Law firm failures are rarely caused by any one thing, according John Cussons, director at Huron Legal. In fact, he says that it’s a combination of three interlinked factors that often brings firms down, namely: lack of a clear strategic plan, financial mismanagement, and failure to retain key people.
Failures, he explains, can be divided into two categories: the catastrophic ones that get all the press and the failure of firms to compete in their marketplace. To Cussons, it’s the second type of failure—the failure to compete—that firms must guard against, as it can be the forerunner to catastrophic failure.
“With catastrophic failures, what’s often reported is financial mismanagement,” Cussons says. “But if you go far enough back, you can see that it’s actually a combination of both financial and strategic mismanagement.”
It’s this combination of financial and strategic mismanagement that causes the loss of key people, which is what causes firms to unravel. “The partners begin to leave in droves, and it becomes unsustainable,” says Cussons.
So what can you do? Develop clear strategic and a financial plans.
Strategically, you need to be aware of where you are now in the market and to agree about where you want to go. Define the clients you want to serve, what you want to do for them and at what level. That may sound easy, but Cussons says that many of the firms he consults for have a distorted view of their current place in the market, which is further impacted by a partnership often unable to agree on its market standing and therefore unable to decide on how to change to achieve their desired future position.
“You’ve got to decide where you want to get to, and you’ve got to be clear about where you are now,” Cussons says.
Financially, you need to ensure your firm is managing its ongoing profitability correctly, he says, noting that many firms don’t link profitability to performance. This is a very critical issue that many firms simply don’t get right.
“That’s what has let a lot of firms down, I think,” he says. “Many partners in firms all over the world don’t truly understand how they make profits. They understand it conceptually, but they don’t understand which levers to pull to improve profitability at matter and practice level…. [But], to be fair to the majority of partners, business skills such as profitability management were not part of their training.”
Only once you have the strategic and financial elements in place can you be truly competitive in your market. You then need to create an internal structure that supports your overall business plan.
“In the case of both strategy and financial management it’s about awareness,” he says. “You need data, you need good reporting, you need a management team and partners who really understand what they need to be looking for, both in the strategic sense and in the financial sense. And then you need a management and leadership team and an organizational structure that actually allows the firm to react to changes in the market or the firm’s circumstances.”
Want to know more? Cussons further explores the causes of law firm failures in the West LegalEdcenter webinar “Why Firms Fail: Identifying Early Warning Signs Based On Past Law Firm Failures” and how to avoid financial failure in “Delivering Financial Success: The Importance of Managing Profitability and the Role of Legal Project Management.”