What Law Firms Need to Know About Crisis Communications

Boies Schiller Flexner has been the subject of a steady stream of articles over the past year which suggest the firm might be facing some cash flow issues. Bloomberg reported in July that the firm was the only one in the Am Law 100 to receive funding from the Small Business Administration’s Paycheck Protection Program, although it was accompanied by several in the Second Hundred. In April, the American Lawyer broke news of fifteen partners in Los Angeles and San Francisco departing for King & Spalding. And when two Washington, D.C. partners left the firm to join Paul, Weiss, Rifkind, Wharton & Garrison in June, their contributions combined with those of the lost West Coast partners were estimated at “as much as $100 million.”

Following a delay in pay raises last month, Boies Schiller denied that cash flow had anything to do with it, responding with a statement that such an implication would be “absurd and flat-out wrong.” The raises were reportedly meant to take effect in June, being postponed several times before ultimately being implemented Nov. 6. While that kind of response may be effective in writing a brief on behalf of a client, it’s not the best strategy for combatting perceptions in the media or the marketplace.

After losing high-performing partners, it would be surprising if lawyers at the firm without sizeable books of business weren’t worrying about cash flow. Whether at one of the country’s biggest firms or a small boutique, law firm leadership has to offer a lot more than a flat-out denial to calm fears of a shaky business.

What’s missing from Boies Schiller’s statements is any sense of the firm’s strategy or priorities in the face of the departure of major rainmakers. In crisis PR, it’s critical to explain how these pieces of news, including the firm’s acceptance of PPP funding and its delayed pay raises, fit into a larger narrative. Explaining a strategy and announcing new hires would help. Likewise, some sense of contrition, regret, or other evidence of being sensitive to the human implications of the story could make it more likely that the intended audiences—clients, referral sources, attorneys at the firm, staff, alumni, and the media—will be ready to engage in a non-antagonistic way. Here, Boies Schiller seems to have a valid point. The number of employees who may have been impacted by any delayed compensation is too small to be financially material. But that doesn’t mean that a blanket and seemingly defensive denial in the press is the best approach.

In today’s media environment, law firms, regardless of size, can’t rely on the market giving them the benefit of the doubt. Crisis communication is a real expertise, and more firms would benefit from determining how they will address the next PR issue before it hits crisis proportions.

What Firms Can Do to Help Staff With School-Aged Children

There is compelling anecdotal evidence that workers with school-aged children are having an especially hard time dealing with the present situation. When the pandemic began, it was the virus itself that drew most of the attention. Now, an increasing percentage of the lawyers we advise are reporting that, while they and their families are safe, they are struggling to cope with the added burdens of running schools out of their homes.

Even the most capable multitaskers are finding it difficult to keep up with their job responsibilities while simultaneously facilitating sometimes multiple school curriculums. Lawyers are affected in particular because their income and performance are so dependent on billable hours. And we have been told by more than one attorney that school-related responsibilities are cutting two to three hours a day into their lawyering time.

This situation isn’t likely to improve as some school districts implement hybrid plans where children attend school on some days of the week and stay home on others. Schools rarely coordinate these plans with one another, so parents with children in multiple schools are faced with an increasing array of requirements to which they have to adhere. We are aware of one household where the parents of three children have to schedule up to 17 different Zoom calls for their children on a single day. This is coming at a time when law firms are counting on lawyers and paralegals to continue to generate revenues.

The most important thing law firms can do right now to support lawyers and staff with school-aged children is initiate an honest conversation about the impact that schooling and other burdens are having on them. Employees might be understandably hesitant to open up about their particular circumstances, so don’t wait for a worker to tell you an emergency has taken place or things have generally fallen apart. Let your team know now that it’s ok to say if they’re not fully ok and that the firm will respond in a flexible and intelligent way.

There are also concrete steps that a firm can take to help employees cope and continue to perform their duties. For example, consider having prepared food delivered to lighten the load on parents who have an enormous amount of caretaking to do at the moment. For larger firms who have more employees, it could make sense to subsidize or underwrite online tutoring services so that burden doesn’t fall only on the shoulders of their workers.

Some of these new benefits might seem novel or strange. So did many benefits that are now more commonplace, like providing free breakfast on Fridays. Workers without children may have a legitimate concern that their needs aren’t being as fully recognized as those of their colleagues with children. Their views and needs should be heard too. It’s possible to initiate a conversation with all of your people about what they might need while recognizing that those with school-aged children are likely to be carrying additional child-rearing responsibilities.

These times call for creative solutions, and the proper response starts with opening the door to your lawyers and staff so they can feel comfortable expressing what’s especially difficult right now and how the firm can help. The cost of not taking these extra steps can be great, in the form of workers’ compensation stress claims, lost clients due to poor work product, and malpractice actions against lawyers who weren’t able to keep up. Don’t wait to check in and offer support to those juggling the most.

