LEADING PROFESSIONAL FIRMS DURING DOWNTURNS

Leadership is never more critical than when a firm hits a major downturn in its business. There was a lengthy article in Sunday's NY Times on the large global law firm, White & Case. It is a scenario that is playing out across the globe at many law firms and other professional firms.

The Leaders of these firms must now act like crisis managers. This is very difficult for the leaders to do. They generally have spent a couple of decades at the firm. They have strong views of the firm's strengths and weaknesses that may prevent them from taking the right steps. They also have strong relationships and beliefs regarding the partners and staff that may prevent them from taking the necessary steps. Furthermore, the firm's accounting systems may produce information that clouds the true profitability of each department and of each partner.

It is actually critical at this stage for these Leaders to retain the services of an outside troubled company expert to objectively and critically analyze the operations. Professional firms grow on the assumption that they will continue to grow and be profitable. Sometimes the revenue recognition and expense allocation is not a true reflection of profit and loss of a service line or an office. And sometimes there are sacred cows that insiders don't question.

Several years ago, I worked with a global professional services firm that was being sold. The London Office of the firm was entertaining offers from other firms. One week the London Office was in our deal, the next week it was out of the deal. And so it went for several weeks. Finally during one of the weeks that the London Office was out of the deal, I finally analyzed the true profitability of the London Office. It didn't make a profit. In fact, as far as I could tell, it had never made a profit.

I met with the global leader and said, "why do we want the London Office? It has never been profitable." The global leader replied, "We are a global firm, we must have a London Office!"
To which I replied, "Thank God we only have one London Office, if we had more we would be out of business!!"

The global leader finally let the London Office go to another deal. Only an objective party could make a recommendation to let the London Office of a global firm go away if it wasn't profitable.

Now when a professional firm is in a significant downturn, the Leaders should hire a professional restructuring advisor. But like the shoe cobbler whose kids have no shoes, it is almost impossible for a professional services firm to hire a professional restructuring advisor. How ironic.

Cheers, Mike