The Challenge for Law Firms without Restructuring Practices

The challenges facing law firms across the country, of every size and shape, are well documented. We have seen a couple of the giants close their doors. Fine firms are laying off attorneys in numbers unlike anything seen in many decades, if ever. And, many firms are beginning to feel significant financial stress.

The reasons for these difficulties are well known. Law firms are being impacted by the same ripple effect of the recession, which is impacting all kinds of other businesses. Clients are being lost to businesses closing. Collection problems and the resulting bad debt expense are increasing. And, clients are pushing back on pricing, and are delaying work wherever possible.

Then there are the industry specific problems. Transactional work of all types has plummeted as the overall lack of liquidity makes transactions difficult, if not impossible, to finance. Disputes are being settled more quickly by parties that can't afford protracted litigation. And foreign investment and the resulting cross border transactional work has slowed dramatically.

When dispute resolution and traditional transactional work slow dramatically,

most business oriented law firms are going to feel pain. And, most have begun to feel real pain!

I am pleased to see that most are also reacting quickly by making the cuts in staffing levels and expenses that other businesses are making.

The problem is that seldom is just cutting the solution for any business. Cost cutting is an important tool for skilled managers, but ultimately success comes from growing one's business. And, that is what has almost every managing partner without a restructuring practice looking at getting into that practice area by recruiting a restructuring pro.

The challenge for managing partners is that the restructuring market for law firms has changed dramatically from the last downturn. The nature of the business and the sources of the business have changed from historical patterns. And, perhaps most importantly, the leverage for other practice areas has changed.

Compounding the challenge for the managing partner of a law firm without a restructuring practice is the fact that there are many fine bankruptcy attorneys; the number of restructuring practice builders is a small subset of that number. And, supply and demand has driven up the cost dramatically of attracting a restructuring pro, many of whom would only come to a firm without a practice if they can bring a couple of supporting attorneys. In a major city, the cost of entering the restructuring market can easily require a seven figure investment. And in NYC, Chicago or Los Angeles, one can easily be looking at a multiple seven figure investment!

Here is the real rub. That kind of investment may well buy a dinosaur or two. There are fine bankruptcy lawyers who are having difficulty keeping themselves busy…truth be known…in these changed markets. Woe be to the managing partner who chooses wrong. And, woe be to the bankruptcy attorney who accepts the gold but doesn’t have a solid understanding of the new dynamics of the business. Or if he (or she) does have the requisite understanding, he lands at a firm where the slide to dissolution is so far along that no restructuring practice could develop and prosper in such a firm. “Saviors” that don’t save can well see their reputations trashed in this day and age where law firm failures are so often accompanied by a ton of very public negative publicity.

Never before has there been a greater need for skilled due diligence, on both sides. The challenge is succesfully doing such diligence when the subject matters lies beyond one's expertise.

Coming next: This five part series continues with a look at the second scenario, law firms that currently have a restructuring practice. The series started here.