Law firms are no strangers to the boom-and-bust cycle. Not long ago, the attention of the legal profession seemed fixed on million dollar profits per partner and starting associate salaries of $160,000. Now the headlines are all about postponing the hiring of new law school graduates, associate and staff layoffs, and the “de-equitization” or demotion of under-performing partners.
The largest firms are facing a new economy shaped by a “perfect storm” in which finance, transactional, and litigation work have turned down simultaneously, with few offsetting increases elsewhere. These, of course, were the hot practices during the boom times, and they spawned practices at larger firms that now are coming back to haunt them. For example, high associate salaries and the de-equitization of partners made leverage more expensive; clients fought rising hourly rates by using RFP “beauty contests” and demanding fixed fees; and frenzied mergers, lateral hiring and law school recruiting gave many firms high headcounts just as demand for legal services turned soft.
Of course, small firms and solo practices face the valley of lean times frequently, sometimes more than once a year. Experts say, and the experience of most of us confirms, that the recent megafirm profits-per-partner figures are of little relevance to most practitioners. The average American lawyer is working at a small firm making $60,000 to $100,000 a year. In California, by far the most populous state, one-quarter of all lawyers earn $50,000 a year or less, and the situation is similar in many other states.
In other words, a “challenging new economy” for the big firms is often what smaller firms consider business as usual. Either way, all firms, no matter what size, need a survival strategy such as the economics of running a law practice.
Take Eight Action Steps To Stay Viable During Economic Downturns
1. Emphasize collections. If clients are facing hard times, paying their lawyers is not uppermost in their minds. That’s why you need to constantly monitor overdue accounts, keep in regular communication with slow payers to remind them of their engagement agreement terms, and use a collection service if necessary before a bill becomes too old. Age does not improve an account receivable.
2. Conserve cash. Investment and staffing plans made in better times may simply not be feasible in a recession. Consider postponing any major new investments in more technology or additional staffing.
3. Expand marketing. This doesn’t mean running up bills for advertising and brochures that you can’t afford. It does mean getting on the phone and into the community, speaking to current and potential clients and letting them know what you can do for them.
4. Control bonuses. In firms that give lawyer or staff bonuses, people tend to expect what they’ve always gotten, an entitlement mentality that makes bonuses become virtually like a salary. But if receivables don’t get received, the firm cannot afford to pay the usual bonuses. Cuts or elimination should be based on the bottom line P&L.
5. Reassess office space. Firms should look hard at their space needs and lease terms. Consider what is affordable, which features are most critical to operations, and what is required by the lease. The firm that is not locked into its current space and terms may be able to negotiate one or several months rent-free as an inducement to signing a new lease.
6. Outsource. With today’s options, any position in the firm could potentially be done by someone other than a full-time hire anywhere in the world. More firms are using virtual assistants—paralegals or other administrative specialists who work offsite and online, and create work product to the specifications of the firm’s practice.
7. Know your banker. Building a mutually beneficial and effective business relationship with your bank is crucial for firm survival when business conditions become tough. If you created and have maintained good financial standing, you may face a modestly higher interest rate than you paid before, but you will still be able to get a needed line of credit.
8. Consult a coach. A business downturn is scary to face alone. A coach who has been through the business cycle can often help you assess where your firm stands and what’s needed to stay competitive. A professional coach uses real-world experience to help resolve practice management problems caused by tough economic times.
Cut Fat, Not Muscle
One economic strategy far too many firms use is not recommended—staff and lawyer terminations. Too often, driven by perceived or real economic pressures, firms make hasty and harmful decisions by cutting too many people too fast. Why can’t these people be transferred from their current practices to other practice areas that are still performing? After all, these lawyers are trained in the culture of the firm, are capable (otherwise they shouldn’t have been hired), and should be able to learn new technical skills. Certainly those lawyers who do not generate the profit to cover their cost may be candidates for layoff, but cutting without a measured assessment of what and where to cut eliminates muscle and not just fat. This strategy will likely cause a problem when (not if) the economy recovers and firms must scramble to catch up with client demand after their layoffs. If we’ve learned one thing in the new economy, it’s that nothing—good times or bad—lasts forever.
RESOURCES
Poll, Ed; Attorney and Law Firm Guide to the Business of Law: Planning and Operating for Survival and Growth, Second Edition, American Bar Association, January 25, 2002.
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