Troubling Signs for Non-Equity Partners

The legal services industry, along with much of the country, is coming to terms with the reality that COVID-19 is not the short, temporary interruption many had hoped. We are beginning to see law firms make more permanent adjustments. Headlines in publications like the American Lawyer are already highlighting the acquisition of stars in hot practice areas, but what won’t be included in the press releases is what will happen to less-desirable practices areas and less-favored attorneys.

While winners in bankruptcy, internal corporate investigations, and healthcare may be sought after right now, a larger number of attorneys work in areas of litigation and transactions that are slowing down. Behind many announcements of new partners will likely be untold stories of other lawyers at those firms who have been demoted from the ranks of partner or had their compensation reduced.

Through the end of the year and into the first quarter of 2021, we expect to continue seeing attorneys who represent certain industries, such as retail and hospitality, suffering severely. Lawyers whose work is focused on serving these industries should start to create options for themselves now. Many partners, regardless of the clients they serve, will need to consider making a move during the first quarter of 2021 when bonuses are usually paid. Given the magnitude of the economic, societal, and health-related changes that are buffeting our lives, some lawyers who have always felt secure at their firms will find themselves looking for an exit in the months to come.

While we may be in physical isolation, this is not the time to isolate from one’s network. For non-equity partners whose clients have been hit especially hard, avoid the temptation to wait for the bad news to come to you. Likewise, it’s a sign of intelligence, not weakness, to begin identifying allies with whom you can discuss forthrightly your situation and your concerns.

By starting the process now, attorneys can give themselves the time to cultivate strong relationships within their networks before asking for any favors. This is also the moment to be present for one’s existing clients through the hard times. When economic activity returns to more normal levels, the demand for legal professionals will return for a vast majority of lawyers. But non-equity partners first need to cross some very choppy waters.

Increase Your Firm’s Cash Reserves

As we reach the mid-point of the calendar year, law firms should be evaluating key financial metrics. It’s a great time to begin tax planning for the full year and to preview next year’s tax returns. Starting now gives owners time to adjust if too much or too little has been withheld. It also allows leaders to take stock of projected cash flow and expenses.

There’s one element to which firms should pay particular attention this year: cash reserves. Many are in the habit of distributing all profits to partners or shareholders at year’s end, but this means they have no cash on hand when January 1st rolls around. The legal press has finally gotten around to questioning the wisdom of draining cash reserves every year. This is a dubious strategy generally (as we wrote about back in 2015), but it could be ruinous in 2020.

Right now, the risk of a financial shock is significantly higher than usual. Employees could get sick, clients could be unable to pay their invoices, and hackers could take advantage of the vulnerabilities of a work-from-home system. The government is rapidly changing rules and requirements, which makes it difficult to plan, and a firm’s other sources of revenue, like subletting office space, are much less reliable.

Beyond the safety net that cash reserves provide, law firms can use cash to expand through acquisitions of distressed firms. There will be more disgruntled but talented lawyers on the market over the next 6-9 months. And with interest rates as low as they are, now could be the perfect time to grow your firm’s market share. These are all better potential uses of firm profits than dividing them among the owners.

Because of the dip in revenues that generally accompanies the holidays in the last quarter, firms should work with their accountants now to plan toward ending the year with cash reserves to cover, at minimum, two months’ worth of expenses.

California SB-939 Signals Potentially Major Changes in Real Estate Leasing

Businesses in California will have an opportunity to rehash traditionally long-term leases if Senate Bill 939 is passed. Applicable to commercial tenants who have experienced a decline in average monthly revenue equal to or exceeding 20% since government restrictions altered the economic landscape, many could qualify “to engage in good faith negotiations with [landlords] in order to modify any rent or economic requirements.”

This provision applies to tenants in food and beverage, entertainment, and performance venues. By its terms, SB-939 would not appear to cover law firms and other professional services companies. Moreover, the bill was recently amended to eliminate perhaps its most far-reaching tenant protection – the ability of commercial tenants to walk away from leases while capping their financial exposure.

Although the protections afforded tenants under SB-939 are narrowing, it is clear that COVID-19 and its aftermath have fundamentally changed commercial real estate. After decades of leaving commercial landlords and tenants to negotiate their own deals and live with the results, the last few months have seen prohibitions on the eviction of commercial tenants and other government interventions that would have seemed unthinkable a few months ago.

In this environment, some law firms are likely to take aggressive action to renegotiate leases. As consultants to law firms, we have already been contacted by managing partners looking to reduce their square footage, especially as relatively few lawyers have expressed enthusiasm about returning to work in a high-rise office.

