Coming off the “batten down the hatches” response to the recession, a common concern among law firm leaders is how to create in their organizations, and particularly among their partners, a greater long term perspective.  But, while many leaders characterize their short term perspective as a natural reaction to economic adversity and being focused on survival, few law firms are known for being long range thinkers even in the best of times.  Law firms have historically designed themselves to emphasize the short term, and, accordingly, the fix may involve a major cultural change within the firms.

Long term Perspective

The life expectancy of a law firm partnership is typically one year based on the manner in which firms operate.  For example:

  • In most firms, a new partnership is essentially created each year as new partners are admitted and former partners retire or depart laterally.
  • It is not uncommon, especially in legal markets with aggressive lateral partner movement, to see a 10 to 15 percent change in the individual members of law firm from one year to the next.
  • Since most law firms reevaluate the distribution of profits each year, the ownership shares of the incumbents typically changes from year to year.
  • Law firm leaders are often elected for relatively short terms of one or two years.
  • Debt instruments and bank covenants are typically tied to annual results.
  • Frequently, we see firms use straight-line depreciation over accelerated to more closely tie depreciation to principal repayment and not give current partners an advantage at the expense of future partners.

Certainly it is not surprising that this structure would create a reasonably short term, annualized perspective on most issues involving finances in a law firm.  Yet, most partners and many leaders believe their firms operate with a long term view.  In fact, when we perform cultural inventories in law firms, we frequently ask partners the degree to which they agree with the statement, “Our firm takes a long term perspective in its decisions and actions.”  Overwhelmingly partners respond that they either “Strongly agree” or “Agree” that their firm has a long term focus.  And, at least anecdotically, there appears to be a strong correlation between the partners’ belief that their firm has a long term perspective and its actual short term perspective.

This brings about the obvious question of what precisely is a long and short term perspective.  Here is a little four-part test of whether your firm is more focused on the long or short term.

  1. Investment. Firms with a short term perspective only invest cash in actions that generate immediate revenue, usually in the current fiscal year.  Firms with a longer term perspective seek a sustainable revenue stream and are willing to wait for it to occur.  However, long term investors typically want a larger overall return than firms with a shorter time horizon.  For example, firms with a shorter term perspective tend to do extensive lateral hiring and are more willing to accept laterals with a smaller amount of portable business.  Longer term firms are more likely to seek revenue growth through improved capability and client base by investing in mergers or internal growth.
  2. Expenditures. Short term perspective firms tend to make purchasing decisions that require the minimum current amount of cash even if another option might be more expensive but provide greater value.  Conversely, firms with a longer term perspective usually seek the greatest value regardless of cost.  For example, shorter term perspective law firms often take great pride in their frugality and consider it part of their culture, including actions such as paying salaries that are close to the bottom of the salary scale for their market.
  3. Timing. Quick fixes are preferred by short term perspective firms over slower options that may provide a better long term result.  Longer term perspective firms are often slow to make decisions, sometimes to the point of stagnation.  Short term firms often take pride in their decisiveness.
  4. Resources. Short term perspective firms will reuse existing people or resources rather than making new hires or purchases.  Longer term focused firms are often more likely to go to a new, custom designed solution.  For example, as a law firm expands, a firm with a shorter term perspective will seek to retrain a paralegal to do marketing work in a branch office rather than hiring a person trained for the position as the longer term focused firm might do.

Clearly there is a lot of room for middle ground and some firms are schizophrenic in their perspective.  More importantly, despite the presumption that a long term perspective by a law firm is inherently better than a short term perspective, there are plenty of examples of extremely successful law firms that consistently operate in a very short term manner.

Supporting a long term perspective

Most of the time, it all comes down to a law firm’s business objective.  If it is to “take the money and run” (make as much profit as possible and worry about the future later), the firm is best served by a short term perspective.  On the other hand, if the objective is to build a sustainable institution, a long term perspective is a necessity.  But, like most things, law firms who preach a long term perspective have to “walk the talk.”  Here are seven actions a firm can take to support an institutional long term perspective.

  1. Stop issuing monthly financial reports.  If you want your partners to think long term, stop directing the attention to the short term.  Sure, management needs to know what is happening on an ongoing basis but quarterly reports are plenty for the rank and file partners.
  2. Increase capitalization.  Nothing creates a long term perspective like having some skin in the game.
  3. Create barriers to exit and to entry.  Ownership of an institution should not be easily earned.  By the same token, leaving the partnership should represent a risk and departing partners should know that the firm will aggressively fight to keep its clients.
  4. Force a multi-year financial perspective.  Look at client revenues on a multi-year basis and analyze all budget decisions (including lateral acquisitions) on at least a three year basis.
  5. Use accrual based accounting.  Make sure the balance sheet value of the firm reflects work in progress and accounts receivable.
  6. Elect leaders for multi-year terms and then make term restrictions.  Managing partners should know they won’t be kicked out of office for making a good long term decision that costs a few dollars in current distributions.
  7. Add an outside director to your board.  Nothing drives a long range perspective like a board member who has no direct financial interest in the firm but has knowledge of what’s going on in the legal services marketplace.

Bottom Line

Whether a firm has a long term or short term perspective is often a function of external influences.  As the saying goes, “It is hard to remember that the best way to get rid of alligators is to drain the swamp when one is chewing on your leg.”  But just as a short term perspective may be necessary during times of turmoil, if maintained too long, it can put firms at a severe competitive disadvantage.  And, firm leaders that attempt to take the middle ground and be long range on some issues and short term on others, run the risk of their partners distrusting the lack of consistency.

On balance, lawyers are conservative and as their law firms and the environments in which they operate become more stable, they will probably be better served by a more long term approach.