How Not To Do It

“I have five fundamental principles that I believe underpin most successful businesses, rarely do I come across a company that flaunted them all.”

Someone told me once that businesses tend to be run in a way that reflects the century the industry was formed and I think there has been, over my working life at least, something in that. Law firms have, until recently perhaps, fitted that model quite well, particularly at the top of the pile where fees have been little challenged and equity partners have all lead rather gilded lives.

For an established firm, the law is such a safe business to be in that I wasn’t really expecting a big law firm to fail so I was intrigued by the rather spectacular failure of US law firm Dewy & LeBoeuf, that also brought down its UK business.  The fact that half of its 300 partners abandoned ship since the beginning of the year was not a good sign and it has now filed for Chapter 11 bankruptcy protection.

It quotes “liquidity problems” and these appear to have been driven by a degree of ambition that suggests a loss of touch with reality, promising big guarantees to superstar lawyers, over several years, in order to grow and join the top table of global firms. It seems to have borrowed $200m in order to attract these star names, but was then overtaken by the economy sliding into recession. As more partners left credit covenants were breached and the company faced a tsunami of writs from disgruntled former employees as well. At the same time the Manhattan district attorney began an investigation into its former chairman.

This company goes a long way to proving my 5Secrets of business success (see my book) by having done the complete opposite:

  1. It embarked on a very ambitious growth plan in a way that suggests to me that it hadn’t done this before and didn’t know what it was doing.
  2. Like most professional firms it relied on relationship inertia, more than brand differentiation, to win business. It could only sustain it if it kept its partners.
  3. In order to attract and retain “talent” it took on much too much risk in terms of guaranteed remuneration and speed of growth. This is always in part because of 1. above.
  4. It did apply leverage, in fact, far too much and this was just not sustainable when the market turned down as it did. Leverage always increases risk. It tried to do too much too soon and its sense of timing was awful – as it very often is, in my experience.
  5. Rather then being aligned the partners were set against each other.

I don’t often come across such a great example of how not to do it, growth that is, but thankfully there are few sectors whose leaders have the hubris to contemplate such folly.

My point? Try doing the opposite and you might be surprised just how well things turn out.

Mark

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