Ignore the business of law at your peril

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Published on 8/10/09

The New York Times recently examined the current down-at-the-heels atmosphere in a once-mighty Wall Street law firm, describing the "melancholy pall of diminished billable hours" now found throughout the firm's deserted hallways.

The article made clear that this could be attributed to the same mistakes that many firms made during the boom times: over-expansion of offices, over-reliance on the financial sector and over-compensation of partners and associates. Despite all that has happened, two statements from the article suggest that some firms may not have learned the necessary lessons:

  • This particular firm "hit the wall" when the recession came because, "remarkably like such ventures as the Mafia or the ice cream vendor, many large firms operate on a cash-in-hand basis, with insufficient reserves to weather a slump."

  • When asked to comment about this firm's plight, a senior partner at a competing Wall Street firm simply sniffed and said, "I'm not really interested in the business of law."

Poor cash management has killed many law firms, large and small. Managing the flow of money is the number one consideration for a firm's survival. Most lawyers and even many large firms begin to realize that they are in trouble only after the money has stopped coming in.

However, cash flow cessation is usually the last symptom of a downward spiral that started long before. Too many lawyers equate financial success with billable hours, but a lawyer's inventory is not billable hours - it's the amount of cash that is realized from the billable hours outstanding.

The lesson is obvious: lawyers must vigilantly focus their energy on collecting what they bill and putting it to use quickly. Failure to do so will cause economic failure.

As for the disdain about "the business of law," a phrase I registered well over a decade ago because so few firms cared about it, this, thankfully, is changing. A good example was the public announcement earlier this year by a major firm that its profits in 2009 will fall by 5 to 7 percent, less than the estimated 10 to 15 percent projected for other large firms.

Usually a very private matter, this law firm with a nationwide workforce of about 1,600 made the announcement after also announcing a round of layoffs. Why? One guess is that the firm wanted to suggest that it is dealing well with economic realities and that the remaining members of the firm will be in good financial shape.

Giving some reassurance is appropriate since people usually fear the unknown more than the known, no matter how bad it may be. And in this case, the bad news was made to seem less bad.

This is a lesson from publicly owned corporations. But the audience here was not shareholders or investors - it was the firm's clients, to reassure them that the firm is economically viable. Another audience was partners - potential laterals and current equity partners alike, reassuring them that the return to equity partners will remain substantial. While unusual, this simple announcement may have been unique. By demonstrating a firm grasp of the business of law, it may have achieved much good will for the firm.

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