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Legal Practice Management

Manager or Leader? Right Now, You Better Be Both

Bruce MacEwen  President / Adam Smith, Esq.

Janet Stanton  Partner / Adam Smith, Esq.

· 8 minute read

Bruce MacEwen  President / Adam Smith, Esq.

Janet Stanton  Partner / Adam Smith, Esq.

· 8 minute read

In this two-part blog series, the authors will address what a manager needs to do & what leadership means as this global pandemic continues to unfold

Over the past couple of weeks or so, we have been fielding more calls and inquiries on a single topic than has ever happened in the nearly two decades in which Adam Smith, Esq. has been in operation. Nearly all are a variation of: “What should I do now, and how is this going to end?”

Taking the second part of the question first, we defer to the sagacity of the late screenwriter William Goldman who remarked about predicting the success or failure of a Hollywood movie: “Nobody knows nothin’.”

As for the first part of the question, we have some thoughts.

The human race has not been through anything like what we’re experiencing now since about the 1400s. Many of the smartest scientists and medical professionals in the world are devoting all their waking hours to this, yet the range of expected outcomes under discussion remains very wide.

The same observations apply to our home turf, the macro and microeconomic landscape going forward. Will this be a V-shaped, or a U- or a W-shaped recession? Is it a complex challenge or a finger-snap to restart the global economy? Will people ever view ordinary work and social interactions the same way again? If anyone claims to know the answers to all these things, hold on to your wallet.

So, we come back to: “What should I do now?”

For law firms leaders, you need to manage what you can control now so that your firm has a tomorrow, and you need to rise to the occasion and embody profound leadership on a scale equal to the challenge.

In this two-part blog series, we will addresses the management side of things (Part 1), and then we will lay out some thoughts on what leadership means as this global pandemic unfolds (Part 2).

Part 1: Manage

It’s an old saw on Wall Street: “Revenue is vanity, profit is sanity, but cash is king.” Since your firm’s revenue going forward is unknowable with any meaningful degree of confidence (and a fortiori your profits), now would be a good time to focus on cash.

We have all seen memorable law firm failures over the past decade or so, some far more spectacular (at least for the spectators) than others, but the ultimate common denominator they all shared was that the lights were turned out when the cash was exhausted.

Bruce MacEwen

Unlike most corporations, law firms have:

      • No retained earnings or even rainy day funds;
      • No liquid assets that can be readily monetized or pledged as collateral for a bridge or term loan;
      • No material discretionary expenses — no factories which can be shuttered, no product development which can be paused, no advertising campaigns or R&D, no stockholder dividends which can be dialed down or shut off.

In other words, when it comes to cash on hand for the vast majority of law firms, what you see is what you have.

“But we’re busy! Everyone’s productive and billing hours!” Yes, we’ve actually heard this in some fashion.

Eye on Expenses

In the global financial meltdown that began in 2008, a wise managing partner reminded his colleagues that ultimately, the firm couldn’t do any better than its clients were doing. Tell me that all your clients are as busy today as they were six weeks ago and will stay that way, conveniently, through the end of your fiscal year. Then answer this: Are you willing to bet your firm’s potential survival on that?

If you’re suddenly not so sure, here are a few alternatives to doing nothing… or wishing and hoping.

Your largest single expense, of course, is compensation and benefits. “Follow the money” (another William Goldman line — honest) and cut back on your cash expenditures here. Firms going down this road have announced some variety of layoffs, furloughs, and across-the-board haircuts in compensation, and delayed the starting dates for new hires across the board.

In this environment, we hate layoffs. Layoffs breach the social contract between the firm and its professionals and staff, meaning they fall disproportionately on associates, business professionals, and staff and plant enduring memories not just in the minds of the targets but across the market.

And in the world we’re all now in, firing people if you can possibly help it is just plain cruel. Cruelty is best avoided.

Furloughs — putting people’s jobs on hold while still funding their benefits and perhaps a small portion of their compensation, and keeping their slot open until a new equilibrium emerges — are obviously far more humane, providing hope, and a reasonable degree of certainty about the future to those affected, while still conserving real money for the firm.

Yes, the crisis is immediate, but there are longer-term implications to consider. And for this, we may learn from the previous Great Recession. Certainly, that time and ours now are entirely different types of recessions. That said, in the previous downturn, many firms slashed associate ranks, rescinded hiring offers, and slashed the ranks of business professionals. This created several unintended and unwelcome consequences.

Layoffs breach the social contract between the firm and its professionals and staff, meaning they fall disproportionately on associates, business professionals, and staff and plant enduring memories not just in the minds of the targets but across the market.

Probably the most enduring one is the current shortage of senior associates and junior partners — a lost cohort — which has created a scramble among firms to fill those very necessary ranks. The moral may be obvious but bears stating in these stressful times: As best as you can, assess both the short- and long-term effects of your actions.

Now, to what we strongly recommend: Across-the-board reductions in compensation and freezing all partner draws.

Janet Stanton

Freezing partner draws should be easy: First, a draw comes from anticipated profit, and who knows what that number will look like by year-end. Second, we find it challenging to justify how a responsible manager could pay out cash on hand for what is essentially a privilege of being an equity partner. Yes, partnership agreements and other contracts may specify which partners are entitled to what share or percentage of profit, but if you can’t forecast that number with any confidence, it seems flatly imprudent to part with the cash now.

But third and most important: At least as of about six weeks ago, equity partners in law firms were doing better financially than about 99% of their fellow Americans. Asking them to line up in solidarity shouldn’t be too hard of an ask.

As for the reductions in compensation across the board: Yes, across the board — meaning imposed on everyone from senior partners to associates, business professionals, and your receptionists, but not a flat percentage across the board. Make it progressive such that most senior and well-compensated people take the largest haircut and the lowest-compensated take the smallest — ideally for the latter group, make it a token amount. (That’s not where the real money is to begin with.)

So, how you characterize the haircut in compensation: As a hard and fast amount, never to be recovered, or as a deferral? Unless you have a better crystal ball than anyone else from the Council of Economic Advisers on down, do not announce it’s a deferral. Immensely preferable to repay it later, as an unforeseen bonus, when humanity emerges from this tunnel and you’re firing on all cylinders again. Meanwhile, preserve your options.

A final thought: Amid the equal-opportunity virus itself to social distancing, hand-washing, wearing masks, and all the other drastically changed routines of our daily life, it’s important to remember that we are all in this together — this is larger than the ego of any one of us.

As law firms, as families and neighbors, as cities and a nation — it’s a time of shared sacrifice. People understand that and can and do want to rise to the occasion. We all long for meaning in what we’re going through. Shared sacrifice may not be the meaning we had in mind, but it will have to do for now. It is, full stop, our reality.

In the second part of this blog series, the authors discuss what it means to be a leader in today’s environment.

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