Well, now, there’s a radical notion, eh? Were you inclined to reject it out of hand as mere headline click-bait? Or did it make you think about that big client from whom you get most of your origination credit and your firm gets so many billable hours? Have you ever thought about Fortune 500 companies failing? That’s rare, isn’t it?
Not really.
When lawyers think about losing clients, they think primarily of being displaced by another law firm or, these days, by technology, in-sourcing, an alternative service provider – or even having the relationship partner take the client with her to another firm. The assumption is that the client will still be buying legal services but from someone else.
What If That Big Client Was No Longer Buying From Anyone?
In March 2016, Sports Authority, the national sporting goods retailer that, at its peak, had $3.5 billion annual sales and made Forbes magazine’s list of America’s Largest Private Companies, filed for bankruptcy. Afterward, its email marketing shifted from promoting famous brands to announcing a fire-sale of their remaining inventory. The last email I received, in mid-June that year, wasn’t about merchandise at all, but instead offered its stores’ fixtures for sale.
When they start selling the fixtures, it’s definitely over. By August, the last of Sports Authority’s remaining 450 stores had gone dark, and the last of its once-16,000 employees hit the unemployment office.
The pain and loss aren’t limited to Sports Authority and its employees. It affects suppliers, too. While a behemoth like Under Armour says the retailer’s death will “knock a few million off 2016 profits,” many smaller suppliers will be hurt significantly, and some may be in danger of failing entirely.
Law Firms Are Suppliers
Set aside the bankruptcy firms for whom Sports Authority’s demise was a windfall. What of the other outside counsel who won’t get paid for the work they had already done on employment, contracts, intellectual property, tax and litigation? And the lawyers who must replace that future business?
In a Working Capital Review article, “Sports Authority’s Bankruptcy a Reminder to Ratchet Up Your Company’s Robustness,” the Boston Consulting Group cautions that “Sports Authority’s fall reflects a wider phenomenon. The mortality rates of companies — across all industries — have increased significantly. Our analysis of entry, growth, and exit patterns for 35,000 publicly listed US companies since 1950 revealed a dramatic trend.”
- Public companies are perishing sooner, with few surviving into their 50s and 60s.
- The five-year exit risk stands at 32 percent today — up from just 5 percent 50 years ago.
- Increased mortality affects companies of all ages, in all industries.
- Size provides no refuge either: Only 7 percent of companies that are market share leaders today are also profit leaders in their industries — down from 25 percent in the 1960s.
Steven Denning pointed out a few years ago in Forbes that 50 years ago, the life expectancy of a firm in the Fortune 500 was around 75 years. Today, it’s less than 15 years and declining all the time. That’s less time than it takes a lawyer to make partner and establish himself as a reliable business generator.
Only 12.2 percent of the Fortune 500 companies in 1955 were still on the list 59 years later, in 2014, and almost 88 percent of the companies from 1955 have either gone bankrupt, merged, or still exist but have fallen out of the Fortune 500 (ranked by total revenues).
The Big Company Failure Trend Will Continue
The Boston Consulting Group article continues, “Rising mortality among businesses is an increasing threat, and will likely remain so for the foreseeable future. Leaders need to consider not only how strong their game is, but how long it will last.”
These are Fortune 500 companies, not mom-and-pop stores or start-ups.
Fast-growing companies fare no better. The Kauffman Foundation and Inc. Magazine conducted a follow-up study of companies five to eight years after they had appeared on the magazine’s list of the 5,000 fastest-growing companies. What they found was startling: About two-thirds of the companies that made the list had shrunk in size, gone out of business or been disadvantageously sold.
Lessons for Lawyers
What can law firms learn from this trend? A few things:
- Don’t allow your revenue to be overconcentrated in any company, and overdependent on their financial health.
- Be careful about drinking the Kool-Aid that “it’s easier to get more work from an existing client than to get a new one.” It may be easier, but after a certain degree of concentration, is it wise?
“[T]he importance of the repeat client is central since the number of potential corporate clients is severely limited. What this means is that corporate lawyers depend on a relatively small client base for a large portion of their incomes.”
– Lawyers at Work by Herbert M. Kritzer - Follow your client’s industry news, so you’ll be alert to the competitive, political or other macroeconomic forces that threaten their financial health. (On the positive side, this is also how you’re alerted early to emerging demand and non-competitive sales opportunities.)
- Market to an industry, not a company. Diversify your client base by cultivating an entire industry, not merely one company within it. Sports Authority’s $3.5 billion revenue, while impressive, was only 5.5 percent of the United States sporting goods industry’s revenue. Industries never go away. The Boston Consulting Group’s data says that a significant percentage of companies not only can go away but, over enough time, will.
- Bill and collect promptly. Everyone scrambles in December and January to collect outstanding receivables. This is reliable evidence that you haven’t been collecting timely all year. Promptly collecting is necessary to optimize cash flow (the stuff they pay your salary or draw with), but also to reduce risk. Better to have a failing company stiff you only for this month’s work, not three or four months’ worth.
When Management Pressures You to Bill and Collect, Take It Seriously
According to Dun and Bradstreet Credibility Corp., which specializes in business credit, “The greatest risk to working capital and company cash flow is deferred billing.”
D&B advises, “In service businesses, make sure to bill for work as soon as the job is completed. Establish a disciplined billing system so that all invoices are sent promptly with clear payment terms. Keep track of all invoices and payments. While this sounds like elementary advice, the busy [lawyer] may become so engrossed in work that actual billing of clients is not prioritized. Failure to maintain discipline in billing affects your cash-conversion cycle and the viability of the business.”
In business, there’s no such thing as stasis. Your clients are either getting stronger or weaker, growing or shrinking. You need to know which it is, and how it’s trending.
More Than a Google Alert
To protect yourself and your firm, resolve today to:
- Strengthen your understanding of how business works, generally, so that you can read, understand and interpret the business news more usefully;
- Pay attention to the business world at large, and the macro forces that shape it; and
- Pay particular attention to the waxing and waning fortunes of your clients.
Many of you have set up Google alerts to tell you when your clients are in the news. That’s fine, but by the time there’s bad news about your client’s company, it’s too late. Add alerts about your clients’ industries and follow those closely. The industry will be talking about the forces that affect your client long before anybody will be talking about your client specifically.
Related: “2017 What’s Hot and What’s Not in the Legal Profession”
Illustration ©iStockPhoto.com
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