Reinventing The Law Business: Embracing Volatility For A Law Firm
Managing partner Bruce Stachenfeld offers 7 tips for how to run a law firm.
This is a continuation of the past three articles I published in ATL over the past month or so. My first article argued that Profits Per Partner is a great servant for a law firm but a bad master. In my second article, I set forth our Profits Per Partner Emancipation Plan as an alternative. In my third article, I set forth what I believe is the highest level in law firm profitability analysis, which is to “embrace” the volatility inherent in the practice of law. In this final article, I will give some thoughts on how a law firm could indeed Embrace Volatility.
Before getting to that, I will mention as an aside that I wrote a few weeks ago in this column an article entitled “Are Lawyers Only Happy When They’re Miserable?” That article largely dealt with how an individual might in fact Embrace Volatility. This article is directed not at individuals but at law firms.
If you have been reading my past articles, you may be open to at least considering how Embracing Volatility might be a good thing for a law firm. But is this whole concept just a fantasy, like it would be nice to not be afraid of snakes but you can’t help it and just reciting “I am not afraid of snakes” isn’t going to work? I don’t think so. I think the following simple steps would do it quite nicely:
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First – don’t take on debt. In case I am not clear about this, DON’T TAKE ON DEBT! It is an evil beast for a volatile business, and truly horrible for a service business. It is like a boa constrictor when times get rough. I will say no more about it.
Second – build up a nice pile of cash in reserve. How do you do this? Simple. At the end of each year, take some money that the partners earned and stick it in the reserve. But doesn’t that create (terrible and awful) phantom income for the partners? Yes, it certainly does. But you just tough it out here and do it anyway and build up the reserve.
Third – adopt our slogan that “Low Overhead is Great.” High overhead is almost as bad as debt for a service business in a volatile industry. It is also like a boa constrictor when times are bad. As Carlos (Slim) Helu, one of the richest men in the world, has been quoted as saying, “Maintain austerity in prosperous times (in times when the cow is fat with milk).” I wrote about this in my column a month or so ago.
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Fourth – live below your means as a law firm! What does that mean? It means that each person in the firm – partner or associate or staff – should assume that his compensation (base plus bonus) for next year will be equal to what she earned during the worst year in the past five years. If that result would panic the partners into making foolish decisions, then the firm is not going to be able to really Embrace Volatility. If, instead, this result would be just a bummer, then you are good to go here. By the way, when you are running these numbers it is a good idea to assume that you will not be cutting compensation for the lowest-earning people in the firm as they will likely not have been able to build up a cushion.
Fifth – train everyone to not be afraid of leaving their comfort zones. Most lawyers’ careers will last for roughly forty years. That is a long time. The chances a lawyer will be able to do the same thing all that time are close to zero. We all pity the lawyer who has spent ten years doing nothing but one thing. Then that one thing goes away and the lawyer is effectively useless! Try to never be that lawyer and instead have your firm populated with people who are trained to think about how to continuously reinvent themselves, to not be afraid of learning new ideas, and even new practice areas. If people are left alone they will often stay in their comfort zones, but with constant training it is possible to have a comfort zone that consists of not having a comfort zone. I may be overstating this a bit, but you get the idea.
Sixth – train everyone to look forward to the downturn as a big chance to expand and grow. Explain it to everyone, including the associates and the administrative personnel. Explain how proud you will all be in a downturn that we will get through it together, rather than throwing the weaker players out of the lifeboat – that all will sacrifice through lower earnings but use the time to expand and succeed. Plan ahead with everyone as part of the plan so that no one will be induced to fall apart emotionally when the bad times come. Instead, plan on marketing and recruiting more in a downturn than ever. The managing partner can talk about it a lot. The partners can talk about it a lot. The associates and administrative personnel can do it too. Until it just becomes part of the firm’s culture.
Seventh – and finally – and this is either the easiest part or the hardest part. If you have a strong and great culture, then grow it stronger and greater. You will need it sorely in the downturn. Your firm has to have a raison d’être (I always wanted to weave a French phrase in). If it doesn’t have that, then sadly the foregoing planning is not going to work. The partners will pay lip service to it during good times when it doesn’t matter but leave during the bad times.
I believe that a firm that behaves in the foregoing manner has a great chance of long-term success. Instead of being whipsawed by the vicissitudes of economic randomness and volatility, such a firm has a great chance of riding the waves to success in both good times and bad. In good times the firm cleans up, and in bad times the firm expands and grows. What could be better?
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Bruce Stachenfeld is the managing partner of Duval & Stachenfeld LLP, which is an approximately 70-lawyer law firm based in midtown Manhattan. The firm is known as “The Pure Play in Real Estate Law” because all of its practice areas are focused around real estate. With over 50 full-time real estate lawyers, the firm is one of the largest real estate law practices in New York City. You can contact Bruce by email at thehedgehoglawyer@gmail.com.
