The New Yorker’s recent article about the events leading to the bankruptcy of Dewey & LeBoeuf could be a business school case study in things that should be avoided in a professional practice. While Dewey & LeBoeuf was a law firm, the same principles could be applied to professional practices of accountants, physicians, insurance brokers, investment bankers or financial advisors.
While its helpful to read the New Yorker article as background, it’s not really necessary to understand these few rules culled from the article.
1. Don’t Build Silos.
Workers need to see their new colleagues, daily, and to get to know them. Even if their only daily interaction is in passing at the water cooler or wash room, people need “face time” to bond. There needs to be a regular, personal connection with the other members and staff of the practice. One group cannot deem themselves to be part of a “fortress”, as was the case with one of the practice areas described in the New Yorker article.
Many practices tend to physically locate specialty practice areas (or an acquired practice) into adjoining workspaces or even to put them off on entire separate floors. While there is some marginal efficiency in this, the physical segregation prevents proper cultural integration with the wider firm. Its far better to intermingle members’ and associates offices so that the litigators, for example, are mixed in with the newly merged securities practice.
2. Actively Manage the Firm’s Liquidity
Dewey & LeBoeuf failed for a variety of reasons, principally related to a failed merger and disputes among the firm’s members. Still, certain cash management practices helped speed the decline and, ultimately, the bankruptcy.
Practices that produce so-called “deliverarables”, like accountants (audit reports, tax returns, etc.) or lawyers (securities registrations, contracts, complex litigation, etc.) or other practices whose work will span more than a month should include work-in- progress (“WIP”) billings in every engagement letter and the terms of payment specified.
At the very least, billings for WIP should be completed monthly by every professional with billing responsibilities and within seven days of the month’s close. Not only does this improve days working capital for the firm as a performance measure, but it improves collections. Billings for “side” or “extra” work that clients or customers might question are more easily recollected, so they can be readily detailed. That doesn’t happen, generally, when work is billed three or four months after it is performed.
A professional’s compliance with the practice’s billing procedures should be evaluated as part of their overall review. Persistent divergence from those procedures (say, for two out of three months) should result in sanctions, such as charging a practice member’s distributive share for the “float” of the overdue billings.
Practice management should follow strict budget practices and discipline that involves various practice department leaders, holding them accountable in managing the budgets of their practice department and providing them with budget data no less than quarterly.
Practices should consider diversifying and “shopping” their line of credit to different lenders every three to five years. Diversifying the line among three to five banks, or having a back-up LOC in place can help safeguard a practice when it suffers a temporary downturn.
Another tactic to maintain liquidity is to deposit a percentage of partner profits into something akin to a non-qualified deferred compensation plan, where payment of a percentage of members’ shares (say, 5% to 15%) are contingent for three to seven years. Such an account – a “rainy day fund” — could be clawed back by the firm either individually (in the case of errant performance by a single member of the firm); or, pari passu from all the members of the practice on the occurrence of certain contingencies, such as if certain management metrics fail to be achieved (e.g., projected cash flow dips below budgeted requirements.)
3. Brand the Firm, Not the Individual
“Superstar” performers can be great for a firm, but some can suck up the oxygen of a professional service firm if they don’t play as part of the team. They can be divisive and ruin morale for other professionals and staff in many ways.
Staff who have been promoted up to senior positions and experienced hires who are not members of the firm should be mandated to “brand” their practice and the firm rather than themselves and their collaboration with colleagues should be part of their evaluation and their compensation review.
Marketing collateral should be branded to highlight the firm and the practice more than the individual. While its appropriate to provide the name and CV of the practice member who authors articles in journals or in marketing collateral, practice managers should consider using the firm’s telephone contact number and a targeted marketing e-mail address (e.g., JSmithinfo@practice.com) so that leads generated from the marketing collateral can be aggregated by the practice instead of just the individual.
Each specialty practice leader should have a strong “second-in-command” who is intimately involved with client relationships, specialty practice management, and other day-to-day management activities of the specialty practice. This will help to keep clients who might otherwise “jump ship” if the specialty practice leader leaves the firm.
4. Cull the Troublemakers.
It’s easy to judge someone whose opinion of himself or herself will jeopardize the well-being of the firm. The fashion in which they treat colleagues and staff, their behavior in meetings and social situations, and their overall ability to “play well and get along with others” is as discernible as it was for their kindergarten teacher. Members of a practice who have been advanced from within will have already proven themselves up to par on this count, but those members hired laterally from outside have not.
It is important to vet outside hires carefully and purposefully. Get to know the new prospective member well before they are brought into the practice and in a variety of environments and with various levels of staff from your practice. How do they work? How do they treat members and associates in the practice and even the support staff?
Check with the prospective new member’s adversaries as well as their friends, if at all possible, such as by meeting with people who have recently left the prospective member’s current practice. There’s no need to let on that you’re considering the prospect; that’s actually harmful. Better to simply raise the prospect’s name and let his former colleague engage in a monologue.
If due diligence fails, it’s better for the sake of the practice to jettison the trouble maker early than to allow him or her to obtain a foothold.
5. Don’t Act Alone
In acquisitions of other practices and in head-hunting practice members, its vitally important that the individual managing the practice have the full support of the leadership of the practice. Nothing will undermine a practice manager’s authority sooner than the ability of the leadership of the practice to disavow knowledge of a practice manager’s decisions or, worse, to say, “I told you so” when a practice manager’s decision goes bad.
Practice managers may be better informed about a matter affecting the practice and they may be far more perceptive about the business of a proposed transaction than their non-managing colleagues. It doesn’t matter. Part of being a good practice manager is persuading your colleagues to make the best decision; then, biting your tongue when they don’t.