It would be a mistake for law firms to conclude that they can just walk away from their lease obligations. In this legal and economic environment, it would be easy for law firms to overplay their hands in discussions with landlords. The next few months do, however, provide law firm managing partners with a rare opportunity to address their real estate needs and perhaps negotiate a more appropriate lease.

COVID-19 Will Hasten the Decline of Small Law Firms

Everyone knows that “small businesses are the backbone of the U.S. economy.” This notion is so widespread that it obscures what has actually been happening over the last two decades.

The Small Business Administration regularly promotes the idea that almost all jobs are created by small businesses. But the SBA defines small businesses as those that employ fewer than 500 employees. By that measure, more than 99% of workers work for small businesses.

But once you examine employment data at a granular level, a more interesting and complicated pattern emerges. According to a report from JPMorgan Chase, since the early 2000’s, small businesses have come to account for a minority of the U.S. workforce. Only 18% are employed at organizations staffed by fewer than twenty people, and the share of GDP represented by small businesses has fallen since the late 1990’s from over 50% to below 45%.

COVID-19 is likely to speed up this trend. It has been estimated that at least one million companies with ten or fewer employees will go belly up as a result of the pandemic. The effects of federal measures like the Paycheck Protection Program, designed on its surface to bolster smaller entities during this crisis, are actually likely to exacerbate the gap between organizations with fewer than ten employees and their larger counterparts.

So what does this suggest about law firms?

In many ways, law remains an industry dominated by small employers. The State Bar of California reports that approximately one in five of its members are solo practitioners and 42% work at firms with between two and ten attorneys.

But the same trends that have caused a reduction in employment by truly small institutions throughout the U.S. economy will almost certainly impact the legal services industry as well.

As the benefits of size continue to increase, boutique law firms may find themselves at a further disadvantage. Smaller firms, and especially solo practitioners, should therefore consider growing by either merger or acquisition. And for younger professionals, inheriting a practice is an increasingly relevant strategy. Being proactive in considering these options may make the difference between thriving and failing to survive in the coming years.

The Plight of Law Firm Marketing Departments

We’ve begun to see a disturbing trend in professional services as organizations respond to the economic impact of the coronavirus. Faced with an uncertain future and looking to cut costs wherever possible, some firms are trimming their marketing departments as a way to reduce expenses.

We are aware of at least one Am Law 200 firm that has frozen business development spending, including certain reimbursements for partners. Notably, some firms are going as far as to lay off or furlough their marketing teams, including senior officers.

This is a curious move. Billion-dollar entities should be able to afford to keep senior marketing officers on the payroll for a few months. Moreover, C-level executives have expertise and institutional knowledge that should make them valuable in a crisis and hard to replace.

Perhaps certain law firm managing partners are showing just how little they value their most senior administrative managers. Large law firms have historically favored paying lawyers and resisted paying top dollar to senior administrative managers. In a crisis, firms might be reverting back to this tendency, and the marketing department is bearing the brunt of administrative cost-cutting efforts. As hiring needs decline, it is possible that HR departments will be next to see cutbacks.

In many ways, it’s harder to lose the head of marketing (which is happening now) than to fire your 29th-most productive partner. That is why all of these reductions in law firm administrative management should serve as a warning to underperforming attorneys.  Given what large firms have demonstrated recently, no one should be shocked when firms go after senior lawyers, especially high-earning service partners in disfavored practice areas.

COVID-19 Presents Lobbying Opportunities for Law Firms

The rapid expansion of law likely to follow the COVID-19 crisis presents a unique opportunity for smaller firms and solo practitioners to get involved in lobbying efforts. While larger and more established firms have a head start when it comes to decades-old regulations, the establishment of new legislative schemes provides a chance for even footing.

Historically, crises have led to the development of new laws in response to unforeseen issues and vulnerabilities. Litigators, in particular, are in strong positions to expand their advocacy in such times because they’re able to represent clients in these burgeoning areas of law before local, state, and federal bodies. Other attorneys may find that their expertise feeds into one or more of the topics up for debate, and they could use that knowledge in lobbying efforts.

With the sudden surge in unemployment, those who specialize in employment law will be able to jump onto the ground floor of new policy and precedent-setting litigation.

As many renters feel the effects of an economic downturn, real estate lawyers might find ways to weigh in on landlord-tenant matters. The implications of this pandemic will touch a huge number of industries, creating similar lobbying and advocacy opportunities across many practice areas.

