The following column was published on Thomson Reuters’ Legal Executive Institute site on April 20, 2020. We reprint it here by their courtesy.
This 2-part series was written by Bruce MacEwen & Janet Stanton of Adam Smith, Esq.
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 firm 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 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 or retail stores 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.
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.
The article perhaps combines two concepts into one when the author discusses “compensation” for senior partners. I’m thinking of the contrast between this sentence (“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.”) and this one (“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.”). In the good old days of one-tier partnerships with no guaranteed payments, associates and staff received compensation and partners received profits. As firms moved toward two-tier partnerships, income partners, and guaranteed salaries for partners plus (or sometimes against) a share of the profits, the line between salaries for associates and profits for partners blurred. The first sentence understands that partners get profits, not compensation; the second sentence implies that partners get compensation rather than profits. As the equity partners get all of the benefit of the profits, it’s reasonable for them to assume all of the risk of loss, and to cut their draws to zero (or to as little as necessary to buy food) until their firms can right themselves. . . . or perhaps the firms will discover that they have too many equity partners for their own good.
Your proposed approach puts me in mind of the order-of-actions for an aircraft in distress: Aviate – Navigate – Communicate (outside) .
A few observations:
1) Paycuts – no brainers. Everyone’s doing it, so everyone’s doing it. Simultaneous with receipt of such news from my firm, I received an incredibly comprehensive summary of what the entire AmLaw 100 was doing with partner compensation. No surprises there whatsoever. If you can count on one thing that will NOT change in this interlude, it’s that lawyers will continue to follow the crowd (in this case, rationally).
2) Furloughs – life preservers or just hoping/praying? A bit of both I suppose. The problem is that, unless you are talking about an employee with zero marginal productivity (do those exist in any serious law firm?), at least some work will have to be done by remaining employees. And law firms get used to that savings very quickly. Indeed, during the last recession, they came to rely on it. So these feel more permanent than many would like to admit, even when things improve.
3) Layoffs – you raise a salient point that these have concrete, adverse effects on the talent pool several years down the road. But I would point out that a few notable firms engaged in some very high profile mass layoffs last time around, and they did not miss a beat in terms of where they wanted to go as a firm. Latham for sure comes to mind. As for how layoffs are perceived in general, I do think most people employed at a AmLaw 200 law firm who are susceptible to being treated basically as an at will employee (i.e. income partners on down) are clear eyed about how modern law firms operate, and that the end can come pretty quickly when the economy turns. Equity partners are always going to be treated with more patience for obvious reasons. In all, there doesn’t seem to be much evidence that layoffs have a measurable, long-term reputational effect on recruiting itself.
I understand this was written for a general audience, but I would submit that each firm’s “social contract” varies widely. You can certainly break it down along the line of Maroons/Grays as a starting point. But even within those categories, there are distinct attitudes about firm’s obligations to its people and vice versa. And the business exigencies are just going to magnify those differences in the coming months.