As the global financial crisis bit, and (in England and Wales at least) the regulatory landscape shifted for law firms, there was a sense that the coming years would see the collapse of a significant number of firms. That doesn’t seem to have happened. There have been a few notable failures (often due to specific local issues, rather than the market conditions), a few mergers and acquisitions, and some stagnation or downsizing. On the whole, though, traditional law firms have survived with often minimal changes to the way they do business.
This fact may be attributable to the generally slow pace of change in the legal sector or to the fact that new legal businesses have still to make a real dent in the market. I think there is another factor that needs our attention — firms survive because people keep them alive.
In technology circles there is a fairly well-known piece of work by Richard Cook of the Royal Institute of Technology, Stockholm (he previously ran the Cognitive Technologies Laboratory at the University of Chicago). He has studied complex systems for many years, and has distilled his insights into 18 points: How Complex Systems Fail (I was originally directed to this work by Jack Vinson, and I have stored this PDF here until it becomes available again at Prof. Cook’s own site).
There is also a video of a presentation on the topic, which touches on the same points:
Some of Prof. Cook’s points are more applicable to technical systems, but many are relevant to any kind of complex system — including a law firm. Two stand out for me:
12) Human practitioners are the adaptable element of complex systems.
Practitioners and first line management actively adapt the system to maximize production and minimize accidents.
17) People continuously create safety.
Failure free operations are the result of activities of people who work to keep the system within the boundaries of tolerable performance. These activities are, for the most part, part of normal operations and superficially straightforward. But because system operations are never trouble free, human practitioner adaptations to changing conditions actually create safety from moment to moment. These adaptations often amount to just the selection of a well-rehearsed routine from a store of available responses; sometimes, however, the adaptations are novel combinations or de novo creations of new approaches.
For a law firm, I think there are three main ways in which people prevent failure:
- Clients are often more loyal than economic rationality would suggest
- Employees make allowance for, and work around, poor law firm systems and working practices
- Partners continue to invest in firms when other funders might withdraw
The question of client loyalty is bound up with issues of trust that I want to explore in more detail another time. For now, it is enough to be aware that deep client relationships can cause clients to overlook shortcomings in the provision of service. When there is no deep relationship, or where the relationship is controlled by someone other than the person for whom the work is being done, there is a higher risk that bad work will lead to a lawyer or firm being dismissed. Firms need, therefore, to be nervous about procurement-led appointments and about client relationships that are not as sound as they might be. Those are the areas where poor quality work will inevitably lead to loss of income (whatever the economic climate).
Employee loyalty is no different for law firms than it is for many other organisations. It is entirely understandable that, especially in times of economic stress, people tend to stay where they are. It is equally understandable that, whilst in work, they will do everything they can to make things work for them. However, as soon as the market picks up, people will stop making allowances for their firms and will move to better places. That’s why firms should invest in better systems and practices when times are hard. Change takes too long to do it when things get better — someone else will have stolen a march.
If one looks at the firms that have failed over the past few years, one common factor is money. Some overstretched themselves with lateral hires or new property. Some just ran out of funding. Often the plug has been pulled by a commercial funder — a bank or external investor. I suspect that some firms have stayed afloat by depending more heavily on internal funders — their partners. In times of financial stress, the ability to reduce or postpone partner drawings or to make a capital call on partners makes the partnership model particularly attractive. Unlike external funders, partners are probably more likely to throw good money after bad. Their intimate knowledge of the firm (and their possibly misplaced confidence in its future) may blind them to fundamental problems. As a result, the firm may stay alive for longer than it would if it were dependent on the more impersonal decisions of a bank or investor.
It may seem good that partners can keep a firm alive longer than a bank would, but more money doesn’t necessarily make the firm any healthier in real terms — especially if it just goes towards meeting recurring costs. A poorly firm in a bad market may survive because it is in no worse a position than many others, but in a healthy market it is much more likely to be overwhelmed by vigorous competitors.
So, firms may look like they are staying alive, but some of them will be depending on life support provided by clients, employees or partners. A really healthy firm will have a different perspective on these three elements:
- Are new clients turning to the firm (and staying) because of the quality of the work and service provided? (Rather than the firm depending on a loyal but little-changing client base.)
- Do people want to work for the firm because it is a joy to be there and it is getting better all the time? (Rather than being kept there by inertia and the fear of a harsh job market.)
- Can the firm provide a real return on investment, that is attractive to external funders? (Rather than being propped up by the captive goodwill of partners.)
Firms giving a positive response to all three of these questions will be in good shape to survive the upturn. Those that are more hesitant will need to spot where they fall short, find ways of fixing them, and act quickly.