Sunday, October 12, 2008

Making Fondue, Personal

Unless you have been backpacking through Nepal or practicing ceremonial dances with the tribes of New Guinea, you not only would have heard of the global economic crisis you have been a contributor to its momentum. In the last two weeks the global economic meltdown has stripped away trillions of dollars in wealth all across the globe, early in the week Iceland teetered on the brink of bankruptcy and continues to search for ways of gaining some stability in its economy.

In a recent survey of top economists 89% indicated that the world is in a recessionary cycle a small number of which is using the “d” word. Where ever the true position is now is the time to ‘batten down the hatches’. Amongst other things this was the recommendation of Sir Richard Branson in a recent interview. Survival of corporate and personal economies at this time requires two very important events. First and foremost the economic community must instantiate measures to protect the credit markets around the world and secondly consumers must believe that these measures will work. As of midnight Friday the G7 financial leaders have put together a financial plan to stabilize the global economy, now we must do our part; act responsibly.

Over the last few weeks major publications were peppered with professional services organizations disbanding, moving to foreign markets and some even merging. With all this action, the question arises regarding whether there is thought behind these actions. A couple of my favorite articles indicated that firms are in the midst of an economic meltdown. Some firms are increasing their billable hour quota and some continue along their merry way with pay increases and the like. Either these firms know something the rest of us don’t or they are operating in their own world!

During the current economic malaise, the corporate world is cutting back on superfluous activities. For many, such activities include a more discerning eye on their use of outside legal counsel. With this position, it is unfathomable to understand how firms can expect to bill more and, more importantly collect more. In the coming 18-24 months, time taken to climb out of this economic swamp, many professional service organizations will fail to see the new economic light; as they will be a causality of the transition.

In the post recessionary world, the landscape will be peppered with a few professional services organization, those who have taken heed to the call of many authoritative figures calling for these organizations to drop the shackles of history and run their firm like a ‘real’ business. As prophesized, by many writes, the “behavior of law firms cannot continue”, the day of reckoning is nigh.

Is there time for turnaround, possibly yes, practically no, as today’s firms are so imbued in historical process. The one single most important thing that today’s law firm has going for them is that some investors believe they are of sound value. Janet Conley, Bankers Still See Law Firms as Good Credit Risks, reports that although banks see law firms as a good credit risk, law firm loans will attract increased scrutiny and carry more covenants and conditions. Behind some of these new conditions are issues that have plagued law firms for years, Dan DiPietro of Citi Private Bank states:

“Like many banks, Citi looks at firms' cash flow, receivables and work in progress when assessing their creditworthiness and how much cash to advance on revolving or long-term lines of credit."

"DiPietro said Citi is giving existing loans a higher level of scrutiny and is looking more closely at firms on an individual basis to assess how the economic turmoil might affect their receivables.”

As I have, and others, have professed for decades, professional services organizations need to operate like real businesses in managing their most valuable assets – client net investment. With the current economic season, this will be at the forefront of banker’s minds and could mean the difference between dying in the quagmire and surviving the next 24 months.

Take heed the economic meltdown has already hit the legal community and has begun squeezing firms. One prominent firm, Heller Erhman, has already fallen victim and has begun the dissolution process. The firm purports several reasons for their dissolution one of which being the global credit meltdown. Niraj Chokshi, Leaked Document Gives Details of Heller Debt, Assets, reports that the firm is 90% confident in successfully collecting their $174 million in outstanding receivables. Based on my experience that is an overly aggressive and highly optimistic position. In recent talks with senior members in the credit/collection community, “those are unrealistic expectations!”

The economic woes are coming from all directions with a strong force; the economic fondue will be shared by all. For survival beyond this day, we must each internalize some portion into our own organization and ‘batten down the hatches’, otherwise we will be left behind after it all.

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