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Are the good times really over? Nobody knows for sure, but one thing is certain: Good times won’t be quite as easy to come by in the next few years as they have been in the past five. New partners — or, more appropriately, owners — are likely to have spent the bulk of their legal careers on a hugely positive cycle. As they move toward leadership roles, market forces may well present partnerships with an entirely unfamiliar set of challenges � related to a macroeconomic downturn. Instead of figuring out how to squeeze more work out of ever-expanding associate classes and scrambling to hire laterals just to keep up with client demand, some firms will need to deal with much darker tasks: cutting underproductive partners and unaffordable associates; reining in costs while trying to maintain a collegial firm culture and finding a balance between the pressures of protecting the bottom line as well as their capability to serve clients. Profits have grown in near-linear fashion recently for many law firms that have been well positioned and thus able to adhere to the business model of continual growth and expansion. This model is characterized by growing the base of the pyramid, recruiting the right kind of lawyers, building the right kind of practices and kismet — the profits follow. But the support of that expansion meant, in some cases, significant investments in both personnel and infrastructure (space, computers, etc.). Yet, the bottom line hummed along, as the impact of other profit factors overshadowed the darkening cost picture. The dramatic inflation of costs during the past three years has been masked by high rates of leverage, record billable hours, lucrative equity investments in client businesses and rapidly escalating billing rates. The bull economy has created an unprecedented demand for highly educated people, including attorneys, and a similarly high demand for legal services. The net effect has been favorable for most firms — revenue growth has well outpaced cost increases and, as a result, few have focused on the impact of, or planned for, a possible retrenchment. The setup is all too clear, and arguably unavoidable for most firms. When and if a sharp slowdown in high-value or high-rate work occurs, many firms will be stuck with artificially inflated salary structures and excess capacity of extremely expensive space. For some, this will be a formula for disaster or will require a complete workout of their underlying cost structure. The changing economic reality is already apparent in several areas: � Slowdowns in corporate departments, and in some cases idle capacity. � Attorneys less likely to leave for entrepreneurial opportunities following the demise of so many dot-coms. � Quiet force reductions as firms gently reduce their ranks through voluntary (and in some cases forced) attrition. � Excess space capacity, except for those fortunate few with below-market leases that can be recaptured neutrally or at profitable levels through subleasing. The legal market is more than one market. In fact, it has become quite stratified. As one subset retrenches, it is quite likely another will bound forward. For those facing retrenchment, the basic assumption must be that excess capacity of personnel and space is upon you, and that your firm must take action to protect short-term profitability without harming long-term objectives and the overall culture. Of the endless tactics possible for use in retrenchment, few work well for law firms, and many are often mismanaged into a long-term negative for the organization. Among the strategies to which firms should pay attention are: Address the problem of underproductive partners. One of the most important lessons learned from prior economic slow-downs is that underproductive partners do not age like fine wine. During the good times, firms tell themselves that they can afford to carry such partners, and thus avoid difficult confrontations. But when a firm’s economics turn, those lagging partners become more noticeable, at a time when the firm needs every dollar to maintain those who are productive but who are experiencing a radical decline in income. And while economics may have clarified the importance of such a move, they also make it more daunting, as there are suddenly few, if any, alternate career opportunities in the marketplace. Worry less about other firms, and don’t avoid common sense: One of the great weaknesses of the legal profession is that law firms tend to obsess over what other law firms are doing, and blindly follow. The problem is, there is so little accurate information available about exactly what other firms are doing, it is easy to be misled about their real efforts and intentions. Don’t let generous, gregarious partners become the firm’s worst enemy: As a firm’s economics decline, it is not unusual to find that many partners have let their lifestyles rise to their income level, with little or no tolerance for reductions in either. These same partners will suddenly become the source of constant, amateur and unauthorized criticisms about the sources of the firm’s financial problems, who is to blame and how to address those problems. Understand that bad news does not improve over time: Also, that surprise bad news is the worst form of communication. When workloads are down and finances are affected, partners should be told straight up, in association with an action plan for climbing out of the hole. Don’t sacrifice your firm’s future to protect entrenched cultural values. We have heard from many firms with idle capacity that certain tactics could not be employed because they would represent “a violation of firm culture” — of “who we are.” One of the really great fundamental shifts in thinking occurring in law firms at this time is the increasing realization that unwanted aspects of a culture must in fact change if the firm is to ever break out of this stifling box. Among the West Coast law firms that have failed over the past decade, this is the No. 1 reason. Thus, if your firm is well led, look for a discussion of cultural blockages during your next downturn. Layoffs are unavoidable for almost any law firm — any organization — over the next decade. At some point in time, it is highly likely your firm will need to rapidly reduce force. Lessons learned: Do it once, and deep enough to make a difference; make sure that existing work is reallocated and overhead proportionately reduced. It requires a steady hand, because cuts must be made while protecting service delivery capability. Also, work hard to preserve the remaining culture, and factor in at least 5 percent additional “scared-off attrition” that always echoes a forced reduction. Some final points: First, leaders should take care of core players at all levels, as they are the future and even in a macro-recession, they have options. Also, do not cut marketing budgets to the bone �- firms often reduce marketing activities to their long-term detriment. And importantly, leaders should focus about 10 percent of their attention on expense reduction and the remaining 90 percent on enhancement of revenue. No law firm has ever been saved purely on the expense side, yet most spend an irrational amount of time focused thereon. Cyclicality is a given in a market economy. While we look for soft landings and long cycles of growth, they don’t always materialize. Successful firm leaders — now and future — will be those who have internalized and even pre-sold a protocol for dealing with downturn actively. Donald H. Oppenheim and Blane R. Prescott are principals in the Walnut Creek, Calif., office of Altman Weil, Inc. (www.altmanweil.com), an international Management Consulting firm that specializes in the legal profession. Their e-mail addresses are [email protected] and [email protected]

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