Killing the golden gooseFirms should think about removing unproductive partners and tightening up financial controls now, while times are good, argues Peter Scott

As law firms are reporting all-time record profits, more ominous clouds are gathering.

In the US the 'R-word' has returned and the warning signs of recession are everywhere: computer sales are down, car sales have recorded sharp falls and Christmas bonuses are well down.

And solicitors' firms - as those of us who lived through the recession of the early 1990s will remember - are not immune from economic downturns.Law firms are notoriously short-term in their thinking.

It is always this year's profits that matter.

But how much of last year's and this year's bumper profits will be set aside for future investment or for leaner times? The likely answer is none, in all but the most far-sighted firms.

Partners will insist on extracting every last penny to sustain their current lifestyles.In the euphoria born of seeing so much work, firms have taken their eyes of the ball, letting costs escalate.

Managements are failing - because there is no crisis - to run the lean and efficient machines that firms will have to become once there is a downturn in work.

And it will not take a large downturn, just a slight plateau, or a reduction in inflow of work, given the current inflated salary levels, to cause serious problems in some firms.Too many firms have still not addressed fundamental issues affecting their businesses' well-being.

Underperformance, inefficiencies and underachievement are unchecked.Many firms could improve their financial performance if they focused on those aspects of financial management which really can make a difference to the bottom line and to cash flow - and with determination drive through such measures.

Firms may be making good profits now, but how much more profitable would they be with better financial discipline?There are still too many under-contributing partners (contribution is broader than just financial performance) whom firms need to weed out now to ensure their long term well-being.

This is unlikely while there is enough money to go around.

Many will ask: 'Why, when we are doing well, should we go out of our way to create internal issues often involving personal and emotional difficulties with our partners?' They should because the good times may not last and now is the time to do the required pruning, when firms can afford to make compensation packages attractive.In the scrum for recruits, silly money - quite apart from huge amounts being spent on recruitment fees because of staff turnover - is being thrown around, storing up trouble for the future and feeding an ever-increasing appetite for ever higher salaries.

This upward spiral cannot go on for long.

Something will have to give and that will be law firms' margins.However, it will not be all doom and gloom for those well managed, more prudent firms that are planning for the future and which: l Are creating working environments designed to attract and retain staff, instead of trying to rely solely on throwing money at staff to retain them;l Have continued to put effort into marketing, business development and client relationship programmes despite heavy client workloads;l Are making the most of themselves by imposing tight financial management to make every penny count and are putting away something for the future;l Are weeding out poor contributors and restructuring their partnerships to ensure they are ready for leaner times, and;l Have a clear and focused strategy for their future.These are the firms which are now building that necessary element of competitiveness into their businesses which will stand them in good stead when times are not so good.

Now is the time for law firms that have been complacent too long to take a hard look at themselves - before it is too late.Peter Scott is director of Horwath Consulting and the former managing partner of City-based law firm Eversheds