We are surely living in times of manic-depressive equity and fixed-income markets ("We’ve
made the future safe for Western financial institutions!" "No,
we haven’t!). New York City itself can seem to be suffering from one
gigantic case of whiplash:
Even last month, those of us who don’t work in finance took wishful comfort in our Econ 101 understanding of the distinction between the financial crisis–that is, all the accumulated bad debt causing panicky global credit pipelines to tighten all at once, like so many sphincters–and an economic crisis, when people in general stop buying things and companies lay off workers or go out of business. The problem for New Yorkers, however, is that a financial crisis is an economic crisis, since more than a quarter of the wages in the city are paid by the stocks-and-bonds industry. For us, Wall Street is Main Street.
The other night, as I drove down one of New York’s more conventional and lovable Main Streets–Bleecker, west of Sixth–looking at the glowing shopfronts and bustling restaurants and strolling pedestrians, I had a sudden elegiac impulse to register the scene and its details. Because, I thought, once a Depression descended, these same blocks would look and feel very different; in 2010 or 2011, I might think back to this particular evening–autumn! Twilight!–and remember how sweet and jolly the city had felt and looked not so long ago.
Alarmist? Certainly. A mildly embarrassing and gushy, jejune, home-town lament? Probably that as well.
But the insight that the financial crisis is not severable from the potential economic crisis is where attention now focused, and that concerns us all.
So where do we stand?
2008 is to some extent the devil we know. At least for most firms, the year will be flat to down in the low double digit percentages in revenues and profitability. But this is also a time when averages may be deceiving. A small but nontrivial minority of firms will actually perform just fine, thanks to a serendipitous practice mix. But across all firms people should have a realistic sense at this point of where they’ll end up. There should be "no surprises" at year-end.
2009, by contrast, is the devil we don’t know. From the perspective of today, to imagine it being a strong year risks professional humiliation, and the key question for most people is whether it will be worse than 2008 and, if so, in precisely what way will it be worse?
Much as US automakers have found their model lineups—featuring pickups, SUV’s, and large, gas-guzzling "crossover" models—suddenly and brutally out of step with market demand, the question for law firms will be whether their practice mix is congruent with the new economic order or orthogonal to it. Lacking the ability to travel forward in time and report back to you, I can only advise nimbleness and celerity in adjusting to client demand.
Within reason, professionals can retool themselves into adjacent practice areas to follow demand. And to the extent people are under-utilized during a trough, but still have valuable capabilities to contribute in the future, redeploy them in support of professional development, writing and speaking opportunities (business development), and getting closer to your clients
What if it’s worse, even, than that?
The 55% unknown in the room is whether litigation will rebound to offset the drought in corporate, transactional, and finance work. ("55%" because that’s approximately litigation’s share of all revenue across the AmLaw 200; your firm’s mileage may vary.) What do the tea leaves say?
Managing partners and senior partners I talk with say that there is no evidence that litigation is rebounding as of yet, and a surprising number of them doubt that it will. This dour and gloomy assessment (we know who we’re rooting for, after all) typically rests on a rather granular analysis of plausible causes of action stemming from the financial meltdown, and the view that since it was a systemic crisis, there is no liability for fraud, misrepresentation, or inadequate or misleading disclosure.
Analytically, they may be right. But my faith is unshaken in the creative ability of our plaintiff brethren to point accusatory fingers (sufficient so survive motions to dismiss) when hundreds of billions of dollars have gone up in smoke.
On another issue, there seems near-universal agreement: We are in for more regulation. From helping craft that regulation to explaining and guiding compliance with it, lawyers will be at the fore.
The real V-8 engine of recovery will kick in once the credit crisis has receded into the vanishing point of our rear-view mirrors,and corporations and institutional investors have recovered their appetites for risk-taking and deal-making. At the moment, that seems a distant day indeed, but our perspective may be warped by the deafening roar of today’s locked-up markets. Warren Buffett, after all, is already stirring.
And we know there is no more salubrious time to buy than when all around you think you’re daft to do so. "Be fearful when others are greedy, and greedy when others are fearful," spoke the Sage of Omaha on the New York Times‘s op-ed page last week.
But back to law-firm land.
Here, the writings and the articles are dire. Various prognostications promise us that corporations are going to
"slash spending
on outside counsel," and that’s just for starters. There are far
more apocalyptic predictions afoot, including that:
- As goes executive compensation (down), so goes law firm compensation.
- The recession will throttle demand across all sectors, particularly M&A.
- Financial institutions experiencing the gruesome task of reducing headcounts
and budgets "20 to 25% across the board" will grant no immunity to legal
spending.
