Law Firm Management

Tales of Fundamentally Flawed Founders

I have decided not to pick on Big Law today for a change. Let’s talk about smaller firms with entrepreneurial founders instead.

Sometimes lawyers call me and tell me about how they feel about their law firms. They don’t call me if they are happy. They call me when they want out. Out of the firm, out of their practice area, out of private practice, out of the practice of law altogether. Out of something.

I have heard a good number of tales of woe. One interesting theme is around the flaws of law firm founders. Serious flaws. The type of flaws that drive good people to head for the exits. I have termed this Founder Deficiency Syndrome. It sort of has a nice ring to it, don’t you think?

During my career, I worked with many entrepreneurs and I had the opportunity to observe a fundamental issue that is common to entrepreneurial business. Simply put, the skill set that it takes to start a business is rarely the same as that which is required to take the business to the next level. Unfortunately, business owners frequently fail to recognize this issue or to develop strategies to address it.

As lawyers are not famous for their management skills, this problem is rampant in law firms.

I first observed this problem in my own firm. A brilliant entrepreneur started the firm and quickly grew it from a handful of lawyers to quite a successful medium-sized firm. He managed everything, pretty much himself. Then it stalled. He could not fix it. It made money, but not nearly enough. He got out and went into the private sector.

The next generation of partners, which included me, were technically minded folks without a single entrepreneurial bone in their collective bodies. However, they knew what they did not know and hired experts to help them. The retired managing partner of an office of a national accounting firm came on as a part-time CFO and brought order to the financial structure. A great marketing consultant (@nevillepockroy) taught us about branding. A phenomenal general manager with expertise in human resources professionalized the hiring and compensation structures as well as a myriad of other processes. The firm blossomed. Not because the partners were more capable than the founding partner. Paradoxically, they did better because they were less capable. Doubting themselves and not having the founder’s ego, they reached out for help from experts. They spent money to listen to other people’s advice, something that founders seem to abhor doing.

More recently, I have seen this same problem being presented by various young lawyers with whom I have been speaking. The founders of their firms are super-capable. They have built firms out of nothing. Unfortunately, they subscribe to the ancient code of business founders that goes something like this, “We are smarter than everyone else. To do a job well we have to do it ourselves. We must be in control at all times. Soft skills are nice but not necessary. Our business defines us.”

As subscribers to this ancient code of entrepreneurs, law firm founders often do the following:

1. They hold onto the key management roles. Or all of the management roles.

2. They often say “We are too small or not profitable enough to hire: [fill in the blank: a COO, CFO, Marketing Consultant, Knowledge Management Lawyer, Human Resources Consultant, Digital Marketing Expert, Marketing Coordinator]. It makes sense to them that they should spend three hundred hours a year on management, losing $600.00 an hour of billings ($180,000) rather than spending $100,000 to hire a more qualified person to manage the firm. They convince themselves that management is something that they do in their spare time so it does not cost anything.

3. Since they are always swamped practicing law, bringing in clients and day to day management of their firm, founders don’t often get around to doing the stuff that they say that ‘only the big firms have time for.’  Things like: (i) having a business continuity plan, so that when a pandemic strikes you can seamlessly transition people to working from home, or if the office burns down the data is safely stored off-site; (ii) having a consistently applied compensation plan so that you don’t have to deal with Associate Number One finding out that Associate Number Two is earning more money for no discernible reason; (iii) branding their firm so that the marketplace knows what services the firm provides; or (iv) providing marketing training to their Associates so that they learn to bring in business. 

4. They don’t find the time to take care of the small stuff either, such as (i) digitizing the old files so that they can reduce the costs of off-site storage; (ii) putting the phone plan out to tender; (iii) optimizing the benefit plans;  and (iv) keeping the technology up to date, as well as many other things that will reduce costs and increase efficiencies.

5. Since their business is often close to their heart, you would think that founders would, like Celine Dion, want their heart to go on, and would plan for it to do that. But no. I see aging founders with no discernible succession plan.

Business succession is not difficult stuff to understand. There comes a time that business owners want out. There are a limited number of choices. In Australia you can take your law firm public. In Canada and the United States you can’t. So, the usual choices are to wind it down (and often lose money doing so) or sell it. Since law firms are tough to sell, the usual exit strategy is to bring in partners who will take over the business and repay the founder their capital and maybe trailer fees for clients left behind.

I used to tell my business clients that the prevailing wisdom was to start the exit process seven to ten years before their planned exit date, and ideally much earlier than that. But I see law firms with a good number of lawyers who have very few (if any) equity partners coming up the ranks to take over. The Founders are too busy to think about it.

6. Founders tend to value people who are like them, but not those with the skills which they are missing. So, the subject matter expert who builds the firm’s reputation but does not bill a ton – expendable. The sub-par lawyer who brings in a lot of revenue – golden. Couple that with the famous deficit that founders of law firms often have for financial management and you see things like the ‘expendable’ lawyer with the low billings and low overheads leaving for greener pastures and the sub-par lawyer with the large revenue and huge overheads being paid a truck load of money to stay with the firm. Who was really more profitable? The firm does not have the financial systems to figure that out.’

7. A corollary of Founders valuing people who are just like them is that they often do not value people who do not want to devote every working hour to the firm, like young lawyers with young families. Turn-over is sometimes rampant.

Of course, not all small and medium sized firms have all of these issues. The firm with which I spent most of my career had fewer of these issues than most because the founders departed early on and the remaining partners paid money for professionals to run the place. A strange thing happened. The more we spent, the more money we made, because the partners were all spending their time practicing law. However, from the conversations that I have been having with lawyers since I retired, I am fairly sure that Founder Deficiency Syndrome is alive and well, which means that it is keeping founders, partners and associates alive, but not so well.

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