You Know Your Firm’s in Serious Trouble When …

The only reason for a law firm to invest in competitive intelligence is to help its decision makers prepare to benefit from (or avoid the dangers in) near- and long-term opportunities and threats. Therefore, among their other duties, CI professionals and their clients must track leading, lagging and coincident indicators that identify specific opportunities and threats and that forecast their timing.

Yes, the US economy is recovering from the Great Recession. But like all downturns, it stressed our industry. Some firms, more vulnerable than others, were tested hard. Happily, some of those firms’ leaders took major corrective actions, and their firms are emerging stronger than before. But some firms will not recover.

Below are 20 indicators that your firm—or a competitor firm—probably won’t make it, at least not in its current incarnation. I thank my esteemed colleagues (you know who you are) for suggesting some of these indicators. 

Twenty ways to know your firm’s in serious trouble …

1.    You dread coming to work.

2.    Partners’ doors are closed all the time.

3.    The coffee’s gotten worse.

4.    Firm revenue and headcount have shrunk, and net operating income has fallen even more.

5.    Profits per equity partner are shrinking or flat, kept aloft by partner de-equitizations.

6.    The only thing growing at your firm is the number of non-equity partners.

7.    Women at your firm are third-class citizens, not firm leaders or full equity partners.

8.    You don’t recruit government officials without business because you can’t afford to invest in them.

9.    There’s a big donut hole in your firm’s partnership, where future leaders used to be.

10. All the firm’s largest client relationships are controlled (“tattooed”) by the firm’s oldest partners.

11. Clients are viewed primarily as revenue sources, not objects of real affection and service.

12. Partners won't delegate work to other lawyers until they make their own production numbers.

13. Equity partner compensation is decided by a few partners, black-box style.

14. Your firm has downsized marketing and eliminated the CMO position.

15. You’re still using MS Office 2003.

16. You haven’t had a real firm retreat in years.

17. Your firm has recently been sued for malpractice, discrimination and/or sexual harassment.

18. Clients have started to ask you about the firm’s health.

19. You’re open to a combination, but “worthy” firms’ leaders won’t take a meet and greet.

20. You’ve finally started to say the M-word, assuring reporters your firm is not interested in a merger.

What other leading, lagging or coincident indicators do you think identify a law firm that’s in imminent danger of failing? 

Pulling Away from the Pack – or Powering with Arithmetic?

Last Friday, The Recorder published an article about FY 2012 Am Law early results:  “Revenue Growth Modest at Many Firms, But Profits Surge.”   Bylined by Julia Love, the article discussed several ways law firms can try to improve their top line performance when revenue stalls, including thinning their ownership ranks.  Three California firms whose FY2012 equity partnership ranks contracted and whose profits per equity partner (PPEP) showed double-digit increases were highlighted. 

Shrinking law firm ownership is an old tradition

 

The arithmetic potential to improve a firm’s PPEP by reducing the number of equity partners at that firm is obvious and significant.  But it’s far from a new trend.  Firms have been thinning their ownership ranks for over 20 years.  In FY1990, Am Law 100 equity partners constituted 32.8% of all Am Law 100 lawyers.  By FY2000, that metric declined to 27.5%.  And by FY2011, it was down to 22.3%. 

As legal industry metric wonks know, Am Law’s leverage metric also measures the extent of law firm ownership, but is calculated differently – as the ratio of all non-owner lawyers to each owner lawyer (equity partner).  In FY1990, the Am Law 100 collective leverage was 2.05 to 1.  In FY2000, it was 2.63 to 1.  And in FY2011, it was 3.49 to 1. 

How low will law firm equity partnership ranks go? 

I’ll confidently predict that if nothing happens to modify this trend, by FY2020 equity partners will constitute no more than 18% of Am Law 100 lawyers.  Stated another way, in FY2020 the Am Law 100 lawyer population will have at least 4.56 non-owner lawyers for every equity partner. 

If those predictions take away your breath, consider the accounting firms:  In FY2011, leverage at the Big Four was already 10.6 to 1, as reported by Accounting News Report.

Some uses of this competitive intelligence 

As ow iHow you absorb the above information and patterns, consider their import to your firm’s and your competitors’ choices about growth, management and business development models.  For instance: 

1.       How will this continuing trend of shrinking firm ownership affect your firm? 

2.       How will this trend impact your firm’s efforts to increase equity partner diversity? 

3.       What unintended consequences might this trend precipitate? 

4.       To what extent have specific firms’ PPEP been “enhanced” through rapidly shrinking ownership ranks? 

5.       When you factor out those PPEP “enhancements,” how do you interpret individual firms’ actual performances? 

6.       Put another way, which firms are truly pulling away from the pack, and which are simply leveraging the power of arithmetic? 

7.       Between now and 2020, what new business models might your firm or some of your competitor firms create to differentiate themselves and go to market more effectively? 

8.       How could you compete effectively against those new models? 

As Am Law releases more early FY2012 firm results, I’ll be discussing them here.