The Most Overlooked Trait in Potential Law Firm Partners

When law firms consider adding a partner, or colleagues consider starting their own firm, they understandably focus on business metrics such hourly rates, billable hours, and portable books of business.  There is no denying that such metrics are critical to the success of any law firm.  But in my experience consulting with lawyers, too many partnerships fail because law firms and attorneys fail to pay enough attention to certain personal qualities of a prospective business partner.

Specifically, law firms fail to give adequate weight to how stable and reliable prospective partners are in their personal lives.  Too often a partner’s personal life bleeds over into how the firm manages money.  For example, a lawyer going through a divorce may convince the firm to forego capital contributions or distribute funds imprudently.  In firms with five or fewer equity partners, some of the pressure firms face to carry a small cash reserve arises because one firm partner needs an unusually large infusion of cash.  Similar cash flow pressures can also arise because partners live beyond their means.  Whatever the cause, too many firms imperil their financial viability by catering to the short-term cash flow needs of a single partner.

That is why well-run firms and strong partnerships will set up mechanisms that will make it harder for them to be held captive by the private life of a single partner.  It can, for example, be wise to strictly enforce provisions in the partnership agreement that deny the payment of bonuses to partners who haven’t submitted their time sheets.  Likewise, firms should generally be skeptical about loaning firm assets or money to a partner whose personal life is in relative disarray.

There are no easy or part answers when a firm partner develops an immediate need for cash.  Firm leaders need to weigh carefully the best interests of the firm with treating a colleague decently.  Human beings are unpredictable and forming law partnerships inherently involves assuming certain uncertainty regarding the personal lives of partners.  Medical and family emergencies impact even the most stable and reliable of people.  It is impossible to eliminate the risks associated with making any significant hire.

Law firms that are considering adding new partners should therefore be more vigilant than they are about identifying high-risk behaviors and traits in those partners.  This is especially important for lateral partners who have little or no previous connection to the firm.  Too often firms have been burned by not performing adequate due diligence on prospective partners.  In today’s dynamic and competitive market place, law firms have much to lose by failing to pay attention to troubling personal qualities of potential business partners.

Running A Law Firm As A Business

Many lawyers are urged to run their firms more like a business.  But what does that mean?  It can be confusing to know given the variety of scenarios in which business owners and executives justify a decision by saying “It’s just business.”

Maximizing behavior is often justified on the grounds that it’s needed to run a business.  For example, CEOs of pharmaceutical companies that have dramatically increased the prices of life-saving drugs have defended themselves by arguing that they “have a business to run.”  Likewise, the managing partner of a law firm could pay a paralegal $15 an hour and bill clients $125 an hour for the paralegal’s time and chalk up the difference to “running a business.”

In my experience advising law firms on business issues, I have rarely come across this kind of maximizing behavior.  Lawyers who struggle to run a firm as a business are dealing with a different set of problems.  They aren’t trying to identify the fullest extent to which a certain matter can be made profitable.  Rather, they are more likely not to know how profitable they are or how different practice areas differ in their profitability.  Their problem is akin to the restaurant owner who doesn’t know how much she pays for the food that is served on the $25.00 entrée.

Too many lawyers don’t know basic information about their firms, including how much money they brought in that month and how profitable they were (or not).  Likewise, they often don’t know how much money is in their operating bank account or whether that balance has increased or decreased over the last quarter.  By contrast, lawyers invariably do know how many billable hours they have billed.  This is understandable given that law firms tend to set hourly targets for hours worked more commonly than they set specific targets for revenues generated.  This is a perverse practice to the extent it causes lawyers to ignore critical issues such as cash flows and profitability.

At its heart, the admonition for lawyers to run their firm’s like a business is the desire for them to pay attention to business fundamentals.  In today’s competitive environment law firms’ continued existence depends on the ability to sustain profitability.  Nothing about paying attention to cash flow, avoiding clients who are unlikely to pay, or taking prudent steps to collect from delinquent clients, will cause a law firm to gouge their clients.  There is a critical difference between maximizing profits in a predatory manner and ensuring that the firm can serve its clients, employees, and other constituents.

So the next time you are urged to run your law firm more like a business, please take heed.