As laws are formed following this crisis, lawyers should be looking at how they can utilize their existing specialties and expand their expertise to include these new markets. No one will be an authority initially when it comes to just-developed regulations, so one lawyer has as great a chance as any other to adopt an additional, related specialty. Operating at the forefront of legal change allows a practitioner to establish herself as a trusted source on a given subject when there may not be many. There’s an enormous benefit to being among the first in line.

Succession Planning in the Age of Coronavirus

The increased importance of succession planning that preceded the onset of coronavirus may only ramp up as a result of the pandemic. The difficulties of running a law firm or other professional services company remotely may be the straw that breaks the camel’s back for some practitioners nearing retirement. And as many practice areas experience declines in demand, firm management may need to consider transitioning or acquiring new ones to pick up the slack.

With stiffening competition, we’ve already seen an onslaught of Big Law mergers over the past several years. At the same time, the attorney population has continued to age, resulting in a disproportionate number of practicing lawyers over the age of fifty. Recent losses in the stock market will undoubtedly motivate some more senior attorneys to push back their retirement date. But, as we’ve witnessed in just these first few weeks, the uncertainty of COVID-19 is leading others to expedite their decision to retire now.

It’s more important than ever to consider succession planning options in your business development strategy. In the coming months, there’s a very real likelihood for many firms that current clients will generate less revenue than they did a month or two ago. While some assistance is available to supplement these gaps and maintain payroll, the reality is that you will need to continue generating new business as the current situation unfolds. While adding new clients should be part of your plan, succession planning, mergers, and acquisitions present especially powerful opportunities to grow during this crisis.

Free Webinar on April 14th: How to Grow During a Crisis Through Succession Planning and M&A

We will be addressing this topic in depth during our next webinar on Tuesday, April 14th at 2 p.m. PST (4 CST/5 EST).

To join us for this no-cost Zoom webinar, please register using the link below:

We look forward to sharing ideas and best practices for this crucial aspect of business development in a crisis.

Cash Flow in a Crisis

In our last post, we advised firms against letting go of personnel as a first resort in this time of crisis. That was published before the Small Business Administration launched its Payroll Protection Program, which provides significant financial incentives to keep people on the payroll through the end of June. We continue to advise most law firms to hold on to their people unless they foresee a reduction in demand that would continue once social interactions return to normal.

There is every reason to think that car accidents will resume once traffic returns. In contrast, cruise ship occupancy may not go back to pre-pandemic levels even after the threat of COVID-19 has passed. Notably, the question of how quickly business financing will bounce back remains up in the air.

After 9/11, even the most credit-worthy of business customers struggled for months to obtain financing. As consultants to law firms and other professional services companies, we are working with our clients to help evaluate how each of their existing practice areas is likely to fare, and we are identifying additional practice areas to complement their existing offerings.

So what can professional services firms do to protect their cash flow?

At many small and mid-sized firms, the equity partners collect around fifty percent of total revenues. So, the first place to look in addressing cash flow concerns is non-essential partner compensation. This might strike some as a quaint notion, but having owners economize to keep their people on the payroll is a tried and proven solution in times like these.

Toward the same end, we don’t recommend skimping on expenses that are directly tied to bringing in revenues. Invoices need to be sent out and collections issues need to be handled. Don’t let important administrative functions fall by the wayside, but look at all other outgoing checks for places to pull back.

Firms should first consider the low-hanging fruit, taking such measures as cancelling subscriptions to non-essential services, postponing or renegotiating perks like club memberships, and looking for cheaper alternatives to elements like the company’s phone plan. Communication is vital here to maintaining relationships with your vendors. If you decide to delay a payment or cut out a particular expense, talk to your providers about it so they can plan too. You don’t want to unexpectedly stiff someone, especially in a time when their margins are probably just as tight.

If these measures prove not enough and your firm finds itself in need of an infusion of capital to make payroll, you’ll have to decide where it’s coming from. The sooner you start thinking about this possibility, the better. The fastest option with the least red tape is for partners to pony up the cash personally. Standard bank financing might be harder to acquire during an economic downturn, but you won’t need any institutional approval to charge to your own credit card.

You could tap into an existing line of credit if you’ve got it or consider a higher-interest-rate loan, knowing that you’ll be paying it back in a short period. In this circumstance, business debt is particularly justifiable. Explore the financing options and defer bills where possible to keep the business afloat until revenues improve.

We recommend that you make these decisions in consultation with people who are not as emotionally invested in your firm. These are difficult conversations, so it is helpful to get used to talking about them. We also urge you to increase the frequency at which you review the firm’s cash flow. While monthly or even quarterly is often enough, during a crisis, you should be generating and assessing profit and loss statements every week, even every day if it comes to that.

These are tough times for sure, but professional services firms have generally done very well once past crises have abated.  We expect the same to happen here. This too shall pass, and we are here to help you.