Even worse, did you know that:
- "The key assumptions that underlie the whole legal market" are being undermined?
- We are experiencing the "Wile E. Coyote Effect," running off the cliff
into space, powered by sheer inertia, but about to discover that, as the
old joke has it, jumping out of a 50-story building is fine for the first
49 stories. - London will eat New York’s lunch, without so much as a "prithee, may I?"
- And lastly that we will be so desperate and delusional that we will engage
in fictitious and unsustainable "financial engineering" to keep the numbers
looking good for a few more hair-raising quarters before the roof comes inevitably
crashing in?
Well, then, that makes two of us. I wasn’t aware of these scenarios
of doom, either.
It’s time, Dear Reader, to take a deep breath.
Here are four very concrete
things you can do to weather this storm.
Time for a Strategic Re-Think
Why are your practice groups arrayed as they are? Is it time to invest,
or disinvest, in some of them? What sense does the geographic array of
your offices make? Ought you to be in (just to pick a random place) London
in a bigger way than you are? Does Frankfurt/Miami/Seattle (pick one
or three) still make sense?
If you had to reorganize your firm from a clean sheet of paper, would it look
the way it looks today? Well, then, what’s stopping you?
Do you have the right people on the bus? It’s entirely possible that
some highly talented people might find themselves on the street through no
fault of their own. Even if some of your professionals and staff are
"just fine," might now be the time for a little quality upgrade?
Now, in other words, is the ideal time to get back to re-examining some of
those "key assumptions that underlie the whole [firm]." Why
now? Because
people’s appetite for change, never great, is at a local maximum in the midst
of disarray and uncertainty.
When clients and fees are rolling in, there’s no sense of urgency about actually
changing anything and, a fortiori, no reason to re-examine whether
anything might be suboptimal. But now is the time when everyone is tempted
to ask, "What’s wrong?!" and when you can engage them in actually trying to
position your firm more soundly.
Go Into 2009 with a Zero-Based Budgeting Mindset
Don’t take sacred cows for granted. Are there things the firm is doing
just because…, well, because we always have?
Again, if given a clean sheet of paper, would you recruit the way you do? Would
you spend your marketing dollars the same way? Your IT investments? How
do you manage cash?
More aggressively, consider bargaining harder with suppliers and vendors,
starting, perhaps, with your landlord. Is the commercial real estate
market suddenly softer in your key locations? Nothing is more deadly
to a landlord than vacant space—it’s like an empty seat on an airplane
leaving the gate. Perhaps you should have a talk. Similarly, need
new computers? BlackBerry’s? Servers? Office suite software? "Let’s
Make a Deal."
Get Close To Your Banks
"Keep your friends close, but your enemies closer." And your
banks may not be your best friends at the moment. (Last week I was at
a large gathering where the speaker asked if anyone knew a generous banker
these days, to a healthy round of laughter.)
Get out a sharp pencil and take another look at your bank debt covenants. Are
you going to be marching close to the chalk line on any of them any time soon? Get
out in front of it. Talk to your bankers; let them know your plans. Let
them know what concrete steps you’re taking to navigate in this new environment. Enlist
their support and counsel (well, you can at least try).
At the very least, know their intentions.
Many many things cause firms to fail, including weak leadership, ill-timed or misguided strategic choices, undiversified practices, extravagant investments in real estate, and weak cultural glue (this one is huge, but that’s a topic for another day), but the proximate cause of failure, if the horrible horrible day arrives when the lights go out and everyone is loosed to the street, is running out of cash. Your bank is your ultimate cash lifeline.
Communicate, Communicate, Communicate
You thought nature abhorred a vacuum? Well, facts really abhor a vacuum; and in their absence, rumor will rush in to occupy the void.
How is the firm doing? Tell people. And after you tell them, remind them. Regularly.
What’s your debt situation? Your cash situation? Your reliance on a few key clients or a few key practice areas or a few key offices? If you have good news to deliver on these counts, deliver it. If you don’t have good news to deliver, be candid. Remember, it’s not the offense that will get you (that will sap morale, that will cause people to look at the exits), it’s the cover-up.
Are we all in this together? Explain why. What’s the professional challenge in front of us all, partners, associates, and staff alike? Lay it out. Why should people care about the place? It’s not about how much it can pay you (best not be, at least), it’s about why it matters.
What’s the vision for the firm? Reiterate it—crisply. At the risk of borrowing language from a no-fly zone in intelligent and sophisticated discourse, don’t just reiterate it, preach it.
After all, you do believe, don’t you?
