10 Warning Signs That Your Practice Is in Trouble

Law firms, like all businesses, get into serious trouble. They follow a pattern when they go down the tubes.

You can see the evidence if you know where to look. You can see the beginnings of the death spiral by taking note of some signals.

The signals are subtle, but once you realize their significance, they’re pretty obvious.

Here are the things I look for:

1. The greeting.

When I show up or call, is there a system for dealing with me? Do I feel like I was expected, or am I an interruption? Regardless of whether the practice has 50 employees or just one, you get a feeling of whether you’re welcome. It can happen on the phone or in the office, but you immediately get a sense of whether this is a well-oiled machine. If it doesn’t feel like the call or visit is welcomed and expected, then trouble is on the horizon.

2. Messages piling up.

Are calls going unreturned? Does it take a day for the calls to get returned? Is this one of those offices where they’re proud of a “24-hour call return policy”? If calls aren’t getting returned fast, it’s a pretty good sign that results aren’t going to be stellar. Law firms at the top of their game are taking calls in real-time, returning them immediately after meetings, or having someone else return the calls. How long would you keep a pediatrician with a “24-hour call return policy”?

3. Interest.

It takes about 10 seconds to scan the profit and loss statement and look for the “interest” account. If a practice is paying an inordinate amount to a lender, we’re in trouble (especially in today’s interest environment). Sure, there are fast-growing practices paying justifiable interest, but those are few and far between. Interest is usually a big red flag.

4. Taxes unpaid.

When I see an outstanding obligation to a tax authority, I know we’re in serious trouble. It shows up as undeposited payroll taxes or as a payment plan for personal income taxes. These obligations are only incurred after every other source is maxed out. This is more than a red flag. We’re getting close to the end of the death spiral when the taxes are outstanding.

5. Unhappy clients.

These folks are noisy. They’re spreading the word, and they can’t be muted. They’re expressing their feelings online and even more powerfully in person. They are the reason for the unpaid taxes and the interest payments. They’re the result of the unreturned phone calls and the unsatisfactory greetings. Their impact is overwhelming.

6. Bills not being paid on time.

Obviously, unpaid taxes are worse than unpaid invoices from other vendors. But unpaid invoices are where it all starts. I usually don’t find them on the books, yet. They’re usually hidden in a drawer and haven’t yet been entered into the bookkeeping system. Hiding an invoice isn’t the same as paying it, right?

7. Turnover.

Staff members come and go, and some turnover is part of the business. However, when they’re coming and going so fast that you have trouble remembering their names, it’s a bad sign. If I meet a team of five, I want to see a broad spread of time with the firm. If they all started within the last year and the firm is five years old, then something is off.

8. Absent leadership.

Where’s the boss? Can the leader be reached? A quick conversation with the team usually clues me into the absent leader. The firm owner comes in late, leaves early, and is hard to find otherwise. The lawyer is avoiding his or her law firm. The team feels rudderless. They want to do the work but can’t figure out what’s next, and no one will guide them. This quickly turns into unhappy clients and unreturned calls, and the death spiral accelerates.

9. Declining metrics.

Every number can be turned into a graph. It’s the only way I can absorb the data. The graphs are trending up or trending down. Down is usually bad (unless it’s a graph of liabilities, expenses, or employee turnover), and there’s no reason for it to be happening. Up is good. I want to see up.

10. Input declines.

Even when the signals aren’t as obvious as those I’ve already mentioned, there can be other signs of trouble. When inbound calls slow (data can be pulled from the phone system), website traffic declines (data can be pulled from the analytics package), and signups trail off for e-mail autoresponders (data can be pulled from e-mail service), we’re headed for difficulty. These are early signs, but they’re bad. I hear excuses (usually seasonality is what lawyers say), but these signs aren’t present in growing businesses, and the excuses aren’t explanations: they’re excuses. Dark clouds are on the horizon.

Just putting these items on a list makes me queasy. I know how scary it must be to know some of them are happening in your practice.

A death spiral is hard to stop. It requires a great deal of effort to stop and turn into growth. Hopefully, the fear of death is sufficiently motivating to get you moving so you can turn things around.

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