: to reign in costs, and to seek opportunities.

Although the first of these is, in large part, obvious, Hunt adds a number of key riders

service delivery (i.e. people) cost, so one way of cutting costs is to get rid of them. This is being done across the profession as law firm after law firm puts in place redundancy programmes. But, as Hunt notes, “change (redundancy programmes) may be and are expensive and can have a long term impact on a firm’s culture”. I would add that you need to know what you want to be as you come out of the downturn is also important.
cutting discretionary spending offers an immediate opportunity to limit costs, but (again Hunt) “marketing, training, recruitment and capex become ever more critical in a downturn as they aid recovery and future expansion.”

And as for seeking opportunities, take the long view: “thought should be given to future as well as current revenues”. So consider

lowering prices to win work (although I would add the caveat that there is a risk that teaching your client to buy on price makes only one party, the client, happy, and may have a long term impact on the relationship
re-evaluate business development activity: build new contacts or markets and strengthen relationships with existing clients (back to Nick Jarret-Kerr’s admonition, which I linked to in my post Spending time wisely, back in early July, to get even closer to clients.

The C word – but which one?

The accelerating downturn, and the UK property market (both residential and commercial) hitting the buffers, has already started to change the legal market. Leaving aside the rumours of cash calls and firms in trouble, the middle market consolidation is starting in earnest (for example the recently announced merger of Withy King and Marshall & Galpin, to say nothing of the gossip circulating about who is talking to whom; or more interesting, who is not being talked to.)

It is an appropriate time to revisit Legal Services Reforms: Catalyst, Cataclysm or Catastrophe by Stephen Mayson, Professor of Strategy at and Director of the Legal Services Policy Institute. In his March 2007 review of the legal services marketplace (inefficient, ripe for reform) Mayson summed up its health as follows,

My diagnosis so far, therefore, is that we have too many qualified lawyers, too many law firms, and too many equity partners.

Later he identifies consolidation as a one of the key themes for the future, highlighting ‘the need to reduce the number of firms . . . in the interests of quality, consistency, efficiency and cost’.

Well, this is already happening and will gather pace. Mayson identified one of the drivers as the ‘natural forces of competition’. I would add to that diminishing fee income, the cost and, at the moment, the availability of borrowing, and the demographic imperative. To say nothing of the Legal Services Act, and the arrival of new entrants into the market.