Dealing with Recession

March 24th, 2009 by Jim Cotterman

Good compensation decisions are tough enough to make in good times.  Making them in times of severe economic challenges is another matter entirely.  Many firms are torn by competing interests of culture/values as opposed to a strict adherence to meritocracy.  There appears to be far more willingness to be generous with an under-productive individual or group or office when the rest of the firm is doing very well.  But, when the pattern reverses and it is a few who are doing well while many others struggle, something different emerges.  This is the reality that we find law firms in as this severe recession unfolds.

Aggravating these problems is an overlay of continued dysfunctional (or at least unaccommodating) credit markets brought about by the banking crisis.  Banks seek personal guarantees, stricter default provisions covering more metrics, quicker repayment terms, higher interest rates, and greater coverage (i.e. lower borrowing authority); if they are willing to lend at all.  And this is at a time when partners are hard pressed to inject capital due to the depressed value of their own assets.  Thus, cash to sustain and buffer the business until revenues return is limited.  Firms with strong balance sheets are thankful for the additional time such resources provide.  But that time is limited as even the strongest firms are only a few months from liquidation.

To manage the effects of the recession law firms have taken a multitude of steps to combat these forces including terminations, furloughs, reduced time commitments, pay reductions, and delayed/deferred start dates.  Other overhead can also be examined, but to meaningfully affect law firm finances one must attack payroll costs and include partners in the equation.

This entry was posted on Tuesday, March 24th, 2009 at 11:26 am and is filed under Economics, Capital, Partner compensation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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