Law Firm Turnarounds

If Dewey's situation is consistent with other law firm financial crises, it fell victim to a series of different issues that individually might have been manageable, but together may prove to be insurmountable. Typically law firms in crisis face more than one of the following critical challenges:

• Loss of key clients;
• Loss of key partners;
• Regulatory or legislative change affecting key practices;
• Excessive reliance upon debt;
• Overhead expenses out of control;
• Overly rich benefits provided to former partners via an unfunded partner withdrawal entitlement;
• Compensation systems not perceived as equitable or pay levels significantly below market;
• Loss of confidence in firm Leadership/Management;
• Inattention to client/practice concentrations;
• Failure to react to market shifts;
• Reliance on billing rate increases at twice the rate of inflation as primary means to increased profits.

The occurrence of one of these problems, if corrected quickly, is unlikely to cause a law firm to fail, but the simultaneous convergence of two or three, or an inability to adjust quickly, can spell doom for a law firm ' a business structure that relies primarily on the shared trust of its co-owners and thin capitalization.

A strong economy can mask serious underlying financial problems. Firm leaders are convinced that generating more revenue (often by charging more and working harder) is the path of least resistance to address a cash flow shortfall. In a recessionary economy all firms feel greater financial stress, and firms that have not been prudently managed will be severely challenged. The protracted economic malaise of the legal profession during the past several years has caused many law firms, including some of the largest in the country, to literally have to fight to survive.