Those tell-tale cracks

February 21, 2013

How can you tell if your firm’s about to collapse?

Photo: Dorling Kindersley












When Cobbetts called in the administrators, a common reaction seemed to be one of sadness but not surprise. This despite the fact that the firm had published solid half-year results in December and was still recruiting right up to mid-January.

DWF has moved fast to snap up the failing firm, which will be a source of hope to some employees. But as they wait to hear their fate, they may wish that they’d been more clued up before the event.

So, how can you tell if your firm is about to implode?

1.     The obvious one: no money

Plummeting fee income, non-existent profit margins, rising debt. That should be more than enough to send you racing to the recruiters. But it may not be that obvious.

Turnover at Cobbetts, for example, appeared to be rising following a horrible year of plunging fee income and profit in 2008/9. But the firm remained strangely cagey about its profit figures. Sure enough, its 2011 financial report showed profits again falling and it remains unclear what profits were made out of the latest 2012 half-year results.

Raise a red flag if your firm is uncharacteristically taking on more debt, at the same time as losing profit. Also beware if you’re firm seems to be struggling to maintain profit after a period of rapid expansion (think Dewey & LeBoeuf). It may be a sign that it has dangerously overstretched itself.  

2.     Partner defections

Partnership restructuring can be a sensible response to a changing environment. But if partners are leaving in droves, be very afraid.

If your firm has a client-hoarding culture and little by way of partner lock-in, then departing partners will be taking clients and money with them, compounding your firm’s problems. Halliwells lost 60 partners in just two years – crippling the business. And worse, as an associate or trainee it may be you that’s left floundering while the ‘star’ partners have long gone.

3.     An obsession with rainmakers

Your firm has an aggressive lateral hire policy. But it only seems interested in big ticket names and promises of major client followings. Fee income hasn’t increased, however, as most lateral partners have failed to deliver against their ambitious business plans.

You suspect an awful lot of wishful thinking at leadership level at the expense of any kind of solid performance strategy. In itself, this will not destroy your firm, but combine it with points 1 and 2, and you’re facing trouble.

4.     Pay freezes, pay cuts

If your firm is culling staff left, right and centre, while implementing pay cuts and/or pay freezes, then it’s probably a good sign that you’re not sailing on an altogether happy ship.

It’s not so bad if the strategy is short-term: many firms resorted to such measures through the recession. But if your firm seems unable to extricate itself, then you won’t need any other sign. You’ll want out.

5.     An increase in chatter

Listen out for growing rumbles of discontent among the masses, combined with increasingly urgent (and sometimes irrational) imperatives from up high.

Be wary if leadership seems particularly keen to stop the chatter but is evasive on the reasons why. It may be a sign that it really has something to hide.

6.     Non-existent communication and secrecy

Research conducted by Greenfield/Belser back in 2002 suggested that failed law firms are typically poor on communication compared to successful firms. This has been borne out by law firm failures since.

Halliwells made a massive management faux pas when it secretly shared out a property windfall between partners. The news spilled out just at the same time as the firm revealed itself to be in the red with £18m of debt – about the same amount as the partners pocketed.

Secrecy will not be enough to bring down a firm, but it will quicken the end when civil war breaks out. When choosing a firm opt for one that has a reputation for management transparency. But still watch out in case your usually communicative leaders clam up.

Between the lines

All those who claim to have predicted a firm’s demise have the benefit of hindsight. In reality, it can be difficult to recognise the warning signs, especially if, like Cobbetts, the figures appear relatively sound and recruitment remains buoyant.

But for associates and more junior members of staff, it’s particularly important to spot potential problems so you’re not left high and dry. If you’re in a strong practice team then you may be scooped up by another firm, or the partners will take you with them to their new home. But this isn’t guaranteed.

Learn to read between the lines, keep your ear to the ground, think about your ‘personal brand’ and have an up-to-date CV to hand.

They say that in this environment, the successful law firms will be those that can most quickly adapt to changing market conditions: the same should be said for anyone who works within them. CP

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