Ideas from the Front

Dealing With Doom

Don’t Let a Client’s Financial Woes Send You Into a Tailspin

Posted Jan 3, 2004 2:56 AM CDT
By Jill Schachner Chanen

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On the morning that An­drew Simpson was supposed to be­gin picking a jury in a civil case he was handling last year for Kmart Corp., the day’s newspaper held an unwelcome surprise: The discount retail giant had filed for bankruptcy protection.

Although Simpson had been reading in the papers about Kmart’s financial woes for months, the news still left him reeling. He was heavily invested in this client it--accounted for almost half of Simpson’s revenues--and his small firm was de­pendent on the work. Now he wondered about his prospects of collecting payment for his work on the upcoming trial, not to mention the fees he had already earned.

These days, with the economy in flux and the government stepping up its scrutiny of corporate Ameri­ca, an increasing number of lawyers are finding themselves in situations similar to Simpson’s. It’s hard not to feel vulnerable when each day brings stories about yet another company in financial turmoil. And it’s even harder when the bad news is about a client.

“Any time there is some kind of big client activity, it makes everyone look at where they are and whether they are positioned where they want to be,” says one Chicago lawyer who, by his own admission, sent himself into a tailspin when a client relationship was jeopardized by the departure of a key corporate executive.

But, the lawyer says, he recognizes that his reaction to the news could have been more measured. Worried that the client would sever its relationship with his law firm, leaving the firm without one of its biggest sources of revenue, he started pounding the pavement within days of receiving the news.

“There were a lot of fundamental questions that lawyers were asking about the direction this corporation was taking as both a corporation and a client,” he says.

But the loss of a substantial client does not necessarily mean that one’s job is doomed, says technology lawyer John Delaney of Morrison & Foerster’s New York City office. Delaney, who has seen many of his startup clients fail, advises lawyers to step back and take a realistic look at the situation before panicking. Even if the client accounted for a large percentage of billings, most larger firms still are diversified enough that a loss of any one client is unlikely to impact the firm or individual lawyers.

Distinguishing gossip from reality is also important. Don’t get sucked in, says the Chicago lawyer, and trust your instincts--the situation may not be as dire as the gossip would have you believe.

Instead, try talking to law firm management. The firm should be willing to have an open and honest discussion about the impact of a client’s misfortunes on the firm and on job security, says Cheryl Heisler, a career counselor for lawyers.

“Don’t rely on just what you read in the paper. Hope­fully you have a good enough relationship to talk to the partners and ask, ‘Hey, what’s up? How does this affect me?’ ” says Heisler, founder of Lawternatives in Chicago. “You may not get the most truthful answer, but hopefully you will get enough to help you make an informed decision.” After all, she adds, “It’s better than sitting in your office and cowering.”

Stay Informed, Employed

Simpson, whose small firm is in Christian­sted, St. Croix, in the Virgin Islands, decided honesty was the best tactic to take with his employees in light of the looming Kmart bankruptcy.

He told two of the four as­sociates that he could not retain them if the client filed for bankruptcy. “More problems are generated by not knowing what the employer will do than by being told what may happen,” he says. Eventu­ally, Simpson was able to rehire one of the associates. The other was able to obtain quick employment at another firm in St. Croix.

Heisler also believes lawyers can gauge their own situation better by learning whether the client’s problems are unique or if they are industrywide. “If you do environmental law, you need to see if environmental practices at other firms are folding. If so, then you have to think about changing practices. If it’s just your firm, then it is wise to explore other firms.

“Put out feelers and see who else is hiring,” she says. “If it’s the industry, then you have to think about how you can show your value in another area of the law.”

Of course, lawyers can take steps within their firms to protect themselves when this situation inevitably occurs. Just as law firms should not be too dependent on one client for work, Heisler says, lawyers need to diversify themselves within their firms.

“The concept of diversification is going to come back to haunt the associate if he or she was aware that 100 percent of the associate’s work was coming from one client or one partner. If you see that as an associate, you need to be nervous,” Heis­ler says. “The best you can do is to try to manage the workload so that you are never fully a one-client lawyer.”

Sidebar

Outline Your Plan for Prevention

While it may not be possible to keep your client from running into financial turmoil, there are steps lawyers can and should take to make sure that those troubles don’t take them by surprise.

“Most attorneys get into real trouble when they only focus on the work to be done and not on the client’s financial performance,” says Edward Poll, a law-firm management consultant in Los Angeles and author of the ABA-published Collecting Your Fee: Getting Paid from Intake to Invoice.

Problems can begin as early as the intake process, Poll says. Often lawyers do not learn enough about their client’s fiscal health. He tells lawyers to obtain financial statements and credit histories to see if the client has a record of late payment or nonpayment of bills. This information can prevent a lawyer or law firm from becoming too invested in a client from the beginning, and it can also act as a tip-off to any potential financial problems looming in the client’s future.

John Delaney, a partner at Morrison & Foerster in New York City, also recommends getting business plans from a small or startup company before taking it on as a client. The plans often reveal how realistic a company is about expenses such as legal fees. “Every business plan has a line on projected legal fees. You can see that a lot of companies have huge growth plans, but their legal budget stays the same,” he says. “I am very dubious about those companies because if your business is growing, your legal budget should be growing, too. That is a red flag.”

Client financials also should be continuously watched, no matter how long the relationship has been and no matter how stable the company seems. Here the Internet can be invaluable.

Mainstream Web sites like Hoover’s Online (www.hoovers.com) and D&B (www.dnb.com) provide important, reliable information about a client’s fiscal health, including whether and how quickly a client is paying vendors and how the markets are viewing it, notes Andrew Simpson, a litigator in Christiansted, St. Croix, Virgin Islands. “That way you can make arrangements with a client and not be surprised.”

Delaney says he also likes to check out the Web sites with unofficial corporate financial information. While such sites often are chock-full of gossip, he says valuable information can still be gleaned about layoffs, vendor lawsuits and government investigations. Delaney also advises lawyers to rethink their billing procedures. For small and startup businesses, he has begun billing in two-week cycles. The bills are smaller and, psychologically, are easier to pay, he notes. Plus, lawyers can learn early whether there is an issue with the client’s ability to pay.

--Jill Schachner Chanen

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