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Three Law Firm Characteristics to Remain Resilient in a Market Downturn

Erik Schmidt | May 21, 2020

Due to pandemic-related disruption, the legal industry is bracing for a sustained downturn. HBR Consulting and The Managing Partner Forum recently conducted a poll of 75 mid-sized firms (<500 lawyers). Responses revealed that more than 60% of respondents are forecasting up to a 25% decrease in top line revenue for 2020. Fewer than 5% of polled firms are predicting no revenue loss at all. This begs the question, what can firms do now to adjust pre-existing 2020 plans to weather this unprecedented storm and, if possible, emerge stronger on the other side

Thankfully, leading economists have been studying the Great Recession for answers to this question. One such study from the Harvard Business Review  reveals interesting commonalities in companies that emerged from the last major recession stronger than their peers. This difference was not due to having superior products or services; instead, these "Resilients" had built flexibility into their operating models and expense structures, enabling them to rapidly trim costs and divest non-productive assets. They were able to trim an average of one percent from their operating costs and enter the trough of the recession with enough free cash to capitalize on growth opportunities. 

Considering three of these Resilients’ key characteristics may help guide law firm leaders as they examine their options.

  1. Resilients focus on the strategic. In the weeks to come, firm leadership should be questioning every aspect of their operating models and asking what core elements of the business are truly strategic. It will be critical to maintain core areas of legal service delivery, while maximizing the efficiency and cost effectiveness of operations supporting revenue-generation.
  2. Resilients focus on client relationships. The Harvard Business Review states, "resilient companies also focused on maintaining loyalty among high-value customers that were central to the company’s growth post-recession." For law firms, that means focusing on how they can provide value to their clients, not only through their existing services but, where possible, investing in practice-enabling technologies like collaboration and data analytics, or other initiatives that can deliver unique insights and deepen client relationships.
  3. Resilients focus on operational flexibility. Operational flexibility is critical when seeking to create cost savings. Since two of the three top firm expenses are notoriously difficult to adjust (i.e., lawyer salaries and real estate), we will focus on moving the needle on technology-related expenses.

Demand with some vendors will increase due to the remote working environment, while others will decrease due to lack of office needs. We recommend focusing first on the latter areas, especially where you have fixed priced arrangement for services less in demand.  Additionally, we recommend engaging with your top vendors with the goal of achieving a 10-20% cost reduction by changing price and terms.

Increasing flexibility in the delivery of IT services will remain challenging if IT staff must remain within the firm’s offices. Leadership should use the current experience with IT working from home to evaluate the validity this assumption. Deploying remote specialists and/or shared IT services can add deeper expertise and broader experience than is available to most firms internally. Remote or shared services are often delivered at a lower overall cost and come with enforceable service-level commitments. Managed services contracts can also be used to smooth investment surges caused by periodic but essential capital expenditures. The resulting savings and increased cash flow can be used to help the firm pivot and invest in areas that will help the firm emerge stronger from this downturn, especially client-facing initiatives. The benefits of a managed services model are being validated by the current crisis and are worth leadership consideration. 

No doubt this conversation will grow as the current situation evolves. In the meantime, sensible firm leaders will begin the hard task of realistically assessing how well prepared their firms are to weather an extended downturn and emerge stronger. If they do not like the answers, then perhaps a deeper conversation is in order. Please contact me if you would like additional information on strategies for successfully leading your firm through an economic downturn.

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