Leading through financial distress: management, communications and welfare considerations

Law firm leaders need to maintain dialogue with their workers and manage expectations in periods of financial stress, write Charles Metherell and Michael Evans

The legal sector is enormously resilient in good economic times and bad, but it is not immune to financial stress, whether driven by exposure to sectors in unexpected decline, management problems, the discovery of fraud in the business, or something more prosaic such as the spiralling cost of insurance premiums. Almost 40 UK firms closed in the last fiscal year for the latter reason alone, while more broadly according to Solicitors Regulation Authority (SRA) data more law firms closed (566) than opened (403) in the same period.
While short-term financial stress can often be overcome with a relentless focus on managing costs and driving more profitable business, the data (as well as some high-profile recent failures) suggest that the number of firms finding themselves tipping into more significant financial distress is growing and is likely to continue to grow as the economy stutters. 
So, what are the key priorities for law firm leaders trying to turn around a firm, or retaining value in an accelerated M&A process?
Managing key stakeholders 

The starting point in managing a law firm in distress centres around balancing your obligations and responsibilities to the major stakeholders for the practice (for example, the SRA, your people, your funder and your insurer). Failure to deal with one or more of these key stakeholders effectively can lead to greater problems further down the line. Facing up to difficulties and dealing with them in a measured, appropriate and consistent manner is undoubtedly the best course – do not put your head in the sand under any circumstances.
Your obligation to the SRA requires the self-reporting of financial difficulty, which may for instance amount to an inability to pay HMRC, rent, suppliers or salaries. Reluctance or failure to self-report can result in more serious consequences and enforcement by the SRA, who will investigate. Entering early discussion and keeping them advised of the steps you are taking to manage financial risk can only help. They and others can support you and give practical advice on improvements that can be made to all aspects of financial management and financial hygiene. The SRA will be concerned about the impact on clients, which may for example be evident from an increased number of complaints about service and client monies. They will also be anxious to protect the public interest. Our experience is that the SRA will want to engage and work with any firm that is clearly working hard to manage themselves more effectively at a time of distress. The SRA will want to avoid the ultimate sanction of intervention if possible. 
If there is a risk of insolvency, you should contact insolvency practitioners and specialist advisers at the earliest opportunity. They can advise on the mechanics of any insolvency process and steps that should and should not be taken in the meantime. Advice will also need to be taken on how to deal with a possible orderly wind down of the practice and/or a sale or disposal, while at all times involving the SRA in regular updates to ensure that clients and client money are protected.
We referred earlier to other significant stakeholders in the law firm business and their management in a period of distress. It is important to engage with your funder and insurer sooner rather than later to keep them on side. Transparency and openness are certainly a better approach if a far more serious consequence is to be avoided.
Communications in a high stress environment
The key components for communicating in a distressed situation are like other strategic or crisis communications scenarios (stakeholder mapping, establishment of clear key messages, a timeline for next steps, Q&A materials and potentially a media statement). But business distress comes with higher stakes, more difficult decisions and stronger emotions internally. Leaders need to draw on deep reserves of resilience and empathy to navigate such situations effectively. 
Remember, people are your most important asset and they will respect openness, transparency and honesty, even in the most difficult of conversations. Always be fair and straight with them. This means communicating about financial difficulties and what is being done to address them. This is hard, but always remember that people can fairly easily move on, potentially exacerbating a bad financial situation.
They will respond better to knowing that there is a plan and the steps that are being taken rather than relying on gossip (internal and external). Leaks to the press are almost inevitable in larger firms and your internal comms must be strong enough to offset these or disaster is likely to ensue. Clearly, we are not talking about 100% transparency with all people at all times, which is why having a proper plan to communicate what is happening is so important. This is essential if you are to retain talent for as long as possible to help retain value in the business. 
Senior management – including interim or turnaround appointments – need to be people-focused and members of the team should also be trained to advise on health and welfare issues. Fundamentally, managing a firm in distress means that people will be in distress, and you should acknowledge this. Create an atmosphere that is collaborative even in the most challenging of times and ensure your heads of department are part of the planning process as they will be vital in cascading the right messages throughout the organisation, however large or small the firm is.
None of these things guarantee success, but they will maximise your chances of turning the business around and create the time and space for you to take clear-headed business decisions that you can effectively communicate to your key stakeholders.
Michael is the joint managing director of Byfield, a PR agency dedicated to the legal sector. Charles is a solicitor who runs a management consultancy business specialising in the provision of risk, operational, restructuring and strategic services the legal sector. He is also a special adviser to Byfield.

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